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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The Myth of the Onsite Coordinator

One of the proven methods to improve quality of communications with the offshore team is to have a dedicated person to coordinate and oversee its activities from your site. This person should ensure the communication flow, act as liaison between the teams, and often interpret information from local to offshore language. Even if the both sides speak English fluently (e.g. outsourcing to India) there is lot of subtle differences in business lingo that need translation. More so the person could be charged with business analyst activities interpreting domain specifics to technical language of the development team. On my book offshore manager should have very solid PM/PMO skills, in-depth understanding of the processes such as SDLC, strong knowledge of the domain, and of course understanding of the offshore. The job description for the person quickly adds up to a very tall order. Add to it logistic challenges – this person typically ends up working long odd hours – and you realize that it’s not an easy task to find some who can do it.

Of course I am not the one who invented dedicated offshore managers, as a matter of fact even for a fairly small engagement your vendors would strongly recommend that you put a full time onsite coordinator on your team. The vendor is likely to have long list of Pros for adding the person to the team, not surprising it’s a very common add-on sold pretty much with every contract.

There are a few serious caveats here, if not to say traps. Something I have observed on multiple engagements:

  • Onsite coordinator could be just a slightly disguised sales executive with primary objectives that have nothing to do with real objectives of offshore manager.
  • Onsite coordinator could be grossly unqualified for the job but given it due to some internal reasons – for example as a holding position between assignments.
  • Most often the onsite coordinator is just that – a mere coordinator – far less than you need for the position.

Each of the scenarios above is guaranteed not to deliver on the objectives of an offshore manager and to prevent engagement failure you’ll need to invest in the manager as well, in that case why do you need coordinator?

More so, one of the biggest issues with offshore onsite coordinator is the mind set, is s/he going to have your interests at heart or interests of the company which pays him salary? When inevitable problems come up on what side s/he will be? Let’s say that problems are severe and you have to take your vendor to court, can you really count on onsite coordinator to be unbiased?

I can not tell you how many times I had this discussion with offshore vendors who continue to push for the “best practice”. Well, if that’s so helpful for you to deliver on the engagement objectives why don’t you do it on your own expense? That question typically falls on deaf ears.

When you consider expense, typically either offshore rate + per diem / hotel / car / etc. or onsite rate of ~$80 an hour you realize that it’s might cost effective to find offshore manager locally. Good offshore managers are not easy to find and they are not cheap but believe me, they are worth every penny.

Outsourcing Myths: Turnover Ratio

The impact of turnover on the total cost of outsourcing is difficult to overstate. Of course you know that and put a turnover question as one of the most important ones in the beginning of your RFP. You look at the proposal that just came back from your vendor and see 18% as the response, “whew, I think we found our guys!”… Welcome to the murky world of turnover ratios. The sad part is that this answer may mean very little; being the most infamous curse of offshore engagements the turnover ratio comes with a few extra traps.

The most frequently overlooked issue strangely enough is the meaning of the “turnover ratio”. When your prospect vendor tells you that their turnover ratio is lower than the country’s average (high changes that’s exactly what you are going to hear) what does the vendor mean?

On one of my recent engagements with a reputable company in Noida, India the staff on the project changed at an amazing rate – while working with 10 member team for about 1 year we saw over 20 people, and only one person stayed on the project from the beginning to the end. No matter what formula I tried apply to that situation it did not seem to align with 18% stated in vendors proposal. And yet every account review my vendor pushed the idea that the turnover ratio was not out of bounds. Ah? ‘Well, Nick:

  • We moved Rajiv and Venkat off the project because they were not performing job well enough;
  • Ramki’s mother got sick and he had to quit to do the right thing;
  • Shushma got married and moved to Hyderabad…

And so on and on and on…

As it turned out my valued partner had a completely different view of the turnover ratio. My guess is that they  calculated the ratio based only on the number people who’d left the company for competitors.

Another trap worth mentioning is an internal transfers.  What difference the company’s average turnover rate makes if your project turnover exceeds it by two or three times?  I’ve seen that numerous times and in a large degree it’s unavoidable. The vendor will move people around to increase their utilization, to appease the loudest customer, and to keep employees motivated.

