Offshoring: Benefit vs. Risk, a rough analysis.
I’ve been trying to do battle with the mentality that the more developers the better for a long time. Or the cheaper the better. No other field presents the fact that you get what you paid for better than the software industry. If you hire a high-school kid to develop your website, it will show. If you refuse to hire a web-designer to skin your site it will show. Last but not least, if you offshore your support and software development it will show.
Why do I say this? Many folks are in the mindset that software is like bricklaying, you have a 1000 hour project, so if you hire 1000 people you will get it done in an hour right? WRONG! Software development is more like an art. I know I am not the first to point this out, but think of it this way. Could you hire 100 college aged art studends and produce a masterpiece such as another Mona Lisa? Answer is… No. There are two reasons there 1) None of us are as dumb as all of us and 2) Quantity does not equal quality.
The first point relates to communication issues, group think, and satisficing that group environments tend to produce. If you have ever been stuck in a meeting where you’ve thought “I’d rather set myself on fire than be here!”, you know what I am talking about. Ask yourself this: How productive would my responses be when I am in that mindset? I can only speak for myself, but I know that my answers would be complete crap. This is why a smaller dedicated team will always work better than pulling 40 people into one small claustrophobia inducing room.
So, with that in mind say that you are offshoring a project to a large team or one that has fallen into that trap. Those folks do not work for your company, they do not care about the health of your business or it’s success. The only reason they may try at all is so that they do not lose the contract. At this point we are looking at a bored and disconnected team that we are depending on for IT needs. One great example of such a disaster is Dell. If you think back to waaaay before the “Dude! You’re getting a Dell” stoner commercials, you will recall( I hope ) that they used to advertise their award winning tech support. This stopped. Why ? Because their award winning service and support was handed over to an offshore team that was not interested in Dell’s wellbeing. They were interested in nothing more than the contract.
This becomes bluntly obvious when you start hearing terms like “Dell Hell” when reffering to their tech support. Often times immesuareable quality is lost due to offshoring. In Dell’s instance we see a very distinct impact, however software is very complex. No one can ever measure the complete lost quality due to offshoring a project. Bugs,time, money, maintenance costs can be measured, but what about that dedicated developer that decides to go above and beyond? Being that the piece of code that is being written offshore is something that the original developer may never see again, I can guarantee you that guy does not exist.( Keep in mind that I am reffering to larger firms only, I’m NOT saying there’s no talent in India )
So whats the point? The point is that when you disconnect your team from the project that much, technology only solves the physical problems. Technology cannot create dedication, talent or loyalty. Lately this problem has become even larger as countries that have been getting these offshore contracts are starting to raise rates. ( you know… that whole supply v demand thing… ) I remember reading a figure somewhere which stated that if an organization executed an offshoring venture correctly, they could save roughly 35% of the cost. (Two questions: 1. Is that just the initial effort? 2. If so, what about maintenance costs?) So if those countries are starting to raise wages and demand more, what is the cost savings estimate at now? Also, what is the percentage of organizations that have managed to get that 35% cost savings, or have executed their plan correctly?
The more of these issues you look at the more risk you start seeing. I am not a gambling man, but I wonder what a professional gambler would say about the odds…
1. Group think.
2. A general disconnect.
3. Immeasureable loss of quality.
4. Rising rates and fewer resources.
5. Inaccurate return estimates.
6. Low margin of return… 35% or less.
Starting with just those six cons… does offshoring seem worth it? In my humble and possibly misguided opinion … No. There is a much greater chance of failure or dissatisfaction to all parties involved than there is a chance of benefit. I have taken a few management courses and even elementary management practices will advise against ventures with this much risk. ( That’s not even mentioning the fact that for most executive types software and it’s development process is a complete mistery )
I know some of you may think: “Well I was promised $ 4 million in savings from this venture.” That may seem like a considerable amount, but take another look at Dell’s situation. How many clients did they lose due to their offshoring venture? No one can answer that with a hard factual figure. The only assumption that one could make based on their quality of service is that the losses are staggering… “Dell Hell”… So they may have saved an initial $20 million but lost hundreds. I can tell you of at least one client they lost … me. I loved my Dell laptop when I bought it. It was a high quality machine and the support was excelent. However, within the timeframe that I owned this piece of technology they managed to offshore support, sales and many other departments. What happened when I tried to buy another Dell laptop ? I called them first, got mad & hung up, went to Best Buy( yea yea yea I know ) bought myself an HP Laptop and bought the 3 year extended warranty. Why? Because when I am trying to finish a project and my computer blows up… I WANT HELP AND I’M WILLING TO PAY FOR IT!
