By M. M. “Sath” Sathyanarayan, President of Global Development Consulting, Inc
 A question many service executives are asking is "how can we tell whether our offshoring efforts are delivering value to our company?" Many companies are finding that their goals are not being met in a consistent way, while others seem to be more successful. Issues that frequently arise are:
- Customer satisfaction relative to functions provided by the offshore group starts to decline. Customers feel the product is moving away from their needs or the software support center doesn’t seem to understand their situation.
- Frequent changes occur in vendor personnel at the offshore location. Members of your US team, who provided training and support to the initial offshore activities, have been reassigned to other duties and now the changes in the vendor personnel need support from your staff once again.
These issues are really symptoms of deeper problems. Almost every company with offshore operations encounters these and other issues along the way. There are some fundamental problems underlying the issues. While easily stated, the problems are not immediately obvious, especially to those who have been involved in the offshore projects from the beginning. This is the first in a series of articles about offshoring challenges and how you can overcome them.
Benefits from Offshoring: Honestly, Are you Getting Any?
While you pay offshore vendors much less than what you would be paying a U.S. vendor, some members of your staff complain that offshore productivity is really low, that 2 or 3 offshore personnel are doing the same work that used to be done by one experienced person in the United States. And that’s not all: offshoring entails additional costs for travel, communications, and duplication of equipment and/or software tools, to name just a few expenses. At least some of your staff may be implying—or even loudly proclaiming—that offshoring is not saving money after all and moving some support functions offshore was a bad idea. Even if offshoring may have saved you money in the beginning, it may not be doing so any longer. After all, offshore labor costs also tend to escalate over time.
The cost of offshoring isn’t only about money; it’s also about perception. If, for example, your management team must work into the night and arrive at work in the early morning to manage an offshore operation, their perception about who is benefiting and who is hurting becomes personal.
While added stress on your domestic staff should not be ignored, the way to address this issue is to develop an objective view of all facets of costs:
- Direct labor cost which is the check you write to the vendor on a monthly basis
- Cost of travel both for regular monitoring and for training
- Communication costs: Additional data communication costs; in some cases companies have had to dedicate separate “communication pipes” in order to keep the offshore and local data bases synchronized. In addition, there is the cost of voice communication, video conferencing, e-mail and chat sessions. You need to evaluate how many of these costs are incremental additions because of offshoring.
- Cost of training and some times re-training (more about re-training in our next issue)
- Additional equipment and/or software tools you need to provide because you now have an additional location and the same tools/equipment cannot be shared.
You should, in addition assess the offshore productivity and factor that in; even if offshore personnel are as competent as the local staff (which is your best case scenario), there will a productivity loss because of systemic issues. If you are just launching the offshore operation, add the costs of finding a suitable offshore vendor and launching the offshore operation for the first time.
Compare this against the benefits you are receiving from offshoring – both tangible and intangible such as reduced costs, easier round the clock coverage and so on. This will give you a balanced view of the situation.
This approach was recently applied in an organization with complex software products and a sizable offshore operation. Mid-level managers, Project managers were up in arms about offshoring; complaints about offshoring to senior execs including the CEO were wide spread. When an objective assessment of Business Value along the lines outlined here was conducted, the company was surprised to find that offshoring was indeed saving the company considerable sum of money; however there were issues they needed to fix. The management shared the results with everyone concerned. This resulted in the staff gaining a better understanding of the situation and the need for the company to continue offshoring. The focus shifted to identifying specific issues with the offshore operation and begin addressing them.
Next month, I will discuss the number one issue in offshoring – attracting and retaining offshore staff: What is happening, why conventional approaches are not enough to address this issue.
About the author:
M. M. “Sath” Sathyanarayan is President of Global Development Consulting, Inc., an offshore advisory firm that that helps you create a new offshore organization or fine tune an existing one. Sath has over 25 years experience as a software industry and offshoring executive. He led the pioneering effort in offshoring at HP/Tandem Computers beginning in early 90s which resulted in direct contribution to the company’s EPS. His clients range from Fortune 500 companies to startups and include Tivo, Brio Software, Agile Software. Sath has been widely quoted in the press -- InfoWorld, CIO, Software Business, Workforce and Economic Times (India) to name a few. His continued thought leadership in offshoring is reflected in the authoritative book, Offshore Development and Technical Support: Strategies and Tactics for Success. Sath can be reached via e-mail: Sath@GDCInc.biz
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