Onshoring vs. Offshoring. Choosing the Best Outsourcing Strategy for Your Business

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1 Onshoring vs. Offshoring Choosing the Best Outsourcing Strategy for Your Business

2 Overview Offshore Onshore Are you thinking about outsourcing your software development project, but you are not sure if you should use onshore or offshore development resources? Based on the straight comparison of hourly outsource rates of onshore resources compared to offshore rates in India or elsewhere, offshore development seems to make a lot of sense. However, there is more to offshore outsourcing than meets the eye. This document is intended to provide you with the facts and assist you with choosing the best option for your software development project and your organization. Offshore outsourcing is the decision by a U.S. business to export some or all of its non-core software development to an overseas third party service provider that specializes in software development. The concept of reducing costs by outsourcing non-core tasks to emerging economies is hardly a new one. Semiconductors moved from the U.S. to Asia in the 1960 s. Electronics made the journey from the U.S. to Japan in the 60 s and 70 s. More recently, we ve seen lowskill manufacturing going to China. IT service jobs moving to India and other emerging economies is the latest trend. Offshore software outsourcing is a reality in mature economies. Under the right circumstances, the cost-savings offered by offshore software development can be substantial. Onshore software development outsourcing takes place in parts of the U.S. where rent is lower and labor rates are less, providing significant cost savings over areas such as San Francisco, Los Angeles, Boston or New York. Onshore outsourcing involves the assembly of an efficient, highly skilled, cross-functional software development team in a centralized location that enables team members to work together closely while maximizing communication and optimizing productivity. Most onshore resources have a streamlined development approach that enables work to be performed in half the time required by many offshore centers. They also employ developers educated and trained in the U.S. developers that understand U.S. business, culture and work ethics. The onshore model minimizes the high travel, labor, training and project management costs commonly associated with offshore development models

3 Considerations A growing number of U.S. companies are considering outsourcing software projects to offshore developers. In theory, companies can save a lot of money by sending development projects overseas, to vendors in India or other countries where programmers are paid a fraction of what they earn in the U.S. Proponents of offshore software development claim the low labor costs in India, China, the Near East, the Philippines, and Vietnam can result in a 50%-80% cost savings. Unfortunately, for many U.S. companies, the reality is much different. Companies that originally engaged in offshore outsourcing activities for reasons of cost savings, ease of execution, flexibility, and lack of in-house capabilities, have found that instead of simplifying operations, offshore outsourcing has introduced unexpected complexity, added costs and friction. They have also found it requires more senior management attention and deeper management skills than anticipated. According to a recent Diamond Cluster International Global IT Outsourcing Study, the number of buyers satisfied with their offshore providers has recently plummeted by nearly 20%. The study also states the number of buyers that have abnormally terminated an offshore outsourcing relationship in the past 12 months has more than doubled from 21% to 51%. Another interesting statistic is the number of buyers planning to increase their offshore outsourcing in the next 12 months has declined from 86% to 70%. Buyers are no longer more satisfied with the services of their offshore outsourcing providers than with onshore providers. In the year prior to the study, 74% of study participants were satisfied with their onshore outsourcing initiatives. Today, that number has risen to 81%. In contrast, offshore satisfaction rates dropped significantly from 79% to 62% during the same timeframe. In growing numbers, buyers of offshore outsourcing services are dissatisfied with their offshore service providers and are either prematurely terminating contracts or struggling to harvest the value they initially expected of their offshore outsourcing relationships

4 The Gartner Group recently performed a study of the myths of offshore IT service offerings. Among their findings were: Cost savings may not be what they seem. Some of the outsourcing firms are quoting savings of 70-80% but there are many hidden costs. These include the additional time spent selecting a vendor, overseas travel as part of either the selection or inspection process, increased due diligence on issues from security for employees and data, more stringent documentation requirements, and additional internal resources to manage risks and perform project management. Additional infrastructure may be required to handle data storage and access, security of data and bandwidth requirements to communicate efficiently. Many of the firms tout certifications, such as the Software Engineering Institute s CMM certification. But advancing up the CMM ladder does not assure compliance with service level agreements (SLA), only an awareness of the level of maturity of their internal processes. At first glance, the cost savings of offshore development appear to be substantial, but Gartner concludes that savings are more accurately determined to be closer to 25%. However, before making a decision based on cost-savings alone, an organization should also factor in the lower productivity rate and higher risk associated with using offshore resources. The bottom line low rates do not equate to low cost. The million-dollar question is offshore outsourcing cheaper than onshore outsourcing? Unfortunately, there is no clear-cut answer. Most organizations do not have a standardized methodology to evaluate the business case for offshore outsourcing. Even those that are several years into at least one offshore outsourcing relationship still lack effective metrics and measures to gauge the success of these initiatives. The short answer offshore outsourcing is economically justifiable when the wage differential is large enough to more than make up for lower labor productivity and associated risks

