Offshore Outsourcing - The Hidden Costs of Transition

Zupnick, who has seven years of offshore outsourcing experience, says most of his peers don’t appreciate the time and money it takes to get a relationship up and running. "The vendors say you can throw it over the wall and start saving money right away. As a result, I’ve heard of CIOs who have tried to go the India or China route, and nine months later they pulled the plug because they weren’t saving money," Zupnick says. "You have to build in up to a year for knowledge transfer and ironing out cultural differences."

CIOs must bring a certain number of offshore outsourcing developers to their U.S. headquarters to analyze the technology and architecture before those developers can head back to their home country to begin the actual work. And CIOs must pay the prevailing U.S. hourly rate to offshore outsourcing employees on temporary visas, so obviously there’s no savings during that period of time, which can take months. And the offshore outsourcing employees have to work in parallel with similarly costly in-house employees for much of this time. Basically, it’s costing the company double the price for each employee assigned to the outsourcing arrangement (the offshore outsourcing worker and the in-house trainer). In addition, neither the offshore outsourcing nor in-house employee is producing anything during this training period.

But it has to be done. "We made a mistake in the beginning of just packing up the specs and shipping them over, looking at it from a pure cost standpoint," says Craig Hergenroether, CIO of Barry-Wehmiller, a packaging manufacturer that has its own development center, Barry-Wehmiller International Resources, in Chennai, India, and works with other offshore outsourcing vendors. "Silly mistakes were made because we didn’t take the time to have them come over. It’s a false savings to keep costs down by communicating only by phone."

DHL’s Kifer had similar problems. Long lead times for acquiring the necessary hardware in India delayed development work, he says. The hardware holdup put off the start of offshore outsourcing work for several months, requiring DHL to continue to keep vendor workers employed onsite at the more expensive rate.

During the transition period, the ratio of offshore outsourcing employees in the United States to offshore outsourcing employees working at the vendor’s overseas headquarters is high. But after the transition is complete, CIOs have to get those employees out of the office if offshore outsourcing is to be a money-saving move. "It’s got to be 80 percent or 85 percent working offshore outsourcing or the numbers just don’t work," explains GE Real Estate’s Zupnick.

It makes sense for offshore outsourcing service providers to place as many of their employees in the United States as possible. The provider’s margins—already quite decent for offshore outsourcing work (Indian companies charge U.S. companies $20 an hour for an employee they pay around $10)—really skyrocket when they’re on American soil. "They make more money and often the client feels better having them close," says Praba Manivasager, CEO of Minneapolis-based offshore outsourcing adviser Renodis. "But the customer immediately loses all of the bill-rate savings." If not included in the original contract, additional travel and visa costs also must be figured in. Tally it all up and you will pay as much as you would for one of your own employees.

It’s a difficult area for CIOs to manage. Work is much easier to do with offshore outsourcing workers onsite, but to cut costs they must push as much overseas as possible. Conversely, the more manpower based offshore outsourcing, the more project problems and delays. Barry-Wehmiller’s Hergenroether says the amount of workers you can reasonably send offshore outsourcing depends on the type of work being done. Industry- or company-specific system development requires more developers onsite. Legacy maintenance or simple upgrades may not require a soul.

"On some of our projects, up to 50 percent of offshore outsourcing workers are onshore; on others it’s closer to 10 percent," Hergenroether says. In some cases—where specific skills are the reason for offshore outsourcing—he may even bring in offshore outsourcing talent over long term. "But if you’re going to do that, your cost savings diminish dramatically," he says. In fact, there may be no savings at all.

Bottom line: Expect to spend an additional 2 percent to 3 percent on transition costs.
By Stephanie Overby

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