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The Hidden Costs of IT Outsourcing
Keith Franklin, president of Empowered Software Solutions in Burr Ridge, Ill., loves offshore outsourcing. It means more work for his 40-person company. Just last year, ESS, which specializes in developing applications for Microsoft's .Net platform for Web services, earned $500,000 in revenues from fixing buggy software written in India. It took ESS five months to repair a glitch-filled application for a Web portal. Most pages on the site weren't connected, turning updating into a nightmare. Some code was missing.
The shoddy work didn't come cheap, either: The Indian outsourcer went $1 million over budget. Franklin says he could have done the project for less than $900,000 - right here in the U.S.
Indeed, off shoring - sending work overseas - isn't always all it's made out to be. Particularly with information technology, which can be a lot more complicated than moving traditional manufacturing operations overseas. IT quality is much more difficult to gauge, says Atul Vashistha, chairman and CEO of info-tech off shoring consultancy neoIT in San Ramon, Calif. And since IT is an integral part of every business process, it requires more communication and management.
Offshore IT outsourcing started to soar during the economic downturn. With their companies' sales squeezed and shareholders screaming bloody murder, many CEOs began mandating that some IT work be sent overseas. They were following the lead of big companies, including chipmaker Intel (INTC) and software giant Microsoft (MSFT), that already do considerable software development in India and Russia. With the trend gaining momentum, more than 40% of U.S. companies will develop software or test it, offer tech support, or provide storage functions overseas by 2004, according to market consultancy Gartner (see BW, 10/27/03, "All The World's A Call Center").
"DIRTY LITTLE SECRET." On paper, it looks extremely attractive. A Russian programmer charges 80% less than an American. But when you parse it all out, the total cost of offshoring a given IT job is generally comparable to getting the work done domestically, says Tom Weakland, a partner at management consultancy DiamondCluster. It's just that few companies are aware of these real costs. "Most companies can't accurately measure their productivity and costs prior to and after outsourcing," says Weakland. "Most look just at wages."
A few companies have learned the lesson the hard way. A year ago, 100% of neoIT's business came from consulting companies wishing to go offshore. Today, about 25% to 30% of its business relates to fixing problems, says Vashistha. Most companies don't want to advertise the problems they've run into, of course. "It's a dirty little secret," says Michael Mah, managing partner at software consultancy QSM Associates, based in Pittsfield, Mass. "There could be more crashed projects in the next 6 to 12 months."
One weakness of moving support functions overseas is that it leaves no one on-site to help customers. Take publishing-software maker Quark. For the last year it has based its English-speaking tech-support staff - people you call if your app keeps crashing - in India. Kamar Aulakh, Quark's president, claims that the move hasn't affected service quality or caused any customers to flee. He says his support staff is able to resolve problems over the phone. But the trend leaves some customers worried.
BACKWARD PRIORITIES. As Empowered Software has discovered, programs developed by offshore outsourcers are also often buggier than software programmed domestically - usually 35% to 40% more so, estimates Mah. "If a company makes software for flying airplanes, I wouldn't want [it] to be created with the priority of the deadline coming first and quality coming second," he says.
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