Offshore Outsourcing Costs Spiral – It’s for Dummies

Offshore Outsourcing costs Double
Offshore Outsourcing costs Double

Offshore Outsourcing Costs

This article, about offshore outsourcing costs, was first published as comments by reader Benk after our article about Carphone Warehouse relocating IT development work to India because UK IT Contractors are too expensive.

We thought it worthy of a wider audience.

Old Argument

I have heard this argument before and experienced it first hand in Australia.

The company I was working for decided to start offshoring part of the IT groups work. It said that it was to be support any extra work that that was over and above what the current IT group was capable of.

Which was an obvious ploy to have a smooth tranisition in handing over IT to the outsourcer and bring them up to speed on what the current IT group does?

Well they still have the internal IT group even though some have left and have the outsourcer embedded in to their group.

Offshore Outsourcing Costs
Offshore Outsourcing Costs

Offshore Outsourcing Costs Doubled

The expenses of running their IT group has now doubled. Moreover, they are finding it is too difficult to be able hire staff internally to get the skills they want as it is known they outsource.

From the Indian side, even though the staff is cheaper in relation to the UK, US & Australia it is unrealistic not to expect that the labour cost will not rise in the medium term.

Costs are going up now. Other countries, such as Malaysia, are trying to become Outsourcing providers, because they can sell themselves as cheaper.

Offshore outsourcing costs look as iif companies save money initially but this is a trap.

High Staff Turnover at Indian Companies

Remember the Indian groups have great difficulty in keeping staff and there is a high turnover.

The time in outsourcer is often used as an opportunity to learn and move on to better pay outside India or with other outsources. This is causing a slow rise in the labour costs. This can only accelerate as the middle and lower classes start to expect a better life style.

Outsourcers Staff Quality

On quality, I would not say that outsourcers provide bad quality. However, their staff turnover does not allow the time to understand and deliver exceptional quality.

offshore outsourcing of IT jobs
Offshore outsourcing of iT jobs

I have met a lot of Indian IT staff who have move overseas who have great or greater skills than many contractors.

This does not mean there are not some selling skills they do not have just like other nationalities. However, be careful blaming the situation on one group.

Question Offshore Outsourcers

I would question any company today that is outsourcing their IT to reduce costs. This tells me straight away that they do not see IT as an enabler for their company‘s competitive advantage.

Outsourcing provides balk standard process and reasonable quality for a relatively cheap price. However, they are not enablers of competitive advantage, apart from reducing costs.

I believe outsourcing a company‘s IT is one of the quickest ways for a company to lose its competitive advantage. When you use contractors they generally come in for short term jobs and part of that job is knowledge transfer.

This will never happen with an outsourcer, it is not what they do.

Third Party Access to Company’s Business Processes

First off, you give a third party access to your company‘s business processes, which is pretty much most of what gives a company its strategic competitive advantage, when you look at the fact that typical barriers to entry in a markets have been diluted over the last 2 decades.

In most companies, IT is embedded in the business processes helping them to significantly reduce processing costs across the board. You may say well we have an agreement with the outsourcer not to release our company confidential information.

How is that?

Have you set up a Chinese wall with them?

Offshore Outsourcing age
Offshore Outsourcing age

Will no one who works on your company‘s IT in the outsourcer side be able to work on a job that may be for your company‘s competitor for say 2 years or even a year?

You could not get this agreement with an outsourcer. That’s because this would stifle their ability to fulfil jobs as they know their staff turnover is high. Plus I doubt it would not be enforceable in the Indian courts.

Niche Segment

Getting back to the Australian company listed in the US, I worked for, they are in a fast growing niche segment where they are the market leaders.

They’ve pretty much got it mad. There’s, plenty of cash flow and it is easy to really work on their competitive advantages and drive more growth.

They outsourced IT and it has definitely left a bad taste in the mouth. The quality they were so proud in their products was unattainable. That’s because the systems end up being more difficult to manage after modification by the outsourcers. They end up with a massive product recall and the share market is not happy with the news.

The Cause of the Offshore Outsourcing Costs Problems

You may question, if going to an outsourcer caused all these problems.

Well it did.

They did not understand what the customer wanted.

The business were looking to streamline their quality processes in the systems and bring in more stringent validation to drive the quality of their products to a higher level.

Unfortunately they didn’t code the system correctly and even though, after testing, it looked right.

It was only after products in the field started to fail that they went back and realised the errors and assumptions that had been made that were in the code.

An inhouse IT developer would have understood the business in a way that a outsourcer just can not.

Challenge Companies who Outsource Offshore

I would challenge any CEO/CFO to look out in the market and see how other companies have done after outsourcing in the share market 1 year after the change. Look closely at the balance sheets.

I would question the cost savings as there is so much more cost in just managing the outsourcer that it is amazing.

Often for each of the staff in IT that are let go, they hire a manager on a high salary to manage the area that staff worked with the outsourcer and the reason for this.

So you end up with the cost of an outsourcer and a innhouse manager. This often equals the costs before hand and in some cases higher.

Adding Risk to Companies

They get a product that is less effective and adding risk to the company that was not there before hand.

Outsourcing is a dumb idea if you want to grow your company in a fast moving market segment. By all means outsource if you are in a mature market as nothing will change will it. Do not be so sure!

Offshore outsourcing costs spiral after companies initially cut costs.