Outsourcing not as cheap as people think
Outsourcing not as cheap as people think
The Meta Group has issued a warning about the gap in perception of savings made when companies outsource business offshore. They believe the reality is more expensive.
They have reported that IT organisations often assume that labour arbitrage will yield savings similar to a person-to-person comparison (for example, a full time equivalent in India will cost 40 percent less) without regard to hidden costs and differences in operating models. They claim the reality is a general saving of 15-20 percent during the first year.
The current offshore outsourcing movement is preparing to grow between 20-25 percent in the next two years, despite initial resistance and geopolitical concerns. The Meta Group believes that key decision-makers should consider a series of risk factors before sending projects/functions overseas. They urge executives to consider putting a contingency plan in place in case the vendor fails to deliver.
Dean Davision, the Meta Group Vice President said: "A common oversight for IT organisations is a contingency plan - what happens if the vendor, all best intentions and contracts aside, simply fails to deliver. Though this scenario may be unlikely, the IT organisation must assess the implications of vendor failure.
"High risk or exposure might deter the organisation form outsourcing, it might shift the outsourcing strategy, or it might drive the company toward outsourcing. The results of risk analysis vary among companies; it is the process of risk analysis that is paramount."
According to the Meta Group, the risks accompanied with outsourcing include:
Security - Breaches or intellectual property protection are inherently raised when working in international business. Privacy concerns must be addressed.
Scope Creep - There is no such thing as a fixed-price contract. Most projects change by up to 15 percent during the development cycle.
Culture - most leading vendors have cultural education programmes, but executives should not assume that cultural alignment will be insignificant or trivial.
Knowledge Transfer - the time and effort to transfer knowledge to the vendor is costly and rarely accounted for by the IT organisation.
The Meta group expects a 20 percent decline in productivity during the first year of an agreement, largely due to time spent transferring technical and business knowledge to the vendor.
Telstra is currently in the process of outsourcing call centre work to India. Last year, the company announced that 1500 jobs would move to India under a radical Telstra plan to scale down key technology operations in Australia.
US-based technology research house Gartner has predicted India will represent two-thirds of the international offshore market within three to four years.
Last year, outsourcing accounted for about one-fourth of India's total software export revenues of $US9.5 billion ($12 billion).
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