Outsourcing the outsourcing

American companies spend about $26 billion each year outsourcing IT services. For years, the lion's share, about 80 percent, of that spending has gone to India. But development is an fickle mistress. Even as she helps countries such as India raise their standards of living, she also spreads her ugly tentacles in the form of higher wages and increased overhead. That, combined with concerns over whether India's educational system can continue to churn out ever higher numbers of IT-savvy workers, has some U.S. firms looking elsewhere for cheap, skilled labor.

The outsourcing phenomenon is no longer limited to a handful of large Asian countries. The hot new destinations for outsourcing are countries such as Mexico, Brazil, and Russia. For instance, one large American firm, CareFirst BlueCross BlueShield, uses Epam Systems Inc., a New Jersey-based company, that employs an outsourced labor force of more than 2,000 people in Russia and Eastern Europe.

What's an Indian outsourcing firm to do when faced with globalization's double-edged sword? Some are following suit by outsourcing their outsourcing. Consider Hyderabad, India-based Satyam Computer Services Ltd. They just opened a 2,000 employee facility in Malaysia, where they can have access to a cheaper yet still skilled labor market. As India's share of U.S. IT outsourcing continues to decline (it's now down to 59 percent) watch for other Indian firms to follow suit.