Real Cost Of Offshore Outsourcing
- October 2010
A recent article in the Washington Post raises several
questions regarding offshoring, this is not political or have anything to do with party partisanship.
Disclaimer:
The views expressed in this newsletter are not to be intended as a political statement
and should not be interpreted as such. , This correspondence is not intended to
disparage any country or culture.
The sole purpose is to convey my 16 years experience
with issues resulting from offshoring. This newsletter refers only to outsourcing
software development. My firm hires and sponsors employees from emerging countries.
They are amazing employees when effectively managed. I am also referring
to software development, not customer support call centers.
The Article Link:
Senate GOP blocks
bill that would promote less outsourcing -...
By Lori Montgomery Tuesday, September 28, 2010; 11:53 PM washingtonpost.com
The latest jobs bill from Senate Democrats - a plan to punish firms that
ship jobs overseas - failed to clear a key procedural hurdle Tuesday after even
some Democrats complained that the measure would hamper the ability of U.S. companies
to compete in foreign markets.
The Disadvantages of Offshoring:
The disadvantages far outweigh the advantages of offshoring software development.
What on paper often seems cost-effective
and feasible, entails many costs that do not surface until
a year or two later. Reversing, such a process will incur additional
exponential costs.
Examples are: legal costs, lost opportunity cost, repetitive attempts before
getting it correct, delay costs, employee turnover costs, the offshore employee’s lack of
understanding the US business culture, and the greatest cost: the practice not providing motivation for the next generation to develop these skill sets
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With a huge margin, the majority of US domestic software development companies will always have a clear and
better understanding of the nuances of a business process or function as compared
to an offshore firm. When a highly sensitive and sophisticated business function
or algorithm requiring very special and multi-skilled handling is outsourced to
a foreign location and the first language of that nation is different from the nation
which outsources the function, more often than not it leads to quality
issues. Unrealized costs are expended in an attempt to correct the errors. This
may require several rounds of corrections over an extended time. This generates
lost opportunity costs. With the initial costs, the cost of correction and the lost
opportunity costs, the total expenditure usually far surpasses the cost of the development
if done stateside the first time.
There are several communication and continuity disadvantages in offshoring. Offshore
companies have a much higher turnover than those in the US. In offshoring processes, the jobs
are highly monotonous and this often leads to employee discontent. This
is a huge contributor to the high turnover rate. My experience concludes that more
often than not there will constantly be new teams assigned to your company’s system,
each likely lacking the proper historical continuity turnover communication knowledge
of your business protocols and
culture.
Security: - I do not put great value
on what offshore companies sign, promise or claim. No one
reading this can truly believe that their data is secure. All it takes is one person
with an 8gig thumb drive, to download four million bank account numbers, complete
with their
routing numbers and associated credit card information along with all US sensitive data. The culprit can then sell this information in blocks of 1,000
to several hundred identity
theft professionals. Of course this threat applies here as well. But!? What recourse do we have with offshore companies? How do we justify the cost to
investigate what happened on the other side of the world? Face it, our hands have been and are be tied in these cases. In June 2010, I saw a piece on “60 Minutes” called
“Cyber War: Sabotaging the System..” where 60 Minutes spoke about cyber hacking into US banks from foreign
countries on a daily basis. This was extremely incorrect and disturbing. As a fan
of 60 Minutes I am surprised they did not report the obvious:.
THE US BANKS ARE OFFSHORING
US BANKING SOFTWARE DEVELOPMENT
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No one needs to be a professional hacker if they have access; we are giving them the
key! And now this the cost of constantly monitoring and reconciling these security breaches
has added additional costs to an already inflated expenditure..
Social Responsibility:
- When off shoring is employed, which
means outsourcing a process to a foreign location, it results in reduction of employment avenues
in the nation from where the function is outsourced. This is counterproductive
to the business that is offshoring. In simpler terms, in the past ten
years we clearly
have a shortage of engineers and software developers in this country. Why?
Where is the motivation for US students to study a field that in their mind
will offer
little to no opportunity? Simple answer: because US businesses are offshoring these
very critical skills.
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With that said, realize that no original idea has ever come from these offshore
countries. For example: Oracle, Microsoft, iPhone, Yahoo and Google were all created
in the US. SAP, one of major competitors is from Germany, Sun Systems is from England.