Anyway the point to this giant rant is that the risks to offshoring are greater than any benefit.
Wow, finally a good article about off shoring that tells it like it is.
you’re exactly right. i’ve talked to many staffing companies that have started to see backlash from offshore ventures. projects sent overseas and failed, came back and had to be revamped. end costs skyrocketing.
i dont blame companies for taking the chance to lower expenses and raise shareholder margins. but ultimately it is a chance. and one that i think fewer companies are willing to take.
I’ve been involved with several different offshore efforts that spanned over two years. Your insights are “spot on” for the ones where it was assumed (or predetermined) that you could just “plug in” an offshore resource where a local resource used to be – this doesn’t work.
Where the efforts did have some positive outcomes was when we developed new processes and communication channels to use offshore resources and didn’t make cost the only or primary benefit (offshore resources in India made our team have basically “2 shifts” where a great deal of work could be done overnight.
It took almost a full year to get any positive benefit of time or money savings from the offshore teams – in fact it often cost us quite a bit of time instead of saving (to the point we started with non-critical efforts of porting old apps or minor enhancements). In the end we determined which types of efforts would work well with the offshore teams and kept all development of time or business critical projects in-house.
Adrian
Thanks for the thoughtful perspective. So sorry we lost you as a customer during the “down” period.
We recognize that mistakes were made during that time and have been moving to correct them.
Michael spoke about some of these issues with Fortune and you might find the interview of interest. Its here:
http://money.cnn.com/2006/09/04/magazines/fortune/dell_intv.fortune/index.htm
Wanted you to know that in light of some of our mistakes, we have invested over $150 million in just the last few quarters to re-train staff,expand our support in places like Ottawa and Oklahoma Cityp; and, deploy new tools like DellConnect.
While we are seeing early results that indicate we have turned things around, we will not be satisfied until we get back to the position of leadership that you referenced we once held.
Another point you might consider is the offshoring of services coupled with use of outside contractors. This can result lack of dedication or connection to the team that you referenced.
On the other hand, global businesses must often have operations in other parts of the world. Some markets practically require it.
No business experiences perfectly linear growth. Whats important is that you learn, make the right corrections and forge ahead, as this young 23 year old company has done every time it hit a curve in the road — including the one you reference.
Appreciate the perspective you have offered
@Richard:
I think the important thing is that Dell is rethinking their strategy. It is really encouraging to see things like this being said:
“The team was managing cost instead of managing service and quality. It’s totally the wrong answer. Stop managing for cost. Manage for a great experience.”
Man is that true! I don’t like calling tech support any more than the folks on the other end want to pay for me calling. So if the process can help me the first time not only will I be happier in the short term, but I will be more likely to purchase that product.
I have found something to be true about myself. I tend to be somewhat loyal to companies. For example I purchased my current vehicle at a certain dealer in town. I got a great deal and was very happy. My fiancee needed a new car a few months ago and that was the first place I went. Why? I don’t like to waste time. As it turns out, car dealers are car dealers and the guy thought he could bamboozle me, so I ended up purchasing the vehicle elsewhere. I constantly find myself doing the same thing with computers, services, you name it.
Your comment moves Dell back to the top of my new laptop search list. Since I very much agree with Dan, companies will make mistakes and the important part is recognizing the problem and fixing it. ( One good example is Wal-Mart and their venture into the Asia market. They quickly adjusted strategies to fit the culture, even though the start was somewhat rocky. )
Anyway, it’s good to see the move back. It is encouraging to see that a large entity such as Dell recognizes the fact that if you keep the customer in mind, the money will come( long as you’re not giving the company away
).
PS: I still have that Dell laptop( almost 6 years old now ), and it runs Ubuntu, like I said it was/is a great machine.
Thanks Adrian for the comments and very much appreciate being back on your consideration list.
We are not perfect…but then who is? However, you can be sure we are focused on our customers, our 1:1 relationship with them and regaining our true leadership in this field.
