The down side of offshoring

Economics lured Hemant Kurande to look to India, his birthplace, for more affordable engineering talent. Three years ago his company hired two service providers to do some core programming for a line of storage management products.

The results were mixed, says Kurande, CTO of Storability. The providers built products that were suitable as prototypes for R&D, but not production. That gap put the burden on Storability employees to shore up the code.

“We were not getting the quality we wanted,” Kurande says. “The offshore companies provided a high degree of innovation, but a lower degree of readiness to ship.”

The root of the problem was a lack of knowledge on the part of the outsourcing providers. “The depth of storage expertise we needed was very difficult to find,” Kurande says.

After maintaining the offshore arrangements for two years, Storability concluded that some work is best kept in-house. Kurande didn’t give up on India, though. Instead, Storability set up its own office in Pune. It employs 25 people there and is adding about five employees per month. Having control over hiring, training and retention, as well as product development processes, makes a big difference, Kurande says.

Storability is not alone in reevaluating offshore outsourcing plans that fell short of initial expectations.

In recent months, a handful of big-name companies have decided to return certain offshore work to the U.S. Insurer Conseco Inc. recalled its customer service operations as it worked to emerge from bankruptcy. Following complaints about the quality of service, investment bank Lehman Brothers Inc. canceled an offshore help desk engagement. Similarly, Dell Inc. brought back a technical support centre after corporate clients complained about communication and service.

About 21 per cent of IT executives surveyed recently by management consulting firm DiamondCluster International Inc. said they had prematurely terminated offshore arrangements in the prior 12 months. The most common reasons cited: the provider had financial difficulties; the provider failed to deliver on commitments; or the buyer consolidated its outsourcing vendors.

Nonetheless, the amount of work coming back is a trickle compared with the flood of work leaving U.S. shores.

The availability of lower-cost technical labour in countries such as India, Russia and the Philippines is winning over resource-strapped U.S. businesses. In the DiamondCluster survey, 86 per cent of respondents said they expect to increase their use of offshore outsourcing over the next 12 months, up from 32 per cent in 2002.

But analysts agree, satisfaction isn’t guaranteed. Companies offshoring are more than twice as likely to be dissatisfied with the relationship than those using national service providers, according to AMR Research Inc.

A big part of the disenchantment stems from inflated expectations. In particular, cost savings are frequently overestimated.

A common mistake, for example, is to project savings by simply calculating the wage differences between customer service agents in the U.S. and India, says David Butler, director of the international development doctoral program at the University of Southern Mississippi in Hattiesburg.

“People see a 1-to-10 savings and extrapolate from there the labour costs savings they will achieve by moving their call centre overseas,” Butler says. “The problem is, labour isn’t the only cost associated with moving overseas.”

Cultural differences, for example, mean more training is required to prepare non-U.S. workers to effectively handle calls from Americans, Butler says. “In India, customer service is usually pretty good — the reps are very nice to callers. The problem is, they often can’t resolve the call,” Butler says.

As a result, a higher percentage of calls are escalated to supervisors. “So you actually have people in queue longer, you have people on the phone longer, and at the end, a lot of times there’s not a resolution.”

Application development projects sent offshore can suffer from similarly misaligned savings expectations.

At the raw resource-to-resource level, offshore development offers a compelling cost advantage, says Partha Iyengar, vice-president and research director at Gartner Inc. “If you look at a programmer with three to four years of experience, that might cost US$45,000 to US$55,000 per year here, depending on location,” Iyengar says. “That same resource in India would probably cost US$15,000 to US$19,000 per year.”

But it’s more complicated than that, Iyengar says. Lower productivity can eat away at labour savings. Plus it’s more expensive to manage an offshore development relationship. “Companies that understand labour is not the entire story usually realize whatever cost savings they expect,” he says. Those that don’t wind up disappointed.

Storability knows the importance of setting reasonable expectations. Kurande says the company has built in a two-year adjustment period before it expects to benefit from having an office in India. Until 2005, the offshore team isn’t expected to save money or realize huge productivity gains. In fact, it’s just the opposite.

