Offshore Outsourcing - The Hidden Cost of Ramping Up

Well-defined and accepted internal software development and maintenance processes are also key to making an offshore situation work. "If you’re an organization that develops and maintains by the seat of your pants, or it’s a case where Mary Jo and Fred have been here for 30 years and they know how to do everything, you are in trouble," says Raspallo, who currently sends 65,000 man-hours of work to India.

Raspallo spent five months and $80,000 in consulting fees to get ISO certified in 1998, which puts his company at about Level 3 in terms of his employees’ "capability maturity" in developing software. He also invested in an automated Web-based system to support the new software development and labor management practices. Most of the Indian offshore companies are ISO certified and at Capability Maturity Model (CMM) Level 3 or 5. "If your own staff can’t get used to working at that level, you’re going to have a major disconnect," Raspallo says.

If a company doesn’t create solid in-house processes, "the vendor will have to put more people onsite to compensate for your inadequacies, and they’ll spend all of your savings," says Meta Group’s Davison.

DHL America’s IT department spent a full year to get to CMM Level 2 in 2002. Kifer is aiming to be at Level 3 in the United States this year, with the ultimate goal of achieving Level 3 across the entire global IS team. "It’s a big project, and it entails a significant level of training and education," he says. "But if you’re going to take full advantage of offshore outsourcing, you have to raise your own maturity level." Not everyone was gung ho about the new level of discipline required, but Kifer lit a fire under them with annual bonuses tied to certification.

The ability to write clear specifications is also critical to achieving offshore savings.

"When you’re doing this stuff internally, you tend to be much more cavalier," says Hergenroether. "When you have to package specs to go outside the company, that has to be done exceptionally well." Creating a great spec package is costly and time-consuming. On a 1,000 man-hour project for example, Hergenroether’s staff will spend 100 hours to create a spec package.

At the other end of the process is quality assurance (QA) testing, an area which must become more robust in an offshore arrangement. "We essentially picked up two shifts of people in India working while we slept. The work we sent out at 4 p.m. came back to us at 10 a.m., and we didn’t have a QA funnel big enough to handle that," says Radio Shack CIO Evelyn Follitt, who now hires more temporary QA staffers during development time.

Bottom line: Expect to spend an extra 1 percent to 10 percent on improving software development processes.

The Cost of Managing an Offshore Contract

Managing the actual offshore relationship is also a major additional cost. "There’s a significant amount of work in invoicing, in auditing, in ensuring cost centers are charged correctly, in making sure time is properly recorded," explains DHL’s Kifer. "We have as many as 100 projects a year, all with an offshore component, so you can imagine the number of invoices and time sheets that have to be audited on any given day."

At DHL, each project manager oversees the effort. He audits the time sheets from the vendor and rolls the figure into an invoice, which then has to be audited against the overall project, which is then funneled to finance for payment. Kifer’s staff has been a bit overwhelmed. "We knew there would be invoicing and auditing," he says. "But we didn’t fully appreciate the due diligence and time it would require."

At GE Real Estate, managing the offshore vendor is such a big task that Zupnick assigned someone to handle it on a half-time basis at a $50,000 salary. The individual makes sure projects move forward, and develops and analyzes vendor proposals against the RFPs when it comes time to bid out new work.

"It’s a critical job," Zupnick says. "That’s the price you have to pay to make this work."

Bottom line: Expect to pay an additional 6 percent to 10 percent on managing your offshore contract.
© 2010 CXO Media Inc. By Stephanie Overby cio.com

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