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June 9, 2003
by David Hirsch

There are two fundamental reasons why a company considers offshore outsourcing. These are cost and accountability. Both are strong motivators and political hot spots. But outsourcing is not the magic bullet that the vendors- and the companies using them- want you to believe. Outsourcing is not a viable alternative for many projects. Extreme circumspection is the key.

Why do companies consider outsourcing in the first place? For an executive looking solely at bottom line numbers, IT operation, maintenance and development costs are anchors that drag profits down without adding much to the income side of the ledger. While it is a fact of life that operations and maintenance are necessary, justification of their expense becomes increasingly difficult, especially in hard economic times. Development gets lumped into this category because the professionals that develop are the same people that maintain the existing applications.

Offshore outsourcing is appealing on the surface because it addresses the cost issue in a direct and understandable manner. But by bringing the cost of IT down to an hourly rate formula, it compares its apples to reality’s oranges. Yes, the cost per hour of a programmer in India is one-fourth the cost of a similar person in the USA. Yes, programmers, regardless of country of origin, have comparable technical skills. Therefore, why not profit from the lower rate? It’s a great pitch!

Hidden Costs
But lost in the zeal for cost-cutting are the hidden costs of obtaining a lower per-hour rate. These costs include the tangible expenses of communications between the US and the foreign country, supervision by professionals comfortable working in different cultures and at unnatural (for us) hours, and the costs of added quality assurance. Then there are the less tangible expenditures of diminished process control, increased risks associated with change management and testing, and loss of industry and focused expertise internally.

The issue of accountability is equally important. For a business unit to think that by using outsourcing it will incur only the development costs and not the ancillary costs it now sees as part of its budget is appealing. The business unit feels that it has lost the need to support the IT anchor. It sees only that a small project team is accountable solely to them and not to the organization as a whole.

Offshore development allows a business to forget all that IT does. It forgets that IT runs and maintains all the projects that are built, even when they are built offshore. It also forgets that IT maintains an infrastructure on which these applications can run, and that this is a time-consuming and costly process. And most importantly, it forgets that taking away the development aspects of work for a professional, leaving him only maintenance, will chase the best professionals away. They get their job enjoyment from the development, not the maintenance activities. This means that if the offshore teams do not produce results as hoped for, the company has less ability to recover.

Questions to Ask Before Considering Outsourcing
For a company to consider offshore outsourcing it must be able to answer yes to all of the following questions. Then, and only then, can outsourcing be considered a viable alternative.

• Can I afford to lose direct process control over outsourced projects?
• Will I be able to recover in the event that outsourcing does not work out as planned, even though I will have less staff and the remaining staff will be less skilled than the current one?
• Can I rationally separate development costs (as a profit-center) from maintenance and operational costs? If so, do my calculated offshore costs include porting, testing, management and subsequent maintenance costs?
• Am I comfortable giving my ideas and systems to people over whom I have little if any control, and who (potentially) work for my competitors?
• Do I have an executive team in place that will accept responsibility for management of and budgeting for offshore development?
  
  

Types of Projects Matter
Also, only certain types of projects that should be considered candidates for outsourcing. Projects fall into three main areas for consideration. These are:

• Conversion Projects: where the task is to convert a set of programs or systems from one version of a programming language to another. This is often the case with old legacy systems, where IBM will no longer support COBOL programs written in ANSI 74 standards. These programs need to be upgraded to newer standards. There is no change of functionality, and this is a rote process.
  
  To a lesser degree, this category also includes projects for converting a system from one technology platform to another. For example, an EDI based web platform could be converted to an ADF web platform. These projects may not fit here because technology platforms seldom are used for stand-alone applications, and at the point where a platform needs to consider multiple users, issues outside of the specific project have to be considered.
  
• Stand-alone Development Applications: where the task is to develop all the requirements for an application that does not interface with other applications in an operational environment. This application may share a common database, but will not interact as a source of information for other processes. An example may be an HR application controlling benefits. This application uses a shared employee database, but does not offer its products, files or results to other applications.
  
• Integrated Development Applications: where the applications involved need to be integrated into an operational plan because of the use of processed data into other applications. Here issues of platform consistency and support are critical, as any problems could affect areas outside the control of the project team.

Of these areas, I suggest that only areas one and two ever be considered for outsourcing on the basis of risk. To consider outsourcing an integrated application development effort is to put your entire company at significant risk, and no cost savings is worth that.

Stand-alone development can be considered, especially for small business units that currently act autonomously. The risk is limited to that business unit, and precautions or fallback positions can usually be developed to mitigate the risk. The major consideration should be if the development platform and language fits into a strategic plan for the organization. If not the effort would be a effectively wasted in a short period of time.

Conversion projects are the best types for outsourcing since all functional requirements are known and defined. Testing can be focused on achievement of data streams that are virtually the same as existing streams. Success can be easily measured, and projects can be broken into small sections for testing and operational readiness. And, best of all, there is always the fallback position of retaining what already works – a great comfort.

When Outsourcing is a Viable Choice
When you consider all of the above points, outsourcing sounds like a dubious choice. Usually it is. But there are exceptions, and this is especially true for legacy shops.

Whenever there are conversion needs of any significant size, outsourcing is an extremely viable alternative. There is a safe fallback position. The costs are minimized because the maintenance and operational aspects of the effort have already been assumed by current process. And control can be focused on matching daily production results against a parallel run from the converted processes. Thus, the larger the conversion effort, the greater the savings.

Another subsidiary benefit of outsourcing conversion efforts is that the in-house staff is free to do more company-focused tasks. With the backlog of needs most company have, the ability to not waste talent on rote tasks is important. And the costs saved could be used to fund additional projects.

Where companies make the largest mistake in outsource consideration is in having an all-or-nothing approach to the question. Outsourcing is a service that, like any other, has benefits and drawbacks. It should be considered on a project-by-project basis, and not as a solution to removing heavy IT costs.

Evaluate, Evaluate, Evaluate!
Evaluate offshore outsourcing as you would any other vendor, focusing on what it delivers against your objectives. Remember that it is only a component of your overall cost, and measure the inherent risk against the potential cost savings. If offshore provides a better return than any other vendor, go for it.

Offshore has grown at a fantastic rate due mainly to great marketing. But as with all marketing efforts, the focus is on what the vendor wants the consumer to see. Due diligence, as you would have with any vendor, is the sole responsibility of a hiring company. It has to be performed in an unbiased manner, preferably by a task force with both business and IT representation.

.© David Hirsch 2003
About the Author: David Hirsch was most recently at Fleet Securities, where among many responsibilities, he managed critical and enterprise-wide projects and, as a strategic planner, developed infrastructure to support OFAC, Patriot Act, and SEC-13-b regulations. Prior to Fleet Mr. Hirsch worked at eFunds as a Senior Consultant where he was responsible for business development at Pershing, including offshore projects. Prior to this he was CIO at Nelson Information, where he developed a successful web business for the firm, and a vice president at ADP where he led the conceptualization, creation and design of what became the ADP Front-Office Brokerage Product. Other positions have included consulting at Merrill Lynch where he developed a FSOD trading system and CTO at Autex Systems where he reengineered the IT department during platform conversion. He has been recognized by the Fleet Architecture Review Board for "Hercules," an enterprise-based client-focused data warehouse. He received his BA in English from Windham College, VT and his PMP from the Project Management Institute. Mr. Hirsch can be reached at wgaclinton@msn.com and by phone at (914) 834-5670 and (702) 809-5209