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Ten criteria for offshore outsourcing, part 1

Looking to jump on the outsourcing bandwagon, or bandboat in this case, and take it overseas? There are ten things you may want to consider first.

Outsourcing has been gaining momentum for years, primarily because of the cost reduction benefits. This was confirmed...

in an August 2002 "CIO Magazine" survey, which cited lower IT costs and capital expenditure as the main motivators for outsourcing.

In addition, a Gartner report states that the focus on lowering IT costs is accelerating the use of offshore services, and Meta Group predicts that offshore outsourcing will grow more than 20% annually to become a $10 billion market by 2005.

While some companies are contemplating outsourcing whole departments, others are choosing to outsource individual projects. Companies not currently engaged in outsourcing should at least evaluate it as a strategy.

Where is the offshore work going? "CIO Magazine" has identified five countries as leaders in this field: The Philippines, Canada, India, Ireland, and Israel with Canada, Ireland, and Israel in the highest category for average programmer salary (that translates into the lowest potential savings for you). That leaves the Philippines and India as the best-cost alternatives.

The top ten reasons companies outsource

  1. Reduce and control operating costs
  2. Improve company focus
  3. Access world-class capabilities
  4. Free up internal resources for other purposes
  5. Resources are not available internally
  6. Accelerate re-engineering benefits
  7. Function difficult to manage or out of control
  8. Make capital funds available
  9. Share risks
  10. Cash infusion

Source: The Outsourcing Institute

Aside from cost considerations, there are 10 things to help you determine whether offshore outsourcing will work for your organization. Here are the first five:

  1. What types of functions or projects make good candidates for offshore outsourcing? Data conversions and system migrations are typical projects taken offshore with well-defined requirements and specifications and minimal end-user interaction with the development team. Naturally, the company must be willing to allow its application code to be located offsite during development.

    Application development projects are also good offshore candidates. From a standard Solution Development Life Cycle (SDLC) perspective, offshore work is most beneficial in the construction and testing phases where end-user interaction is limited, and the task is well defined. For stable applications, most maintenance activities can be performed remotely so application maintenance is also a good candidate for offshore outsourcing.

    With the right communication infrastructure and a clear understanding of your company's business language requirements, Call Center or Help Desk functions can also be moved offshore.

  2. How big does the project need to be to make significant savings? In absolute terms, assuming a mix of offshore and US-based resources, a 5-10 person engagement is needed to justify taking a project offshore. This could be a single project, function, or series of smaller projects managed together. A smaller project may serve as a low-risk pilot, providing both you and your offshore partner are prepared to underwrite it as an initial investment that will bring benefit from later endeavors -- assuming the pilot is successful. You can expect to incur one-time costs just evaluating your options. Ideally, this will involve travel to prospective offshore locations.

    On a per project basis, the offshore option may make the difference you need to get approval to go forward in the current economic climate. If your IT department has a staff of 1,000, you should estimate that at least 50 positions or 5% of your headcount can be reduced to generate noticeable, long-term savings.

  3. Is the project well defined? Well-defined projects that allow the project team to work independently and autonomously are ideal. For example, projects like data conversions and system migrations work well because little or no user interaction is required until user acceptance testing. Likewise, development tasks like remote construction are good candidates if you and your offshore partner have a sound development methodology in place and reasonably firm requirements and design.

    Offshore testing with a properly constructed software product is another function to consider. The lower offshore rates make rework or changes less expensive too, but remember that changes will also involve extensive communication and management overhead.

  4. Are the right resources readily available? Does the offshore staff, have the necessary experience with your particular software? For example, there may be a very small installed user base of SAP or PeopleSoft in that part of the world, so there will be very few local resources. But the local installed user base tells only part of the story. In some cases, the local talent pool is enriched by temporary workers returning home.

    If offshore resources are not available in sufficient quantities for your needs, they will have to be trained, so the anticipated savings may not be realized as quickly.

  5. Is your environment easily learned? If you are considering a development project, take into account if your offshore partner wrote the requirements or created the design. If you are considering either maintenance or testing projects, did your partner develop the application? If so, the learning curve should be short. If not, you may have to keep your existing staff in place while your new offshore partner learns your environment.

Click here for the second five criteria.

Roy Garrad is an application maintenance consultant, with more than 25 years of IT and management experience. Garrad is a National Director of Solutions for RCG Information Technology, a global IT professional services firm based in Edison, N.J., specializing in IT strategy and design, application development, integration and project management. He can be reached via e-mail at [email protected].

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