Gartner: Five reasons why offshore deals go bust

Businesses will spend more than US$50 billion on offshore and near-shore outsourcing by 2007, but many of the offshore projects will fail because of poor planning, according to a recent report from Gartner Inc.

Some organizations are rushing into deals hoping to gain a competitive advantage, often through cost cutting or a boost in productivity. But the expected gains can be severely crimped by many factors. Gartner’s report identifies five areas where outsourcers should apply more thought before taking the plunge:

— Unrealized cost savings: Most businesses push work overseas in the hope of cutting labor costs. An application maintenance worker in India, for example, earns about $25 per hour, compared to $87 per hour in the U.S, according to Gartner. But businesses make a mistake by looking at salaries alone.

Hidden expenses for things like infrastructure, communications, travel and cultural training take a bite out of the wage differential. What’s more, planning and startup costs are high, so offshore deals lasting less than a year may not pay off at all, and savings from longer term deals will emerge slowly, Gartner said.

— Loss of productivity: Staff at an offshore service center probably won’t be as productive as internal staff back at home, at least not initially.

Gartner offers several reasons: Staff turnover can be high in competitive offshoring markets such as Bangalore, India, which also means programmers there may be new and inexperienced. And service centers overseas struggle with ambiguities in the work they are assigned and shifting directives. Sending jobs overseas can also lower morale at home, creating a drag on output.

— Poor commitment and communications: Senior executives often drift out of the picture once a deal is signed; they need to stay engaged to keep morale high and strategy on track. And good communications among all parties is paramount: Projects, goals and expectations have to be defined clearly and in detail. And on the home front, managers need to explain clearly why work has been sent overseas and what benefits are expected.

— Cultural differences: Communication styles and attitudes towards authority differ from region to region and the differences can cause problems. In some cultures, questioning authority is considered disrespectful, so a team may push ahead with a given plan even if they see a better approach. Offshorers should get expert advice about a local culture, provide cultural training and even arrange exchanges among staff on both sides, Gartner said.

— Lack of offshore expertise and readiness: Some organizations make the leap before they are ready. Offshorers need to get everything in place internally and secure the support of key stakeholders in the company before launching a project. They should also figure out the risks and how to mitigate them.

Gartner also advises outsourcers to figure out their IT process maturity, often measured with the Software Engineering Institute’s Capability Maturity Model. Mature processes have standardized methodologies, established mechanisms for managing change, detailed service-level agreements and strong skills in project and portfolio management. Weakness in these areas can translate into poor results from outsourcing projects, Gartner said.

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Jim Love, Chief Content Officer, IT World Canada

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