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Is Offshoring for you?

Wikipedia defines offshoring as: “the relocation of business processes from one country to another. This includes any business process such as production, manufacturing, or services”. American companies are shipping their IT development, customer service centers, and manufacturing overseas to countries that offer low-cost labor pools.  This effort is seen as promising to cut costs and, in some cases, reducing the “time-to-market”. Firms in America want the latitude to compress costs by shipping labor and production to ever-cheaper markets offshore. Yet American workers need to protect their livelihoods. Outsourcing firms are eager to serve U.S. companies and their customers. In the ensuing outcry, Senator John Kerry calls U.S. firms that participate in offshoring "Benedict Arnolds," while CNN anchor Lou Dobbs has hammered job-exporting "offenders" nightly. Thirty-one states have proposed anti-outsourcing legislation, and the U.S. Senate has voted to ban the practice for federal contracts.

Companies move projects offshore, largely to India and China, for cost savings, but also for time to market, according to David Thomas, executive director of the SIIA. It simply takes too long to hire and build a team in the U.S., especially when a team of 50 or 100 is assembled and ready to go in Bangalore or Shanghai.  It is estimated that there are over 150,000 engineers in Bangalore, India as opposed to 120,000 in Silicone Valley.

Companies move many of their functions offshore and layoff their inhouse staff.  As this trend continues, the very people that buy the companies services and products find themselves out of work and unable to purchase them. Companies strip their staff to “bare-bones”.  This leaves them in a position where they cannot properly manage the offshore efforts.  One woman related how she was sent to India to train the developers on how to manage a development project and two months later was replaced by one of her students.

In three years the U.S. has lost 400,000 service and 1 million manufacturing jobs to offshoring, Goldman Sachs says. All told, up to 14 million U.S. jobs are vulnerable to offshoring, say researchers at the University of California, Berkeley. The irony is that American innovation sparked the job flight now hurting America. Forrester Research predicts that about 3.4 million U.S. jobs (and $136 billion in wages) will move overseas by 2015.  Forbes listed the top  10 Jobs not likely to be outsourced:

Chief Executive
Physician and Surgeon
Pilot, Co-Pilot, Flight Engineer
Information Systems Manager
Sales Manager
Physician’s Assistant
Elementary and Secondary school teachers

India and China are not the only countries benefiting from offshoring. These are the Top Ten Countries For Offshoring

India - IT software and services export market will grow from nearly $10 billion in 2002 to $60 billion by 2008
China - the population under age 18 in China is larger than the combined total populations of the U.S. and the U.K. Poor reputation regarding property rights.
Malaysia - has even less bureaucratic red tape than Canada.
Czech Republic - competitive infrastructure costs, good education system, stable business environment.
Singapore - education system, infrastructure, intellectual property protection, stable political environment.
Philippines - graduates an estimated 15,000 technology students annually. English language skills, low costs, cultural affinity for the U.S.
Brazil - low costs, large population, good business process outsourcing results.
Canada - Turnover at CGI, one of Canada's largest call centers, is just 6% versus 25% to 50% turnover at most U.S. call centers. Good business environment, high-quality workers, infrastructure, language skills.
Chile - Santiago, Chile's capital, is among the least expensive cities in the world. good infrastructure, including telecom networks, good business environment.
Poland - good education system, slightly lower costs than Czech Republic and Hungary.

Offshore companies promise experienced, qualified, engineers at 25% the cost.   The following ad appeared in an offshore web site:

Job Title: Software Engineer
Platform: Microsoft .Net
No. of openings: Multiple

Qualification:  Freshers from BE/BTech; BSc/MSc; BCA/MCA with specialization in Computer Science or Information Technology only may apply.  .NET trained freshers or candidates with .NET work experience may have any education qualification.

Skill sets: Basic Knowledge of .NET, TSQL, C#. Additionally web2.0/xml/rss/web services. Good communication skills is a must.

Experience: 0 to 2 years; Freshers are most welcome.

“Freshers” are people with little or no experience, right out of college or trade school.  A Google search for “fresher” returns thousands of results.  Many jobs offer “walk-in” opportunities.  The applicant doesn’t even need a resume; just walk in and they are hired. The great distance between client and outsourcer makes it difficult to know who is working on a project or if the person selected has been replaced.

The promise of low-cost, qualified labor is attractive. But, the true cost of a system goes beyond the development costs, maintenance and upgrade (new version) costs can outstrip the initial investment and cancel any short term savings.  In an earlier article (see the January 2007 issue) this author found that current research indicates that a smaller staff consisting of experienced developers coupled with a larger testing staff can provide greater long-term benefit than the “throw more bodies at the project” approach.

