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Onshore vs. offshore IT labor productivity

May 19, 2014

Have questions about whether to move part or whole of your IT team offshore but not sure how to evaluate the trade-offs? The cost of performing certain business functions outside of the country is often cheaper than doing it domestically. This can be true for a variety of reasons but is most commonly associated with the variance in labor pricing from local to offshore. The price may be right, but are companies getting the product or productivity they would achieve at home?

Quantifying the productivity benefits of onshoring versus offshoring is a difficult task with gray areas that prevent one from making broad generalities. I recently was asked to do such a thing from someone who “heard that onshore productivity triples that of offshore initiatives.” Phip-phip-phip (sound of me waving a red flag).

I have come to the conclusion that people can’t shake the feeling that you get what you pay for. Here I am referring to the belief that quality of offshore IT efforts is not up to par with domestic output and this is reflected in the price of labor. However, the U.S.’s reliance on H1B visas—and the speed with which we grab every single one of the rationed resources each year—is a clear sign companies believe offshore talent is perfectly capable of hanging with anyone in Silicon Valley.

The answer to the question of whether to move IT operations offshore or not is: it depends. It depends on many of the same reasons that IT projects succeed or fail domestically, mainly management. Oversight is vital to IT project success both domestically and internationally, but with offshore management, the level of human capital management and attention a company must provide is even more critical to overcome differences of language, time and culture. If a company is unable to plan for and meet these challenges, it would fare better with an onshore approach.

One interesting set of metrics to use when considering various offshore locations is Hofstede’s Cultural Dimensions. Geert Hofstede quantified different cultural variables describing the common dynamics a society has. These include areas such as individualism versus collectivism, and the masculinity versus the femininity of a country. With this index, one can take a look at how a country’s cultural mores relate to another in order to eliminate risk of cultural conflict. For instance, a company might find it risky to send their female project managers to supervise any Japanese offshoring efforts. Japan is the most masculine of all countries, and whether or not one agrees with that country’s viewpoint, companies should carefully consider the ramifications in having women in leadership roles.

Overall, the reality is that offshore outsourcing remains a practical option for most enterprises. As labor prices continue to shift internationally, the question should not be whether offshore production will be better but will the resource management of offshore production be proficient enough to tame the differences that come with cross-cultural engagements. 

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