The six hidden costs of Offshore Outsourcing – a warning to all

2nd May 2019

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Hidden Costs of Offshore Outsourcing

There are hidden costs of offshore outsourcing which will lead to companies not getting the cost benefits they expected. These extra cots come under:-

Project Management
Intellectual Property Rights Theft
Quality Control
Standard of Documentation
Rising Labour Costs
Time to Market Costs

Too many companies send projects offshore without realising the hidden costs pf offshore outsourcing and which projects are not suitable for sending offshore. They do this at their peril.

1. Project Management

The first of the hidden costs of offshore outsourcing is in Project Management. Usually companies look at how much it would cost them to do a project in-house and look at the quote they have got from an outsourcing company to do the project.

What they often miss out on is the hidden extra Project Management costs. You can only outsource part of the Project Management capability and costs. You must keep some of it onshore as you have to manage the offshore company to make sure that you get what you want.

Extra Project Management, Liaison and Co-Ordination Costs

There would be a lot of extra project management, liaison, and co-ordination costs that you wouldn‘t get in an in-house project, and these are all using the time and costs of the most expensive people both in IT and among the Business Users.

It is even worse if you outsource to an onshore company with an offshore facility. This means that there are three levels of Project Management making the project far more difficult and costly to co-ordinate and gives far more opportunities for errors emanating from misunderstandings to occur.

2. Intellectual Property Rights theft

It is hard enough to make sure that onshore companies that you outsource to do not help themselves to your Intellectual Property Rights without trying to make sure that a software company in some far flung place doesn‘t do it.

You don‘t mind them helping themselves to a few sub-routines but you don‘t want them selling large chunks of the system to someone else, or even building a similar system for a rival of yours.

Intellectual Property Rights Falling Into Competitors Hands

If this is mission critical software, you don‘t want the intellectual property falling into the hands of potential rivals.

You may be able to monitor it onshore, but it would be impossible to find out how some company operating out of Andra Pradesh or Bangla Desh managed to get hold of an IT system similar to your system

Protection of Contracts

It is never wise to have a contract with an overseas company if you don‘t have the wherewithal and ability to be able to pursue the offending company through the courts in their native country if they break the contract.

Otherwise the contract is worthless.

3. Quality Control

Quality control is another of the hidden costs of offshore outsourcing. It is difficult to control the quality of a project when it is being built in a faraway land in a different time zone.

As everyone knows, the further down the line in a project lifecycle that errors and misunderstandings are identified the more expensive it is to fix them – and it is much, much more expensive to fix an error or misunderstanding during User Acceptance Testing than it is at Analysis or Design time.

If you only get the opportunity to fix all the errors and misunderstandings at User Acceptance Testing time then, especially if there have been some basic understandings then the cost differential in using offshore workers can quickly be eroded.

4. Standard of Documentation

Another of the hidden costs of offshore outsourcing is the standard of documentation. The standard of documentation is often of an inferior quality when work is shipped offshore – especially if the program comments etc. are written in a foreign language.

Even if the User and Production documentation and the Program Comments and Specifications are written in English, it is often in a form of English that we don‘t understand as well as our own version of it.

This could be critical during a major Production problem.

5. Rising Labour Costs

Many companies are finding that they are falling into a Cost trap.

When they initially outsource some work offshore there are very good cost differentials.

However, if they have tied themselves into an offshore company they can quickly find that the cost differentials erode – and at quite a speed.

There are a number of factors here:-

1) the costs of IT labour are coming down dramatically in the developed world

2) the costs of IT labour in the developing world are rising very quickly

3) the currency rates of some developing countries like India are rising against the western currencies making it more expensive to deal with them.

This is one of the major hidden costs of offshore outsourcing.

Labour Cost Differential Erode Over Time

One US company thought it was great that they were able to use Indian developers at $15 an hour as opposed to US developers at $100 an hour.

Less than a year later they were finding that the costs of US developers had fallen to $35 to $50 an hour, whereas the price of Indian developers had risen in dollar terms to $25 an hour, wiping out much of the cost difference, especially when you add the greater co-ordination needed.

6. Time-To-Market costs

During downturns Cost becomes the main business driver.

However in normal times, and especially in boom times, Time-To-Market for their products is normally the main business driver.

If companies can get their products, or major changes to their products, to market ahead of their rivals then they will take the lion‘s share of the marketplace.

If, when they want to make changes to the software component of their products, they have to negotiate and explain to an outsourcer who then has to explain it all and get it built in their offshore office then this is going to take a lot more time and co-ordination than simply giving the job to an in-house person or team.

Businesses Lose Flexibility

This cuts the flexibility for the business to be able to change and adapt quickly. The business users normally complain that the inability of IT departments to change and write systems more quickly is a drag on the business.

It would be much worse if the work is done overseas.

Think Twice Before Sending IT Work Offshore

Therefore companies should have a long hard think before sending IT work overseas.

It may not deliver the cost benefits that they want in the medium to longer term, and it could restrict severely the ability of the business to adapt quickly to change or to new opportunities in the marketplace.

It could well be that Offshore Outsourcing will turn out to be one of those fads or trends that were caused by an economic downturn when companies were looking for something to help cut their bottom line costs.

This game is not over yet by a long way.

Those hidden costs of offshore outsourcing mean that companies can end up paying more for their software – but lose control of it.

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