Survey: U.S. Companies Plan More Overseas Outsourcing

Most U.S. companies plan to outsource more of its back-office functions overseas where labor is cheaper, despite a public relations backlash and weaker prospects for cost savings, according to a survey of 182 companies released on Friday.

About 86 percent of U.S. companies plan to increase the use of offshore outsourcing firms, according to a poll by Chicago-based management consulting firm DiamondCluster International (search) .

But companies have lost the illusion of dramatic cost savings from outsourcing, the survey said, because managing far-flung international operations can be costly and difficult. They expect outsourcing to save only 10 percent to 20 percent of their costs, down sharply from 50 percent two years ago.

"The reality is the euphoria has come down a little," said Tom Weakland, who leads DiamondCluster's outsourcing advisory services practice. "Expectations for cost savings are lower but more in line with reality."

As a result, customers are demanding lower prices, leading to fierce competition between U.S. outsourcing providers such as International Business Machines Corp. (IBM) and Accenture Ltd. and their India-based rivals.

Despite the higher demand, pricing is falling overall, particularly for routine tasks such as software maintenance and support work. But in newer areas, such as managing other companies' operations, rates have held up.

Weakland said pricing for U.S.-based vendors will fall further as they themselves move jobs overseas. But offshore vendors will see the outsourcing market stabilize or even rise slightly because their prices are still lower than those of large U.S. service providers.

U.S. companies also suffered from negative publicity and lack of cooperation from their home workforce as the migration of white-collar jobs overseas becomes a hot button issue in the 2004 U.S. presidential campaign.

About 85 percent of customers and 81 percent of providers are concerned that legislation or political pressure may prevent them from shifting jobs offshore.

According to the survey, 74 percent of customers are satisfied with their outsourcing efforts, while 21 percent said they had stopped outsourcing arrangements in the last year.