Why Offshoring Hasn't Always Been the Perfect Solution
Although companies have been moving increasing numbers of IT jobs overseas for over a decade, offshore outsourcing has recently received high levels of publicity amongst lawmakers and the general public alike. Described by CNN in early 2004 as “the new political hot potato,” the sudden offshoring debate has given rise to a surge in media hype that has encouraged unprecedented numbers of CIOs and software development firms to actively consider the practice.
Used effectively and in the right circumstances, experts agree that a certain degree of outsourcing can cut costs and maintain efficiency, and research groups predict that offshoring to places like India, Bangladesh, and Bulgaria will continue to grow in the coming years. But companies are beginning to discover that not all circumstances are the right circumstances, and the practice isn’t for everyone. Despite the hype, several companies have found that offshoring has promised more than it has delivered, leading analysts at Gartner Research to dub 2004 the start of an off-shoring “trough of disillusionment.”
This page will describe some of the “cons” of outsourcing from the perspective of an IT employer or software development firm. Additionally, it will provide several instances of situations in which companies have chosen to forgo outsourcing and keep jobs at home due to issues with offshore quality, communication, cost, and bad press in the U.S.
With all the ‘tall talk’ surrounding offshoring in early 2003, many companies walk into offshoring deals with inflated hopes about the quality of software they will receive. However, experts are now urging corporations to lower their expectations to more realistic levels. “Companies going offshore are often unhappy with the quality they receive initially,” write e-commerce experts Marcia Robinson and Ravi Kalakota in Offshore Outsourcing. “The expectation that processes will be the same or better as before they offshored is unrealistic.”
One IT supervisor who learned this the hard way was Wesley Bertch, chief technical officer for the national health club chain Life Time Fitness. Bertch wanted to develop software to evaluate prospective cities for new health club locations, and thought a reputable offshoring firm in India sounded like a safe bet. An article in the April 2004 edition of Newsweek describes his story:
Newsweek cited software development as one area in which it is particularly difficult to get consistent, high-quality results. As evidenced in an interview with Mark Andreessen of Opsware Inc., tech firms have long reported good results when outsourcing jobs like low-level support and maintenance tasks. However, as outsourced IT projects become increasingly complex, experts advocate caution about trying to do too much with overseas employees.
Even in the electronic age, effective overseas communication can be difficult. Basil Tesler, editor-in-chief of Intetics Co. with IT experience in the U.S. and abroad, warns that “it’s usually difficult to avoid the inherent problems of communication.” In particular, time zone differences can significantly hamper projects that require constant personal communication. Time spent composing endless e-mails, differing standards of correspondence, and cultural & linguistic misunderstandings can all result in wasted time and frustration.
One oft-overlooked aspect of offshore communication is the language barrier. Despite corporate training programs to teach Indian tech support offices to speak English without Indian accents, firms with foreign-based call centers continue to receive complaints of poor English communication skills. Dell recently eliminated a tech support office based in India after receiving negative feedback from customers, and concerns about slow responses prompted investment bank Lehman Brothers to liquidate a small India-based help desk. Although offshore call centers remain common in the industry, on-site solutions can have their advantages.
Cheaper programmers have always been the impetus for moving software development jobs offshore. However, the increased number of American firms moving work to the same Indian cities is making inroads into future offshorers’ savings. As demand is increasing, costs in cities like Bangalore and Mumbai—Indian offshoring powerhouses that once exported work at dirt-cheap rates—are higher than ever before. Additionally, the logistics of sending work overseas can be expensive. Offshore Outsourcing points to the following as reasons why “costs add up even when offshoring is done right”:
While offshoring still allows companies to cut operational costs in the long run, its overhead and risk has led some clever officers to take advantage of the poor economy at home—offering on-shore work at nearly off-shore prices.
When the State of Indiana needed to upgrade their computerized system for processing unemployment claims, 2003 Indiana governor Frank O'Bannon turned to India. Tata Consultancy Services (TCS), India's largest software export organization, was awarded a four-year contract that angered government IT workers in Indiana. The public backlash was severe enough to induce Joe Kernan, O’Bannon’s successor, to cancel the $15 million contract in favor of one that kept technology jobs at home. Indiana isn’t the only state government worried about a public backlash; Information Week notes that all four states represented at a recent global IT sourcing roundtable are engaging in very little offshoring, while CNN cites six more states that are considering legislation to restrict the flow of American jobs to foreign countries.
