(IDG) -- With the labor market tight at home, IT departments increasingly are seeking help overseas. The promise of faster, less expensive IT work has led companies large and small to outsource work offshore, the most common way to tap into foreign labor pools. The rewards of doing business this way can be great -- but so can the headaches and the risks.
In many respects, offshore outsourcing is like any kind of outsourcing deal. For example, the company outsourcing the work can choose the extent of its involvement, from one project to a long-term arrangement in which a dedicated team works on the customer's projects. Indeed, many companies start out simply looking for help, rather than looking for an offshore partner.
"Twenty percent of our clients have zeroed in on offshore; 80 percent are in a solution-finding mode," says Raju Venkatraman, president and CEO of Vetri Systems, an IT services and outsourcing company in Troy, Mich. Vetri does about 60 percent of its work in the United States and 40 percent offshore, mostly in India.
Curt Smith, controller at Cloister Spring Water, in Lancaster, Pa., wasn't looking for offshore help specifically when he hired Mastech, a Pittsburgh-based outsourcing company, to redesign his company's business software.
"We engaged [Mastech] to do that without any specification up front about onsite or offshore," Smith says. "A lot of the work was done onsite at our location. In the course of that work, they approached us with the cost savings of moving a lot of that work offshore and having it done in Bangalore, India."
As technology improves and success stories emerge about foreign outsourcing, the practice is growing, according to those who study it and those who participate.
"There are lots of good reasons," says Erran Carmel, a professor of management of global information technology at American University, in Washington. "No. 1, the telecommunications infrastructure is allowing it. No. 2, we have a software labor shortage all over the developed world, and that's creating pressures to go abroad. No. 3, we have the cost issue in some cases."
Those who have been through the process say that although offshore outsourcing can save money and get a project done on time, it will be successful only if you start with the right kind of project; manage it well; and heed the logistical, political, and legal risks from the outset.
Choosing wiselyThe first step toward successful offshore outsourcing is to make sure the project lends itself to being sent abroad.
"The things that work well offshore are the things that do not require frequent client interaction, [such as] very well-defined application development -- the key word being well-defined -- application maintenance, year-2000 [problems], things of that nature," says Sunil Wadhwani, CEO of Mastech.
Year-2000 projects fit this bill nicely.
"That's the really big trend," says Paul Johnston, an analyst at International Data Corp. (IDC), in Framingham, Mass. "Year 2000 has been the big thing that has really worked quite well."
Some projects, like Cloister's, can be divided between onsite and offshore workers.
"[Mastech] did a significant amount of coding offshore," Smith says. "As they would complete sections of the code, we would go into testing mode. Almost all of the tweaks were done locally. We used the offshore [workers] to do the fairly repetitive stuff. The people on site did the systems design work and all the specs for it."
As project management methodologies and infrastructure improve, more types of work can be done offshore. Advances in technology are even making it possible to send different types of help desk support offshore.
"Generally speaking, real-time activities haven't lent themselves very well to support from offshore organizations in the past," says Mandli Sathyanarayan, president of 24by7 Corp., in Cupertino, Calif. "The reasons are the time difference and the need to be able to physically see what's wrong. But because of the Internet's availability, support takes on various flavors. There are possibilities that you couldn't do maybe three or five years ago."
In another example of the increasing complexity of offshore projects, the CIO at an East Coast manufacturing company is considering offshore outsourcing for add-on application development for his enterprise resource planning system.
"Basically, [we're outsourcing] to be able to respond to the needs of the business and do it at a lower cost," the CIO says.
Those in the field emphasize, however, that more complex projects may take more time to be successful.
"Offshore or global outsourcing is a longer-term process unless it is cut and dried," Sathyanarayan says. "If you're looking at software development of any kind, you've got to look at the longer haul. I advise people to start small, make sure things work, and then scale up."
"If work has a lot of changes that have to be made and is continually being modified, then it's probably not going to work as well," says Rita Terdiman, vice president and research director at the Gartner Group, in Palo Alto, Calif.
The bottom line
Almost no one disputes that labor in the countries frequented by offshore outsourcers is less expensive than it is in the United States. But labor isn't the only cost to consider.
"Generally, sourcing abroad as a way of reducing costs is not a very good strategy," says Avron Barr, co-director of software research for the Stanford Computer Industry Project, in Stanford, Calif. "Even if the labor rates are less, some middleman has made up the difference by the time they're done. If they haven't, you should be worried about quality."
But companies that send projects offshore frequently do cite cost savings as a primary motivator.
"Most companies report between 35 percent and 50 percent savings," Terdiman says.
Once again, the key is to choose projects wisely.
