The risks and rewards of offshoring your IT functions

When is it appropriate and when will it be counter-productive?

Yogi SchulzMany organizations have reaped significant or huge benefits from offshoring parts of their IT function.

This offshoring success creates the question of when offshoring is appropriate and when it will be disappointing or even counter-productive.

IT functions suitable for offshoring

Successful IT offshoring examples include:

  1. Help desk.
  2. Data center operations.
  3. Cloud migration and application operations.
  4. Network and security monitoring.
  5. Application operation.
  6. Custom application development.
  7. Website operation and content management.
  8. IT administration.
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IT functions not suitable for offshoring

Situations where offshoring is unlikely to be successful include:

  1. Strategy development.
  2. Collaboration to achieve a consensus on IT goals.
  3. Consensus-building on requirements.
  4. Computing infrastructure build and upgrade.
  5. Significant people change management effort.
  6. Software package implementation.
  7. Technology evaluation.

The bottom line is that the larger the IT operation or project, the higher the net benefits. Larger projects are better able to absorb the risks of offshoring described below.

Benefits of offshoring

Most offshoring benefits arise from cost and capacity. Economic development benefits that occur in the country of the offshore service provider are not included here.

Cost reduction

The primary driver for organizations to move IT work offshore is cost reduction.

It’s typical to find professional services hourly rates for equivalent education and experience to be 25% to 40% of the North American rate.

Access to expertise and capacity

As offshoring has grown, some service providers have become enormous organizations with deep expertise and incredible capacity.

If your large project, meaning budgeted at over $1 million, is under time pressure (which isn’t?), then engaging this expertise and capacity can be hugely helpful.

Risks that undermine offshoring benefits

Customers of offshoring services have encountered the risks described below to varying degrees and mitigated the risks with varying degrees of success.

Productivity differences

The productivity of the offshore staff varies widely depending on the culture and experience of the individuals.

Some offshore service providers are world-class in their productivity, the quality of their work and the rigour of their processes. Other offshore service providers not so much.

On balance, the lower productivity of offshore staff offsets some of the value of the lower rates.

This productivity risk can be reduced through the following:

  1. Careful selection of offshore service providers.
  2. Setting and managing expectations of the offshore staff.

Language differences

Offshore service providers are located in many countries. I’m astonished by how many people in distant lands speak at least some English.

More problematic is the enormous number of English dialects. The combination of accents and vocabulary differences between your onshore and offshore teams make clear communication difficult. It’s easy to believe understanding has occurred when it has not.

Many minor misunderstandings often pile up, creating rework that increases cost.

This language risk can be reduced by:

  1. Offering English classes.
  2. Travelling more for face-to-face interaction.

Cultural and social differences

Many cultures are even more deferential toward bosses than we are in North America. This dynamic can make the discussion of significant project issues awkward and inconclusive.

Then there are issues of seniority, ethnicity, religion, and race that interfere with the ability of the offshore team to work well with your onshore team.

The staff of the offshore service provider will tend to be respectful toward you, the critical customer, and not ask too many questions.

These differences lead to underachieving the Service-level agreement (SLA), incomplete requirements, a confusing design, and incomplete software testing. The resulting rework can materially undermine the business case for offshoring.

Cultural and social risks are difficult to reduce. Sometimes it’s possible to:

  1. Be selective about the country of residence of the offshore services provider.
  2. Reduce the number of native languages and cultures among the offshore staff.

High staff turnover

In some developing countries, offshore service providers experience significant staff turnover as the staff is headhunted for more money, less commuting or other perks.

Since you, as the customer, are paying for onboarding and familiarizing the offshore service provider staff, high staff turnover will increase these costs and lead to underachieving the SLA or increasing project schedule and cost.

This turnover risk can be reduced by ensuring the offshore service provider:

  1. Treats staff reasonably.
  2. Operates with an appealing work environment.

Time zone difference

Typically, there is a seven to 10-hour time difference between your time zone and your offshore service provider. This difference severely inhibits your ability to engage in real-time collaboration. It also creates ongoing lags in email communication.

The time zone difference elongates the project schedule and therefore increases the overall project cost.

The time zone risk can be reduced by creating the following:

  1. A detailed project plan that communicates when you expect to review and finalize the various deliverables.
  2. Superior documents and reports.
  3. Scheduling meetings at specific dates and times well in advance.

Internet service disruptions

In some developing countries, Internet service disruptions can occur for a variety of reasons, including:

  1. An over-taxed Internet service provider (ISP).
  2. Deliberate Internet shutdowns by the government to suppress government criticism and prevent opposition groups from communicating.
  3. Accidental Internet shutdowns due to construction activity cutting through the wire.

Internet service disruptions undermine service levels and delay software development.

The risk of Internet service disruptions can be mitigated by buying services from multiple ISPs.

Telephone service disruption

In some developing countries, telephone service disruptions can occur for a variety of reasons, including:

  1. Poorly maintained telephone infrastructure.
  2. Deliberate mobile communication shutdowns by the government to prevent opposition groups from organizing protests.

Telephone service disruptions undermine service levels and delay project progress.

The risk of telephone service disruptions can be mitigated by buying services from multiple mobile providers.

Travel impact

The high value of face-to-face discussions to overcome cultural differences and minimize the risk of misunderstanding leads to inevitable travel.

In addition to cost, travel undermines the productivity of the individuals travelling. For some countries, visa requirements and travel uncertainty create additional difficulties.

The risk of travel impact can be reduced by frequently using video communication and remote collaboration tools.

Utility disruption

In some developing countries, essential utilities, like electricity and water, that we take for granted in the developed world, can be intermittent.

This problem will undermine service levels, elongate the project schedule, and add cost.

Part of the utility risk can be reduced by operating a standby diesel-powered generator.

If these risks of offshoring scare you, then consider nearshoring, where these risks are eliminated or much diminished.

Yogi Schulz has over 40 years of information technology experience in various industries. Yogi works extensively in the petroleum industry. He manages projects that arise from changes in business requirements, the need to leverage technology opportunities, and mergers. His specialties include IT strategy, web strategy and project management.

For interview requests, click here.


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