IBM: Outsourcing at Home

India has become synonymous with tech outsourcing. More than 90% of tech services that are performed in low-cost countries happen there. But when IBM (IBM) announced its two newest global service delivery centers this week, they weren't in Bangalore), Delhi, or Mumbai. Instead, Big Blue picked East Lansing, Mich., and Dubuque, Iowa.

In what may blossom into a countertrend, the company is hiring close to home. The moves come at a drama-fraught time, since the U.S. economic downturn has already claimed more than 60,000 tech jobs in the past three months alone. In East Lansing, IBM expects to create up to 1,500 direct and indirect jobs in five years, and it should employ 1,300 people in Dubuque within two years.

With 200,000 service employees worldwide and nearly 80,000 in India, IBM has over the past six years created a vast global network of service delivery centers. Michael Daniels, senior vice-president of IBM Global Technology Services, says that while the cost-competitiveness of East Lansing and Dubuque were factors in the company's decisions to locate there, salaries and other costs weren't the biggest factors. "Low cost is a factor in any decision, but the critical thing for us was the access to skills and the willingness of the local universities to cooperate with us and add to their curricula," he says.

Leading the Pack

Industry analysts expect more tech services outfits to establish operations in low-cost parts of the U.S. in the coming months and years. The phenomenon first took root last year, when India's Wipro Technologies (WIT) opened small service delivery offices outside Atlanta and in Troy, Mich. "You'll see more of this. It won't be huge. But it will be a nice niche," says analyst John McCarthy of market researcher Forrester Research (FORR). "This is all about building out a global network. It's not one size fits all: India." McCarthy says some states want their service work to be performed within their borders, and some companies want services kept close to home.

For Dubuque, IBM's decision comes as a major stroke of good luck. The new jobs will include setting up, monitoring, and maintaining large computing systems. The midsize city has a blue-collar tradition, but employment has dwindled at a John Deere (DE) construction equipment plant that once was a pillar of the local economy. "This is transformational," says Mike Blouin, president of the Greater Dubuque Development Corp. "It has the impact on Dubuque on the white-collar side that John Deere had in the early 1950s on the blue-collar side."

Dubuque and Iowa offered IBM an enticing package of incentives worth $55 million over 10 years. They include a loan of $11.7 million that will be forgiven if IBM fulfills its hiring pledge. A local development agency will spend $25 million to rehab an historic former department store in downtown Dubuque.

The new East Lansing service delivery center will modernize out-of-date software for states and corporations. It will be located in a former credit union building on the campus of Michigan State University, where IBM will also work with faculty and administrators to modify the curriculum to include skills that will be needed there.