Pragmatic Outsourcing

Top reasons for outsourcing

Whenever I have to introduce using offshore to executives I start with a slide with has title “Good reasons for going offshore”. The slide is otherwise empty. With all the headache it will cause why would I go offshore if I do not absolutely have to? I have been using offshore vendors since ‘92 and there is no place on my body which doesn’t have scars left by that experience – from grotesque stabs on the back to burned fingers. And yet again and again I find myself using offshore vendors and recommending them to my clients and partners. So what are the main “bad” reasons for using offshore? What typically drives companies to consider offshore outsourcing? For many companies those reasons could be roughly grouped into 3 categories:

Reducing operations cost, some most obvious examples would be:

• Lower resource cost; this topic deserves a separate discussion but for now let me just say that if you are good at utilizing offshore you may realize 25-30% savings;
• G&A savings (benefits, office space, utilities, etc.);
• Other resources related savings (reasonable severance, resource add-on acquisition cost, training cost, etc.).

Reducing time to operations / time to market, some examples include:

• Access to existing pool of resources vs. hiring; I will need to touch upon that subject in more details, for now let me just say that that in some cases that is true;
• Establishing development / operations infrastructure vs. using existing or building upon existing;
• Access to specific skills / domain expertise / methodology, etc.

Solving specific organizational issues, a lot of diverse and unique items here, here are just a few common examples:

• Outsourcing legacy maintenance to motivate developers by moving them onto more glorious tasks. That is a well known double-edged sward though.
• Dealing with sawmill of resource demand. Need for resources goes up and down if you staff at the top level your resource utilization suffers, if you target the bottom you can not react to market needs. Proper offshore supplement can help alleviate the issue.
• Risk mitigation, for example: should you hire for dealing with substantial spike in demand? Is the change permanent or when the novelties ware off you will be facing RIWFs? Outsourcing could be a better way to handle the spike.
• In some way the same idea as above but put into terms very clear and dear to hearts of CFOs – eliminating fixed cost
• Using third party operational expertise, existing processes, certifications, etc.

While in a way each of the reasons above could be enough to consider offshore in my view you need more than one reason to actually go offshore. The risks and penalties are just too high. And that deserves a separate discussion.

August 22, 2008 - Posted by Nick Krym | Making Offshore Decision | Offshore Pros, Outsourcing, Outsourcing Reasons