September 16, 2007

Offshoring Myth - Easy Cost Reduction

The accounting side of the offshoring scenario always looks very promising. That is because numbers on a spreadsheet only tell you part of the story. Yes - replacing a $100 onsite resource with a $25 offshore resource theoretically saves you $75 or 75% but notice the emphasis on the word - theoretically ... Therein lies the myth.

The other costs which are not accounted for in this very naive scenario are

Transition cost - Transitioning a resource takes time and effort. This includes - training, mentoring, shadowing and the usual learning curve. Increase this effort significantly when the resource to be trained is offsite, in a totally different timezone and comes from a different cultural background.

Process cost - To effectively engage offshore resources - you have to invest in formal and robust procedures. These include change management, formal communication procedures, issues escalation, status reporting, shift transition management and assignment planning. If managing a local team wasn't challenging enough - now you have a remote team that works when you sleep. Without the procedural maturity – the offshore model will not be effective.

Continuous integration - Just because your offshore team is remote does not mean they are not part of your core team. To be effective they need to be involved in key discussions, training changes and plans. They are an extension of your team and need constant participation to retain their effectiveness.

Retention - Human contact is important to forge strong relationships and trust. Remote management exacerbates this issue by presenting you with a faceless resource. Motivating, encouraging and building relationships need extra effort due to the remote nature of these engagements. If you cannot build the relationships - there is always risk of attrition, which becomes another cost component.

In reality - effective offshoring is a long-term investment that pays dividends later in the life cycle. If you are enamored by the easy cost savings that are a result of switching onsite rate with offshore rate - then stop and consider these factors. Don’t fall for the easy cost saving myth.

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