Why Offshore?

Despite a continuing trend to move both information technology and business processing offshore I am yet to hear anyone touting it as a major success (except for the outsource companies themselves)! What are the reasons behind this?

I first got involved in offshoring in 1997 and have been involved in various incarnations since. This has stretched from first sampling the service by bringing a few skilled people onshore to top up head count, to moving complete data processing teams offshore. I have had varying levels of success from complete failures where we have had to rewrite all the code that was produced to successful teams functioning during our night to process data.

There are many resources out on the web that can help you to avoid the pitfalls that I and others went through so I don't intend to focus on them here (if you are interested then leave a comment and I will give you my two cents worth on how to make it successful) instead I would like to discuss some of the downsides to offshoring. This may sound a bit negative but if you wade through it to the end I have some more positive thoughts about alternatives.

Cost

It is indisputable that the cost per day of doing work in India, Thailand or China is dramatically less than the USA, UK, Europe or Australia. There are countless examples whereby it can be shown to be cheaper by a magnitude of 10. However what is more questionable is the cost per unit of work. How much functionality do you get for a day's worth of coding in Australia versus that in India?

I know that some software companies will first quote for the work using their local resources and will then apply a multiplier of 2-3 times to get the budget for doing the work in their offshore centre. So what you say! Assuming a cost of $1000 per day in USA versus $100 per day offshore, even if it does take 3 times as long, you are still dramatically better off. This is true but the gap narrows and some of the other trade offs that you have to make might erode that benefit further. For critical time to market initiatives this does start to make much more of an impact.

Ancillary costs also start to add up. For example it is generally agreed that to make this process work you need to send quality people from your local operation to the offshore location to transfer the knowledge and then manage the process. This initially sounds like a quick trip but in fact takes substantially longer than you would expect. I know of instances of people that were sent to the offshore location and are still there 4 years later. With the lucrative ex-pat packages that are used to compensate these people it is not a complete surprise. Once again adding to the costs.

Then there are the regular managerial trips across to review the operation. Given the distances involved these will normally take at least a week of a senior person's time, without counting the cost of "Delhi Belly" that will make it impossible for them to actually do any work!

These ancillary costs are easily consumed if you are moving very large numbers (hundreds or thousands) of staff offshore but in the funds management or independent software vendor world this is not so easily achieved so they do have a tendency to be noticed on the bottom line.

Quality of Service

Anyone that believes moving your operation away from your clients to a country that does not have the same first language or cultural background, does not effect the level of service you can provide, has their head buried in the sand. You need only look at the number of UK financial and utility firms that tried moving their call centres to India around 2000 only to move them back a few years later. See articles such as:

http://www.independent.co.uk/news/business/news/call-centre-switches-jobs-back-from-india-to-britain-574174.html

In another example there is a major US bank that has offshored its internal help desk. You need talk with very few of their staff to understand the very high level of frustration with using this service or the number of work arounds they have in place to try and get things done.

Remember when measuring the cost of a support service to your clients or your internal staff, the actual cost of providing the service is normally a lot less than the impact it has on the customer. For example lets assume I am a senior manager in Australia costing $200 per hour, my local support person costs $100 per hour and the offshore support person costs $10 per hour.

Scenario a) Under the local model the support person comes to my desk and takes an hour to fix the issue. This costs $100 for support.

Scenario b) With the offshore model using remote diagnostics the person takes twice as long to fix the problem. (From actual experince I think I am being very generous here!). This costs $20 for support.

It is quite clear from an IT perspective the offshore model is dramatically cheaper, but lets compare the real business cost. In scenario a) I lost an hour of my time or $200. In scenario b) I lost 2 hours or $400. It is not too hard to see which method is truly cheaper for the business.

None of this takes into account the relationship cost of exposing your customers to a degree of frustration.

All of these issues lead me to one of my strongest beliefs: NEVER push your clients (either internal or external) away from you by sending them elsewhere to get service. Know your clients well and keep them close to you and loyal!

Political Instability

There have been a number of disturbing events in both Thailand and India of late that raise the question do you want to put your business at risk or worse the lives of your staff for the sake of a few dollars.

Thailand has had 10 coups in the last 40 years and then more recently had sufficient civil unrest to close the airports for eight days in 2008.

The terrorist attacks in Mumbai, which took 2 days to suppress, have exposed some of the security risks within these countries.

Regulatory Protection

Satyam. Need I say anymore. One of the key criteria when selecting an outsourcing provider is financial stability. How can you trust the local regulatory regime when this style of fraud has been perpetrated for so many years?