Political motives could explain why most CIOs in the public sector have been hesitant to go offshore, despite the opportunity to reduce operational costs by as much as 20 to 40 percent. In an Information Week article that attributes this hesitancy to “politics, not economics,” Michigan CIO Teresa Takai “agreed that the use of offshore outsourcing for low-level IT work would help her gain efficiencies, but cautioned that outsourcing is not a good political move in states such as hers.” This sentiment was echoed by CIO Peter Quinn of Massachusetts, one of few state governmentss to actually go through with a large outsourcing contract in the last few months. But to constituents, Takai conceded, “jobs are jobs,” and few politicians are willing to risk being voted out of office in exchange for the potential economic benefits of offshoring.
Will the battle on Capital Hill and disgruntled IT staff affect the private sector’s policies as well? Andrew Efstathiou of the communications research firm The Yankee Group told CNN/Money that "companies need to be wary of a [public] backlash … If a firm goes offshore,” he warned, “they need to engage in scenario analysis to map out what could go wrong, and a backlash is one thing that can."
However, it appears that the negative publicity hasn’t had much of an effect on private business so far, as demonstrated by an informal poll conducted at the Gartner Outsourcing Summit. Of 150 outsourcing decision-makers surveyed, less than twenty-five indicated that a public outcry would incur any delay whatsoever in their company’s plans to offshore. According to Information Week, “86% of respondents said negative publicity wouldn't slow their offshoring plans. Only 5% said bad press would cause them to delay an offshoring strategy by more than six months.” An unrelated survey by Hewitt Associates revealed that a mere 11% of companies who outsource believe the practice harms their brand’s image.
Predictions from research heavyweights such as Gartner and IDC have made it clear that the trend isn’t going away anytime soon. While it’s clear that the public outcry against outsourcing has failed to be the “perfect solution” for state governments, this particular factor has failed to have much of an impact on companies less closely tied to politics.
Despite these concerns, offshoring is still going strong; Gartner Research predicts that the amount of money U.S. companies spend on the practice will quadruple in the next three years. Additionally, most experienced corporations express satisfaction with their offshore relationships. The majority of IT outsourcing contracts are revived after expiration; a mere 20% to 35% of are not resuscitated after time runs out, and only 11% of those polled at an outsourcing conference in Nevada reported that past outsourcing projects did not live up to expectations.
However, as numerous IT decision-makers like Wesley Bertch have discovered, problems can quickly arise when attempting to up the ante to high-level software development. Disillusionment with quality and cost savings has led to what Newsweek called a “growing disenchantment” with outsourcing, inspiring an “on-shoring” effect as some move jobs back to the States. Not everyone can pay the upfront logistical costs, and Offshore Outsourcing authors Robinson and Kalakota believe that few companies have what it takes to take advantage of the global job market. Additionally, while bad press has failed to make much of a dent in private companies’ overseas employment rates, the political backlash has decimated the practice among the ranks of state governments. Although offshoring has at least been an “adequate solution” for the giants of the information technology industry, inflating costs and the risk of poor communications, inferior quality, and negative public opinion have prevented it from being a “perfect solution” for all.
Sources Other Than Those in the Annotated Bibliography
Armour, Stephanie. "Companies crow about keeping jobs in the USA." USA Today. 12 Mar 2004.
Bishop, Ian. "Outsourcing toll mounts." Bennington Banner. 20 Mar 2004.
Greenemeier, Larry. "State CIOs don't offshore much--but many would like to." Information Week. 28 Apr 2004.
Gross, Grant. "Senate pushes ahead with offshore outsourcing legislation." Computerworld. 5 Mar 2004.
Hellweg, Eric. "All offshore who's going offshore?" CNN/Money. 17 Dec 2003.
Krishnadas, K.C. "India alarmed by Indiana's cancellation of software deal." TechWeb. 11 Dec 2003.
McCullah, Declan. "Bill aims to curb offshoring." CNET News.Com. 3 Mar 2004.
McDougall, Paul. "Bad press apparently can't dent offshore outsourcing." Information Week. 28 May 2004.
Sharma, Dinesh C. "Federal bill targets offshore labor." CNET News.Com. 20 Feb 2004.
Stone, Brad. "Should I stay or should I go?" Newsweek. 19 April 2004.
Turner, Shirley and eWeek. "Outsourcing debate." eWeek. 24 Mar 2003.
Washington State Legislature House Democrats. "Democrats assail offshoring, call for state-contract accountability." 16 Feb 2004.