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Ever dial a 1-800 number and have your call routed directly to India? In as little time as it takes to say “hello,” many organizations outsourced their IT functions and projects overseas with high hopes for significant cost-savings. As time passed however, a good percentage of these organizations received a wake up call: “off-shore” does not always translate to “less expensive.” Progressive companies will evaluate the risks and rewards of an outsourcing model to determine the best means of getting their IT work done.

 

 

The Unintentional Cost of Outsourcing and the Near-Shore Advantage

IT leaders are naturally attracted to the low bill rates an off-shore model offers. A skill-set that costs $100 per hour in the U.S. may be as low as $15-$20 per hour in an off-shore location such as India. However, the price of labor is just one component of the total costs of ownership. An off-shore engagement is prone to various risks related to travel, communication and contract management complexities that can drive expenses upward.

 

For companies that worry about the inherent risks and costs associated with a full-scale off-shore operation, the near-shore model offers comforting middle ground. Near-shoring addresses many of the risks of off-shoring, thus producing an optimal blend of cost savings and operational efficiencies.

 

For companies that worry about the inherent risks and costs associated with a full-scale off-shore operation, the near-shore model offers comforting middle ground.

To help you select an off-shore model that’s right for you, I’ve listed a few key considerations below:

 

 

 

  • Travel Expenses: Travel expenses are a major financial factor when outsourcing work to an overseas location. A plane ticket to India, for example, will cost thousands of dollars. CIO.com estimates that companies spend an additional one to 10 percent of the total project cost on travel alone.
    In contrast, by plane, travel from anywhere in the U.S. to Canada or Mexico will take a maximum of six hours and cost significantly less than travel to another continent. This ease of travel also allows for greater project visibility and risk mitigation.
  • Significant Time Zone Differences: The difference in time zones between the U.S. and an off-shore location can range anywhere from eight to 12 hours. As a result, off-shore communications such as booking a meeting or scheduling a simple phone call can require a significant degree of planning and coordination. Under a near-shore model, in comparison, real-time communication is simplified as the time difference is only a few hours.
  • High Attrition: Another consideration is consultant retention. Given the currency differences, many IT consultants in off-shore countries are willing to jump ship for a matter of a few more cents per hour. When attrition rates are high, companies run the risk of having their outsourcing partner replace high-end talent with talent it can find quickly to backfill.
    Relatively speaking, IT consultants in a near-shore location, like Canada, are more likely to dedicate themselves to their job and their employer. If a consultant does leave a project, the project’s closer proximity to the U.S. grants greater visibility to the screening and selection process for backfills.
  • Security Risks: Clients must pay specific attention to data security because standards in different countries can vary greatly. While Canada complies with security measures set forth by the U.S. government, off-shore countries do not. As a result, security breaches and hacking of accounts are more common in an off-shore model. A recent McAffee survey found that 40 percent of organizations in India suffered at least one data breach last year, and 30 percent of Indian organizations suffered an IT security incident that caused them to lose money. On the contrary, only 20 percent of companies throughout North America suffered a breach that caused them to lose money.
  • Transition Costs: Transitioning work to an off-shore location can take anywhere from four months to a year, thus resulting in significant knowledge transfer expenses. Bringing management and other key resources to the U.S. to learn the business, the applications and the requirements prior to project kick-off is one way companies deal with knowledge transfer. However, this method does generate additional travel and living expenses. Language and cultural barriers can also present transition costs. Off-shore projects will inevitably require more time spent on communications planning and management – time that could be spent on project execution. Communication of business requirements can be particularly painful. Vastly different social, cultural and business backgrounds in foreign countries necessitate extra time and effort to ensure proper translation and understanding. Moreover, since business requirements can change as a project progresses, the time zone difference can complicate effective, real-time communication.
  • Business Acumen: Replacing an American IT consultant with one from a remote country is not an interchangeable process. The typical profile of an off-shore IT consultant is that of a recent college graduate with great technical skill, but little business experience. As a result, customers may not receive the same degree of consultation and creativity as they would from an American or near-shore firm.
    Near-shore countries tend to employ more tenured IT professionals who are willing and able to provide high-level analysis and consultative advice. Additionally, while geographic proximity and cultural similarities enable a high degree of accountability in a near-shore model, these factors inhibit accountability off-shore. (How often are you really going to talk to the IT consultants in India or Romania? How accountable can you really hold a team member that is half-way across the world and whom you have never met?)
  • Contract Management: Contractual difficulties can be attributed to varying legal systems and accounting for diverse tax and labor laws in off-shore countries. Extreme currency differences can introduce even more obstacles. For example, the Indian rupee continues to vary in value compared to the American dollar. Contractually accounting for this difference is cumbersome and time consuming.

