10 Myths of Offshore IT Outsourcing Revised

Google search on 10 myths in offshore outsourcing brings a few good articles written 3 – 7 years ago, some of them are still worth looking at even though some of the top myths lost their mystical nature, some debunked myths turned out to be facts, so it is worth taking a new look at what the myths are and whether they are worth debunking…

Let me start with a few Facts that are often called Myths:

Fact # 1. Offshore outsourcing is costing U.S. jobs. This myth has been debunked so often that by now we should strongly believe in its opposite. Supposedly someone very trustworthy institution calculated that for every dollar spent on a business process that is outsourced to India, the U.S. economy gains at least $1.12. An easy way to fix the economy, isn’t it? Should we pass the idea to the new administration? Well, I am not planning on questioning this global statement. What I can say with certainty is that every outsourced IT job is a local IT opportunity lost.

Fact # 2. The cost benefits of outsourcing are overstated. I touched on this subject in several earlier posts (e.g. Outsourcing Myths: cost advantage). The reason I wrote on the topic is exactly that “the cost benefits of outsourcing are overstated”. I would not call IT outsourcing “the best story ever sold” yet there is a large portion of exaggeration to almost every offshore vendor presentation I’ve ever seen. Fortunately many of buyers came to grips with the fact that on any meaningful scale IT outsourcing can at best save 20-30%, if handled well.

Fact # 3. There are “huge” cultural barriers. For anyone who’s been through any substantial outsourcing initiative there is nothing mythical about cultural barriers. The fact that they are not necessarily huge and sometimes only subtle doesn’t make them easier to deal with. Especially now when “IT outsourcing” doesn’t equal “Outsourcing to India” underestimating complexity and challenges associated with cultural differences can trip over otherwise bulletproof engagements.

Now let me switch to some of the most popular misconceptions that fit the definition of “Myth”:

Myth 1: India is the best destination for IT outsourcing. India is a leader in IT outsourcing no matter what angle you look at – sheer volumes, number of providers, process maturity, breadth and depth of service offering and so on. It doesn’t make India the best destination in every case though. In particular India is farshore destination for European and US-based companies vs. nearshore option provided by Eastern Europe or Latin America correspondingly. There are other Cons to India as the destination (take a look at Pros and Cons of Outsourcing to India). Growing competition from almost every country in the world cuts into India market share and offers multiple alternatives to buyers across the world.

Myth 2: Offshoring is the best strategy for cutting costs. Offshore outsourcing is just one of the strategies that companies can use deploy in tough economic climate. There are many areas that should be considered by the companies looking for bottom line improvements. In many cases the steps should include rationalization of IT portfolio, SDLC and other process improvements, usage of tools, etc. Offshoring is a very powerful weapon and as other ones is a double-edged sward.

Myth 3: Offshoring drives IT salaries down. Offshore outsourcing is of course a contributor and plays its role in salary dynamics, it is however less important factor than other elements of the economy and geography. The areas that are affected the most are actually wages of “local outsourcers” – freelancers, contractors, etc. Take a look at oConomy you will see some staggering trends catering to the concept of “flat world”. Hit with homesourcing many US freelancers had to drop their rates to what market is ready to pay nowadays. On the other hand some comp. packages increased in size: consider for example rates you need to pay people running distributed engagements.

Myth 4: Offshoring will result in significant unemployment in the technology sector. Similar to salary dynamics offshoring affects employment trends, and so far did not deliver the impact feared. High-end IT professional continue to be one of the scarcest commodities in the world, even low-end IT workforce still remains gainfully employed in a large degree despite huge economy downturn. It remains to be seen how far IT unemployment figures would go and would be the geographical distribution.

Myth 5: Quality of offshore IT operations is lower than in the US. That is almost as bad of a generalization as they get. As a matter of fact having seen IT operations in many companies in this country and some of the best operations offshore I can say that there is much to be learn from IT companies in China, India and other countries. As a matter of fact how many CMMI5 companies are there in US and how many in India? It would be interesting to see average maturity across IT outfits in different countries.

