Many organizations have reaped significant or even huge benefits from offshoring parts of their IT function.

This offshoring success creates the question about when offshoring is appropriate and when it will be disappointing or even counter-productive.

IT functions suitable for offshoring

Successful IT offshoring examples include:

  1. Help desk.
  2. Data center operations.
  3. Network and security monitoring.
  4. Application operation.
  5. Custom application development.
  6. Website operation and content management.
  7. IT administration.

IT functions not suitable for offshoring

Situations where offshoring is unlikely to be successful include:

  1. Strategy development.
  2. Collaboration to achieve a consensus on IT goals.
  3. Consensus-building on requirements.
  4. Computing infrastructure build and upgrade.
  5. Significant people change management effort.
  6. Software package implementation.
  7. Technology evaluation.

The bottom line is that the larger the IT operation or IT project, the higher the net benefits will be. Larger projects are better able to absorb the risks of offshoring described below.

Benefits of offshoring

Most offshoring benefits arise from cost and capacity. Economic development benefits that occur in the country of the offshore service provider are not included here.

Cost reduction

The primary driver for organizations to move IT work offshore is cost reduction. It’s typical to find professional services hourly rates for equivalent education and experience to be in the range of 25 per cent to 40 per cent of the North American rate.

Access to expertise and capacity

As offshoring has grown, some service providers have grown to become enormous organizations with deep expertise and incredible capacity. If your large project, meaning budgeted at over $1 million, is under time pressure (which seems to always be the case), then engaging this expertise and capacity can be hugely helpful.

Risks that undermine offshoring benefits

Customers of offshoring services have encountered the risks described below to varying degrees and mitigated the risks with varying degrees of success.

Productivity differences

The productivity of the offshore staff varies widely depending on the culture and experience of the individuals.
Some offshore service providers are world-class in their productivity, the quality of their work and the rigor of their processes. Other offshore service providers not so much.
On balance, the lower productivity of offshore staff offsets some of the value of the lower rates.
This productivity risk can be reduced through:

  1. Careful selection of offshore service providers.
  2. Setting and managing expectations of the offshore staff.

Language differences

Offshore service providers are located in many countries. I’m astonished by how many people in distant lands speak at least some English.
More problematic is the enormous number of English dialects. The combination of accents and vocabulary differences between your onshore team and the offshore team make clear communication difficult. It’s easy to believe understanding has occurred when it has not.
Most often, many small misunderstandings tend to pile up and create rework that increases cost.
This language risk can be reduced by:

  1. Offering English classes.
  2. Traveling more for face-to-face interaction.

Cultural and social differences

Many cultures are even more deferential toward bosses than we are in North American. This dynamic can make the discussion of major project issues awkward and inconclusive.
Then there are issues of seniority, ethnicity, religion, and race that interfere with the ability of the offshore team to work well with your onshore team.
The staff of the offshore service provider will tend to be respectful toward you, the important customer, and not ask too many questions.
These differences lead to underachieving the SLA, incomplete requirements, a confusing design, and incomplete software testing. The resulting rework undermines the business case for offshoring.
Cultural and social risks are difficult to reduce. Sometimes it’s possible to:

  1. Be selective about the country of residence of the offshore services provider.
  2. Reduce the number of native languages and cultures among the offshore staff.

High staff turnover

In some developing countries, offshore service providers experience significant staff turnover as the staff is headhunted for more money, less commuting or other perks.
Since you, as the customer, are paying for onboarding and familiarization of the offshore service provider staff, high staff turnover will increase these costs and lead to underachieving the SLA or increasing project schedule and cost.
This turnover risk can be reduced by ensuring the offshore service provider:

  1. Treats staff reasonably.
  2. Operates with an appealing work environment.

Time zone difference

Typically, there is a seven to ten-hour time difference between your time zone and that of your offshore service provider. This difference severely inhibits your ability to engage in real-time collaboration. It also creates ongoing lags in email communication.

The time zone difference tends to elongate the project schedule and therefore increase the overall project cost.
The time zone risk can be reduced by creating:

  1. A detailed project plan that communicates when you expect to review and finalize the various deliverables.
  2. Superior documents and reports.

Internet service disruptions

In some developing countries, Internet service disruptions can occur for a variety of reasons including:

  1. An over-taxed Internet service provider (ISP).
  2. Deliberate Internet shutdown by the government to suppress criticism of the government and to prevent opposition groups from communicating.
  3. Accidental Internet shutdown due to construction activity cutting through the wire.

Internet service disruptions undermine service levels and delay software development.
The risk of Internet service disruptions can be mitigated by buying service from multiple ISPs.

Telephone service disruption

In some developing countries, telephone service disruptions can occur for a variety of reasons including:

  1. Poorly maintained telephone infrastructure.
  2. Deliberate mobile communication shutdown by the government to prevent opposition groups from organizing protests.

Telephone service disruptions undermine service levels and delay project progress.
The risk of telephone service disruptions can be mitigated by buying service from multiple mobile providers.

Travel impact

The high value of face-to-face discussions to overcome cultural differences and to minimize the risk of misunderstanding leads to inevitable travel.
In addition to cost, travel undermines the productivity of the individuals traveling. For some countries, visa requirements and uncertainty create additional difficulties.
The risk of travel impact can be reduced by using video communication and remote collaboration tools frequently.

Utility disruption

In some developing countries, basic utilities, like electricity and water, that we take for granted in the developed world, can be intermittent. This problem will undermine service levels, elongate project schedule, and therefore add to cost. The utility risk can be reduced by operating a standby diesel-powered generator.

If these risks of offshoring scare you, then consider nearshoring where these risks are eliminated or much diminished. What factors have you encountered that favor or detract from offshoring? Let us know in the comments below.