 

Under a near-shore model, real-time communication is simplified.

 

 

When to Off-Shore and When to Near-Shore?

Generally speaking, the IT consultants in off-shore locations such as India are programming wizards; they can punch quality code fast, for unbelievably low rates. Thus, standard issue coding, such as .Net, Java and J2EE, is well-suited for an off-shore arrangement as the work is well-defined and the necessary communication is infrequent. You can simply send the coding requirements to an off-shore firm and it gets done for 10 to 15 percent of the cost an American firm would charge for the same work.

When project management or detailed analysis are critical components to a job — i.e. for work such as high-end QA and testing, custom application development or data architecture — the off-shore option does not work as well. In these cases, high project visibility, individual accountability and frequent collaboration are necessary for success. Therefore, a near-shore model offers a more attractive and realistic option. The similarity in language, time zones and culture, in tandem with the geographic proximity, lead to a more productive working relationship.

Standard issue coding is well-suited for an offshore arrangement as the work is well-defined and the necessary communication is infrequent.

 

Setting Yourself up for Outsourcing Success

I recommend companies considering an outsourcing model follow these best practices:

 

1) Perform your due diligence to assess appropriate work model

In the rush to take advantage of a cost-savings opportunity, companies can neglect to adequately perform the “discovery phase” necessary to analyze and understand the work model certain projects or functions require. Some IT activities need to be closer to the business than others. When these areas are outsourced through an off-shore model, the degree of hand-holding is so high that the anticipated cost-savings are swallowed by the total cost to manage the relationship.

2) Don’t pick an outsourcing vendor based on price alone

The highest and lowest bids are typically the most unrealistic. Customers should seek out a vendor that offers a balance of quality and cost reduction. They should also be sure to partner with a provider that has a successful track record in the specific IT work required, as opposed to one in the “experimental” or “testing” phase of its outsourcing maturity.

3) Determine ownership of work up front

Determining who owns the resulting product and all components of the project is key to a successful team model. Ownership should be defined in writing and include: all roles and responsibilities, accountability per role, change management processes, and knowledge transfer expectations surrounding design, coding guidelines, problem resolution and documentation.

 

4) Define measurable success

Prior to project kickoff, the customer and outsourcing vendor should reach an agreement on vendor performance metrics – and the appropriate method by which these metrics will be reported. Throughout the project, customers and vendors should discuss performance metrics to identify necessary corrective or preventative actions.

 

5) Select the right Project Managers

 

Strong project management skills are necessary for an outsourced project to succeed. Customers should invest time to ensure their onsite and offsite project managers are tenured, specialized and in sync with the business drivers behind an outsourced IT engagement.

 

In the rush to take advantage of a cost-savings opportunity, companies can neglect to adequately perform the “discovery phase” necessary to analyze and understand the work model certain projects or functions require.

 

 

Conclusion

Even though many off-shore projects, such as the outsourcing of call centers and helpdesks, spiked some companies’ profit margins, near-shoring is often a better solution. According to Global Delivery Center more than 50 percent of companies that utilize off-shore outsourcing did not earn the savings they expected. Furthermore, a recent AT Kearney study found 60 percent of companies that moved operations off-shore did not reach operational performance targets.

In my experience, companies will ensure they are set up for a successful outsourcing model by investing the upfront time to analyze the direct and indirect requirements to getting a job done right.

About TEKsystems®:

 

People are at the heart of every successful business initiative. At TEKsystems, we understand people. Every year we deploy over 80,000 IT professionals at 6,000 client sites across North America, Europe and Asia. Our deep insights into IT human capital management enable us to help our clients achieve their business goals – while optimizing their IT workforce strategies. We provide IT staffing solutions, IT talent management expertise and IT services to help our clients plan, build and run their critical business initiatives. Through our range of quality-focused delivery models, we meet our clients where they are, and take them where they want to go, the way they want to get there.

TEKsystems. Our people make IT possible.