Afterall, we are the company that puts customers first, not retailers or others. There is an accountability and responsibility that goes with that.
Appreciate the thoughtful perspective here. Hope you too have gained some understanding of our situation too.
Do you have any statistics on this? I agree with everything you say, but then again we all want to find reasons our jobs should not be exported, so this may be a case of wishful thinking. I’ve tried to find numeric data on this issue (like: how many companies are doing it? what percent of their workforce was replaced? how much money did they save/lose? etc) but haven’t had any luck so far. One reason is the fact that companies never make this kind of information public, specially if they got burned in an offshoring adventure. One thing I’ve noticed is that offshoring is not mentioned in the news as much as it used to. I think (or wish…) it has reached a plateau of some sort. But only time will tell.
@Pete :
I have been looking for hard figures for a while, I agree they are hard to find. The 35% figure was something I read in an article a while back, and now wish I would have bookmarked it. The issue is that companies release overall figures to the public, not itemized ventures. Thus, I can only speculate that if the returns were better they would have been published. I know companies like to publish successfull ventures since that draws investors and pleases stockholders. Articles about wildly successfull offshoring aren’t very prominent( as you mentioned ). For developers that are worried about their jobs I will say this: Stay sharp, find a nitch, and get in touch with the market. I have seen companies offshore as much as 96 jobs and most of them were support, old COBOL code, and stale process support jobs. So what’s an example of a profitable nitch? I am primarily a Microsoft developer and as far as that goes integration between Sharepoint and Office 2007 is one example. Get to know Windows Vista ( it will get better and become standard ), start learning the .NET 3.0 framework now, learn about XAML if you are a designer… etc. The main thing is to enter the field because you love it and you are good at it not because there is money to be made.
On another note, I didn’t think this would spark so many responses. I just dropped what has been sitting in the back of my head for about 2 years onto the keyboard. Guess this was an issue bugging folks looking to offshore and those affected by it. I have been considering doing a quick write-up about what may make an offshoring venture somewhat successfull… or at least share what worked for me when working with our “offshore partners”.
Hi Adrian
Could not find an email for you…so I will post this here for you, as well as visitors to your site. Hope you will get involved.
Since our paths crossed we have undertaken several new initiatives to foster the direct connection between Dell and our customers. Because of our direct relationships with customers, Michael wanted to roll out some additional ways for customers to share their ideas directly with us and the entire community of Dell users around the world.
As a result, today we are introducing two new ways for customers to share ideas and experiences directly with peers and with us. Dell’s IdeaStorm (www.dellideastorm.com) and StudioDell (www.studiodell.com) were announced during a presentation by Michael Dell, Chairman and CEO, at a statewide education summit in Texas.
As Michael pointed out at the conference today, “We are at our best when we are hearing directly from our customers. We listen, learn and then improve and innovate based on what our customers want. It’s one of the real advantages of being a direct company.” He views both IdeaStorm and StudioDell as ways for customers to help shape Dell’s future.
That’s why I would like to invite you to get involved in these new online initiatives or simply drop by and check out some of the user-generated content.
To offer you a little more background you can visit the Dell blog, where our post will go live at 1:30pm CST http://direct2dell.com/one2one/archive/2007/02/15/6311.aspx
I have also outlined a little more detail here.
Ideastorm:Ideastorm will be an online community that brings customers closer to the creative side of technology by allowing you to share ideas and interact with other customers and Dell managers and executives. You will have the opportunity to suggest new products or services you would like to see Dell develop or tell the world how you feel about major trends in technology and society. Dell’s commitment is to listen and to use the input and ideas from customers to improve our products and services, and the way we do business. You will be able to check back over time to see how Dell brings customer ideas to life.
StudioDell: StudioDell has been in existence for several weeks. Today we are adding a new video upload feature on StudioDell in the section called “Your Stories.” Similar to YouTube, you can submit videos showing how you are using Dell technology and services for whatever you love to do. StudioDell has channels for consumers, small business and for IT professionals. We hope our customers will join to learn about technology tips and share their stories.
Thanks for the consideration and hope to hear or see you at IdeaStorm or StudioDell
Just joined ideastorm . Pretty cool! Like the interface and apparent use of AJAX. I’ll start posting some stuff about what I would like to see in a laptop other than Linux as most folks have posted