Planning, execution and continued oversight of an outsourcing strategy requires a lot of work. The benefits will not be realized immediately and cost savings will probably not be as significant as predicted. Many of the articles written on offshoring blame the client for not managing the projects effectively.  The great distances and communications gaps in both time zones and language require the client company to maintain tight controls and develop clear, concise specifications.

Unclear specifications that leave themselves open to interpretation will be interpreted according to the local culture.  Offshore developers will build exactly what you tell them to build. This is both good and bad. The good news is that they are likely to take your specification very seriously—not merely as a suggestion or starting point from which to improvise (as sometimes can happen within an organization).

The bad news, of course, is that if you don't clearly plan and articulate every aspect of your product from user interface and product behavior to business logic and algorithms, developers are forced to rely on their own experience and judgment to determine an appropriate solution to an unforeseen problem or vaguely documented feature. The reality with offshore resources, however, is that they are very unlikely to have the same experiences as domestic workers.

One company outsourced their customer technical support hotline to India.  Because of the language and cultural differences, the call-center staff were given a “script” to work from.  The company received a lot of complaints from customers that were misdirected.  Their questions were either misunderstood or not covered in the script.  One customer was even told that their question was wrong and then misdirected.

It is important for the client to understand the capabilities of offshore developers, to recognize what challenges they can address and what problems they can't and shouldn't be expected to solve, and to adapt the appropriate management practices. Augmenting staff through offshoring – for example: using offshore resources as contractors - is a bad idea because of the time and geographic differences that make it difficult, if not impossible, to integrate these resources into on-shore project.

Client organizations should avoid trying to "buy" process discipline from offshore vendors, without making a corresponding investment in their internal disciplines. An offshore developer can provide a significant improvement in development methodology, but won't be able to take an organization any farther than it's ready to go. Process discipline creates work for the client, in terms of documentation, specification, and review. If the client doesn't have a sufficient retained organization to assimilate these sophisticated processes, the vendor will end up ratcheting down their capabilities at client intersection points.

It is important to recognize the types of activities that are well-suited to offshoring, and the ones that aren't. Offshoring tends to not be effective for projects with vaguely-defined specifications. Finally, the concept of "Round the Clock" development, whereby a UK-based team hands off a project at the workday's end to a US team, which then passes it off in the evening to an Indian team, has proven impractical. The benefit that is touted is that by putting hands on the code base at all hours of the day, functionality gets written faster. Experience has shown that the inevitable questions and problems that arise within any development center quickly bring the flow of work to a grinding halt.

Knowledge Management (KM) tools are needed to facilitate coordination between on-shore and off-shore teams, and to track and communicate project status, particularly to update clients with respect to off-shore activities. Specific measurement criteria that should be applied to offshore projects include the following:

  • whether work is done to schedule or not
  • a method to track vendor performance regularly
  • whether the vendor's effort estimates represent good productivity and low unit costs
  • whether the vendor achieves industry quality levels
  • what performance targets should be set for the vendor

The Global Information Assurance Center on offshoring (SANS Institute 2003, part of Global Information Assurance Center ) has stated that “It is difficult, and often impossible to validate that the software that is developed offshore does not contain bugs, worms, or back doors… Not accounted for in the balance sheet benefits may be concealed a new drain on resources. Additional security vulnerabilities are often introduced and the cost to mitigate these vulnerabilities is often not identified or funded.” 

In addition, even though many offshore development shops have adopted quality assurance practices (e.g. Software Quality Initiatives and CMM) and put service level agreements into place, companies must still manage the work from planning the project to accepting. Otherwise, what seemed like prudent cost saving choices could turn into a costly, high-risk venture.

There's still many differences of opinion within the general enterprise software world about the costs and benefits of using offshore development. The reason why most people look to offshore is to reduce costs, noting the significantly lower rates that you find from offshore vendors. However it's foolish to look only at rates. Rates are only one component of costs, and in any case you have to look at the entire return on investment.

Overseas Outsourcing: the road to democracy?  Outsourcing has created and strengthened the “middle class” in countries like India. This is made up of people that are educated, vote, and have a vested interest in protecting their freedoms.  They depend on western countries to provide revenues.  This creates stronger ties and makes for political allies.

Offshore development is very fashionable, but it's still too early to really understand its true strengths and pitfalls. Certainly anyone doing it because they think they'll get cost savings similar to the rate differences is seriously deluding themselves. Some people talk about all software development moving to the third world in the same way that the steel industry did, others think that after a period of fascination the offshore industry will dry up.The bottom line: whether it's done in Bangalore or Boston, application development can be managed. All it takes is facts, a rigorous methodology, and knowledge of the processes and challenges involved.


Online Networking Inc.   dennis@onlinenetworking.org