And one more trap to mention is key resource turnover.   If your team has an average turnover of 20% (you lose and have to retrain 2 people a year on a 10 member team) it might not be so bad if these two are junior QA engineers. What if these two spots both belong to the tech lead on the project?  You find a great TL, he comes to your site for knowledge transfer and after two months go back to India just to resign the next week, two months and countless meetings later another one comes to your office, goes through K-transfer and goes back, and then gets hit by a typhoid fever?

Recognizing that there is much more to turnover than just a percentage sign is a huge step forward.  Dealing with turnover is a much more complex issue and a rather large topic, so I’ll cover it in the next post.

Outsourcing Myths: cost advantage

On a surface that seems obvious: even with dollar fall, rising cost of living in India, China and especially eastern Europe the hourly rates continue to be much lower than those you have to pay in the states. For example, a mid level java developer would roughly cost you:

SF Bay Area, full time $60/hr
SF Bay Area, contractor $80/hr
Bangalore, India $25/hr
St. Petersburg, Russia $30/hr
Shenzhen, China $20/hr

So for every contractor in your San Mateo office you can put 4 in Shenzhen or 2 in St. Petersburg. Or, looking from savings angle, instead of paying a team of 8 engineers roughly $80K a month you can pay less than $30K in China and get yourself a hefty raise.

However, let’s take a look at real cost of outsourcing. The first rate killer is productivity: in my experience on average productivity of resources in India would be 50% of what you would get with local mid level resources, for senior developers it would be at best 75%, and for juniors you could potentially see it as good as 80%. To achieve that level of productivity you would need to put above average efforts in shaping your team and have considerable amount of luck. Typically getting a good senior developer is only possible if s/he is managing is at least 20-25 resources. Also be prepared that understanding of seniority may greatly vary from what is considered a norm locally, and in that light delivering another productivity hit. Let’s imagine that you are planning to outsource a 5 member team that includes one tech lead, two mid-level java developer and relatively junior ones. Your cost for the team would be roughly:

Role Level Experience QTY Salary Aprox Rate Monthly Cost
Tech Lead Senior 10+ 1 $140,000.00 $ 82.60 $ 14,537.60
Developer Mid 7+ 2 $100,000.00 $ 59.00 $ 20,768.00
Developer Junior 3+ 2 $ 75,000.00 $ 44.25 $ 15,576.00

Total:

$ 50,881.60

What would it cost you in Noida? Let’s assume that you got lucky in finding a tech lead for the team and the rest of the members were typical developers you could find out there.

Role Level Experience QTY Salary Aprox Rate Monthly Cost
Tech Lead Senior 10+ 1 N/A $ 32.00 $ 5,632.00
Developer Mid 7+ 2 N/A $ 28.00 $ 19,712.00
Developer Junior 3+ 2 N/A $ 25.00 $ 17,600.00
PM Mid 5+ 1 N/A $ 30.00 $ 5,280.00

Total:

$ 48,224.00

Note that team in India also includes full time PM which is not surprising for a team of 9. The result is a staggering 5% of cost savings. Your actual numbers could be different based on your negotiating skills, but the dynamics won’t change.

I am sure that many outsourcing companies would dispute my assessment of productivity. Well, let me give you a couple examples:

  • We stopped a development project (CICS adapter) being developed by team of five “very senior engineers” from Mastech after ~3 months due to unacceptable quality of deliverables. 2 months later the adapter was developed by a single developer we had on staff.
  • We had to stop and take in-house a handheld development project (.NET) being delivered by a senior developer and several mid-level ones from MindTree due to low quality of code and extremely low productivity. This project was later delivered by a single mid-level developer with oversight from a senior developer in time shorter than it had taken us to ramp up the team in Bangalore.

The list of examples can go on and on, they are just examples, however, considering that I could not offer any examples of an opposite nature, there is possibly a trend here. The question is why offshore developer’s productivity is so low? I’ll put my thoughts on in a separate post.