In the short term, Kurande says working with offshore labour creates headaches. Offshore setups require all employees to adjust their processes and get used to a geographically distributed development process that is unfamiliar and requires a re-evaluation of roles and responsibilities. “It’s not natural. Natural is having everybody on site in the same location.”

He goes so far as to say that unless a company is in it for the long haul, offshoring doesn’t make sense. “There are no benefits to gain in the short term,” Kurande says. “It’s not even worth doing.”

Border concerns

According to IDC, the top three risks that users associate with offshore outsourcing are time-zone issues, language barriers and cultural differences.

In particular, cultural differences have to be closely managed in an offshore relationship. “You can get into cultural nuances where the U.S. manager doesn’t understand how to manage the offshore team, and the offshore team isn’t always comfortable taking instructions from an American manager,” Iyengar says.

Some distinctions are simple but potentially critical. For example, in India a “yes” doesn’t always mean what a “yes” means in America. “In the U.S. it’s pretty unambiguous what it means when you say ‘yes,'” Iyengar says. “In India it means, ‘I’ll think about it, and I’ll get back to you.’ ”

The importance of local expertise keeps Mobil Travel Guide’s call centre close to home. The Park Ridge, Ill., company, which is known for its North American travel guides, generates a portion of its revenue by selling hotel reservations — transactions that require call centre agents to have a good understanding of U.S. and Canadian locations.

“We want individuals who are able to sell hotel rooms,” says Paul Mercurio, senior vice-president and CIO of the company. “That means they need to understand geography. They need to know that Des Moines is in Iowa. They need to be able to explain proximity to the Hoover Dam. There needs to be contextual knowledge of the United States and Canada.”

Mobil Travel Guide selected Virtual-Agent Services, a Chicago service provider with call centres in New Brunswick, to handle reservations. The decision wasn’t about price, but rather about expertise — Virtual Agent Services specializes in hotel sales, Mercurio says.

Foote Partners LLC, a research and advisory firm in New Canaan, Conn., has studied 90 offshore outsourcing implementations over the past three years and has found companies that don’t achieve the desired outcome are tripped up by communications problems, not technical shortcomings.

Organizational, behavioral and cultural aspects are more to blame than the details of contracts and technology selection, says David Foote, president and chief research officer.

Companies aren’t paying enough attention to how they manage the people involved in offshoring projects and how they make the transition to a distributed workforce, Foote says. Communication problems that aren’t addressed early in the process continue to fester and impact project delivery.

Changing workloads

As in Storability’s case, some companies shy away from offshoring because of quality concerns. CareGroup Health System relies on key vendors for infrastructure design but isn’t about to give up control of its application design.

“I’ve hired Cisco (Systems Inc.) to design my wide-area network. I’ve hired EMC (Corp.) to design my storage architecture and information life-cycle management processes. I’ve hired Microsoft (Corp.) to ‘harden’ my Windows security infrastructure,” says John Halamka, CIO of the network of five Boston-area hospitals. “My experience with offshore outsourcing is that you can pay very little for a large quantity of unusable code.”

Analysts agree outsourcing software development has its risks. The big ones, according to Aberdeen Group, are untested technology vulnerabilities; additional costs for fixes and patches; increased risk because of unauthorized access to business data; and operational instabilities.

Over the years, however, the quality of offshore work has gotten better, particularly in certain focus areas, but gaps remain.

Services that are traditionally sent offshore include application maintenance work, custom application development, data entry, customer service and technical support. Two years ago, there was a general lack of experience in customizing packaged applications such as those from SAP AG and Oracle, says Lance Travis, vice-president of research at AMR Research. But he contends that many providers now have gained experience.

“U.S. companies are generally satisfied with the quality of software development available offshore,” especially in India, where excellent process technology is common, Travis says.

But offshore projects are getting increasingly strategic, which changes the stakes. Over the past 18 months, offshore providers have landed broad application development projects for U.S. clients that encompass everything from requirements definition and design to development and testing, Iyengar says.

This can inflame cultural issues. “While Indians are great at technical capabilities, a lot of the IT resource pool in India is not very good in terms of people skills,” Iyengar says. So to suggest an Indian outsourcer handle requirements definition — which requires heavy interaction with end users — may be counterproductive, Iyengar says. “In the end, the client may have to dedicate quite a few of its own resources to help the Indian outsourcer through the process. Which becomes much less efficient.”

