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The price of offshore attrition

CIOs need to get creative to ensure quality from offshore providers wrestling with job turnover. Experts offer four tips for how CIOs can successfully work with offshore vendors and still protect their critical assets.

How safe is it to trust a company that has a revolving door for employees? That's the big question facing CIOs who depend on offshore service providers to manage all or part of their IT systems. In offshore hothouses such as India and Eastern Europe, employee attrition is running at exceptionally high rates -- anywhere from 20% to 30%, depending on the region and the estimate.

And that attrition rate is raising concerns at many client companies. "It's a big issue," said Neil Backes, a partner at Backes Crocker LLC, an outsourcing consultancy in Houston. "Executives that pay attention to internal attrition rates will project that to outside relationships, and high turnover [at offshore providers] could be deleterious to their companies."

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Indeed, the very things that made offshoring so attractive -- a highly educated workforce with low wages -- has been put into jeopardy, as job competition has also boosted salaries. "In India particularly there are a lot of concerns about the talent pool," said Mindy Blodgett, a research analyst at Boston-based The Yankee Group. "As more companies move in, there's a lot of competition for good talent."

As a result, offshore providers are getting an earful from clients about lowering turnover within their companies.

"Clients are pressuring us to be proactive about this," said Theo Forbath, chief strategist and practice leader at the Global Product Strategy and Architecture Practice for Bangalore, India-based Wipro Technologies. "They do see the value in having the same teams in place."

Forbath said his company, like many, has tried to address the issue in a number of ways, from creating employee incentives to opening centers in smaller cities that have less workforce volatility. "All companies in offshore in India are dealing with this," he said. "We're in every tier one, two and three city at this point, and encourage senior management with incentive to open centers outside of Bangalore."

Forbath also pointed out that most of the attrition takes place at the entry level, as employees seek to move up in their career. "Look at management and senior management," he said. "If they've been in the firm from five to 10 years and beyond, there's no longer a significant drop in attrition."

Dean Lane, CEO at Los Angeles-based Varitrak Systems Inc. and a longtime offshore consultant, also sees offshore providers offering more incentives to retain workers, from programs targeted to high-value employees to basic benefits such as medical and 401(k) plans. "They have to do both," he said. "Special programs will keep the high-value people, but unless you come up with benefits that affect all employees, they will continue to suffer attrition."

Still, no matter how creative a company gets, the problem will persist as long as the job market is competitive. "It's not fully solvable in a market that's red-hot," Forbath said.

For CIOs considering offshore relationships, the reality is that they must do some upfront work to protect themselves and their company's informational assets. "Companies are always going to lose employees," Backes pointed out. "It's up to the company doing business with the provider to find ways not to lose business continuity."

How can CIOs best protect their assets? Offshore experts offer the following tips:

Be choosy about what goes overseas.

The logical first step to protecting company data is to make sure the really vital stuff isn't put at risk. "Companies really have to guard against what they take offshore," Backes said. "They shouldn't lead with core competency stuff -- that way if they do have an attrition catastrophe it doesn't mean the business will sink."

For example, Blodgett recommends back-office maintenance coding as a good candidate. "The IT staff doesn't care if the coding is being done there," she said. "Some of the more sensitive data, such as HR or finance, is dicier."

Consider nearshoring for sensitive data.

Another option is nearshoring, in which a system or project is outsourced a little nearer to home -- depending on the original home of the data, that is. By spreading out where data lives offshore, it dilutes the impact of attrition in one area, or allows companies to avoid trouble spots altogether.

"We love to see nearshoring," Backes said. "After the first year, the cost structure is what it is, and you can't really save more money. So setting up closer to home saves a time lag in managing the project and helps lower language and cultural barriers."

Blodgett likes this idea carried out on a global delivery scale. "Offshore centers are opening all over the world, wherever their clients are doing business," she said. "For example, for U.S. companies near shore would be Mexico, Canada, Latin America and even the rural U.S. Eastern Europe is a good fit for Western Europe, and China for the Asia Pacific area. It gives clients cheaper labor but assuages the fears of clients involved in sending projects far offshore."

Consider second-tier cities.

Much of the big attrition happens in the larger cities, where there are more offshore centers, and hence more job opportunities. Backes recommends that CIOs consider centers in smaller cities in the same region. "Bangalore is more volatile than Chennai, for example," he pointed out. "If you want a dependable, constant stream of labor for your vendor, you want smaller cities."

Grill prospective providers about attrition in many ways.

Lane recommends that companies find creative ways to find out the true attrition rate at prospective offshore providers. "Offshore providers can make their attrition rate come out any way they want," depending on how they slice the data, he said. "So you have to ask about attrition in many, many ways." For example, he sends out a request for proposal to providers that asks about the attrition rate, but also asks about average length of service for employees, how the company hires (from colleges or from other firms), what incentive programs are in place, the basis for promotion and what benefits, such as medical, retirement or daycare, the company offers. "The more they do along these lines, the longer employees tend to stay," he pointed out.

Lane then scores each answer, and can rate each prospective provider for his clients depending on how high they score.

Specify shadow teams.

After CIOs have chosen an offshore provider, they can build a contract that helps protect against attrition through the addition of what offshoring consultants call shadow teams. Basically, this means the contract will stipulate that the provider will have an additional number of employees 'shadowing' the main team, and that the client does not pay for this team. Backes recommends that CIOs shoot for a shadow team of 10%-15% of the main team. "It basically gives you people on the bench that are familiar with the project," he said. "That way, they can come in and join the team and make sure the business doesn't fail should the team lose people." The provider takes on the shadow team as a cost of doing business -- betting that it will grow the client business and need to add more trained people in the process.

In the end, there's no denying that high turnover will exist as long as the job market stays hot. But even in such an environment, CIOs can protect themselves and their companies. "There are ways of not being caught behind the eight ball," Backes said. "It helps ensure that once you send a project offshore you can get it done with quality."

Carol Hildebrand is a contributing writer based in Wellesley, Mass.

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