5 Risks Following is a summary of the most common risks associated with outsourcing software development projects to offshore companies: Infrastructure Many offshore countries lack the network bandwidth for fast communication and many experience intermittent electrical outages. Security Ambiguous privacy laws overseas have placed companies at risk of intellectual property theft. Skill Set/Quality Expect the quality of work and worker productivity provided by offshore resources to be lower than domestic providers. Attrition As the market for offshore talent heats up, it becomes harder for companies to attract and retain top employees. High employee turnover rates also make it difficult for many offshore providers to keep their staffing commitments to their buyers. Complexity Offshore outsourcing activities can introduce unexpected complexity, add cost and friction into the value chain, and require more senior management attention and deeper management skills than anticipated. Objectivity Only by conducting testing independent from the offshore developer s testing, will there be an objective assurance of the quality of the code and applications being developed offshore. Geopolitical Climate The lack of business certainty in an emerging economy and the fact that India, in particular, is surrounded by geopolitical instability is another risk to consider

6 Cultural Differences Business conduct, greetings, forms of address, gestures, value systems and punctuality vary widely around the globe. These cultural differences create significant gaps in maturity and business processes between a company and its offshore vendor. Language Barriers Many offshore resources present communication challenges, especially when the only means of communication is telephone or . Geography Because of the cost and length of travel (as much as 20 hours each way), visiting your partners with any frequency becomes less realistic. And there are possible visa restrictions and heavy expenses associated with bringing your partners to where you do business. Increasing Price Trends Many offshore providers are increasing their prices because competition for local human resources is pushing up the cost of labor. Volatile Currency Rates Rapid fluctuations in offshore currency rates result in unstable market conditions. Guidelines Outsourcing software development projects to offshore vendors can deliver value to companies that enter into outsourcing for the right reasons using the right model. Following are some guidelines that will help ensure success of an offshore project: Choose The Right Projects The amount of coordination involved in offshore outsourcing and the high level of risk suggests that small outsourcing projects should be avoided. Long-term projects that require 40 or more resources and a minimum of 1-2 years are more suitable for offshore development. At the same time, these projects must have clearly defined requirements and should not require a significant amount of design and engineering

7 Enforce Consistent Business Processes Consistent quality and timeliness depends on consistent business processes, particularly around IT projects that must be integrated within a company's architecture. Using a common vocabulary and following clearly delineated project guidelines for process, costs, and scheduling are essential. Communicate and Collaborate Language differences are only the first potential stumbling block in communicating and collaborating with vendors. Companies must understand cultural differences and find ways to communicate and collaborate effectively and regularly to ensure quality and timeliness. Maintain Constant Oversight Having a clear view of how all projects and programs are progressing, in terms of both costs and scheduling, is essential to successfully managing offshore operations. Conclusion In this global economy, companies have to consider options that allow them to operate more efficiently while reducing costs. However, outsourcing decisions should not be made solely on the basis of cost savings. They should be part of a larger discussion about how IT can enable the enterprise to meet its growth and profit objectives. In the end, both onshore and offshore outsourcing offer the potential to manage fluctuating capacity needs and access world-class skills as a means to free up internal resources for more strategic activities. However, choosing the right outsourcing strategy for your business and your project is key. In the end, you will want to undertake software development in the most suitable and efficient manner available, regardless of where the job is completed. Prior to making a final decision to outsource your project to an offshore company, you may want to consider Baldwin Hackett & Meeks, Inc. (BHMI) because the company offers a pricing model that is very competitive and an attractive alternative to offshore outsourcing. BHMI also specializes in translating general business objectives into software applications that are technically and commercially successful. The experience and skill sets possessed by BHMI software specialists combined with its proven development approach ensure your projects will be - 7 -

8 completed at a lower cost and in less time resulting in lower total cost of ownership and quicker return of investment. With BHMI, your project will be on time, on budget and trouble free