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10/17/2003
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Precious Connection

Companies thinking about using offshore outsourcing need to consider more than just cost savings

The argument for offshore outsourcing begins with a basic assumption: There are masses of high-quality IT workers available in places such as India, China, and the Philippines at low cost. Yet what worries business-technology managers most about sending work abroad is poor quality and high costs.

That's because there are so many ways an offshore project can go sour. Despite the enticing tales of Ph.D. engineers who will work for $10 an hour and pristine, Six-Sigma offshore-programming facilities, the risks are greater and more complicated than they appear on the surface. Even those bullish on offshore outsourcing have their concerns, according to a new InformationWeek Research survey of 300 business-technology executives. Among the 40% of respondents who are considering or already using offshore outsourcing, what weighs most heavily on their minds is the quality of the work performed, unexpected costs, and project delays (see chart, "Outsourcing Worries", page 4).


Maureen Read -- Photo by Phyllis Redman

You have to articulate your needs with foreign companies, VP Read says.

Photo of Maureen Read by Phyllis Redman
They're wise to be cautious. Companies that don't look past the shiny veneer of offshore outsourcing to closely examine the risks and develop plans to deal with them are likely to lose much, if not all, of the benefits. "I've gotten into so many conversations with people who had done it and failed," says Maureen Read, VP and general manager of Sony Electronics Inc's customer-services center, which outsources software-development, application-monitoring, and customer-service call-center functions to India and the Philippines.

Read considers offshore outsourcing a boon for Sony, providing the company with an extended, flexible workforce that can increase or decrease as needed and allowing Sony to do more projects because of the cost savings. In her search for an explanation of the negative reports, Read found a common thread. "The difference was, they expected it to be like calling a temporary agency and saying, 'This is what I want,'" she says. "Offshoring isn't that simple. You need to make sure that you've articulated your needs and the level of performance you expect and what the ramifications are for not providing that."

There's no question that offshore outsourcing has afforded some companies dramatic benefits in IT and other operations, freeing money for projects that otherwise may never have been undertaken. Yet it's important to assess the actual up-front and ongoing cost savings of an offshore engagement, which can vary by company and project. Factors such as vendor management, travel, communication with in-house staff, and knowledge transfer all come at a price. That means the advertised savings for an overseas engineer isn't always the end savings. "The biggest mistake companies make is assuming the savings will match the salary differential," says Dean Davison, a Meta Group analyst. "For most companies, the average overall cost savings is 15% to 20%."

Companies are pretty good at keeping failed offshore projects out of the public eye. Keith Franklin, president and chief software architect for IT-services firm Empowered Software Solutions Inc., says his 40-person staff was called in to take over a Web portal that had initially gone to an $11-an-hour firm in India. The Indian company told Franklin's client it could develop the portal using Microsoft's .Net architecture, "but it was very clear from the code we got that these people had little or no experience at all with the .Net Framework," Franklin says. The Indian firm's development delays pushed the client's budget for the project over by $1 million, Franklin says, and his company charged another $500,000 to fix the problems, at rates that ranged from $65 to $120 an hour. The lesson? "Just like doing business with a vendor in the U.S., companies have to do due diligence, even if the savings are theoretically drastic," he says.

But the relative quality of software code isn't the most-common complaint of offshore clients, particularly those who use the larger Indian services firms. To overcome doubts about quality, those companies have changed the landscape in the services industry by using process-quality standards such as the Capability Maturity Model, a recognized standard for software development created at Carnegie Mellon University's Software Engineering Institute. Now, customers ask about those certifications, and more are looking to learn or adopt some of the CMM or other quality practices. "Two years ago, I couldn't get one out of 100 clients interested in the Capability Maturity Model," says Tom Gary, a managing director for BearingPoint whose responsibilities include adding more than 800 technologists to the company's Chinese services offices by next summer. "The Indian companies used CMM as a true differentiator."

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