Is IT Offshoring Worthwhile?

Posted by Kevin Brady on Sun 10th December 2006 at 11:12 AM, Filed in Outsourcing

So what do we mean by the term Offshoring for the Newbie Project Manager?

“It is the relocation of business processes to a lower cost location, usually overseas”.

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In theory this looks an almost “too good to be true” opportunity to increase profits through reduced production costs via the exploitation of cheap foreign labour. The expectation with respect to IT software development is a promise of cost reductions in the region of 30% to 40%. The management consultants convince clients that all you needed to do in order to encapsulate this cost saving into your balance sheet, is to carry out, with their help, an IT staff change-over similar to changing out an old car engine and replacing it with a new one made in India or China. Make this happen and “he presto you’re in the money”.

In addition, the road to Elderado is promised not to be at the expense of quality as the new people employed would all be similarly qualified to the ones targeted for redundancy.

“Just seems to get better and better”

“No brainier” you might think.

Well, I visited a client (software house) last week, to discuss the problems they were experiencing with their project management when the subject of their offshoring arrangements (Indian - Java J2EE coding capacity) was brought up over lunch, and how they have turning out to be more trouble than they were worth.

Originally they had hoped to achieve all the expected benefits of offshoring mentioned above, along with the use of this new found “on tap” development capability as a means of flexibly handling peak-load related project works. The latter expected benefit was of particular interest to my client because, up to this point in time, they had not been able to quote effectively for larger project opportunities. Larger projects typically involve considerable business risks such as taking on large numbers of extra staff in short timescales, accompanied by significant and expensive facility upgrades.

However, once my client had signed up with their new Indian offshore vendor they had found to their cost /alarm that they had been largely chasing a mirage. There issues ran as follows:-

1. Their Culture

The biggest problems they faced seemed to be cultural. Very often countries with highly skilled workforces, which are under utilised, are in this situation for a good reason, and foreign investors, looking to exploit this reservoir of cheap labour, need to be very very careful. Quite often, the economic and cultural environment of such countries have acted as barriers to business and foreign investment for decades, and as such, offshoring your IT development (coding resource) can be like injecting Polonium into the heart of your business. The only defence against this is to enter into such arrangements with your eyes wide open by always making sure you carry out proper due-diligence (please click for FREE check list).

My clients referred to their relationship with their Indian offshore vendors as akin to having a “milestone around their necks”. I asked for specific details of the cultural issues, which were dragging down their business:-

• “Never Say No Culture”. In India it is unheard of for staff to stick their noses out and say something might be wrong, or technically unfeasible, for fear of upsetting the client and their bosses. This results in an inability to run effective risk and issue management resulted in mission critical software bugs and increases in costs related to the rework of unfeasible system designs.

• “Dated work Practice”. The Capability Maturity Model (CMM) can be an important measure of a company’s ability to deliver quality systems. Many consultants (including myself) consider that for an offshore vendor to deliver effectively, it is important for them to have a standardized, and repeatable, development /management model, which must be in the region of CMM Level 5. My clients felt that their Indian offshore vendor was only worthy of a CMM Level 1. This gap (between level 1 and 5) was compensated for by their vendor engaging additional resource, thus killing the original offshore cost advantage they were seeking in the first place.
However, I have to credit my clients with trying to make the best of a bad situation, by trying to help this huge Indian offshore resource provider with advice on what CMM level 5 is all about, and how it could greatly benefit their business. The advice fell on deaf ears because, in the vendors view, 70% of their local competitors were operating at CMM Level 1 and doing just fine in growing their business. Therefore they couldn’t see the need for increases in management overhead (also lack of local management resource) and lower revenue through reduced staff numbers when there were so many potential clients suffering from “Gold Fever”.

The symptoms of this “fever” seemed to take the form of client engagements with local vendors on the basis of little, if any, due diligence assessment, because the potential cost savings as mentioned earlier were supposed to be a “no brainer” i.e “The Gold IS up der in dem der hills just for the taking”. This “Gold Fever” seems to have been further reinforced by the belief that the whole Global IT Industry is moving towards the offshoring model, and with so many people in favour of it, surely they can’t all be wrong (Klondike Gold Rush).

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Does all this mean that many UK and US companies who engage in offshore systems development are “Suckers” and “Lemmings” ?

2. Overheated labour markets

My client also stated that the local labour market, which looked so ripe for exploitation, had been exploited by the time they got there (Just as in the Klondike Gold Rush).

They believed that the situation was so serious that, following project audits, they reckoned that their vendor was experiencing a 30% staff turnover rate as staff shuttled between employers looking for the best salaries and bonus rates. My client felt this had a huge impact on the quality of their work:-

• The Indian vendor, faced with such huge turnover rates, was plugging the gaps with more and more rookie programmers who only had the ability to “code for England” and not much else. More and more they were seeing the changeover of unintelligible code out.

• Furthermore, much of the in-depth knowledge acquired in the early stages of a system build was going out of the door before project completion impacting deadlines and the overall quality of the build.

