Gartner Research VP Frances Karamouzis recently wrote an interesting blog post comparing IT service costs between India and China. In her blog, she highlighted a number of key factors that make it difficult to generalize the answer to that question. There are too many variables – type of service, skills, supplier maturity, risk factors, etc. On the face of it, China’s labor costs are lower than India’s, but factoring the other issues that go into a total cost of outsourcing (TCO) calculation, the final analysis isn’t that obvious.

However, the fundamental question got us revisiting the same question in the context India and the US mid-west. Does offshoring to India save money? It’s literally the million-dollar question US enterprises, especially mid-sized companies have been asking. On the surface it can appear that offshore IT initiatives saves money, but very frequently hidden costs and challenges need to be managed can lessen or even negate these savings.

This is especially true for high performing mid-market companies that need to deploy new technologies quickly. In these circumstances, where the technology deployment initiatives tie closely to business, have to be necessarily iterative in nature and lack significant scale and stability, going global can actually end up being a drag on ‘time-to-value’, and ultimately result in higher TCO.

Sometime ago, Joseph W. Rottman & Mary C. Lacity from the University of Missouri, St. Louis completed an exhaustive, case study of a large offshore IT outsourcing engagement by a Fortune 500 company. The case study uses the pseudonym ‘Biotech’ to identify the company. Their study makes for very interesting reading. The study includes extensive data collection and individual interviews with stakeholders across the enterprise to drill down into the complex layers of the offshoring initiative.

Budget cuts at Biotech led to offshoring to reduce IT costs. Officially, the project was a success with total cost savings consistently reported in line with expectations, but only if measured in terms of total payouts to the supplier. Other than a comparison of payments, Biotech had no formal metrics to assess the effectiveness of the 21 offshored projects in meeting their overall goals.

Rottman and Lacity’s study created metrics to evaluate the projects in subjective terms. The participants gave an overall grade of C to C- to “the degree to which project objectives were met, budgets and schedules were met, and the quality of the delivered product…

What caused these low grades, if the project seemed on paper to be successful? Rottman and Lacity summed up their findings: “It is quite clear from our interviews that the projects sourced offshore were not as uniformly successful as the official PMO reports.”

Several factors led to problems with offshoring. A lack of social networks between Biotech IT employees and offshore suppliers was compounded by technical barriers including security concerns, bandwidth constraints and restrictions on access to production data and the code repository. Biotech has a culture they refer to as “sneaker-net.” In other words, employees and domestic contractors typically walk to each other to discuss projects and get clarification. Documentation processes were similarly informal, often consisting of personal notes and scribblings on white boards. Indian-based IT workers were left out of the loop on both the “sneaker-net” and informal knowledge transfer.

In addition, “Biotech’s project management processes and expectations were often incompatible with offshore suppliers….many participants that the offshore IT workers could not be relied upon to report that the project was behind schedule or that they did not understand the requirements.”

Systems In Motion’s Inshore service delivery creates tighter integration between internal IT and business stakeholders and the offsite teams, largely avoiding the pitfalls that Biotech experienced. Our US location relieves social networking and cultural concerns. In addition, small projects, which are typically difficult to outsource, are easily handled by SIM’s agile, scalable teams. Inshoring offers the best of both worlds: the per-employee cost saving of offshoring combined with the quality, timely delivery and project satisfaction of onsite works.

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