Outsourcing IT is one of the first suggestions to hit the table whenever top managers talk about reducing the IT spend. Offshore outsourcing — outsourcing to a vendor in a cheap labor locale like India, China, or Belarus — follows immediately behind.

A continuous debate has raged around offshore outsourcing (offshoring) since it appeared. Does it hurt U.S. jobs or boost U.S. competitiveness? Does it save money or cost money? What’s the net net for the company, the country? You can bet the question will come up in your organization the next time the IT budget is on the table.

In March, BusinessWeek reported on a study showing that CFOs at leading U.S. businesses are more likely to consider outsourcing to U.S.-based vendors rather than offshore. This is a clear shift in thinking from previous studies. At the same time, there is turmoil in the Asian outsourcing markets. Maybe it is time to review the offshoring question.

You can think of IT offshoring as geographic labor arbitrage. You seek out locales that have a lower labor cost than what you pay domestically. If the cost spread is great enough, then, in principle, offshoring is the winner.

Offshoring is possible because of global networks. IT people typically do their work sitting at a computer that connects to your computer. Whether that connection is 100 feet or 10,000 miles long, in theory, doesn’t matter. For the work most IT people do, they need not be physically present at your computer.

However, just because a COBOL or Java programmer in India will work at one-third the rate of a U.S. programmer doesn’t mean the cost of IT to your organization will go down commensurately. Many components make up the cost of your IT.

In their recent book Iterate or Die: Agile Consulting for 21st-Century Business Success (Author House, 2008), authors Eric Berridge and Michael Kirven examine the realities of offshoring. To begin, it takes time and effort to find a suitable offshore vendor and manage the ongoing relationship with that vendor. This entails numerous long trips to places like India.

Once software is delivered, it still has to be thoroughly tested and then integrated with the systems you already have. This is neither a trivial nor inexpensive task.

And cultural differences loom large. What an offshore application developer might consider an intuitive interface may be far from intuitive to your workers or customers.

There also is the cost of connecting to the offshore vendor. The Internet is not free, although often it seems so. You will have to invest in reliable, high-speed network connections. As Berridge and Kirven write: “We haven’t priced out a T1 link to India or China lately, but we certainly wouldn’t want to assume that we’d be happy to pay for it month after month.” But with offshoring, you must.

There are a number of ways to reduce IT costs without resorting to offshoring. Some have previously been discussed here: SaaS and cloud computing. Investing in automated IT management and application development tools can also reduce overall IT costs. I will take up others in the coming weeks. In truth, you don’t have to use offshore vendors unless you really enjoy 18+-hour flights to India. ###