As a rule, anything that a client can cleanly specify and deliver as a firm requirements document to the offshore team is most effective. Clear, complete specifications are a must-have, Travis says. But that’s not always common practice in U.S. companies.

In a local setting, IT departments are often looser about the early stages of an application development project, such as the requirements-gathering process, Travis says. In offshore arrangements, “there needs to be a more robust process for gathering requirements, and you have to write much better functional specs because you’re handing those off to someone else.” Without that discipline, a project can take three times as long to complete offshore as onshore.

The migration to reusable software components and service-oriented architectures (SOA) promises to muddy the issue even further. “When you move into SOA, the focus is not so much on the pure programming but on architecting the requirements of the business as a whole bunch of services,” Iyengar says. “What becomes more important is your understanding of the business and how the processes within the business interact.”

The challenge for offshore providers is to accrue more business-focused expertise, such as people who are comfortable with how processes work in industries such as insurance, health care, banking and finance.

At the same time, U.S. IT executives need to consider if their own business savvy is up to par.

IT technologists don’t always have the expertise they need to manage a strategic, business-centric relationship with offshore IT teams, Travis says. It takes training and skills development to turn technology-focused IT workers into business-focused IT workers.

Almost everybody can save 15 to 20 per cent by sending certain IT work overseas, he says. Those that really understand how to make it work find they save 50 or 55 per cent. “There’s a huge benefit to making outsourcing a core competency.”

Protecting corporate smarts

Gaps in business savvy raise not only technical issues but also legal concerns.

Regulations such as the USA Patriot Act and Sarbanes-Oxley Act affect a range of companies and govern how those companies structure their business processes. Industry-specific regulations such as the Health Insurance Portability and Accountability Act (HIPAA) also require data and processes to be handled a certain way.

Companies have to decide the level of risk they are comfortable with and make the decisions accordingly. And that is often enough to convince companies to keep businesses onshore.

“The domain of medicine requires such expertise and such a degree of user feedback that using offshore developers is not practical,” CareGroup’s Halamka says. “Further, HIPAA regulations put severe restrictions on the privacy and security of data, so we do not want to outsource call centre activities that require patient-identified data to be kept offshore.”

Ensuring the security of corporate information is an issue that isn’t going away, particularly as companies consider sending more strategic work offshore. As that happens, the risk of intellectual property leakage rises.

“One of the dangers is that all of this work is being done in a remote location with very little interaction between that team and the on-site experts,” Iyengar says. “Over time, on a one-, two- or three-year project, the learning and the knowledge around those applications is really in the offshore vendor’s heads, not in your own team’s heads.”

The retransfer of business knowledge and intellectual property is critical. Iyengar recommends scheduling time in a project cycle for weekly or quarterly “reverse knowledge transfer.” He also recommends adding provisions for getting copies of an outsourcer’s maintenance logs.

“The combination of these two things — which we see very few clients doing today — is something we strongly recommend,” Iyengar says. “Be aware that you could be losing your knowledge and IP over time.”

In the end, many people believe the shift to offshore IT is inevitable. The instances of big corporations bringing work back after a bad overseas experience is an anomaly and over-hyped, Iyengar says. The jobs Dell returned to the U.S. represent only a small percentage of its offshore service operations. The same goes for Lehman Brothers, he says.

The net impact on most IT organizations has so far been minimal. But within the next five years, 800,000 of the 10 million IT jobs in the U.S. will move offshore, AMR’s Travis predicts.

“The whole migration is inevitable for sure,” Storability’s Kurande says. His company’s new arrangement isn’t effortless, but it looks like it’s going to work. “We can address gaps in an effective fashion,” Kurande says. “We figured out a balance.”

Would you recommend this article?


Thanks for taking the time to let us know what you think of this article!
We'd love to hear your opinion about this or any other story you read in our publication.

Jim Love, Chief Content Officer, IT World Canada

Featured Download

Related Tech News

Our experienced team of journalists and bloggers bring you engaging in-depth interviews, videos and content targeted to IT professionals and line-of-business executives.

Featured Reads