Myth 6: Quality of code produced by offshore organizations is very poor. Quality of code produced by outsourcing companies is another topic being frequently discussed. And again I would not venture to generalize; the code is produced by people, not organizations. Bad programmers write bad code and bad programmers are one of the most numerous creatures in the IT habitat. High wages of IT and huge demand on it attracted large volume of mediocrity into the field across the world and even in exclusive locations such as Silicon Valley you will come across of horrible code on a regular basis. Add to that the possibilities of writing bad code that have been opened by new “forgiving” technologies such as Java or PHP and you get where we are today…

Myth 7: Offshoring is a never ending nightmare. Funny enough I hear this one more and more often nowadays. Yet when you deep dive into the reasons behind nightmare they often point much more towards the organization outsourcing the IT tasks rather than to the vendor. As I said many times it takes knowledge and skill to apply outsourcing tools to the benefit of your organization. You can not get rid of a problem by throwing offshoring at it. Organizational inefficiencies such as broken communications are only amplified by outsourcing and can result in the nightmares.

There are more common misconceptions about outsourcing, it’s not surprising as it is still a somewhat new and rapidly changing phenomenon, but I think I should stop at this point as I met my quota of top 10…

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19 thoughts on “10 Myths of Offshore IT Outsourcing Revised

  1. Not a bad comparison – if anything, you are bending a bit too far in your efforts to be fair.

    I started setting up off-shore technical response and parts managemen centers in India about the mid 80’s for Honeywell. At that time, India’s government policies, import/export regulations, etc., were their biggest enemy. At that time, you could ‘hire’ a PHD for about $6-$8k / year. You can absorb a great deal of customer dissatisfaction when your margin rates are at 50-60%. My prediction then (and I stand by it yet today) is that when the advantage of doing business there is 21% or less better than in the US – companies will stop doing it there. That seems to be the ‘cost’ of customer/client satisfaction.

  2. Thanks Ed. 21% is a great benchmark, could be a good answer to those looking for “break even” point of going offshore. thanks, nick

  3. There was some math around that number by the way.

    I also liked your comment about the ‘flat’ world. I have worked in 37 countries during my career – lived in 6. There is very little I would consider ‘flat’!

    Cheers!

  4. From Patrick Nicolas:

    Here is my comments on

    – Myth 6: Quality of code produced by offshore organizations is very poor.
    I have used offshore engineering teams (India, and Bulgaria) with some success to maintain an existing product line. The quality of code was very good.

    – Myth 1: India is the best destination for IT outsourcing
    I used both India and Bulgaria. It worked because I decided to use manage the project directly from the US. I used recruiters overseas to pre-select candidates for the interview process so those engineers were just an extension of the US team. It is also critical to use effective communication and collaboration tools if you rely on 24 by 7 development.

    Links:
    http://www.pnexpert.com/24-7_SCRUM.html

  5. on behalf of Arpana Rawat (Linkedin Answers)

    Myth 1 – Offshoring means we don’t need to manage it anymore. Offshore engagement management needs to be managed like any other work. Perhaps the parameters are a little different. No customer involvement will lead to deliveries that do not satisfy the customer.
    Once we played a game with our service providers. The game was simple. One person takes a smal bucket and stands away from another person who has to throw the coins in the bucket. In the first round the bucket had to be placed on the ground and stood upright. We had a few coins that went in the bucket, many fell outside. In the second round, the bucket holder could tilt the bucket forward. We got more coins in the bucket. In the third round the bucket holder coudl move the bucket around to catch the coin. We got the most coins.
    If we translate the bucket guy to be the customer and the coin thrower to be the vendor, we have our answer. When the customer and vendor are attuned to each other and work like partners, we derive the most value. In other cases non-participation or little participation from the customer resulted in lesser success. Now if the coin thrower was throwing coins in someone’s elses bucket, you may want change them!!!

    clarification:

    Myth 1 = the myth I believe is the biggest myth

  6. In the present market Offshore outsourcing will help make all IT workers become more productive and allow companies to develop more lively and responsive business replica, which in turn, will help raise salaries for domestic workers in all countries….

  7. on behalf of Ravi Raman (Linkedin Answers)

    Offshoring issues are rarely understood and appreciated without an inherent bias is clear from the lists of “Facts” and the “Myths”.

    Lot of the confusion is knocked off when one compares “offshoring” to “imports” and “Outsourcing” to “procurement”.

    It is true that there are exporters who export substandard quality, but on an average- “better quality” is kept aside for exports.

    It is true that imports are normally cheaper than local goods but this is not always the case. When a product/service establishes a mark for itself it becomes expensive as there is a low degree of comparability with local alternatives. Same is the case with offshoring IT.

