Readers React to Parkinson's Offshoring Cost Estimation

By CIOinsight  |  Posted 02-17-2006
Editor's Note: At CIOInsight we encourage readers to respond to stories or columns and do our best to give them a forum for their opinions, online as well as in print.

The following are responses to John Parkinson's Feb. 8, 2006 column What's The Real Cost of Your Offshore Operations :

Reader Comment:

From: Les Hazelrigg
Sent: Thursday, February 9, 2006 3:09 PM
To: editors
Subject: Two More factors - Security Risks & High Turnover

You have omitted at least two very significant additional factors from What's The Real Cost of Your Offshore Operations article.

First, you suggest that productivity improvements will continue due to the dispersed team members growing to know one another over time.

This ignores the very real high turnover being experienced at many India and other global resource locations. With ongoing high turnover rates, the teams are in a perpetual relearning situation instead of building closer team relationships. So this assumption of improvement over time is overly positive if not entirely flawed.

Second, there was no mention of security risks associated with having teams from multiple countries participating collaboratively. Some work simply should not be exposed to more than a few people in a single location.

Each additional person and location exposes information to more and more security breaches resulting in a need to invest more and more time and dollars in maintaining control of sensitive data and preventing hack attacks on more networks and servers.

I am sure that there are a number of additional positive and negative factors to consider when evaluating overall cost effectiveness of global outsourcing.

I think the article should have concluded with a notation that others factors apply and that business specific consideration must be given to risk assessments.

Response from Parkinson:

You raise valid points that I could have commented on more specifically. However, my data is largely based on the work practices of global outsourcers and systems integrators who have high turnover rates in their onshore resource pools as well. Although turnover rates are indeed higher in India (they can be as high as 40 percent) and are increasing in China, they are generally not that much higher than the 17 percent-24 percent that is common for SIs in North America. Rates in Eastern Europe, Southern Europe and South America are actually quite a lot lower—in the 6 percent-10 percent range that is comparable to corporate IT departments in the US. So, while turnover is a factor (and cost) that has to be managed, it can be managed—and it's not necessarily the deal breaker that you suggest.

Security absolutely is a concern. IP leakage as well as the cost of defending corporate and personal data from theft isn't insignificant, but I have factored this into the increased infrastructure costs.

In some cases quite extreme measure that would likely not be tolerated here are used—including scanning employees for potential data storage devices when entering and leaving the facilities, persistent surveillance and recording of a ll activity and the requirement to keep all working materials inside the facilities—no one gets to take work home. In comparison, the private WANs that link the distributed teams are relatively easy (although not cheap) to secure.

Thanks for taking the time to comment and share your thoughts.

John Parkinson

Reader Comment:

Regarding the February 8, 2006 article entitled "What's The Real Cost of Your Offshore Operations?". The article and your conclusion appear to make sense to me. It leaves me with some nagging questions. How do you ever reach the benefits four years out if many of IT staff members have left? It seems to me the average retention of IT employees is less than years.

If so, does that imply that you never reach the theoretical maximum benefit? Furthermore, if retention of staff becomes a critical component to reach the theoretical maximum benefit, what, if any, are the additional cost associated with keeping existing staff in place?

Lawrence Delby
Logic Development, Inc.
Chicago, IL.

Response from Parkinson:

Staff turnover is indeed a limiting factor that other readers have raised as an issue. SI's typically see average turnover rates of 17 percent-24 percent, but the turnover is concentrated in the most junior/least experienced resources. Experience actually accumulates quite quickly in those that do stay. As long as you have en effective process to capture and make available working practices and you can build up a well practiced project management and team leader community this level of turnover can be managed.

Replacing staff is expensive—I have seen estimates that it costs an equivalent of 1 year of fully burdened costs to hire, on board and integrate a new resource to the level that they are as productive as the individual they replace—and durin g the time it takes to bring them up to speed you are losing productivity as well as incurring this additional cost. Retention is often cheaper—even if sometimes challenging to achieve. Do you ever get to the theoretical optimum? Probably not in general, although sometimes (especially with the relatively stable teams performing long term support for installed software) you can get close.

John Parkinson

Reader Comment:


I like the article because I was able to follow his logic of calculating outsourcing costs and benefits in a simple way. I wonder whether he figures that the costs will stay constant and benefits will grow as improvements kick in steadily. 

I understand that John is looking at the future productivity gains to be greater than the costs to justify an outsourcing deal even though it would cost more in the short-run. 

But, costs also tend to creep under your sleeves as time progresses. One good example would be how fast labor cost of IT professionals in India is growing. 

The growth rate of labor cost of IT professionals in India is much greater than the one in U.S.  If future gains cannot exceed the future costs of outsourcing, outsourcing for that case still doesn't make sense.


Reader Comment:

To: The editors
Re: What's The Real Cost of Your Offshore Operations

Drop dead.

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