3. Stealing of Intellectual Property

My clients were also engaged in development of some cutting edge, supply-chain software, which they felt couldn’t be trusted with their offshore vendor. They were concerned that the local legal systems were corrupt, or inefficient, and as such intellectual property rights protection clauses in service contracts were worthless and no deterrent to these vendors selling on their domain knowledge to other third parties.

4. Massive increase in management overhead costs

With vendor resistance to the adoption of modern management /work practices within their business, my client was forced to engage in frequent face to face meetings, audits, and lots of out-of-hours conference calls, putting a heavy strain on their management team. Running project plans and risk /issue management via remote control, really hovered up lots of key management capacity.

5. Massive increase in QA activities.

With so much poor code being generated by their offshore vendor, my clients had to make sure that code was shipped electronically to my clients own in-house analysts and tech architects for review and unit testing. The time and effort involved in making this activity work (taking into account unhelpful time zone issues) became an unexpected cost to the business in respect of in-house development resource being tied up on never ending code review activities.

In conclusion, the offshore software development model turned out for my clients to be a costly mistake, with the internal running costs of maintaining the relationship (additional Management & QA work) combined with the local inefficiencies of the vendor eating up all their expected cost savings.

In fact, my client felt that the relationship was making software development more expensive for a poorer quality outcome than compared to a do-it-yourself scenario. 

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READER COMMENTS:

Hi,

nice post. You point out very well the problems arisen when you outsource to India. What you miss to mention, is that there are other countries where you can outsource that might produce better results.

Countries like Argentina (yes, I’m advertising raspberry) have a closer timezone to US (EDT +1), much similar culture, excellent IT resources (many of my classmates are in US or Europe now) and a very convinient change rate.

One thing I disagree with you in, is in the statement that companies should have CMM level 5 capacity. Level 3 assures you enough control over the process, and bears a lot less documentation. Anyway, I think TDD and agile methodologies can achieve much better results than writting as much docs as the CMM requires.

Well, JM2C.
Regards,
Pablo.

Posted by Pablo  on Mon 11th December 2006 at 12:34 PM | #

This is an interesting article, but are you sure that you aren’t confusing offshoring with offshore outsourcing? In my opinion the industry seems to have learned its lesson with offshore outsourcing and you’re seeing less and less of that. However, you are seeing more and more large companies openning offshore development centers. The difference here is that the management of the developers in these centers is pushed down to the level of line management. It is a far better arrangement than the old outsourcing arrangements because a low-level director is much more qualified to judge the quality of work and the resource requirements than the high-level execs who used to make these decisions. This offsets the results of your CMM level 5 comment simply because you aren’t managing to a paper contract.

That’s not to say that offshore development centers are worth all of the hype. When I talk to other people in my field it seems that we all share the experience that these centers are usually teamed up with a stateside development team. In these situations the offshore teams are usually given the less sophisticated tasks for many of the reasons that you state.

It is clear that while there may be a lot of potential to offshoring it is vastly overrated. I think that your analogy of changing a car’s engine is needlessly far fetched. There is plenty of experience with this sort of thing in the manufacturing industry. They went around and around before they figured out how to make this sort of thing work. There’s no reason to believe that it can’t work the same way for software development. You simply have to keep in mind that software development is more sophisticated than manufacturing engineering and that you have to manage your expectations of the returns based on that fact.

I remember hearing statements like how India has a billion people and therefore must have a huge number of developers. I worked for a very prestigious private fund management firm that decided to reduce thier investment in Indian outsourcing companies because they felt that the labor market was going to experience shortages. At the same time the CIO couldn’t ship over there fast enough. Talk about a disconnect! I also worked for one of the largest investment banks in the U.S. whose CIO was a huge proponent of development in China. I worked as a consultant on one of their projects and it went about 300% over budget. When the project was finally completed it was declared a raging success. When I asked the CEO of the division who foot the bill why he didn’t say something about the cost overruns he made it clear that he had worked some back room deal to make sure that they didn’t show up on his bottom line. Nobody wins in these kinds of situations. It’s only a matter of time before the reality starts to show through the nice, shiny veneer.

Posted by Les Walker  on Mon 11th December 2006 at 04:33 PM | #

Hi Pablo,

Thanks for your comments. I believe you are a regular to the site if my site meter tells me correctly. If true I appreciate your regular readership.

The argument between CMM level 5 or CMM level 3 is not important and in my view should be a flexible decision based on the risk /issue and assumption profile of the project.

In my view having spent 20 years running large programmes of work it all depends on SCALE. If you are outsourcing your development to a 5 man team in India, Argentina or Alaska and the people are skilled, experienced, motivated and willing to speak out and question things, than magic can and does occur whether you use Agile or anything else for that matter.

This issue is that methods must be fit for purpose and relate to the risk, issue and assumption profile of the project. If I was outsourcing to my clients vendors I would consider the project to be high risk especially as the work required cutting edge design involving some 15 to 20 Java J2EE developers and one Tech Architect I would say Agile would be a really high risk approach. Distance and risk equals more documentation and more management process. Anything else turned out for my clients to be a disaster.

