What IT offshoring offers other than cost savings?

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I wrote a blog post last week following a reply from an IT manager to a previous post I did about RBS offshoring work. The IT manager had analysed the costs of offshoring and concluded that it is not that much lower than doing work onshore.

He said he was concerned that CIOs that were offshoring just to save money might actually be making a mistake.

And there are clearly many reasons other than cost to offshore work, but the person making the decision needs to know what these are.

For example I blogged about Morrison utility's decision to offshore software development. Cost was an important factor but so too were the ability to flex up and down the number of developers it uses at any one time and access to skills - because its in-house team did not have the cloud and mobile development skills it required.
 
I posed this question to some LinkedIn groups with members for the offshoring industry: If offshoring IT is not that much lower in terms of cost why bother?

Here are some of answers I immediately received. This is a debate worth having so please contribute.

Reply 1

a. Managing spikes in your business -resource demand
b.You manage your core business and outsource not so important functions so that your "smart" people can be used for more strategic projects
c. Broader skill set you get, which you may not have internally
d. Access to skills from a different geography helps - let's face it some geographies have smart people in a particular domain- A Japanese may be good mechanic, an Indian a better coder OR an American more creative!
e. You get the flavour of different cultures - which helps in making your people more "global", understanding what a NO from a Japanese or an Indian or a Chinese means!
f. COST is just the icing on the cake!

Reply 2
 
a. Limitation on talented resources.
b. Certain industries need round the clock support so a different time zone is complementary

Reply 3
 
Experience of the offshored destination. If the cost is the same, but the quality and overall offering is better, then perfect. Although, in practicality, what IT offshoring destination does not provide is cost savings.

Reply 4
 
The first thing to note is that the emphasis in offshoring has shifted from pure cost savings to value. So while you may not make significant savings for high-end software, for example, you can expect to obtain a more scalable solution from a good outsourcing provider than your own team can provide -- or even one that solves two or three problems at a stroke, thanks to the ingenuity of offshore developers.

Reply 5

|n reality it truly is much lower when you factor in all associated onshore costs of maintaining a qualified IT resource. The recruitment and logistics costs alone, due to lack of certified staff compared to other global outsourcing regions, are just a few examples of many cost justifications that large scale IT employers factor over and over everyday.....and still...offshoring continues to grow annually at a double digit pace.

Reply 6

One of the major reasons for offshoring is research & development and newproduct development of innovative products.

Have an idea,  concept which you want to get developed, test and see it working?

Get it done by outsourcing - offshoring !






7 Comments

Don't forget the end-less legal wrangling about what is and is not covered in the contract and excessive charges for what used to be virtually free.

I was speaking to a friend at the weekend who is working for big company that is bringing work in-house again for these reasons.

To respond to the first response
a. Managing spikes in your business, resource demand - I have found this to be untrue, the outsourcing company runs as tight a headcount as possible and for them to ramp up is not as easy as their salemen tell you. It is true that there are lots of skilled resources out there, it is not true that they are idle waiting to get a job
b.You manage your core business and outsource not so important functions so that your "smart" people can be used for more strategic projects - this is out of an MBA handbook, but not what happens in the real world. After outsourcing you tend to lose all your smart people
c. Broader skill set you get, which you may not have internally - maybe some truth in this, but then resourcing departments exist to handle this function
d. Access to skills from a different geography helps - why? These skills are not lacking in any western world country
e. You get the flavour of different cultures - what does this really mean to the profit margin, other than onshore people get to speak to other people on a phone with different accents
f. COST is not that cheap

Outsourcing started in the 80's, became expensive in the 90's, Indian resources stepped in around 1995 and lowered the costs, however 15 years later, those costs are not that low anymore

The IT world changes every 18 months, yet we still believe strategies from the last 30 years, covered in salesmen gloss are still the fashion.

Smart CIO's are realising, inhouse is better, and employees holding corporate know how is more useful than and outsourcing partner who has their own financial interests at heart

To respond to the first response
a. Managing spikes in your business, resource demand - I have found this to be untrue, the outsourcing company runs as tight a headcount as possible and for them to ramp up is not as easy as their salemen tell you. It is true that there are lots of skilled resources out there, it is not true that they are idle waiting to get a job
b.You manage your core business and outsource not so important functions so that your "smart" people can be used for more strategic projects - this is out of an MBA handbook, but not what happens in the real world. After outsourcing you tend to lose all your smart people
c. Broader skill set you get, which you may not have internally - maybe some truth in this, but then resourcing departments exist to handle this function
d. Access to skills from a different geography helps - why? These skills are not lacking in any western world country
e. You get the flavour of different cultures - what does this really mean to the profit margin, other than onshore people get to speak to other people on a phone with different accents
f. COST is not that cheap

Outsourcing started in the 80's, became expensive in the 90's, Indian resources stepped in around 1995 and lowered the costs, however 15 years later, those costs are not that low anymore

The IT world changes every 18 months, yet we still believe strategies from the last 30 years, covered in salesmen gloss are still the fashion.

Smart CIO's are realising, inhouse is better, and employees holding corporate know how is more useful than and outsourcing partner who has their own financial interests at heart

The replies given to the question you have posted are right on point. The cost is the initial factor that makes outsourcing enticing, and it is also the same factor that seals the deal, so to speak. The point raised on being “global” is another excellent point and could certainly give any business the competitive advantage. Hence, it is not just a cost-based decision but more of a strategic one wherein several other benefits follow thereafter.

This - “The first thing to note is that the emphasis in offshoring has shifted from pure cost savings to value.” And the point on the ability to “obtain a more scalable solution from a good outsourcing provider than your own team can provide -- or even one that solves two or three problems at a stroke, thanks to the ingenuity of offshore developers.” These are excellent reasons that make outsourcing beneficial, not just in terms of cost.

It's interesting how people think only of cost savings when it comes to outsourcing when there are a lot of benefits - most of them stated here already. I think one should not forget that when you outsource work, you need to know and speak legalese by making sure you don't violate any laws in the country of your outsourced vendor or provider.

It looks like most of the replies to your question have a common claim that offshoring is necessary to find key skills.

If there is indeed a skills shortage in this country then it has been made worse by companies scrapping their graduate training schemes in favour of offshoring and International Computer Trainee (ICT) visa sponsored resource.

Consequently, sending thousands of our IT graduates to the dole queue, or to work in other professions, and putting off future students from taking up the subject.

Companies should have the number of ICT visas that they are permitted, linked by a fair ratio to the number of IT graduate training positions they offer, at least until the IT graduate unemployment rate falls to below 5%.

Outsourcing isn't as cheap as it used to be because there are hidden costs to it, such as that of logistics. However, one benefit is that foreign governments are receptive to foreign investment and may provide a more conducive business climate for the client company.

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