One of those old saws about outsourcing - that the U.S. sends "grunt work" offshore while remaining the innovation powerhouse - may be proving to be false. Bangalore now sports the second largest concentration of engineers in the world, outpaced only by Silicon Valley. Concentrating these engineering resources is what often leads to innovation - many times, innovation is a bottom-up, rather than top-down effort.

Furthermore, with extraordinary capital resources in India - and relatively low costs for even the best talent - it is not hard to see the possibility of India, particularly Bangalore, becoming the next, great innovation hub. See this article in CNet for more information.

Where may this talent be turned? I have two bets - energy and health care delivery. In both arenas, the brilliance of these engineers, combined with a developing economy with fewer regulatory constraints (but many political ones) could unleash development in such cutting-edge areas as solar/alternative power, remote delivery of health care, and health records management. These areas, particularly, are places where the political debate in the U.S. has become stifling - to the point of seriously and adversely affecting innovation.

While it is easy for us in the US and UK to think that nearly all outsourcing is in North America or Europe (and that most is happening in the English-speaking world), this story shows how outsourcing is going into new markets in areas with enough common language and tradition to make the transition reasonably easy.

In this article, an increase in outsourcing from Thailand to Cambodia and Vietnam is chronicled. And we're not just talking BPO and back-office processing. Instead, this is call-center work.

Can India and Bangladesh be far behind? How about Russia and the Ukraine or the other Slavic states? Could regionalization become the new globalization?

Recently, there have been a plethora of articles on how outsourcing can meet the challenges of these difficult economic times by reducing costs to companies. No doubt, successful outsourcing can save a decent amount of money over time, but most recorded experience indicates disappointment with the total savings.

This blog, and many others, have talked about the possible reasons for this. Incomplete requirements definition, weak customer-side management, opportunistic supplier behavior and currency fluctuations are the usual suspects. However, I think that there is one major, unsaid reason - customer's near-rabid focus on cost cutting.

Because of this focus on cost cutting - at all costs - departments are forced to cut budgets below what is necessary to operate the busines on a reasonable basis. Outsourcing vendors are glad to accommodate this, reducing first-year costs to sell the deal, and recognizing that the money can be made up on the tail end. And often it is.

This is why vendors prefer long term deals - and price them accordingly. In a long term deal, they can reduce the first-year (and sometimes second-year) budget numbers to an attractive level, raising 3+ year profitability. The result are deals that get by the CFO and CEO because they meet the immediate budget needs (and because the lifespan of CIO's is often far shorter than the deal), followed by a headache that is left to be deal with by their successors.

At the end of the day, it is important to remember that outsourcing also costs money, and that vendors need to be profitable - just like customers. If the costs are low this year, then they will be made up in future years. It is after all, a zero sum game.

In a recent series of articles (part 1 part 2), Decipher Information Systems detailed the steps that they went through in helping a client enter into an offshoring relationship. The articles provide an interesting high-level overview of the process and may prove to be a useful guide for executives looking into offshoring IT or technical matters.

While not comprehensive, they represent the basic steps in the process of selecting and engaging with an outsourcing vendor. Thanks to the authors for this great "quick list" of offshoring steps.

Today, it was announced that Deutsche Post World Net has backed out of a proposed IT outsourcing deal with HP. The primary reason stated was that the "savings were not there."

Digging deeper into the article, Deutsche Post asserted that its own internal IT department was able to cut their own internal costs and get some additional projects started during the six month deal process with HP.

What is interesting to me is that these savings could not be found when dealing with a European provider. What that tells me is that either (a) there was no significant offshoring aspect to this deal, or (b) that the deal was not properly priced by HP. In any case, it is interesting to take a peek under the hood of a deal that went from LOI to near-contract, and then fell apart.

Ann All, one of my favorite writers on the subject of outsourcing, reported recently that companies "sometimes employ IT outsourcing to help prepare for mergers." For a number of reasons, this makes a lot of sense.

First, going through an outsourcing process forces a company to standardize its processes and procedures and codify them, and also oftentimes breaks the informal network within companies that define how things get done. While this may create operational downside risks, it also paves the way for the prospective merger by eliminating fiefdoms and obscure processes.

Second, if the prospective merger partners "happen" to use the same IT vendor, merging the services may prove easier than merging two separate in-house organizations.

Finally, since many outsourcing contracts have "exits" surrounding mergers, this approach may be a low-risk way to cut costs and streamline operations - e.g., begin taking "synergies" - prior to any public announcement of a merger.

It would be very interesting to see if anyone had sufficient data to correlate this assertion - e.g., look at recent mergers and see if any of their material outsourcing agreements commenced somewhat near the merger announcement. If so, it may be possible that we have a new "canary in the coal mine" viz a vie mergers and acquisitions.