If the project was smaller then perhaps Agile would be a great move or something else less invasive. What you have to understand is that there is a point reached concerning a projects size where the benefits of increased motivation through liberation, freedom and the power to self assemble are outweighed and eventually taken over by the effects of increased complexity. This is common sense and is all about providing customers with the best project outcome for the least money.

Agile is not in my view a scaleable methodology and is in no way enterprise ready. However, this does not matter these days because its fashionable, its loved by the mass of programmers who have suffered long enough with poor management and it promises to make loads of money for consultants (please read my post “Agile Fees Feeding Frenzy”.. It totally understand the appeal of Agile to developers because its a form of shop floor socialism (mind set) and we all like the idea of that! I have to say that most IT Project Managers I review, mentor and audit each year are a real disgrace. However the sorry state of today’s IT management is not excuse for knee jerk reactions which just make things worse.

If you don’t believe me then take a look at “Jims Blog”.. He worked for Thoughtworks one of the biggest proponents of Agile with a geek boss who is a signature to the Agile manifesto and he can tell you in his own words that this stuff just does not work consistently and is in know way a silver bullet. Even Alan S.Koch states that agile has size limitations.

Just make sure that when picking fit for purpose management and development methodologies the you get the technical, risk, issue and assumption profile of the project understood at the beginning so that the right methods are used on the right project to give the right outcome.

Posted by Kevin Brady  on Mon 11th December 2006 at 09:10 PM | #

Hi Les,

One of the best comments I have read on this blog !. The last para was great. I have experienced more times than I have fingers on my hand the CIO coverup for project /programme failures. Spin management at its best!

Concerning the engine change out remark I meant this in terms of how the consultants sell offshoring to companies. Its all simple ! - No pain, High Gain, Lower cost. I have to say the ones that do this with the most conviction these days always seem to have suits one size to big and look like they have just started shaving.

Really loved the comment and a great addition to the debate

Posted by Kevin_Brady  on Mon 11th December 2006 at 09:43 PM | #

Sure you have all the -ve points on coding, CMM capability, management issue etc. However if you look at objectively, with no sentiments attached, all that it says is about the general problems in the IT industry. Especially the startups and not so well established companys. These companys exist in US and all other places and is no different than a offshore company.

However the Quality practices is much more stronger and you find better Qualified intellectuals in the Offshore company’s like India which has the largest output of Engineers every year.

And with a country like India which provided the world with the invention of zero’s and one’s, you can ask nothing less in innovation or intellectual ability by outsourcing.
You will be amazed to know their Vedic mathematics is much advanced than any country and is nowadays taught in European schools for its simplicity.

Its a well known mantra in Offshoring world that US company’s start Outsourcing for Cost advantage and stay on for Quality and Reliability.

The observation in the industry is that the Timely deliverable of a project is 95% or more when you are dealing with a established Indian IT company or even with a smaller IT company run by a experienced technocrat as compared to 80% or lesser with a US company.

So, the company’s which resisted the economic theory of producing Goods or Services at a place with low cost and take advantage from it in the 80s have perished in US.

the company’s which took advantage of establishing themself with produce at low cost and market at high value have become the survivors of the 21st century.

Its like the old saying “Make Hay while the Sun shines” & In today’s context it can be said as “Make Hay where & when the Sun shines its Best” and if its in India as of today, so be it….unless you want to be left behind.

Posted by chan  on Wed 4th July 2007 at 12:26 AM | #

No counter arguments or debates.

The facts are: 80% of the worlds most innovating, strongest, biggest and powerful companies have shop in India - Adobe, Microsoft, Google, Symantec, Cisco, Veritas, Intuit, Sun ... many many more.

These are not the companies that might have taken decision overnight and must have considered it giving a 360 degree perspective

Posted by Shashi  on Mon 9th July 2007 at 09:09 AM | #

I would like to know the proportion of these companies total spend on offshore outsourcing. My hunch would be that it’s comparatively small.

Which then begs the question - If these companies have considered the “360 degree perspective” why isn’t that proportional spend much more?

“No counter argument or debates” I would conjecture that there is still an awful lot of nervousness out there about this issue.

Posted by Chris  on Mon 9th July 2007 at 10:12 AM | #

great article, thank you for shining a light on the “cockroach” aspect of IT off-shoring, so to speak smile)

my issue is what happens to the local job market and ultimately with the recruitment of new IT talent at the University level. the main attraction not so long ago was the starting salary new IT professionals would earn right out of College. this is not so these days, so who in their right mind will enter a diminishing salary/job security field and do all that midnight oil homework? US is losing it’s technical edge…

Posted by Raw  on Thu 24th January 2008 at 11:51 PM | #

I have worked with offshore accountants, and I have spoken with several people who have experience managing offshore IT.  It seems that Indians can be just as misguided as Americans can, and there is a major flaw in Indian management (which is that they somehow are able to be even more arrogant than American managers), but a large part of the problem is still expecting to get something for nothing.  In-house IT shops can sometimes make up for lack of planning and communication by flexibility and personal immediacy, but the latter two traits disappear when you are dealing with another company and people that you never get to get chummy with.

Posted by David S. Scott  on Tue 3rd June 2008 at 06:19 PM | #

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