Why Outsourcing?
Outsourcing is a powerful weapon, but if you don’t know how to harness its power, it might end up backfiring.
Offshoring or nearshoring software development tasks could prove very profitable for your organization and professionally enriching. We believe that anyone should be able to get the most out of an outsourcing experience.
Thus, in this post series we will be helping you understand whether to offshore or nearshore software development, with whom, and how. Armed with this knowledge, you’ll be able to make an educated decision on whether to embark on this journey.
In this first part, we will explain the most common risks and rewards associated with outsourcing, define what SMART objectives look like, and understand expectation versus reality so you can check if outsourcing is what you need to achieve your goals today.
Risks and Rewards
Does outsourcing seem like an appropriate technique for addressing your personal goals and professional objectives?
Chances are that if you survey your organization, you will find that some people say that outsourcing steals jobs and destroys organizational culture. Others might say that it could help the company stay in business and beat the competition.
Each side has valid points. Rather than debating, let’s explore some of the risks and rewards of outsourcing to see if it could work for you.
Risk types
Starting with the negatives, we can classify risks into three categories: external, internal, and personal.
External
External risks are related to factors outside your organization’s control. These include: geopolitical instability, intellectual property loss, inadequate vendor capabilities, and failure to meet joint responsibilities.
One of the most dramatic scenarios could involve a terrorist attack in “safe” offshore destinations like Mumbai or Moscow, which underscores the importance of understanding different countries’ political stability.
A less dramatic example would be when an unexpected change in tax regulation at an offshore location suddenly jeopardizes your investment.
Your potential partner’s financial stability, organizational maturity, technical skills, and ability to acquire and retain qualified talent are key to fully understand the situation you are getting into.
Internal
Internal risks are associated with factors your organization can control. The most notable ones include: unrealistic expectations, lack of organizational preparation, and negative staff impact.
Sometimes even the expectation of outsourcing, if incorrectly managed, can create organizational adversity by declining employees’ morale and productivity. Also, outsourcing initiatives will likely imply some degree of changes for existing processes and roles.
Maybe the most important internal challenge will lie in the unrealistic expectations that some organizations set about the end result. Exceptionally high-cost reduction expectations are one of the most common reasons for dissatisfaction.
Personal
Outsourcing can affect you personally in many ways, introducing changes to your lifestyle, career, and reputation.
Outsourcing may require you to increase the percentage of time you spend on activities you don’t enjoy or to shift working hours to cope with different time zones.
The very nature of outsourcing means that someone else does the work. In many cases, this will be someone whom you have little control over, but it is your name that will be in the line.
Moving from the role of individual contributor to representing an offshore or nearshore team might mean becoming a bearer of bad news. And that will have an inevitable impact on your reputation.
Reward types
With all the risks listed above, why would anyone want to outsource abroad anyways?
The answer is that competition is hard, the market is demanding and outsourcing could give your company a competitive edge. We can divide outsourcing benefits into organizational and personal ones:
Organizational
Cheaper salaries, a strong exchange rate between the US dollar and almost any other currency, lower overhead, economies of scale, controlled operation costs, productivity, and quality improvements all contribute to increased profit through resource efficiency and savings.
At the same time, outsourcing allows you to reallocate the workload during your busy season and shift less critical services abroad. This will help you meet deadlines faster and focus on disruptive innovation projects to gain a competitive advantage.
Outsourcing broadens your recruiting horizons. Having access to a huge staffing pool gives you access to hard-to-find personnel and the opportunity to team up with international experts. In addition, many outsourcing providers have a tremendous work ethic and drive to succeed.
A shortened time-to-market can be achieved as well. Having access to specialized skill sets, unique expertise, and certified processes can improve your competitive advantage.
Personal
There are several key personal benefits to choosing an international team.
From your career’s perspective, consider running an outsourcing engagement as a productive training session for developing management and leadership abilities. These are skills you can add to your resume and you would be surprised how often recruiters and companies look for outsourcing management abilities.
The skills you develop like negotiating, learning foreign languages, managing remote teams’ day-to-day, and assertiveness are invaluable skills that will benefit you in the long run. Accomplishing successful outsourcing engagements could catapult your career forward and open new doors.
Let’s not forget traveling! Seeing new places, meeting new and interesting people, experiencing foreign cultures, and trying new cuisines without spending your own money are major perks.
Having discussed outsourcing risks and rewards, you now have a better picture of the potential it has. But before deciding whether it’s for you first let’s consider which objectives you want to accomplish through outsourcing.
Defining SMART Objectives
This might not be the first time you’ve asked yourself if you should outsource a project, an initiative, or a company function.
Each time you face this situation, always remind yourself: you should only offshore or nearshore either when it is the only tool you have at your disposal or when it is the best tool for the job.
Consequently, you will first have to understand and determine what the “job” is in the first place.
When determining the “job,” you shouldn’t settle for broad goals like “need to reduce cost” or “put local staff to better use”, since ambiguity and lack of specification are lethal to success.
