Information technology outsourcing is said to have originated with the Kodak–IBM outsourcing agreement of 1989 (Loh and Venkatraman, 1992). Yet the form and range of IT outsourcing have undergone two key transformations since that date. First, it has expanded beyond just the outsourcing of IT to encompass entire business processes, which are underpinned or enabled by IT. The second transformation is the spread from onshore to offshore outsourcing. This trend to offshore outsourcing is largely serendipitous. The enormous amount of reprogramming required by the 2000 bug meant that domestic suppliers could not meet the demand and firms in the USA and Europe had to take a chance on overseas suppliers in spite of concerns about quality.
Nevertheless, organisations have been offshoring long before the recent trend in IT services offshoring. In previous decades, manufacturing companies were motivated to offshore because of the low costs and availability of skilled labor, production and supply networks in some developing countries, and reductions in cost of transporting goods (Dutta and Roy, 2005). Meanwhile, production processes where divided into separate components that were feasible to offshore independently. But, organisations usually retained higher-end, higher-skilled services functions in their countries, such as management, finance, marketing, and research and development.
The late 1980s saw a mass exodus of IT professionals from permanent work to freelance employment. This came at a time when most companies were experiencing rising IT costs and started asking questions as to whether IT was a strategic asset or a commodity (Hormozi et al., 2003).
Broadly speaking, the results of the academic literature suggest that the recent expansion of offshoring into white collar services in general and IT in particular is due to three key factors:
First, technological advances have enabled workers in different locations in the world to communicate and be connected electronically and has also facilitated the digitization and standardization of activities needed to complete business processes. These changes in turn have allowed all functions which do not require physical contact to be offshore candidates; in particular IT processes as well as IT supported business processes. These services typically require a large number of staff with close to no client interface. For example, standardized software has made it possible for firms to outsource financial or human resources activities to a separate offshore company that carried them out for many clients, rather than handling the functions internally (Dossani and Kenney, 2003). Thus, in many cases, the offshoring of services constitutes an outgrowth of outsourcing business functions (Dutta and Roy, 2005).
Second, after the breakdown of socialism in Eastern Europe and The Soviet Union, the production and consumption of services has expanded from western countries to include most nations worldwide. And even some countries such as India and China have increasingly opened their borders to the global economy. Meanwhile, more and more trade agreements have been signed in the last few years. World trade treaties and the advance in technology have widened the competitive landscape. For instance, Morocco signed recently free trade agreement with both the EU and the US. These agreements are likely to encourage trade or investment in all domains, in particular in Information technologies. Moreover, there has been improved institutions and governance in the last decades, in the developing countries for offshored activities.
Third, some countries have got highly educated populations with the technical skills for performing services and technology-related work. India’s pool of young university graduates (those with seven years or less of work experience) is estimated at 14 million. It is almost twice that of the United States. This huge number of young graduates is topped up by 1.5 million new ones every year. (Farrell, 2005)