"It will vary by case," Carmel says. "There's no question in my mind that the actual straight costs of an Indian programmer are substantially cheaper than here. Yes, there's a lot of overhead associated with doing a project in India. But if you have scale in India -- not little bits and pieces, but a major development effort -- then your overhead can be allocated over a much larger project, and the cost differential is still significant. Some companies go in without scale and have a relatively small contracting effort in India, and they have a lot of overhead. They don't realize substantial cost savings."
For instance, Mastech's Wadhwani says projects costing more than $1 million make the most sense in terms of saving money using offshore outsourcing.
And it's important to keep expectations realistic. Venkatraman says Vetri Systems can almost always save customers 15 percent on a project -- but some come in expecting to save 80 percent.
Sathyanarayan warns that projects will not save money if they are not done properly.
"A cost-only-driven approach will not work for the long run," Sathyanarayan says. "There are infrastructure and management issues that will add to the cost of whatever you pay to someone in a country such as China or India. If you structure it correctly and have the right kind of scale, you can come out of it gaining a strategic advantage. I don't advise people to go for cost alone."
In addition to the normal risks associated with outsourcing, such as protecting your company's secrets while they are in the hands of outsiders, offshore outsourcing brings its own challenges and uncertainties.
"If you're on the West Coast and you're dealing with Bangalore, you can never talk to them on the phone when you're in the office," Carmel says. "It's not a trivial issue. You have to change some of the ways that you work."
Frequently, working with offshore outsourcers makes travelling to their site necessary, even if they have a team working with the customer in the United States. Overseas travel can add significantly to the cost and complexity of a project.
Communication is an issue particularly in non-English-speaking countries; indeed, one reason India has thrived as a supplier of offshore outsourcing is its large English-speaking population.
Language isn't the only barrier to effective communication, however. Cultural issues can cause problems -- in some cultures, it's impolite to answer "no" even if someone asks whether the project will be done on time and no is the truthful answer -- and everyone has to understand the project goals.
"If the requirements were clear and precise, then the work was fine," says a lead systems analyst at a Fortune 50 company that has worked with offshore developers. "If there were any problems, then there could be problems on the deliverable."
These communication issues can complicate project management.
"There is a fair amount of discipline and overhead involved in doing work offshore," Wadhwani says. "Issues like configuration management and version control become dramatically more complex when you've got teams several time zones apart."
Finally, offshore outsourcing has legal and political dimensions. For example, one reason that most companies that use offshore outsourcing do so through a company based in the United States is so U.S. contract law applies if the deal goes sour.
"A certain percentage of these projects fail," Barr says. "If you're going overseas, you'd better have somebody you can sue."
The potential for political problems became clear in May, when India began nuclear testing and the United States responded with sanctions. Though there has been little lasting effect on the market from that incident, it provided a clear demonstration of how quickly conditions abroad can change.
"We had great big concerns [after the nuclear tests], but one of the things we did with [Itex Group] was to create contingency plans," says Jay Mandelstein, CIO and senior vice president of the National Council on Compensation Insurance, based in Boca Raton, Fla.
The council provides data and research on worker's compensation and is working with Ft. Lauderdale, Fla.-based Itex Group on a year-2000 project in India.
One of Itex Group's backup plans is to move operations to Barbados.
Also, the virtual nature of IT work provides some protection.
"Although there is some political instability in a country like India, it really doesn't impact the software development, primarily because all of this work is done through satellite links," Wadhwani says.
Economic problems abroad, such as the current problems in Asia, can affect outsourcing arrangements, as well; however, so far, the problems haven't had much effect on the Indian market.
"If it's purely economic, it could be a great channel for people to find work," Johnston says.
However, when economic problems cause political unrest, as is the case in Russia at the moment, the situation becomes more complicated: Inflation can make it hard to pay workers; an uncertain legal system makes it hard to enforce contracts; and in a worst-case scenario, people can become so focused on their own survival that they stop working.
The current economic problems are not the only question being raised about the future of global outsourcing. Another is whether the global supply of labor will fall short of global demand.
"Labor is becoming a problem in India," Terdiman says. "The demand is growing faster than the supply, and therefore we're seeing a slight inflationary trend in salaries."
Some speculate that once year-2000 work is completed, the labor shortage will ease. Whether that happens -- and what effect it would have on offshore outsourcing -- is a big question.
"Because some of the methodologies have continued to be improved, I think there will be a migration toward more complex services," IDC's Johnston says. "The envelope will continue to be pushed."
The people making outsourcing decisions will almost certainly still be drawn to offshore labor as long as it offers lower cost or greater efficiency.
"If I can do it for significantly less someplace else and have the same level of control and quality, then I'm going to continue to look at that," Mandelstein says.
Where are the foreign workers?
Margaret Steen edits InfoWorld's Enterprise Careers section. She can be reached at email@example.com.
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