Offshore Outsourcing: Success and Savings Still Elusive

Despite unimpressive results, offshore outsourcing market is growing rapidly. Even so, plenty of offshore adopters could bring it all back home again

There’s no disputing the fact that outsourcing has momentum.

Market researcher Gartner Inc. says the global market for outsourced services will grow to $133.7 billion in 2005—an increase of almost 10 percent from 2004. The firm expects spending on all types of outsourcing will comprise one-third of all IT capital expenditures by 2008.

To what extent are companies actually embracing the offshore variant of the outsourced services model? Last year, an ESJ survey found that 85 percent of companies with revenues of $500 million or more per year are outsourcing, but that only slightly more than one-third are doing so overseas. Even so, analyst firms such as DataMonitor warn that the offshore floodgates could soon open, thanks in part to a less volatile post-election climate in the U.S.

The benefits of outsourcing as a whole are decidedly mixed. Professional services firm McKinsey & Co., for example, says offshore outsourcing can reduce an organization’s costs by anywhere from 45 to 55 percent. But Gartner reports that most customer-service outsourcing not only fail, but end up costing companies one-third more than keeping them in-house. In fact, 80 percent of companies that outsource customer service operations to cut costs won’t be successful, Gartner says.

Furthermore, market watcher AMR Research Inc. surveyed more than 220 companies last year and found less than a third were satisfied with the amount of money they’d saved by outsourcing. Needless to say, for companies that outsource to cut costs, the Indian sub-continent and other offshore points are popular destinations.

There are important caveats to both of these anecdotes, however. In the first case, Gartner found that even though customer service outsourcing almost certainly doesn’t deliver on projected ROI in terms of cost savings, and in most cases actually ends up costing more, U.S. firms are anything but discouraged. In fact, Gartner projects that the market for outsourced customer service operations will grow from $8.4 billion in 2004 to $12.2 billion by 2007. And AMR—which found that most outsourcing adopters don’t save money—nevertheless expects that outsourcing activity will increase substantially over the next two years.

Blind Faith in Outsourcing

Part of the growth may be another manifestation (albeit in a different context) of what Federal Reserve Chairman Alan Greenspan famously called “irrational exuberance.” In this case, it’s a blind faith in the efficacy of outsourcing, and particularly of offshore outsourcing, as a cost-cutting panacea.

Nowhere is this more evident than among corporate decision makers, analysts concede. “I think that [idea of executive blind faith] is basically true. I think particularly during the real cost-cutting years, I think there did evolve this outsourcing to India as the panacea, and clearly it is not. Nothing is a panacea,” says Gordon Haff, a senior analyst with consultancy Illuminata.

Folks in the IT trenches who have first-hand experience with the fruits of outsourced labor have a very different perspective on this issue.

Rodney Gilbert, a programmer and analyst with the U.S. military, explains: “In my current position, I came in after two failed attempts at outsourcing a software project.” Gilbert says that he successfully tackled the same project himself, on an in-house basis. “I am still here and have completed numerous other software projects in addition to that one.”

This is par for the course wherever outsourcing is concerned, Gilbert argues. “[When] I interviewed with Dell in 2000, one of the interviewing managers asked if I knew C++ because they were rewriting an outsourced software project.” He experienced a similar situation while working for a Texas state agency during the late 1990s.

Like many IT professionals, Gilbert also has an obligatory offshore-outsourcing-experiment-gone-horribly-awry anecdote. “I have a friend who interviewed for a job … and the position was created to ‘clean up’ C# code that had been contracted in India," he explains. “They had over 100,000 lines of the garbage. Any programmer knows it's usually easier to start a project over from scratch than to take over someone else's failed attempt.”

While accounts such as this sound counter-intuitive—the Indian sub-continent is renowned for its programming talent, after all—they’re actually not that surprising, or uncommon.

Theodore Woo, a product support engineer with a prominent services firm, says he recently had to clean up some Java code that had been outsourced to a programming team in India. While Woo hesitates to call into question the programming skill of the Indian coders, he does admit to some head scratching.

“I jumped into this project in the middle, so I couldn’t tell you if it was a case of bad or poorly defined requirements from the start. I just felt that knowing that somebody else had worked on it for some period of time, it astounded me that they could have tossed out what I was looking at,” says Woo.

