Experts reveal hidden costs of offshore outsourcing

Offshore outsourcing is a fast-growing trend among IT shops. Just be careful -- the much-vaunted savings isn't necessarily all it's cracked up to be.

Offshore outsourcing is a fast-growing trend among IT shops. Just be careful -- the much-vaunted savings isn't necessarily all it's cracked up to be.

Gartner Inc. predicts that 40% of companies with revenue of more than $100 million will be piloting or using offshore services by the end of 2004, compared with 10% that are outsourcing work overseas today.

Purveyors of offshore services -- who deal in everything from application maintenance to IT help desk work -- rightly tout a vast differential in the cost of labor in some countries outside the United States. And while this is true, other costs, for infrastructure, travel and training, for example, can lower the overall savings by a substantial margin.

"There's a difference between the wage rate and the charge rate," explains Debashish Sinha, a principal analyst at Stamford, Conn.-based Gartner. "The wage rate might be 70% lower in India than it is here, but that doesn't necessarily translate into a 70% cheaper charge rate from the vendor involved." The supplier needs a profit margin, too.

Other costs to consider include any hardware and software needed to duplicate the client's environment, which can be pricey overseas, with taxes, duties and other extra charges. Then, too, a dedicated or leased line from the offshore team back to IT central can add to the cost. Even if you're dealing with a vendor that already has a building and its own infrastructure in place, expect to pay your share of the costs for all these things.

Travel costs figure into the mix, too, because customers ought to go to the offshore locations to help establish strong working relationships. So says Rodney Smith, director of technology for Chicago-based Apartments.com, an online listing of rental properties throughout the United States. Smith went to India 11 times during an eight-year period to visit with the people he calls "an extension of my team."

In another example, Xerox Corp.'s manager of global software operations, Brian Segnit, manages approximately 300 offshore IT staffers in India, Brazil and Singapore. He started Xerox's first offshore operation about 13 years ago. He says that cost estimates also need to include time zone issues, culture, language and a myriad of other factors.

"There are costs involved with managing distributed development," he says. While some customers prefer to operate around the clock with teams in various geographic regions around the world, others feel that's too much trouble to manage; instead, they prefer to work with outsourcers one time zone away in a nearby country such as Canada, rather than India, which is 12 hours ahead of East Coast time.

And while customers of offshore services swear by the quality of what's produced, saying the error rate is on par or even lower than acceptable U.S. quality standards, there is "some question about productivity," Segnit says. Still, if the rate is low enough, managers can hire extra hands to make up for the slack.

Overall, though, because of the cheap labor rates elsewhere in the world, "there's a lot of wiggle room," William Martorelli, an analyst with Forrester Research, in Cambridge, Mass., explains. "So those other costs, if you manage them correctly, won't neutralize the savings."

In addition to understanding the labor costs, customers need to take into account where the offshore outsourcing takes place. The majority of offshore outsourcing takes place in India, which has up to three-quarters of the market. Despite the time difference from the United States, one big attraction there is that English is commonly spoken in India; therefore, communication barriers are not quite as significant as they are in other parts of the world. Other hot areas for offshore outsourcing these days include China, Ireland and the countries making up the former Soviet Union.

There are several paths to take to get to offshore outsourcing. One is to work with a global services provider such as IBM Corp., Hewlett-Packard Co. or Electronic Data Systems Corp., all of which have substantial global resources. In some cases, the customer may not even know that people all over the globe worked on a particular project.

Another way to do offshore is to work with a specialty vendor. Just as in the domestic outsourcing market, there are some differences in what vendors will take on. Full-service offshore outsourcers include Infosys Technologies Ltd., in Fremont, Calif., and Wipro Technologies, in Mountain View, Calif. Other names include Trigent Software Inc., in Southborough, Mass.; Aviana Global Technologies, in Diamond Bar, Calif.; and NaviStorm LLC, in Princeton, N.J.

A more complicated option -- but one that might be a solution for a long-term offshore arrangement -- would be to contract with an overseas vendor that will eventually turn over the joint venture to the customer.

In the 15 years or so that offshore outsourcing has been common, IT shops have turned to overseas providers for projects including custom application development and application maintenance. Still, today's offshore services are much more complex than those of the past, offering help with everything from IT help desk work to business processes, including call centers, desktop support, accounts payable, supply chain management and many other types of service.

Another trend is the growing tendency of IT customers to look at offshore staffers as an on-demand resource from other countries, to supplement skills they can't always hire quickly in the U.S.

In addition to the financial issues, offshore outsourcing customers offer other caveats. Chief among them is this one: Choose your projects carefully. Longer-term projects that need larger teams do well in offshore outsourcing situations, observers say, whereas those that need really fast turnaround time -- or constant input from business users -- aren't such good candidates.

Also, be prepared, Apartment.com's Smith says: "You have to have a good process in place, with clear, concise requirements." Even simple tasks like removing slang, which Americans tend to use even in business communication, can make all the difference. "Say what you mean, and mean what you say. They're a half-day ahead of you," if they're in India, and so planning is key. The old programming motto applies here, too, he says, "Garbage in, garbage out."

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This was first published in April 2003

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