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There's More to Consider Than Cheaper Labor
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Other Outsourcing Stories
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April 28, 2003 (Computerworld) -- There's much more to offshore outsourcing than lower labor rates. Industry experts and CIOs with offshore experience caution would-be customers to carefully examine all of the risks, including the hidden costs. It's also important to protect intellectual property, examine the geopolitical risks in the region where the work will be done and effectively communicate the company's overall outsourcing strategy to stateside workers.
Offshore outsourcing "creates some stressful situations, some motivational factors and some confidence factors with your own people," says Rick Greenwood, CIO at GMAC-RFC Residential Capital Group in Minneapolis. Greenwood addresses those issues, in part, by keeping his company's most important IT work in the U.S.
"We're very careful not to give away what I would say is a core competency and core business knowledge," he says. Instead, he and other IT managers at the company try to maintain those competencies by providing IT staffers in the U.S. with continual training and moving them to high-impact projects.
Scrutinize Political Risks
Curtis Robb, president and CEO at Delta Technology Inc.
"We're trying to manage the risk of the political environment," says Curtis Robb, president and CEO of Delta Technology Inc., the IT services arm of the Atlanta-based airline. The company has awarded IBM a contract to provide offshore IT services because IBM has 16 regional centers worldwide.
More than 90% of outsourced application maintenance, help desk and desktop maintenance work and a limited amount of call center and customer service work is currently being sent to India, according to Avinash Vashistha, a senior adviser at NeoIT, a San Ramon, Calif.-based offshore services advisory firm. That figure excludes IT work outsourced to Ireland and Canada but includes other countries such as Israel, says Vashistha.
Experts say outsourcing to India can reduce IT labor costs by up to 50%, but most customers underestimate the indirect project and program management costs.
"When you send your people overseas to visit these sites frequently, your costs go from $42 an hour to $85 an hour," says Steve Andriole, a senior consultant at Arlington, Mass.-based Cutter Consortium and a professor of MIS at Villanova University. Andriole's calculation includes travel costs plus the cost of lost productivity that occurs when a U.S. IT worker is removed from his daily tasks and sent overseas for a few weeks.
Those costs can go even higher when project requirements "creep" or if a development problem emerges at an offshore programming house, says Andriole. "If you have to drop in 10 people from the states, and they spend a month or two there, guess what? You've just erased most of your cost savings."
Another risk of moving IT work offshore is the potential loss of intellectual property and business-process secrets. Some IT managers worry that offshore outsourcers will copy and sell that knowledge or repackage it and present it to a competitor.
"If we send development of too much of our core business out of our control, what happens to that when our competitor goes to the same third party and says, 'We want to do what they did?' " says Richard Nolle, vice president of systems at Reinsurance Group of America Inc. in Chesterfield, Mo. "The economics is driving me to it [outsourcing], but those kinds of concerns are making me cautious," adds Nolle, whose company already sends application development work overseas.
One way to avoid these problems is "by trying to break up key pieces" of work being sent offshore so "no one can easily assemble those pieces," says Dennis Roell, IT manager at Betts USA Inc. in Florence, Ky., which makes packaging products such as toothpaste tubes. "Think of it as encryption—you want to reassemble the message," says Roell.
FAST FACT
India
is graduating roughly 75,000 IT professionals annually, vs. 26,000 in the U.S.
Source: National association of Software and Service companies, New Delhi, India
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