March 10, 2009
King's Corner

Offshore Outsourcing – How come I haven’t saved any money?

Since the late 1990’s, IT Departments in most every major US based company have gotten on the “offshore bandwagon“. It seems that in every conversation in which reducing costs is the topic, someone asks the question “why don’t we just offshore it?”. Yes, “offshore” became a verb. It became a noun in several new contexts, “I haven’t slept much…I had a 9:00 p.m. call with offshore and a 5:00 a.m. call too” and “He’s not an employee…he is with offshore”. Regardless of the context, the movement to “offshore” many development and support activities blossomed and the reason was simple: Lower Bill Rates.

When faced with rising US employee salaries and the exorbitant hourly fees of many onshore Consulting firms, looking at $20 or $30 per hour bill rates was a compelling story. IT Leadership rightfully concluded, “I could get 5 – 10 people offshore for the same price as one person onshore…this is a no-brainer”. And truth be known, if the efficiency, productivity and sustainability of the new model was equal to the all-onshore model, this would have been a no-brainer. So why then, have many so companies seen no appreciable savings? Why then, have so many companies suffered through increased time to market of key technology implementations? Why then, have so many companies actually LOST MONEY due to re-work, rescues and delays? The answer to this question is not simple: Operating Model.

Scene: Four years ago. John, Mary and Joe lead teams of 9 people each. These 30 people develop and support 10 HR Applications for ABC Corporation. The average hourly rate is $100 per hour. Their supervisor calls them in and says, “we are going to geo-balance your team (another great verb for the 21st century)”. After the panic sets in, they agree to do so. Their boss is level-headed, and concludes that a one third/two thirds split would make the most sense. And so, John, Mary and Joe identify 20 resources they can “let go” and obtain the 20 offshore resources they will ramp up.

Fast-forward: It’s one year later. The onshore team of 30 is now 10. The top 10 stayed, and their average bill rate is $110 (more senior than the other 20). The new 20 offshore are $30 per hour. The attrition offshore is rampant. The economy is booming and nobody can keep their staff. Turnover is a problem. The 10 people onshore have not been trained in how to work outside the 9 – 5 paradigm, and communication with offshore suffers. What used to be a cube to cube conversation, is now a 5 page document. What used to be a single person task (designer/developer) is now a two person task (designer AND developer). What used to be a “five minute fix” is now a 2 day conversation/document/fix. Users are unhappy. They are getting things later than they hoped. They are finding too many errors in testing. They are not pleased with the “cost-savings”. Keep in mind, the average bill rate for the team went from $100 per hour down to approximately $35.

Fast-forward further: It’s two years later. Offshore bill rates are climbing. The economy is doing so well there that attrition continues to be a problem. Sustaining the same resources on the team is now a major issue. Average bill rate is now $45 offshore. Onshore management is dealing with morale issues. Team members are working early mornings and late evenings to facilitate live phone conversations. Management also added 5 additional onshore people (up to 15) due to the issues with speed to delivery and quality. Team also added 5 additional offshore resources (i.e. shadow resources) who protect against the negative impacts of attrition. Average bill rate (for offshore/onshore combined) is now over $50 an hour, and the number of resources has gone from 30 to 40 and overtime has gone from a 0% average to a 15% average, thereby making total spend only slightly less than the original model. Team is still dealing with slower delivery speeds and impacted quality. Reams of additional documentation are now necessary for improved quality, but also lead to longer durations. Business teams are furious.

Fast-forward further: It’s today. Onshore management has brought more “development” resources onshore. There are now 20 resources onshore, half of which are now delivering the high priority high urgency work for the business. The 25 offshore resources are now delivering the lower priority lower degree of difficulty work. The Business teams are happy because they have it the way they like it. The costs are slightly higher than the cost of 30 people onshore.

Where did this all go wrong?

With a movement to offshore development, support and maintenance, there is a culture shock. It shocks members on both shores. It forces documentation when there used to be a personal conversation. It forces delays when there used to be immediacy. It forces the need for increased scrutiny when there used to be innate trust. So what do I do?

  1. Determine what solutions are the right solutions to offshore. Best candidates for offshoring (another 21st century word) are well-established, mature solutions that require standing maintenance.
  2. Change management, training and a slow methodical approach to the new model. Teach onshore resources cultural dynamics, modified work weeks (i.e. to facilitate overlap of resources onshore/offshore) and documentation best practices. Hint: This is not a one-hour brownbag.
  3. Gradual migration of responsibilities.
  4. Increase offshore presence without impacting onshore numbers (i.e. don’t reduce staff onshore until offshore resources are effective).
  5. Cross-train without impact to in-flight, current deliverables.
  6. Slowly allow offshore to take over ownership of the solution in question.
  7. Let offshore resources learn the requirements that brought you to the solution.
  8. Roll-off onshore resources only when proficiency offshore has been proven.
  9. When the solution is ripe for a re-write, the offshore team will be positioned to assist.

Be smart in your approach. Minimize risk to the business. Get the business to trust the offshore model before hoisting it upon them on their most mission-critical initiatives.

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