Again, I have to reiterate my disclaimer, I am not here trying to disparage any
country nor do I believe that off shoring should be banned. I just hope that American
executives reflect on the decisions that they make and realize the long term ripple
effects. We are in a global economy and global competition for market share. So
why give away one of our most precious resources-intellectual property- to anyone
that promises to save us a dime?
This week we witness out president visit India and China, two very critical and
important trading allies to US. I am glad to see that he is there increasing our
relationship. I am also glad when I hear news like India & Boeing enter into
a “100 million dollar MRO JV project . Here is an example where we can have good business
relations, without giving away our intellectual property or US jobs, and have mutual
trade relations.
H1 Sponsorship: Good or Bad?:– I will admit
that in 2001 I was wrongly opposed to H1 sponsorship. I analyzed it superficially
and did not look at all the factors on process and macro economic effects. By 2003
when ASI grew and the demand for qualified developers became scarce I seriously
considered the H1 route.
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Since I personally interview my staff, I was taken back a bit by these very elaborate
resumes from developers with less than five years experience, that averaged four
pages; some were seven pages long and extremely verbose. On all developer interviews
I ask the candidate to bring in sample code that they have created, because writing
code is more of a creative process as opposed to technical. I can go on for pages
with excuses and stories I was told. One person stands out, a very qualified and
advanced programmer with a platinum resume and a little arrogance. More than likely
many that interview him do not know code, so he felt overly confident when meeting.
When he displayed his sample code before me, within 2 minutes of scanning it I found
it to be good but not efficient. I asked him why he wrote three algorithms consuming
about 250 lines of code, when he could have written a single global call procedure
algorithm using about 50 lines of code that would be quicker and more reliable.
He responded without hesitation, “The client will never know”. Needless to say the
interview was over. |
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In the end, I sponsored and hired several H1 employees and found them to be amazing,
steady developers that have a huge desire to learn and be challenged. Why is this better than Off Shoring!
Because rather than taking away from our economy these H1 employees pay US taxes.
They operate under US laws and standards of security and in most cases take a true
concern for the client when they meet them. They take greater pride in the work
that they do, no different than our migrated forefathers that came here to the US.
Due to the current economy many of these H1 sponsorships are not being renewed and
after years of training and working here in the US, these people are being forced
to return to their country of origin. We then end up off shoring to the same countries
because those workers are no longer here. A paradox, isn’t it? Once again my beloved
country missed seeing the center sweet spot, and chose to go from one extreme to
another.
Two months after I wrote this article; in November 2010 when the WikiLeaks situation arose; I received many correspondences, mostly agreeing
with me and some strongly disagreeing. Let me clarify, this is not about politics
or nationalism, this is about keeping the global trade at a balance and not the
US not giving away our intellectual property while leaving us venerable for an economic
coup.Many readers seem to think I focus on India and there is much merit to that. Taking into account the B.R.I.C.
global focus group (Brazil, Russia, India & China), India is by far the US’s best and largest true democratic emerging country and India is where any US company should be setting their sights for trade. But with that do not
give away our country or compromise our middle class for the sake of an easy short
lived dollar. I gave an example on how Boeing & India have a 100 million dollar
MRO Project, which is outstanding for both countries and does not take away from
the US, but rather adds to both countries.
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Ford is also in this elite intelligent business group with the “Ford Fiesta" , so far over 50,000 cars
have been sold in India. But what makes this so ideal, it was designed from scratch offshore with
Indian & Ford engineers, manufactured over in India with some key parts made
here in the US. This is good global trading, and both countries will keep to their
part, because both need each other.
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I realize I touched on some sensitive ground that could be misinterpret, but I hope
that the reader will see this is one person’s observation, a person with an open
mind that understands that this is a global economy and it is in the best interest
of the US and our foreign business partners to learn and grow together, but we see
where we may over shoot a good idea and where it is beneficial for both countries
for many years to come.
Executives need to learn that this is not the case with Financial Software, or Banking
Systems, they need to learn the many different nuances, risks and use extreme caution when offshoring
our banking systems, because it looks good on paper.
I hope that this correspondence helps senior executives consider where off shoring
is feasible and where it is not. We have to stop going to extremes and find that
acceptable sweet spot where everyone wins.
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