    Any attempt to restrict “imports” through tariff and non tariff barriers will have the same impact( on the long term) that was there on countries which had closed its borders for imports. There will be low levels of investment in the local markets resulting in reduced competitiveness over the years. Imagine the days ( 1970’s ) when one had to pay 360% duty to import a computers and the present days when Notebooks are importable practically duty free into India.

    IT and process outsourcing are no different from import of goods and lessons have to be learnt from the past.

  8. Hi Nick,

    great information here! My 2 cents to “Myth 5: Quality of offshore IT operations is lower than in the US”.

    The subject of quality can be really hard to grasp. I would not though rely on any QA certification here too much. Yes, it is a good indicator, that’s for sure. However, I think there are other aspects as well. CMMI5 (or any other certification) might be a double-edged sword. It might make total sense if the processes and the project scope are clearly defined and if the project is quite big. If I think about software development (say agile SWD) it might not be that easy.

    One of my older colleagues who has experience outsourcing in Europe and India even says that for Western countries CMMI3 is as much as they can get, because of the Western mentality. Everything above is simply too rigid (for software development).

    Jozef

  9. Good point Jozef, interestingly enough I am planning to cover CMM as one offshoring myths. There is a lot to be said about controversy around it. Thanks, Nick

  10. Most of these myths are truths. I’ve worked with Indian offshoring first hand. The quality is horrible, test results are falsified, CMM LVL 5 designations are purchased through bribes, deadlines are never met, there are very hostile and judging attitudes towards americans. Poor ethics is rampant and so is poor quality.

    One company went dark for 4 days due to a code move from offshore that was poor quality.

    Another almost incurred a HIPAA fine due to falsfied test results. You must be joking to state there is quality in offshore.

    Also, jobs are lost, wages are lost government support increases (as does cost) to supplement the unemployed and the dollars go offshore and never come back. There is a multiplier that reduces consumer demand damaging the US economy on a macro level. And our young people are unmotivated to study sciences as they know there is no future in it. Hmmm..that leaves the US totally dependent on a third world country someday that doesn’t like our country but loves out money…hmmmm not a good scenario for national security is it?

    I’d like to question your model of 1.12 gain. What source did you use?

    Where is the great benefit to the US economy that was promised? Where are the jobs? And my favorie where is the lower cost of goods and services? I’ve noticed nothing getting cheaper since this trend really took off.

    I have noticed executive bonus’s going up at a rather alarming pace. Then so has the rest of the country…AIG anyone??

  11. We have come across several ways to tip the scales in favor of quality offshoring. Here are a few:
    * Invest in the right tools and templates for your development environment. With outsourced teams, rely on your tools to replace the conversations that take place on a day-to-day basis for onsite teams.
    * Don’t rely on top-scheduled meetings and communication. Offshore developers should work directly with the business analysts and others writing requirements. People on both sides of the ocean should be encouraged to call and email each other directly.

    The ability to offshore successfully is definitely distinct from the ability to manage a development project. Hope the two tips help.

    See also our discussion at http://www.manoatech.com/quality

  12. Good topic! However there are several things to discuss here, I mean Outsourcing has a lot of benefits in my country, I’m an American working in Guatemala, and it has generated a lot of jobs, know on the other hand you do have a point, local jobs opportunities are decreasing, but I mean the pros for outsourcing are amazing, the price, technology,Quality, if these weren’t that good companies would not be outsourcing to Guatemala, India, Costa Rica etc. check out this post your lectors might like it http://www.officient.biz/k-o-knock-out-tips-on-outsourcing/, By the way nice posts looking forward to reading more, good info on the global outsourcing revenue.

  13. Hi all,

    I would agree with Arpana regarding the coin game; if you want real benefits from outsourcing then you have to see this like a partnership and not just as a short project that has the only scope of cutting costs.
    Reducing costs is important but if you target a minimum of 21% then you will have to face problems at home: hard to find and retain motivated people and experts in their area. A reliable partner (or more) can take all this headaches and to offer you flexibility and scalability beside the points mentioned earlier.
    The only issue is to find the right partner for you and is not whether outsourcing is good or not.

    Wish you luck!

    Paul

  14. …to find the right partner for you and is not whether outsourcing is good or not. – very much like in so many areas of life,
    it’s not about the biggest, the best, the cutest, etc. it’s about what’s right for you

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