Just concluded an in-depth discussion with the SVP of IT for a large product company that has an outsourced team of approximately 110 people with one of the largest India-based IT services provider. Below are the economics of the operating metrics of their engagement. I have a simple question. Why are we still offshoring?
Application Development and associated Testing Services
In steady state, this company has about 30% onsite staff and 70% offshore in India
The onsite team averages about $85/hour and the offshore team averages bill rates of $28/hour
Based on their experience, the IT leadership of this company believes the Application Development team offshore has approximately 50% productivity of an equivalent onshore team, given communication and time-zone challenges
In addition there is an approximately 15% overhead for program management, travel and governance. This does not include any additional internal cost of management resources (though the company admits that there is definitely some cost associated with it)
There is a reasonable assumption that given current economic trends, the cost of the offshore team will escalate at least 10% yoy over an equivalent onshore resource, given increasing wage escalation and staff attrition
What does this mean?
The total blended cost of the team across the engagement is $45/hour Cost including program management overhead is $52/hour Productivity weighted cost of the engagement is ~$70/hour. Future trends indicate that this total cost will increase to ~$74/hour over the next 24 months.
How does this compare with an Inshore engagement?
The total cost of engagement for Application Development and Testing in an Inshore model in Michigan would be a blended daily rate of $500/day (or ~ $55-60/hr).
So the question is, if the offshore strategy is not about cost optimization anymore, why offshore?