Does offshoring IT work really cut costs that much?

As I have said before the real value of a blog like this one is often in the comments. Real life IT professionals reacting to stories.

I wrote a blog post last week about RBS’s increasing offshoring to cut costs. I have had a comment made in the blog that questions the actual savings that can be made through offshoring in the long run.

In this comment, a senior IT manager at a large company known as David, explains some of the findings of his own analysis into the true cost of offshoring. From his findings he fears that CIOs don’t look beyond the day rate when offshoring.

Here it if missed it:

By senior IT manager David,

“I fear that many CIOs don’t look much beyond day rates when deciding to offshore work and don’t really understand how offshored IT projects work in reality.

As a senior IT manager at a large UK company, I have tried to better estimate what offshore resource is actually costing us. I obviously won’t be posting the official document I produced but I have included some figures to give you an idea of my findings.

Average onshore consultancy day rate £800

Average offshore consultancy day rate £225

Average freelancer day rate including agency fee £500

Average onshore day rate considering the contractor/consultancy resource mix £670

So from the starting point the offshore rate looks quite attractive.

For handovers and training, an offshore resource will work onshore at least 3 weeks a year at onshore rates plus expenses. This pushes their average rate over the year up to about £300.

The overheads to make the offshore module work, KT, communication, hand-holding, double checking the work done offshore etc, has been estimated to be at least 15% of onshore/offshore time. So £670+£225*0.15 = £134. I believe this to be a conservative estimate and these overheads might actually be higher.

So we are already up to £434, still competitive with onshore consultancy rates but now closer to the contractor rate
If we consider other inefficiencies such as language difficulties, having to rely on emails and telephone for communication, time zone differences, cultural differences, quality issues, and rework then we are probably not saving any money at all.”