“Just drop it in Manila” – the phrase most commonly heard in organisations who fail in their offshoring endeavours. Successful offshoring requires businesses to move beyond a simplistic approach to a rigorously and thoroughly researched and planned approach. Those who are able, are rewarded with cost reduction opportunities, new product and service development and a competitive business edge.
Offshoring is one of those words you regularly hear buzzing around. Not surprising, as relocating ones operating activities to another country becomes ever more regular, and the market for offshoring services is rapidly growing. In fact, the accountancy firm McKinsey expects the global market for offshore business and technology services to rise to $1.80 trillion by 2020.
Indeed, offshoring has its advantages. Significantly lower wages and access to a pool of talents in certain low-cost countries bear the promise of a compelling savings potential and high-quality services. But, at the same time, offshoring has its pitfalls. Many companies have mismanaged their offshoring efforts, and many have failed – often with significant financial consequences and competence (know-how) losses. This article aims to arm you with knowledge to offshore software development projects successfully.
TO OFFSHORE, OR NOT TO OFFSHORE?
The primary motivating factor behind offshoring projects is cost reduction – plain and simple. And the argument for offshoring software development projects is easy to make. Why spend $60 an hour on a software developer, when you can hire one for $6 in a low-cost country? As lower wages in foreign countries translates into significant cost reductions, some international corporations offshore as much as 70 percent of their competence to low-cost countries.
However, it is imperative that you are conscious of how an offshoring project may impact your existing staff and consider any financial and non-financial disadvantages often associated with offshoring.
The first step in any offshoring project, then, should be to evaluate and decide whether you should offshore at all. Before you say “let’s drop it in Manila” ask yourself the following questions:
Why are you offshoring? Is it to increase your net income or to increase your capacity due to a growing business? Keep in mind that reducing the existing staff for the benefit of cost reductions through reduced labour wages overseas, is not likely to be greeted warmly within most organisations and may result in lowered public perception. Additionally, you run the risk of losing critical onshore competence.
Do you have a plan to succeed with your offshoring project? Thorough research and planning is essential for offshoring success. What country should you offshore to? How are you ensuring optimal operations? How are you ensuring knowledge transfer? Financial, cultural and operational aspects should be carefully planned out beforehand.
Can you optimise your operations independently? More often than not, this can be a far more efficient solution.
Have you accounted for any hidden costs associated with offshoring? High turnover rates in offshoring countries often involves returning employee training costs. Such hidden costs may make the financial advantages far smaller than first anticipated.
Are you offshoring to a developing country? When you're offshoring to a low-cost country take into consideration the economic growth. What's the annual increased salary wages?
These and other questions should be answered and considered before even deciding to embark on an offshoring project.
UNDERSTAND THE COUNTRY YOU OFFSHORE TO
A significant challenge with offshoring to most low-cost countries is high turnover. Take India, the leading nation in offshore business worldwide in 2017, as an example. With a population of 1.3 billion people and 3 million university graduates produced every year, it has a reputation for being a low-cost, high-quality country for offshore endeavours. However, turnover rates in the country's analytics and data science industry currently stands at near 25 percent – a genuine productivity killer.
To understand why this is the case in India, you need to understand the country’s socio-economic conditions, its labour market and its overarching cultural environment. With approximately one billion people living in poverty, only a handful of people get the chance to study at university level. Furthermore, the ones that do pursue graduate studies are expected to pursue a particular career to support their families. This often leads to employees changing jobs every two years to increase their salaries and climb further up the career ladder until they eventually reach whatever their goals may be, and their career development efforts flatten out.
Having a thorough understanding of the motivations of the people you hire for your offshore teams, is a critical component in successful offshoring. I have seen the effect of this myself. In one project I was involved with in India, we realised that married employees with seven to ten years of work experience, were far less likely to change jobs as frequently as younger unmarried employees. As a consequence, we reduced turnover from 25 percent to seven percent – just through the power of thorough research. In effect, hiring employees with higher wages but the right competence, provides a stable workforce. In the long run, this is more economic than hiring an unstable workforce with returning training costs.
ENSURE KNOWLEDGE TRANSFER
Hiring the right competence for your offshore team is critical to your operational success. And what you’re offshoring have a significant impact on how you should approach the recruitment process. Offshoring development of new software created from scratch, for instance, requires hiring highly independent and experienced people, preferably several skilled lead architects, who are highly motivated. In addition, offshoring the development of existing products requires you to ensure knowledge transfer.
Say you have an existing product with a development team of seven employees in-house, each with twelve years of individual experience with the specific product and a combined 84 years of product experience in total. Even though the team in the low-cost country has the same level of coding competence, you should keep in mind that their experience with the product in question is non-existent. It takes a long time to get the offshored team on the same level of product expertise as your existing staff. In this example, the offshored team won’t be at the same level of product experience even after ten years working with the product.
Knowledge transfer is indeed a time-consuming process. To maintain your know-how and ensure successful knowledge transfer, you should ideally keep minimum 25 percent of your competence onshore. Furthermore, you should make sure you have onshore competence within each team, such as development teams, business analyst teams and testing teams. Retaining onshore competence during the knowledge transfer process and even after securing the necessary offshore competence, ensures optimal customer relations and bridges the gap between your customers and your offshore team.
CREATE AN OPTIMAL ONSHORE/OFFSHORE ORGANISATION
Communication breakdown is one of the most typical causes of failed or ineffective offshoring projects, and several organisations regularly struggle with different time zones, physical separation and teams spread across different geographical locations. When setting up offshoring projects, you should pay particular attention to these four critical areas of focus:
Communication infrastructure: For offshoring to be successful, communication infrastructure must be in place and working. Surprisingly few, however, invest the money and time to ensure proper communication processes, which should be a crucial investment when offshoring to a low-cost country. Invest in video cameras, monitoring screens and technology that allows participants to see each other and share their work across time zones and borders.
Aligned work methods: Establishing common work methods is equally necessary as implementing communication infrastructure when offshoring. This requires both technical infrastructure and standardised work processes. Enable configuration control, avoid doubled work processes, set up common data repositories and ensure aligned reporting and work processes. The better the communication infrastructure is and the better the work methods are aligned, the faster your time to market will be.
Business travels: It’s wise to arrange for regular business travels between your home country and the country you offshore too. The offshore team should visit your offices, and you should travel to theirs. Not just for pleasure, but for practical work. And not every four years, but as frequently as possible. This ensures a team dynamic that allows team members to get to know each other personally and a healthy understanding of cultural differences.
Cultural differences: Merging two widely different national and work cultures in a distributed team might pose some challenges. It’s critical that you understand how an offshoring project will influence the existing work culture in your company and are mindful of the cultural differences within the distributed team. Investing in social events and happenings is a great way to ensure good team dynamics and team building, but take care in respecting different food and drinking cultures and choice of entertainment.
CONSIDER PARTNERING UP WITH AN OFFSHORING CONSULTANT
An offshoring project is rarely as straightforward as one might initially think. The perils are great, and the pitfalls are many. If you’re considering offshoring a software development project, I urge you to partner up with a consultant firm well-versed in the offshoring business. We in Noria Consulting are more than happy to be your helping hand – all the way from concept development to implementation.