Offshore Outsourcing—Are There Hidden Costs?

Home/Publications/Best Practices Newsletter/2003 – Best Practices Newsletter/Offshore Outsourcing—Are There Hidden Costs?


December 2003

Offshore Outsourcing—Are There Hidden Costs?

CIDMIconNewsletter 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 (IT) 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 (RFPs), 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.

Overby, in this article, takes a balanced approach, demonstrating that although there may be significant savings from outsourcing offshore, the savings are nowhere near what might be implied by the labor rate differences alone.

The author did not address what may be another significant cost, the loss of goodwill. How will the foreign accents on the help line affect your customers’ image of your company? Will a perceived decline in quality of product or service affect future sales? Will there be a decline in morale of your remaining staff and will it have an affect on the quality of your information products? CIDMIconNewsletter