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Putting a price on offshoring

Arpit Kaushik | Jan. 28, 2009
When quantifying the business value of offshore outsourcing, customers must consider three important aspects that are often ignored.

LONDON, 27 JANUARY 2009 - Read any case study and you'll probably encounter overblown statistics that say offshore outsourcing reduced costs by 50 per cent, reduced number of defects in production by 25 per cent, reduced time to launch application by 40 per cent and so on.

Some even go a step further and extrapolate these figures to 'business value'. Example: launch time reduced by 10 weeks implies 10 weeks of additional revenue or reduced costs. So 10 divided by 52, then multiplied by annual revenues or IT annual spend equals business value from reduced launch time. Lo and behold -- suddenly you have a number in the tens of millions. Add up all the other sources of value and you may reach hundreds of millions and even billions as the business value. Sounds good, right? Especially in this time of recessionary woes.

But if this was accurate, customers would not be so unsure about whether offshore outsourcing has delivered value. Numerous surveys indicate that anywhere between 17 per cent and 53 per cent of customers have not realised business value/return on investment from offshore outsourcing. Yes, statistics can prove just about anything, but whatever the number, there are customers who have not realised tangible returns from offshore outsourcing. And this article is for you folks.

When quantifying the business value of offshore outsourcing, customers must consider three important aspects that are often ignored: the appropriate comparisons, the hidden costs and the distinction between theory and reality.

The wrong assumptions

When it comes to building the business case for offshore outsourcing, the most common comparison is between onshore and offshore, apparently in answer to the question: "If we had to do the project in any other way apart from offshore, how much would that cost?"

Many assumptions end up wrongly over-estimating the onshore cost. Most common is using the same headcount number in both cases. When a project is done onshore, fewer people are required because of -reduced activity levels in areas like knowledge capture, knowledge transfer, project coordination and environment support. Then there is the productivity factor.

M. M. "Sath" Sathyanarayan, president and principal consultant of Global Development Consulting and author of Offshore Development and Technical Support: Proven Strategies and Tactics for Success, says that even if offshore personnel are as competent as your local employees -- which is your best-case scenario and unlikely to be the case when you are getting started -- there will still a productivity loss because of systemic issues.

Also, the assumption that all the onshore work will be done by newly hired internal employees may not be the right one to make; customers almost always leverage contractors and existing employees. For the former, use the relevant contractor rates that are likely to get negotiated and the appropriate loading factor (you don't pay pensions, holiday allowances and so on to them). For the latter, consider if they can be treated differently: it could be a sunk cost for a period of time or a partially apportioned cost.

 

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