The offshore outsourcing of IT grew because of the cost of offshore labor. A software engineer in India is paid but a fraction of what a U.S. worker earns. Payscale puts the median salary for a senior software engineer in India at $10,000.
When IT services firms bring in H-1B visa workers, these workers earn substantially more than their overseas counterparts, but often significantly less than American IT employees.
This labor cost advantage has been a powerful lure for U.S. customers, but analysts see labor costs diminishing in importance. Customers want more automation, whether it's infrastructure management or business process outsourcing. IT services firms can no longer complete exclusively on lower cost labor.
"The search for just cheaper people is a thing of the past," said Frances Karamouzis, an analyst at Gartner. What customers now want is to buy more "thinking" and automation for the "doing," she said.
One process that has taken off is called "Robotic Process Automation (RPA)," a term given to a virtual machine that takes over some of the applications and workflows managed by workers. These systems don't directly replace humans, but take structured tasks and automate them, with users saving as much as much as 15%, said Karamouzis.
But Karamouzis sees RPA as a gateway to more sophisticated tools. Once IT services customers realize savings using this tool, their next question often is: What else can we automate?
Automation tools are coming, and quickly. IBM, which is a major employer in India and has shifted much of its work overseas, is focusing a large part of its future on its cognitive engine, Watson.
Gartner believes that by 2020 Microsoft will center its strategy around Cortana, its intelligent personal assistant, instead of Windows.
The overseas firms -- Infosys, Tata Consultancy Services and Wipro, in particular -- are also focusing on artificial intelligence tools to take over tasks. Infosys, in a recent annual report, said it was able to move nearly 4,000 full-time employees from projects to other tasks as a result of the automation of underlying services.
"Is offshore dead? No, but it's no longer going to be used for competitive advantage," said Karamouzis.
Offshore outsourcing may be one of the more controversial issues in the political landscape, but the industry has grown despite it.
Among the large offshore providers, Everest Group said that HCL, for instance, had 450 clients in 2014 providing $1 million plus in revenue; last year, it had 495. Infosys had 950 active clients in March 2015. This past March, that number had grown to 1,092, with repeat business accounting for 97%, said Salil Dani a vice president at Everest. Other firms showed gains as well.
IT services firms are shifting to automation, cloud, the Internet of Things and to "next generation services contracts that have pushed the traditional outsourcing services to the backseat," said Dani.
More broadly, the arrival of intelligent automation is spreading through all industries, not just IT services.
"Intelligent Automation is one of the most disruptive trends the industry has seen," said Tom Reuner, an analyst at HFS Research. The approaches are "about decoupling routine service delivery from labor arbitrage. However, the direction of travel is toward human augmentation, and not substitution."
In some ways, it is hard to imagine the labor advantage disappearing anytime soon.
The cost advantage of using offshore workers in the U.S. remain substantial. Outsourcers must pay visa workers the prevailing wage, but about half of these workers are paid Level 1, or entry level, salaries in a four-tier system, according to a report by the U.S. Government Accountability Office. (The prevailing wage Level 3 represents the median.)
Presumptive Republican presidential nominee Donald Trump has offered up an immigration reform plan to raise H-1B wages that strongly implies using Level 3 as the new wage floor.
Ron Hira, a public policy professor at Howard University, looked at the wages paid at one firm, Southern California Edison, which cut some 500 jobs last year after signing outsourcing deals, and compared it to data paid to H-1B workers. What he found was that the offshore contractors were saving as much as 41% on labor cost by using visa workers. His research, which was published by the Economic Policy Institute.
The idea of raising the wages of H-1B workers is championed by reformers in Congress. But what analysts are saying is that wage advantages won't be as important as automation capabilities in the years ahead.
Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.