Specify your goal applying the SMART business management technique
Defining SMART criteria objectives help you stay focused on your goal and make good decisions. For instance, let’s check this objective: “Outsource to substantially improve quality assurance (QA).”
What’s the goal here: to use outsourcing or to improve QA? What does “substantially” mean? How long should it take for improvement to occur? This objective is too vague, doesn’t guide you towards actionable steps, and generates more questions than answers.
Now, let’s compare it with this other objective: “Reduce my department’s budget expenditures by 20% next quarter by nearshoring the maintenance of a legacy asset while my in-house team develops a new one”.
This one appears to be SMART since it’s specific and measurable (20%), it defines an action (nearshoring the maintenance of an asset), it focuses on results (reduce my department’s budget expenditures), and it’s time-bound (next quarter).
Defining a SMART goal is the first step when deciding if it makes sense to outsource work. But first, you might want to compare some financial and practical considerations to avoid common mistakes.
Expectations Versus Reality
Offshore outsourcing has been called one of the greatest stories ever sold.
Like many products today, outsourcing comes with a lot of fine print. The pain for smaller companies is that they don’t have the bandwidth even to read it.
However, understanding the fine print is important in these three areas: cost savings, vendor’s ability to scale, and quality of deliverables. Let’s check them out.
Cost Savings
How much money can you save by outsourcing? On the surface, it seems obvious. Even with wage inflation in India, China, and Eastern Europe, rates there are still substantially lower than in the United States.
For example, a mid-level Java developer in San Francisco earns roughly $75 per hour, compared to $25 per hour on average in Bangalore, Shenzhen, or St. Petersburg. At first glance, this lower rate translates into savings of more than 65%, or a 3:1 ratio (for every on-site Java developer you can get three offshore Java developers).
Is it that simple? Will getting three developers for the price of one give you three times the productivity? Unfortunately, no.
Hiring cheaper offshore developers doesn’t mean they will be as productive as local ones. Due to productivity issues, the difference in hourly rates could not necessarily translate into overall cost savings.
Overhead
Overhead expenses related to management, communications, and risk mitigation can eat away what you save in low hourly rates.
For example, if you outsource a small QA team, for example, you’ll probably need both local and offshore QA leads. Without outsourcing, a single lead is enough.
Moreover, if you distribute teams across multiple time zones, language and culture differences could significantly increase the volume of communications required to minimize misunderstandings.
Turnover Ratio
This one is an important expense to keep in mind. Losing a tech team member can be very expensive — as much as three to twelve months of employee salary. The turnover costs come from loss of productivity, hiring fees, training ramp-up, and other factors.
The degree of turnover is typically measured by turnover ratio or the number of lost employees divided by the team size over the course of the engagement. For example, a loss of two developers from a team of ten over the course of the engagement would be a 20% turnover ratio.
Ability to Scale
Many organizations face the challenge of adding personnel for an increased workload and ramping down when demand reduces. Outsourcing seems to be the perfect solution to this problem. Yet some staffing issues are inevitable:
Finding staff with specific skills, especially for cutting-edge technology, can be extremely time-consuming even for a top-tier vendor.
In your search for qualified personnel, consider which country you are outsourcing to and how the government supports young IT professionals.
Quality of Deliverables
There is a strong perception in the industry that the quality of deliverables produced by offshore personnel is inferior to that of local staff.
This perception is deeply flawed because outsourcing partners can either deliver higher or lower quality products and services than those of local employees. The challenge in getting quality deliverables lies in understanding all the aspects of communicating quality expectations to your partners and overseeing their work.
Summary
In this first post of these series, we have brought you general info and insights on outsourcing to help you check whether outsourcing software development is what you need to accomplish your goals.
First you have to be aware of the risks and challenges that come along on this journey. Some of them are external and out of your control, while others are internal to your organization and can be directly dealt with.
Of course, there are plenty of rewards as well like cost reduction, shortening time-to-market, improving workforce usage, improving your management skills, traveling around the world, and increasing productivity and process agility.
Second, you have to ask yourself what your goal is and what you want to accomplish by outsourcing. Remember that ambiguity and lack of detail are lethal to success. Thus defining goals with SMART criteria will go a long way in helping you establish realistic and actionable objectives.
Last, don’t forget to compare expectation versus reality. You would be better off bringing inflated expectations down to earth and taking into account factors like overhead expenses, vendor turnover ratio, scalability, quality of deliverables, and cost-saving versus productivity.
In the next installment of this series, we will be talking about what, with whom, and how to offshore or nearshore software development so you can make an educated decision on whether to do it.
We hope this post has been useful! A special shout-out to Daniel Castro who collaborated in the creation of this post.
Bibliography
- Nick, K. (2012). Outsource It!: A No-Holds-Barrel Look at the Good, Bad, and the Ugly of Offshoring Tech Projects. Pragmatic Programmers, LLC. https://www.amazon.com/Outsource-No-Holds-Barred-Look-Offshoring-Projects/dp/193778505X
