Spin collides with economic reality

Vendor spin coupled with pressure from CEOs and CFOs to create savings has led to poor offshoring decisions that do not live up to expectations.

Addressing a packed room of enterprise and government IT managers and CIOs at the Metamorphosis conference in Sydney last week, Meta Group Inc. vice-president and services director Dean Davison warned of a serious disconnect between the savings that services vendors tout and economic reality.

This was at least in part caused by business executives with little direct knowledge of applications development making sourcing decisions led by a heavily discounted price tag.

“Everyone is trying to do everything and it is going to become messy. The convergence point just happens to be applications (development). (Vendors) are trying to blend and mix capabilities. Vendors will say onshore, offshore, near-shore and no-shore… any shore but Dinah Shaw,” Davison said.

He refuted arguments that a quest for quality code was sending development work to countries such as India rather than the greatly reduced labor costs in developing economies.

“Are you starting to hear that offshoring is not about money but about quality? That is a major sales pitch. Who would go to India or the Philippines if there was not a significant labor arbitrage opportunity. (Ultimately) it is about money,” Davison said.

Davison said organizations which underestimated the backlash that the loss of “white collar jobs” could generate did so at their own peril, noting that with both the U.S. and Australia in election mode, redundancies quickly translated into political albatrosses.

“Politicians will exaggerate and manipulate everything for their own advantage. You have to filter that out. There must be a distinction between public policy and economic reality…[in the current environment] public policy is always politically based,” Davison said.

As for where all the sourcing trouble started, Davison said he had few doubts.

“The biggest problem is CFOs who expect (a continuing) reduced labour cost.”

Meta principal consultant on services, Wissam Raffoul, said many organizations fail to add up the bill when they send development to the other end of the world.

“Be very careful about what is inside and outside the scope of the contract…about what is maintenance and what are enhancements. Make sure that work which does not add functionality is not (billed) as enhancements,” Raffoul said, adding that at least seven per cent had to be added for extra communications and wrangling before contract management costs.

“It’s more complex in many regards. Make sure you have a lawyer that understands the way Indian law relates to intellectual property. There are cross-jurisdictional issues. There aren’t always savings, there aren’t always advantages. Never negotiate anything after the contract is signed. Vendors will come back to you if the applications require a lot of work — that will be reflected in the cost.”