Sending work offshore has pitfalls, drawbacks

Offshoring — the practice of outsourcing business functions to a vendor outside of North America – has the potential to save companies millions of dollars in labor costs. But the practice is not a panacea for bottom-line savings. Poor offshoring strategies can cause a riptide of problems that may cost companies — and the nation — far more than the amount saved.

When the quality of products is adversely affected – whether it is a refrigerator, a shirt or lines of programming code – outsourcing concerns begin to arise.

“Most businesses outsourcing their computer programming aren’t program development companies. They don’t have expertise in programming. What is experienced, quality work here might be different in another country,” said James McKim, a technology business owner and chairman of the Software Association of New Hampshire. “Companies are looking abroad for top-notch programmers with cheaper price tags when what they should be looking for are simply top-notch programmers.”

According to McKim, “there are standard definitions that organizations use to assess the maturity level of work, ‘1’ being bad and ‘5’ being the ultimate. Most countries around the world are at a ‘2.5’ or ‘3.0’. America is around a ‘3.5’. So you might not be comparing apples to apples.”

The model to which McKim refers is the Capability Maturity Model, or CMM scale, which measures the quality, accuracy and maturity of software coding. The scale was developed by the Carnegie Mellon Software Engineering Institute, a federally funded research and development center sponsored by the U.S. Department of Defense through the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics.

Lower quality might be something some companies are willing to trade for in reduced labor costs, but those costs might increase at the customer end with repairs to defects or other fixes. These end-stage costs may create a consumer backlash. Take the now infamous case of Dell Computer. Outcries from customers about complaints and delays forced a decision by the Texas-based company to bring its India-based corporate tech support call center back to America.

“We may start seeing people less likely to do business with companies that outsource because of a perceived lack of quality,” said Dennis Delay, special projects director for the Workforce Opportunity Council.

Productivity is another issue that faces companies looking to go overseas with product development. McKim said, “If an onshore company is bidding on a project it says it can complete in three months and an offshore provider says four, if time is not an issue, then the offshore team may win.” However, he said, if the time frame is shortened to a matter of weeks and the offshore team says it can meet that, he urged companies to be wary. “Most offshore companies are not as productive. Our productivity is still among the best in the world. That’s an important point to consider,” said McKim.

Lots of questions

The quality of work an outsourcing provider supplies is just one of many strategic objectives to which both a client and the outsourcer must agree.

“What you’re looking for is a win-win situation. You don’t want to just give work to a bunch of developers. You need to know what their business goals are and whether they match yours. Go to outsourcing firms with a goal to be a presence in the same industry,” said McKim.

Outsourcing also can unwittingly unravel local processes that previously worked well. For instance, one global transportation and logistics company offshored its IT assets, including decision-support reports for managers. The process of obtaining the information it needed became so convoluted that the firm stopped requesting the reports – and stopped looking for new ways to analyze company data.

Many companies also fail to consider what is – or is not – stipulated in their contracts with outsourcing providers. There are dozens of cases in which projects have gone awry because the outsource provider subcontracted out a portion of the work to a third party.

Intellectual property and the laws that protect it also are affected the moment the work leaves American shores. “World laws don’t protect intellectual property,” said McKim. “You need your contract to spell this out.”

Beyond paper, McKim said, companies also need to look for outsourcing firms in countries that have their own stiff intellectual property laws. “If something goes wrong over there, you need to have those laws enforced and have some legal recourse,” he said.

Other pitfalls, said Delay, involve legal issues: “Laws in other countries are not open to interpretation like ours are. What are their labor laws? Laws for trade secrets and confidentiality? And how do you litigate such?”

Even something as simple as a paycheck can become fraught with difficulty. “Do you pay them in U.S. dollars or yen? At what exchange rate?” said Delay. “And what about political risk?”

Many business analysts and researchers say outsourcing is a practice that is here to stay and will only increase – as much as 23 percent of U.S. IT services will be overseas by 2007, according to some predictions.

Positions at call centers, jobs based on data entry, such as human resources benefits or payroll processing, insurance claims processing and some accounting and banking functions are currently being outsourced to a greater or lesser extent. With the widening use of satellite communications, education is another possible avenue for outsourcing.

“Even printing and publishing,” said McKim. “A marketing firm can send its graphics design work out to India, print it there and ship it back here.”

Thus any company that outsources outside of America has become a de facto global company. The cubicles walls have become blurred. This can be a difficult concept for some businesses. “The companies who can think globally in segments and find niches will be successful in outsourcing,” McKim said.

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