The Risk and Return of Off-Shore Development

For the past decade, outsourcing to off-shore providers has grown by 20-25% per year and now is firmly seeded as part of the core IT strategy of many North American businesses.  While North American businesses have looked to stretch IT budgets or find a competitive edge, many outsourcing providers have experienced heavier than expected growth.  In the outsource providers market, there pure-play providers that operate almost entire off-shore with a skeleton stateside office presence.  Then, there are well-established US providers that have developed large off-shore development capabilities, with towering development facilities in Bangalore.

Furthermore, outsourcing has changed fundementally, from purely software development to application support and maintenance, to business process outsourcing.  For example, large corporations today have designed and built the software to run their call centers off-shore and then hosted that call center off-shore.  Thus, using labor arbitrage to reduce costs of both system development and system run or operations.  In fact, off-shore vendors are now offering "bundled services" which means they build it and run it.

What customers need to understand are the risks associated with doing business off-shore.  Especially in cases where you would like to build it and run it, risk is often a factor that is overlooked when chosing location and providers.

1. Cost Reducation Expectations:  The largest risk with off-shore development lies completely on-shore.  Setting expectations within the internal organization about how much money will be saved, is always at risk, because it is sometimes assumed that there is some linear savings over time.  The math just isn't that simple.  For example, there is usually a learning curve both on-shore and off-shore that is marked by an initial phase of "getting to know eachother."  So, for example, when some companies assume that a 40% savings will fall  to the bottom line each year, in reality, they may save 15-25% the first two years and then 30-40% by the forth year.
2. Application and Data Security:  The customer needs to review and approve of the foreign provider's security practices to confirm that they are in-line with internal expectations.  The risk of security breaches and intrusions are an inherent risk of outsourcing overseas.  For example, if you build your customer relationship management system off-shore and then host it off-shore, you need to confirm that your intellecutal property, such as prospects and/or new products,  stay on-shore. 
3. Loss of Intellectual capital:  For many customers, expertise in a their product or service can be a large competitive edge.  Companies need to evaluate this business intelligence as a real asset that will potentially be de-graded in value by outsourcing off-shore.
4. Failure to Deliver:  Despite lengthy contracts, qualified development teams and rigorous adherence to time-proven methdologies, some providers have failed to deliver.  In some cases, companies have used risk arbitrage by spreading risk across multiple foreign providers or developed using a hybrid approach where on-shore and off-shore is split and the work is integrated.  Despite all measures, the risk of failure is hopefully small, but doe exist in many software projects, whether it is full developed and hosted on-shore or completely outsourced and operated off-shore.
5. Scope Creep:  There are very, very few foreign providers that offer a fixed-price, fixed-bid  service.  So, if the actual work increases, time and material also increase.  However, as many know, scope creep is always an issue on software projects.  The point here - is that by outsourcing your project off-shore, it does not go away.
6. Government Regulations and Policy:  US Government and regulations sometimes require a certain degree of transparency to verify that your product is in compliance with legislation such as Sarbanes-Oxley or other policies.  The auditors will require this transparency regardless of whether your system is built and hosted on-shore or off-shore.  In fact, sometimes this risk increases, because the fact that it is off-shore, makes the auditors a little bit more interested tightening standards and compliance.
7. Culture:  Executives should not assume that culture is trivial and that because a company has been doing work with America for years, that it is now "American-ized".  Especially in countries such as India, where there are more than 60 different languages and dialects, culture can play a huge role in many critical sucess factors.  For example, if you host a call center in India, your customers will still expect english-speaking representatives.  Fluency is not just grammar and vocabulary.  There are heavy accents and phrases that get lost in translation and even figurative statements that are not understood.  For this reason, many off-shore providers send their resources through language and cultural boot-camps which sometimes can have varying results.  In short, just because their brochure claims they speak english, one should not assume that culture or location is a trivial issue.
8. Turnover and resource retention: In foreign outsourcing markets, the supply and demand of labor in certain locations is not balanced.  The result is high turn-over as resources are able to move quickly and without recourse from project to project.  Companies will often provide a turnover statistic, which may or may not be correct.  In India, the reported turn-over levels are between 15 and 20%, which is much higher than other foreign countries.  Furthmore, the loss of key personnel is a large risk and can become expensive.  There is no statistic for loss of "key personnel."  In fact, it has become so problematic that providers are sometimes are placing contracts on key personnel as liabilities to offset the loss when they leave the project.  High turn-over and the loss of key personnel result in disruption to schedules, extra training and increased time on knowledge transfer.  Generally speaking, it can and does have a real impact to momentum on software projects.
9. Knowledge Transfer:  Many companies under-estimate the amount of time required for knowledge transfer which is usually key during the intitial stage of projects.   Unclear business requirements or requirements that are not well understood can create risk on projects.

In summary, there are many risks associated with outsourcing development to foreign providers.   While outsourcing can reduce costs, this reduction typically is not linear, and customers and providers need to work together to reduce risks.

Excel SoftSources wants to discuss and plan risk mitigation upfront and in plain terms.  We are seeking long-term and positive synergy and believe strongly that unmanaged risk can impact both sides.