Harvard Business School Professor David A. Thomas explains why offshoring is no longer a sustainable human capital strategy, and argues for new alternatives.

In a recent talk at Harvard Business School, a professor who studies offshoring gave us a statistic that was quite striking: 50 percent of offshored work doesn’t provide the cost-benefit or the quality that the client expected when they started the project.

That reminded me of a great Dilbert cartoon in which a U.S. company had offshored its work. In it, one guy is complaining about the quality of the work. He says, “Why is this work so poor?” Another guy says, “We don’t know who’s doing it.” The first guy asks, “Why is that?” The other guys says, “We offshored it to India, they offshored it to Indonesia, they offshored it to Mexico, and they offshored it to the U.S.”

Many IT and HR leaders have felt the pain of offshoring. But why has such a huge phenomenon from the 2000s gone so sour?

For starters, all of our low-wage, offshore target countries want to move up the food chain to do higher technical work. When that happens, wages inevitably rise. Add that to the transaction and overhead costs of sending work offshore, and over time, the cost savings we expected simply erode. That’s why offshoring moves from country to country.

Additionally, IT work is far more sophisticated than manufacturing work. Many of the Indian outsourcing companies have recognized this, and in response, they’re creating huge operations in the U.S. and U.K. That means working with them costs even more, simply because its more expensive to operate in those countries than it is to operate in India.

All of this is leading American executives to rethink the cost-benefit quality analysis of going offshore.

Unfortunately, many companies who have made huge capital outlays to turn over their IT to an outsourcer may be stuck in those arrangements. Those that are not as locked in—because they’ve only outsourced functions like helpdesk or writing simple code—have their own problems. They are struggling to find applicable talent in the U.S.; because they’ve outsourced for years, they have ceased to develop the people they need.

One of the big losses here is innovation. Many companies outsourced a piece of their IT operation that was actually a core capability, as opposed to the commoditized function they perceived it as. As they’ve realized it was part of their innovation stream, their abilities to move ahead became constrained.

So what are companies to do? What are the most viable options?

To be quite honest, I haven’t seen too many creative solutions. More often, I’ve heard people talk about what the problems are. It will be interesting to see what companies do as we come out of this economic down cycle, which has created the opportunity for many to rethink their HR and outsourcing strategies in terms of how they align their human capital with their business needs.

I got involved with Workforce Opportunity Services because it addressed two major human capital problems U.S. companies face today. First, the WOS model addresses the underdevelopment of people in high-poverty neighborhoods to create a viable middle-class future. And second, it creates the ability for companies to keep that work in the U.S. and create employees from U.S. citizens—reap the advantages that are now becoming clear in terms of keeping certain work instead of offshoring.

Plain and simple, offshoring or outsourcing work to lower-wage countries is not a sustainable HR strategy—and many changes need to take place.

David A. Thomas is H. Naylor Fitzhugh Professor of Business Administration at Harvard Business School and Chair of Workforce Opportunity Services’ Academic Advisory Board.

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