Companies overestimate offshoring savings -Computer World
SOURCE: ComputerWorld UK
DATE: April 9th, 2009
Mohit Soapbox:
Do companies overestimate offshoring saving – off course they do. It is no different than expectations around an operational efficiency projects where at the start if the expectations are not managed correctly it tends to create
conflict during the initiative. Should companies look at offshoring as a quick fix, absolutely not. But that does not mean that you cannot create global delivery centers to manage cost strategically and in the long run.
No one should be looking at the pure salary cost differential as the only basis of offshoring though cost saving is a huge part of why people are doing offshoring today.
I believe the study indicated below talks about the right metrics to look at for evaluating initiatives for outsourcing or keeping them inhouse but puts it in a wrong context.
Very few firms in today’s economic situation are looking at or encouraging innovation and value in house in technology. A number of them are looking to minimize cost of running business and continue status quo.
So today when making outsourcing decisions the risk of doing it or not doing have to be weighed in carefully rather than jump into offshoring to save a buck which will end up costing you more.
ARTICLE
The recession is pushing businesses to cut the cost of their software portfolios, but most companies overestimate the savings that offshoring can deliver, according to Compass Management Consulting.
Companies rushing to outsource their software development for quick savings actually risk significant losses in productivity because developers do not fully understand business requirements, according to the consultants.
While staff costs may be 40 percent lower in offshore locations, Compass research found these savings were undermined by a 60 percent drop in productivity in operations where the full lifecycle of application development has been outsourced.
“This means that the decision to migrate development, when you include additional management control, increased infrastructure spend, employee attrition, language, and cultural issues, can end up costing up to 20 percent more than current in-house operations,” said the consultant group.
Compass analysed over 200 outsourcing contracts, accounting for a total value of more than £3bn over the past two years.
Many organisations are already replacing legacy systems and updating applications to reduce costs, said Nigel Hughes, a consultant at Compass. “Complexity of the application environment is a major driver of overall cost escalation in IT, and 2009 is the best chance since the year 2000 issue to make radical change.”
Staff attrition related to moving application development to offshore locations, particularly the loss of functional expertise, will have having a “negative effect” on productivity.
“With lower productivity in many offshore locations and currency movements that are working against UK buyers, it is important to outsource the right type of development project and ensure that business analysis skills are kept in-house in order to make any savings,” said Hughes.
“More than 70 percent of a typical software budget is spent on maintaining legacy systems. Top performers are clear that they cannot run a 21st century operation supported by 20th century technology,” said Hughes.
But Compass said that rationalising software estates by consolidating applications could reduce spend by 20 to 40 percent within less than a year.
Compass advised companies to keep strategic applications in-house, and look at outsourcing “non-strategic, non-critical and low complexity applications”.
“For the strategic, complex and business critical applications, it makes more sense to retain the analysis skills that will drive the innovation and value in-house,” said Hughes.
No relate
You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.
