A business outsourcing trend that targets the Midwest instead of countries such as India and China is fueling growth at several southwest Ohio companies. The so-called “rural sourcing” model could further benefit the Dayton region’s strong information technology sector, experts said.
Rural sourcing, in which IT work is sent to contractors in low-cost U.S. locations outside of major metropolitan centers, is gaining interest and credibility as a viable alternative to global offshoring, according to a report by Information Services Group, a Connecticut-based technology advisory company.
Potential benefits include access to relatively low-cost labor, and fewer time-zone and cultural constraints, the report said.
The International Association of Outsourcing Professionals named rural sourcing as one of the top 10 industry trends for 2013.
The Dayton region is “well-positioned” to take advantage of this trend because it offers a low cost of living, workers with good technology skill sets, and technically trained university graduates, said David Salisbury, an associate professor of information systems at the University of Dayton School of Business Administration.
In addition, Wright-Patterson Air Force Base and area defense contractors have created a demand for U.S. citizens to perform IT work because much of it requires a federal security clearance, Salisbury said.
The Dayton area ranks third in the U.S. in high-tech job growth, adding nearly 3,500 high-tech jobs from 2010 to 2011, according to a December 2012 report by the Bay Area Council Economic Institute.
Several fast-growing area IT firms specialize in rural sourcing services, including Lighthouse Technologies of Beavercreek and Illumination Works, which has offices in Mason and Washington Twp.
Illumination Works performs software development and consulting work remotely from the Dayton-Cincinnati region. “We are looking to do that down the street versus across the ocean,” said Jon Mitchell, the company’s president and chief executive.
Illumination Works’ staff has grown 71 percent since last year to 60 people at both locations, Mitchell said.
Lighthouse Technologies of Beavercreek provides software testing, vendor quality management and Oracle enterprise resource planning services. Most of the company’s business comes from large U.S. metro areas, as well as Europe and Canada, said Jeff Van Fleet, president and chief executive.
“We have been targeting higher-cost regions of the country now for probably three years,” Van Fleet said. “As a result, that part of our business is growing very nicely.”
Lighthouse has seen 127 percent revenue growth over the past three years, according to Inc. magazine, which ranked the firm at number 56 on its list of Ohio’s top 100 companies. Lighthouse has more than 60 employees, including about 12 who were added over the last two years.
U.S. companies have been offshoring IT work and jobs to India and China since the early 1990s to take advantage of those countries’ low-cost, technically proficient workforces.
However, India and China also have experienced rapid growth in IT and are now seeing escalating wages and high turnover as their workers jump to new jobs for better pay, said Ann Gallaher, chief operating officer of Technology First, a regional IT trade association.
“Add in the time difference, security concerns, supervising projects long-distance, and the cultural and communications challenges — offshoring isn’t as easy of a choice as it was in the past,” Gallaher said.
Many U.S. companies are bringing some of their IT work back home, but they continue to outsource it to domestic IT firms to focus on their core business.
This has created a “small but rapidly growing market” of rural sourcing firms, often located in university towns in the Midwest and Southeast, according to the Information Services Group (ISG) report.
ISG found that rural sourcing suppliers can offer wage rates 20 percent to 40 percent lower than those found in metropolitan areas. In addition, the rural approach can ease data privacy and security restrictions, the report said.
“We do business in London, England. The cost in London for software testers is tremendously higher than it is here in Dayton, Ohio,” Van Fleet said.
Lighthouse can offer software testing services at a cost up to 36 percent less than more traditional IT centers such as New York, Boston or the Silicon Valley, said Julie Hagan, a software test practice manager.
Hagan said the region’s university and college graduates provide a stable workforce, “which allows us to provide our clients consistency, stability and low turnover rates, which is something they find a lot of value in.”
The ISG report said the potential lack of talent is perhaps the biggest shortcoming of the rural sourcing model. Even the largest U.S. state universities produce only “a trickle of talent relative to the technical academies of Bangalore and Beijing,” the report said.
A Dayton Development Coalition report released this week found that area colleges and universities are not producing IT graduates at a level that keeps up with demand. Information technology, computer science and computer engineering are currently some of the highest demand degrees in the region, that report said.
“Our biggest problem is that we don’t have enough students going through the pipe right now to take all the jobs that are out there,” Salisbury said.