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Bill Hackos
Vice President, Comtech Services, inc.
How much is your company saving by offshore outsourcing? Rates for information development
in India run about one fifth of rates in the United States. Are you saving 80 percent on
information development costs, or even anything on information development costs? Maybe not,
says Stephanie Overby in "The Hidden Costs of Offshore Outsourcing" in the September 2003
issue of CIO magazine.
Careful studies by companies that have outsourced information technology work to
India and China show that savings are minimal compared to the upheaval that offshore
outsourcing is creating. United Technologies, a leader in developing offshore practices,
reports saving just over 20 percent, but that does not include the huge upfront expenses.
For information development with the added complication of human rather than programming
languages, the potential savings are probably even less.
Overby defines six kinds of hidden costs, above and beyond the offshore vendor contracted
costs:
- Selecting vendors
- Transitioning the work
- Handling layoffs and lost productivity
- Managing cultural issues
- Improving development processes
- Managing contracts
The Cost of Vendor Selection
Vendor-selection costs include creating requirements, sending out requests for proposals,
evaluating proposals, and negotiating a contract. Some companies have had to hire
people to perform these functions. Travel costs to send people to India to evaluate and
negotiate can be significant.
The Cost of Transition
The transition phase can be costly and time consuming, taking from six months to a year
after the vendor has been contracted. You have to bring vendor representatives to the United
States to learn your processes. It is typical for companies to bring their offshore workers
onshore, particularly when specific skills are needed. While the vendor employees are here,
you have to pay them prevailing US wages. During this time, you also have to use your American
employees to teach the offshore vendors. Companies that have skipped the transition step and
have just sent specifications overseas have failed in their offshore outsourcing efforts.
The Cost of Layoffs
There are many costs associated with laying off your American employees. These are the same
people who are critical for training your offshore vendors. As a result, you will end up
paying them generous severance packages to keep them long enough for the training. The
"survivors" in your organization will be demoralized, leading to job dissatisfaction, which
will result in a loss of productivity for your onshore staff.
The Cultural Cost
The cultural differences between the main office in the US and the offshore vendor in
areas like India and China cause several problems. American writers are used to speaking up
and offering suggestions about their assignments. When we give an assignment to our American
writers, we expect this and count on it. In China and India, writers do what they are told.
It follows that unless you have flawless specifications, you will cause mass confusion
offshore. Flawless specifications here or mass confusion there both cost a lot of money.
We also expect our American writers to have a basic understanding of our products and how
they are used in the United States. Our writers are writing to their own culture. Finally,
unlike programmers, writers work in a complex natural language with immense cultural
differences in the way English is used here compared to India or China. This means more
editing and rewrites than for homegrown writing.
The Cost of Improving Development Processes
To meet the demands of working at a distance with people of a different culture, you
will, more than likely, have to improve your development processes. Process improvements
may include ISO certification, improvement in CMM-level maturity (Software Engineering
Institute's Capability Maturity Model) for software development, or an improvement in IPMM
maturity (CIDM's Information Process Maturity Model) for technical information development.
These improvements, while probably needed anyway, can amount to substantial up-front costs.
Nonetheless, organizations with low levels of process maturity are more likely to fail at
offshore outsourcing.
The Cost of Managing the Contract
Managing the offshore vendor is an additional significant cost. There is a significant
cost in estimating projects in preparation for obtaining quotes from the vendor as well as
in auditing timesheets and invoices to ensure their accuracy.
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