Offshoring: Pathway to a Competitive Disadvantage
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Companies that have over-embraced offshoring will take back many critical business functions or eventually lose their competitive advantage.
By Frank Wander
Corporate IT remains a source of great dissatisfaction in many companies. After enduring high project failure rates for more than 50 years, companies should already know that highly competent, tight knit teams are a source of competitive advantage and project success. Companies should know that knowledge workers, and successful teams, are corporate assets, not expenses. Moreover, companies should know that talented professionals are not an interchangeable commodity. Unfortunately, workers don’t count, so everyone just soldiers on.
When I examine how traditional IT operates, the book Extraordinary Popular Delusions and the Madness of Crowds immediately comes to mind. In it, Charles Mackay recounts how otherwise intelligent people get caught up in manias, like the Dutch tulip craze in the 1600s, where, at the height of the fad, a single tulip bulb sold for 10 times the annual salary of a craftsman. It is part of human social psychology that once a herd mentality takes root, most everyone goes along, afraid to speak out, even if they know the situation makes no sense. That is where we have ended up in IT. Many people in the industry quietly say the offshore model is a source of enduring failure, yet it remains a staple of IT.
Offshoring is a tool. Like all tools, it must be used correctly. Offshoring has legitimate uses, and I’ll briefly touch on them later. Generally, it increases the cost of application development and maintenance because it uses a leverage model, where large numbers of inexperienced resources with little to no institutional knowledge are thrown at a problem. Failure rates are high. Productivity is low. The model is the exact opposite of what works. I experienced this firsthand, as a CIO, when one of my managers replaced a team of 50 offshore resources with six full-time, high aptitude employees, and delivered more projects.
The problem with offshoring is that decisions are made using a single factor: dollars per hour of labor. Instead, what should be used is productivity, which is output divided by cost. Someone making $100 per hour can easily be 10 or 20 times more productive than an inexperienced offshore resource that costs $25. Worse yet, vendors get paid for bodies, so they want you to use a lot of them. Vendors also need to make a good margin. Therefore, cheaper resources are more desirable because they produce a greater profit. And therein lies the problem.
Let’s examine the factors that drive IT knowledge worker productivity, so you can make an informed decision about offshoring. Even though some of these factors are not easily measurable, they are still true.
Team Size. Small teams are the most productive staffing model. This has been proven time and again, and I have personally observed it many times. Case in point: In a 2005 study, QSM, an IT consulting firm, compared small and large team outcomes across 564 similarly sized projects (100,000 equivalent lines of source code). The large teams averaged 32 persons, and consumed 178 months of total effort; the small teams averaged 4 persons, and consumed only 24.5 months of total effort to complete the projects. Interestingly, the elapsed time was approximately nine months for the small and large teams. Clearly, the smaller team was much more efficient, but offshoring is designed around larger teams, and it requires more overhead on the domestic side to communicate, manage, design and document everything. These large teams are slow, costly, and unproductive, even at lower rates.