If you are contemplating moving your development or research functions offshore then you should also investigate the issue of intellectual property protection. Some of these countries have a questionable background in protecting ownership rights as can be attested to by the Swiss Watchmakers and the American Film Industry both of whom are selling a tangible product. How well do you think you can protect your intangible intellectual property in that style of regime.

Staff Turnover

It is difficult to get exact numbers for staff turnover in the offshoring industry but there is a perception that it is high. This should be investigated when considering moving anything offshore.

You should also be aware that it is a very competitive environment to attract staff into. At one point I was trying to find 2 test analysts offshore. These positions took a number of months to fill. Once we had found the right candidates and they had accepted the positions the offshore manager advised us to keep interviewing. I asked why and was told they might not show up. I ignored this advice much to my detriment. Netiher candidate reported for work!

Methodology

The majority of development styles being used for offshoring are centred around traditional waterfall or plan-driven methodologies. These emphasise the up front analysis and design processes before passing the specifications offshore to be built. The opposing camp is around a new style of development generally referred to as agile. Agile methodologies emphasise face to face communication between all parties invloved. This style can be contradictory to the whole concept of having your developers 10,000 miles away.

Martin Fowler compares these two methodologies very well in his article "The New Methodology" at http://martinfowler.com/articles/newMethodology.html

Within this article a comparison is made to the construction industry that uses similar plan-driven methodologies whereby the engineers write a design which is then passed to the builders to complete. The concept is that design is difficult to predict and so requires expensive creative people whereas the build can be passed to less expensive people. This matches to many software companies' views of offshoring. We will do the design locally and ship the grunt work offshore. However there is a viewpoint suggested by Jack Reeves that the writing of source code is the true design and that the build is simply the compile. If you follow this line of thinking then with offshoring you are pushing the most intellectual part of the process away from where the action really is.

The Alternatives

I promised at the beginning that I would move towards suggesting some alternative to the current trends so hopefully I am good to my word. But first a bit of background of the funds management industry in Australia.

Going back 20 years there was a fairly even spread of organisations between Melbourne and Sydney and then a second tier within the other capital cities of Australia. Since then there has been a continuing trend of mergers, acquisitions and back office outsourcing which has moved most of the players to Sydney with a small contingent in Melbourne and an almost negligible amount in the other capital cities.

This has forced most of the workforce into Sydney which is by far the most expensive place to live in Australia and 15th most expensive in the world. In comparison Mumbai is 48th, Bangkok 105th and Bangalore 118th.

Given this it is no surprise that firms are looking to move their operations out of Sydney to a cheaper location and these days that all means Asia. But does it have to? Brisbane is cheaper than Mumbai at 57th and Adelaide also competes at 73rd.

Imagine what your staff would say when you announced that you are moving their jobs to a cheaper location and they have the option of moving to either Mumbai or the Gold Coast. I think I know which queue I would be in.

This same analogy can be used in most countries around the world. For example many UK Banks have chosen centres outside of London for their call centre operations. The US has middle America or Canada.

By choosing to move some of your operations to a cheaper location within your own country you negate many of the issues mentioned above. Some of the advantages are:

• Communication is easier since there are no language or cultural issues
• Ancillary costs are less since flying to Brisbane from Sydney is cheaper, quicker and less likely to result in sickness
• Time zones are basically the same
• You have a known political situation and an active regulatory regime

The issue of cost per day still stands though. These regions are cheaper than the major financial centres but still not as cheap as Asia. This is where I believe the government can step in to help stimulate the economy. In the current financial crisis many organsiations will be looking for ways to reduce costs and moving things offshore will be in the front line. Governments are all talking about stimulus packages to help the economy grow at this time. If they were to provide tax incentives to encourage firms to move the work to other regions within Australia, jobs would be saved, infrastructure invested in and a new competitive environment created.

I would point you to the incredible success that Dublin had with the International Financial Services Centre. This was a zone defined by the government as a low tax zone that encouraged European organisations to setup their operations in Ireland. It dramatically boosted the Irish economy and has seen unprecedented growth. For example funds under management grew by 77% in 2 years from 1998.

Conclusion

To conclude I think the trend to offshoring into the cheapest of locations in Asia will continue, particularly for large firms. However I would hope that with smaller firms, where many of the issues I have raised will show themselves, serious consideration will be given to their local options without being lured by the promises of amazing returns.

I am very interested in other views on this topic so please feel free to comment.