Guru’s Corner: The Cost of Offshore Outsourcing
Written by Peter Atalla
We are seeing time and time again that the major drivers for the offshore model have always been cost related. The all-too-familiar mantra of “Can we save thousands of pounds by sending all of our development offshore?” is something we hear constantly. When you consider that some offshore software development locations can be over 50% cheaper than the UK, on the face of it it certainly makes good business sense to look overseas… or does it?
Sadly, it’s not quite as simple as that. We hear hundreds of horror stories about development projects that have gone terribly wrong, resulting in unusable code and software, wasted time and a lot of money down the drain. Very often the offshore company or the offshore developers are blamed, and offshore development gets a BAD name. I’ve been working in this industry for a long time and I’ve seen projects that have been a tremendous success and I’ve seen projects that have ended badly. However very rarely have I seen bad developers being the cause of the problems. If you’ve done your due diligence properly you will have already ascertained the standard of the developers before a project has commenced. So what exactly is the cause of these problems?
The Business Case
First, let’s consider the cost for outsourcing. Most offshore outsourcing comparisons consider only the direct labour costs.
| UK | Typical Offshore | ||
|---|---|---|---|
| Average man-day cost employed | £125 | Average man-day cost employed | £88 |
This picture is then further enhanced by adding the other associated costs…
| UK | Typical Offshore | ||
|---|---|---|---|
| Average man-day cost employed | £125 | Average man-day cost employed | £88 |
| Daily cost of desk space | £25 | Daily cost of desk space | Included |
| Daily cost of Computer / IT Comms Services | £7 | Daily cost of Computer / IT Comms Services | Included |
| Other Employee Benefits | £10 | Other Employee Benefits | Included |
| Management Costs | £16 | Management Costs | Included |
On the face of it this looks like a fantastic business case. Moving to an outsourced model represents a saving of 51%. However these apparent cost savings often fail to materialise and some projects end up costing more. Why is this?
The Hidden Costs of Outsourcing
Very often there are other costs of outsourcing that are overlooked, and I’ve highlighted the 8 most frequent issues below:
1. Detailed Specification stage
This stage is so often overlooked or compromised. A cheap, quick specification stage will undoubtedly result in expensive problems later on. As a rule of thumb a good specification should cost around 20% of the total outsourced project.
2. Detailed project methodology, testing requirements, documentation
It is important to define the methodology the developers are going to follow before a project commences. There are many project management methods, and a combination of a few can often result in a better approach. However this needs to be clearly documented, and both the developers and the client need to have bought into this. It is also important to define the testing procedure and documentation before commencing the project. Failing to do this properly will result in additional time and cost.
3. Local Project Management
We are not talking about the project manager that you will be assigned from the offshore entity. The hidden cost is the local internal person who will be responsible for all communications with the offshore company. Many people think this will be nothing more than answering a few questions – a glorified messenger boy. However the role and the job will soon grow. Very often around beta and final delivery and it’s a full-time commitment.
While it is difficult to estimate the exact cost of this, as internal staff costs differ from company to company. It is important to have a realistic idea of the time requirements. Have these clear defined upfront and block out the beta and final delivery periods to allow for testing and troubleshooting.
4. Travel Commitments
The specification document cannot just be handed over to the offshore development company. Effective communication of the specification is immensely important especially if you are outsourcing to a location whose first language is not your own. You must meet face-to-face to explain, clarify and in some cases revise the specification to avoid all possibility of doubt. You must identify areas of risk in the project straight away and then work with the offshore company to address them.
An allowance for these costs should be factored directly into the project costs.
5. Regular face-to-face progress meetings
Ok so you’ve done the hand-over of the specification and now all you have to do wait for the software to be completed and handed over to you, right?
Wrong!
You must keep on top of the development project. Make sure there are regular review points, whereby problems that are uncovered (and there will be problems, there always are) can be dealt with swiftly. Again the best way to deal with these are by meeting face-to-face. Be sure to include these time and travel expenses in your project costing.
6. Change Request Management
Here’s the killer: change requests are the second biggest cause of project failures. (The first being communication). Change Request procedure needs to be clearly defined at the beginning of the project. Once a change is requested by the client it is the job of the project manager to assess the risk and impact to the project.
This is where it is advisable for the project manager to have some spare capacity to be able to handle a situation like this.
7. Coordinated beta testing and acceptance
It amazes me how many people take the beta stage lightly. I’ve known clients not to even pencil it into their diaries. Beta testing is a crucial stage, and it’s important that at this time the people required to test the project are available. The beta stage does cost money as it requires the time of the client and project manager. Very often clients end up causing delays during this period, having underestimated the time required. If you eat into the beta period without doing the appropriate level of testing there will simply not be enough time to fix the bugs you will find later. This will result in additional costs and late delivery.
The costs and time associated with the beta stage very much depend on the number of people testing the project and how the feedback, fixing, testing cycle is managed. Typically a beta stage will cost a company approximately 20% of the total outsourced project cost.
8. Project delivery and troubleshooting
How smoothly the project delivery stage goes really depends on the quality of the beta stage. Provided that the beta stage went well, then the project delivery shouldn’t be too traumatic. That said, some things will go wrong so you must make sure enough time and resource is put aside to address these problems.
If done correctly, the project delivery stage should only cost between 2-3% of the total outsourced project cost.
A real-life example
A friend of mine worked on a project for technology company based in Silicon Valley. The company decided to use a team of software developers based in India. On the face of it the business case looked very strong.
The estimated cost for developing the project in house was £268,000. When they first received the quote back from the Indian company it was almost too good to be true - the Indian company said they could develop the project for £112,560. This was a massive saving of 58%.
However the project went wrong. The Silicon Valley company had drastically underestimated the required time for the specification and methodology stages. The poor specification document resulted in a number of change requests, which again were poorly specified. If regular progress meetings have been scheduled many of the small problems could have been resolved before they turned into major ones.
The project was predicted to take 5 months, in the end it took over 8 months and cost the company over £315,000. What looked to be a saving of 58% turned into a price increase of 17%.
The Silicon Valley based company blamed the failure of the project on the Indian development company; however I had seen this company work before and produce some amazing results. The real problem was the communications and the underestimation of the hidden project costs and resource requirements.
A new model for offshore outsourcing
It is clear that the old model of offshore outsourcing only works if you have considered all the hidden costs and have the appropriate management experience to handle it. However most companies don’t, and this is why DataArt has always taken a different approach.
DataArt uses both onshore and offshore staff to deliver a project. We don’t just wholesale hours looking to entice companies into a false sense of value based purely on cost. We approach a project by asking the question “what will it take to make it work?”
The local onshore team of project managers and technical architects work with the client - very often onsite - to address the problems and concerns with project. The local team will also include all the hidden costs so that when you get a price from us it is realistic.
During the course of the development the local onshore team is constantly visiting the offshore developers and the client, ensuring the work is done to the required standard and that communications are clear, concise and accurate.
Working like this, DataArt has been able to deliver true cost saving, while maintaining or in most cases increasing quality. The result is many happy clients.
Why don’t you drop me an email, and we can set aside some time to discuss your software development requirements?
If you would like to talk to DataArt about your project requirements, or for more infromation about our offshore software development services please call +44 (0) 208 600 2595 or email sales@dataartuk.com