Poor communication, cultural differences and lack of expertise can derail engagements.
Economics lured Hemant Kurande to look to India, his birthplace, for more affordable engineering talent. Three years ago his company hired two service providers to do some core programming for a line of storage management products.
The results were mixed, says Kurande, CTO of Storability. The providers built products that were suitable as prototypes for R&D, but not production. That gap put the burden on Storability employees to shore up the code.
"We were not getting the quality we wanted," Kurande says. The offshore companies provided a high degree of innovation, but a lower degree of readiness to ship."
The root of the problem was a lack of knowledge on the part of the outsourcing providers. "The depth of storage expertise we needed was very difficult to find," Kurande says.
Storability is not alone in reevaluating offshore outsourcing plans that fell short of initial expectations.
In recent months, a handful of big-name companies have decided to return certain offshore work to the U.S. Insurer Conseco recalled its customer service operations as it worked to emerge from bankruptcy. Following complaints about the quality of service, investment bank Lehman Brothers canceled an offshore help desk engagement. Similarly, Dell brought back a technical support center after corporate clients complained about communication and service.
About 21 percent of IT executives surveyed recently by management consulting firm DiamondCluster International said they had prematurely terminated offshore arrangements in the prior 12 months. The most common reasons cited: the provider had financial difficulties; the provider failed to deliver on commitments; or the buyer consolidated its outsourcing vendors.
Analysts agree, satisfaction isn't guaranteed. Companies offshoring are more than twice as likely to be dissatisfied with the relationship than those using national service providers, according to AMR Research.
A big part of the disenchantment stems from inflated expectations. In particular, cost savings are frequently overestimated.
A common mistake, for example, is to project savings by simply calculating the wage differences between customer service agents in the U.S. and India, says David Butler, director of the international development doctoral program at the University of Southern Mississippi in Hattiesburg. "People see a 1-to-10 savings and extrapolate from there the labor costs savings they will achieve by moving their call center overseas," Butler says. "The problem is, labor isn't the only cost associated with moving overseas."
Cultural differences, for example, mean more training is required to prepare non-U.S. workers to effectively handle calls from Americans, Butler says.
"In India, customer service is usually pretty good - the reps are very nice to callers. The problem is, they often can't resolve the call," Butler says. As a result, a higher percentage of calls are escalated to supervisors. "So you actually have people in queue longer, you have people on the phone longer, and at the end, a lot of times there's not a resolution."
Application development projects sent offshore can suffer from similarly misaligned savings expectations.
At the raw resource-to-resource level, offshore development offers a compelling cost advantage, says Partha Iyengar, vice president and research director at Gartner. "If you look at a programmer with three to four years of experience, that might cost $45,000 to $55,000 per year here, depending on location," Iyengar says. "That same resource in India would probably cost $15,000 to $19,000 per year."
But it's more complicated than that, Iyengar says. Lower productivity can eat away at labor savings. Plus it's more expensive to manage an offshore development relationship. "Companies that understand labor is not the entire story usually realize whatever cost savings they expect," he says. Those that don't wind up disappointed.
In the short term, Kurande says working with offshore labor creates headaches. Offshore setups require all employees to adjust their processes and get used to a geographically distributed development process that is unfamiliar and requires a re-evaluation of roles and responsibilities. "It's not natural. Natural is having everybody onsite in the same location."
He goes so far as to say that unless a company is in it for the long haul, offshoring doesn't make sense. There are no benefits to gain in the short term," Kurande says. "It's not even worth doing."
According to IDC, the top three risks that users associate with offshore outsourcing are time-zone issues, language barriers and cultural differences.
The importance of local expertise keeps Mobil Travel Guide's call center close to home. The Park Ridge, Ill., company, which is known for its North American travel guides, generates a portion of its revenue by selling hotel reservations - transactions that require call center agents to have a good understanding of U.S. and Canadian locations.
"We want individuals who are able to sell hotel rooms," says Paul Mercurio, senior vice president and CIO of the company. "That means they need to understand geography. They need to know that Des Moines is in Iowa. They need to be able to explain proximity to the Hoover Dam. There needs to be contextual knowledge of the United States and Canada."
Mobil Travel Guide selected Virtual-Agent Services, a Chicago service provider with call centers in New Brunswick, Canada, to handle reservations. The decision wasn't about price, but rather about expertise - Virtual Agent Services specializes in hotel sales, Mercurio says.
Foote Partners, a research and advisory firm in New Canaan, Conn., has studied 90 offshore outsourcing implementations over the past three years and has found companies that don't achieve the desired outcome are tripped up by communications problems, not technical shortcomings.
Organizational, behavioral and cultural aspects are more to blame than the details of contracts and technology selection, says David Foote, president and chief research officer.
Companies aren't paying enough attention to how they manage the people involved in offshoring projects and how they make the transition to a distributed workforce, Foote says. Communication problems that aren't addressed early in the process continue to fester and impact project delivery.
As in Storability's case, some companies shy away from offshoring because of quality concerns. CareGroup Health System relies on key vendors for infrastructure design but isn't about to give up control of its application design.
"I've hired Cisco to design my wide-area network. I've hired Microsoft to 'harden' my Windows security infrastructure," says John Halamka, CIO of the network of five Boston-area hospitals. "My experience with offshore outsourcing is that you can pay very little for a large quantity of unusable code."
Analysts agree outsourcing software development has its risks. The big ones, according to Aberdeen Group, are untested technology vulnerabilities; additional costs for fixes and patches; increased risk because of unauthorized access to business data; and operational instabilities.
Offshore projects are getting increasingly strategic, which can encompass everything from requirements definition and design to development and testing.
This can inflame cultural issues. "While Indians are great at technical capabilities, a lot of the IT resource pool in India is not very good in terms of people skills," Iyengar says. So to suggest an Indian outsourcer handle requirements definition - which requires heavy interaction with end users - may be counterproductive, Iyengar says. "In the end, the client may have to dedicate quite a few of its own resources to help the Indian outsourcer through the process. Which becomes much less efficient."
Furthermore, regulations such as the USA Patriot Act and Sarbanes-Oxley Act affect a range of companies and govern how those companies structure their business processes. Industry-specific regulations such as the Health Insurance Portability and Accountability Act (HIPAA) also require data and processes to be handled a certain way. Complying with government regulations requires knowledge of the U.S. government, the regulations, and how to use business strategies, processes and technology to comply with these regulations.
Source: Network World, Ann Bednarz, July 5, 2004