The irony, of course, is that Woo isn’t a Java programmer by trade. His expertise lies in another language, albeit one that bears a facile relationship to Java. “I am by no means a Java expert, but it fell to me to fix this thing when it failed during [user] testing. Basically, the problem was an elementary logic error. A condition was set, yet there was not an ‘else’ in this condition,” he explains. “Like I said, it could have been a case of poorly defined requirements, but this is something that’s pretty basic. This should have been caught.”

(Sub-continental) Land of Opportunity

There could be a simple explanation. To the degree that firms in the U.S., the EU, and Japan have accepted without question—or, at least, have endorsed with little (if any) empirical evidence—the inevitability of outsourcing, particularly of the offshore type, there’s been a corresponding explosion in demand for services talent in the Indian sub-continent and elsewhere.

One upshot of this is enormous opportunity, particularly for Indian, Chinese, Malaysian, and other offshore IT workers who lack hands-on experience or technical skill.

Consider the following posting to Yahoo!’s Mainframe Users Group, which also serves as a clearinghouse for offshore job offers in India and elsewhere. In this case, the poster obviously has only a basic familiarity with mainframe operations. Nevertheless, he’s trying to obtain a position with global services giant Accenture—and to do so, he’s soliciting help from other, more experienced mainframe hands. “i am learning mainframes course,” the poster writes. “i went to accenture, they asked that what happens with respect to main memory if u call sub program by using static and dynamic. pls elaborate the answer.”

Another post makes the point even more explicitly. “I search for job in Mainframe. I want technical questions for written test. I attended the interview in TCS, PCS, Kanby and Accenture. But I can't complete the first round. Please give me the tips and send the QA. Thanking you,” the poster writes.

The Yahoo! site also has postings about mainframe “refreshment” courses in Hyderabad and other offshore sites. The not-so-subtle upshot, of course, is that it’s through these courses that many “fresher” attendees get their first exposure to mainframe systems operation and programming.

These are extreme examples, to be sure. In fact, many of the contributors to Yahoo’s Mainframe Users Groups are experienced, knowledgeable, and competent. More to the point, the same thing arguably happens in the U.S. and elsewhere—and was almost assuredly a commonplace in North America during the IT boom of the late 1990’s. And that’s just the point: Like the U.S. in the late 1990’s, the Indian sub-continent and other offshore sites are areas of intense, and possibly short-lived, opportunity.

What this means, analysts insist, is that there are both advantages and trade-offs associated with the offshore model, and most companies are still feeling their way. Chances are, many early adopters will bring some outsourced operations back home, after disappointing experiences abroad.

This is particularly true for companies that have sent mainframe operations offshore, observes Illuminata’s Haff. “If you’re talking about some specialized skills, and mainframes are certainly specialized skills, that’s going to be more difficult to outsource in general than sort of more common types of programming tasks. The best you can do is kind of try and sense where the highest peaks of value are. Outsourcing in various forms can still be valuable, but you have to do it intelligently.”

Fixated on Costs

It may take a while for corporate decision makers to loosen their grip on the vision of outsourcing-as-cure-all.

Don Cave, an IT manager with a prominent global insurance firm, has in the past taken a pragmatic view of outsourcing. Following the acquisition of his employer by an even larger insurance competitor, however, Cave isn’t so sure. He expresses doubt that corporate decision makers, still fixated on cutting costs, are capable of seeing the issue from any other perspective.

“Our forced-in parent company … has started to exert more control, somewhat. They adopted a cost control because of the ‘competitive price’ of offshore help and became more aggressive. They got their wish. Before Christmas, pressure and cuts resulted in the exodus of all the California DBA staff,” he says. “The replacements were green offshore contractors. And, of course, they began calling for some information and assistance. … We can still observe the net productivity loss on the other team, though none is admitted [by management].”

The irony, Cave says, is that by focusing solely on cutting costs, company management is tampering with a demonstrated profit center. “By our efficiencies for the past and company strength, our sub-company alone contributed $1.087 billion last year to [the company],” he says. “But, if [or] when they finish altering the creativity and drive of the developers, those efficiencies will dwindle and eat away on those profits all the while with management crowing success.”

Related Links:

ESJ Outsourcing Survey