Is there an Outsourcing Bubble?

This is an interesting perspective I have not seen before.

Now another peak and valley are on the horizon—not in Silicon Valley but far away in India, and not among dot-com startups but among providers of outsourcing services, from call centers to software development houses. As experts and the media hyped offshore outsourcing as the Next Big Thing, the industry ballooned with new and expanding players eager to get their share of business.

But CEOs who have outsourced operations in India to save costs during tight economic times should heed the signs of pending consolidation.

Already a shakeout is occurring as some outsourcing competitors go out of business or get gobbled up by bigger rivals in a power play for market share—and survival. CEOs who are not especially clever at picking and managing a good outsourcing provider could find themselves left empty-handed just when their operations have been moved offshore. They may be forced to temporarily halt production, research and development or customer service. Or, if they team up with a provider that suddenly expands to take on new, bigger clients, they could find themselves shoved aside.

One thing I haven't talked about much, with respect to outsourcing, is risk. There is always a risk that the company you hire could go out of business or have some other problem that could screw you if you don't have a decent amount of software knowledge in-house. Another thing to note is that the intense competition could in part be what is helping to keep prices down, and an industry shakeout could lead to higher prices and thus less attractive financial incentives for outsourcing to certain countries.

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