The transition period is perhaps the most
expensive stage of an offshore outsourcing endeavor.
It takes from three months to a full year to
completely hand the work over to an offshore
outsourcing partner. If company executives aren’t
aware that there will be no savings—but
rather significant expenses—during this
period, they are in for a nasty surprise.
"You have to bring people to America to
learn your applications, and that takes time,
particularly if you’re doing it with a
new vendor for the first time," explains
GE Real Estate’s Zupnick, who maintains
a handful of three-year contracts with offshore
outsourcing vendors, including TCS and smaller
vendor LSI Outsourcing. In GE Real Estate’s
case, the transition time for each vendor was
three months at the very least and up to a year
in some cases, in addition to the money-draining
vendor selection period of several months.
Zupnick, who has seven years of offshore
outsourcing experience, says most of his
peers don’t appreciate the time and
money it takes to get a relationship up and
running. "The vendors say you can throw
it over the wall and start saving money right
away. As a result, I’ve heard of CIOs
who have tried to go the India or China route,
and nine months later they pulled the plug
because they weren’t saving money," Zupnick
says. "You have to build in up to a
year for knowledge transfer and ironing out
CIOs must bring a certain number of offshore
outsourcing developers to their U.S. headquarters
to analyze the technology and architecture
before those developers can head back to
their home country to begin the actual work.
And CIOs must pay the prevailing U.S. hourly
rate to offshore outsourcing employees on
temporary visas, so obviously there’s
no savings during that period of time, which
can take months. And the offshore outsourcing
employees have to work in parallel with similarly
costly in-house employees for much of this
time. Basically, it’s costing the company
double the price for each employee assigned
to the outsourcing arrangement (the offshore
outsourcing worker and the in-house trainer).
In addition, neither the offshore outsourcing
nor in-house employee is producing anything
during this training period.
But it has to be done. "We made a mistake in
the beginning of just packing up the specs and shipping
them over, looking at it from a pure cost standpoint," says
Craig Hergenroether, CIO of Barry-Wehmiller, a packaging
manufacturer that has its own development center,
Barry-Wehmiller International Resources, in Chennai,
India, and works with other offshore outsourcing
vendors. "Silly mistakes were made because we
didn’t take the time to have them come over.
It’s a false savings to keep costs down by
communicating only by phone."
During the transition, the offshore outsourcing
partner must put infrastructure in place. While
the offshore outsourcing partner incurs that
expense, the customer should monitor the process
carefully. Often it can take longer than expected. "It
took an awful lot of time to bridge the Pacific
[networking our company to the Indian vendor]
and getting that to work correctly," remembers
Textron Financial’s Raspallo, who spent
six months and $100,000 to set up a transoceanic
data line with Infosys in 1998 for Y2K work.
It also cost an extra $10,000 a month to keep
that network functional. "You have to
know hands down that the technology infrastructure
you put in place is fully functional and will
operate at the same performance level as it
would if you were connecting to someone on
the next floor. Otherwise, you’ll have
a lot of costly issues to deal with."
DHL’s Kifer had similar problems.
Long lead times for acquiring the necessary
hardware in India delayed development work,
he says. The hardware holdup put off the start
of offshore outsourcing work for several months,
requiring DHL to continue to keep vendor workers
employed onsite at the more expensive rate.
During the transition period, the ratio of
offshore outsourcing employees in the United
States to offshore outsourcing employees working
at the vendor’s overseas headquarters
is high. But after the transition is complete,
CIOs have to get those employees out of the
office if offshore outsourcing is to be a money-saving
move. "It’s got to be 80 percent
or 85 percent working offshore outsourcing
or the numbers just don’t work," explains
GE Real Estate’s Zupnick.
|It makes sense for offshore outsourcing service
providers to place as many of their employees in
the United States as possible. The provider’s
margins—already quite decent for offshore
outsourcing work (Indian companies charge U.S.
companies $20 an hour for an employee they pay
around $10)—really skyrocket when they’re
on American soil. "They make more money and
often the client feels better having them close," says
Praba Manivasager, CEO of Minneapolis-based offshore
outsourcing adviser Renodis. "But the customer
immediately loses all of the bill-rate savings." If
not included in the original contract, additional
travel and visa costs also must be figured in.
Tally it all up and you will pay as much as you
would for one of your own employees.
It’s a difficult area for CIOs to manage.
Work is much easier to do with offshore outsourcing
workers onsite, but to cut costs they must push
as much overseas as possible. Conversely, the more
manpower based offshore outsourcing, the more project
problems and delays. Barry-Wehmiller’s Hergenroether
says the amount of workers you can reasonably send
offshore outsourcing depends on the type of work
being done. Industry- or company-specific system
development requires more developers onsite. Legacy
maintenance or simple upgrades may not require
"On some of our projects, up to 50 percent
of offshore outsourcing workers are onshore; on others
it’s closer to 10 percent," Hergenroether
says. In some cases—where specific skills are
the reason for offshore outsourcing—he may
even bring in offshore outsourcing talent over long
term. "But if you’re going to do that,
your cost savings diminish dramatically," he
says. In fact, there may be no savings at all.
Bottom line: Expect to spend an additional 2 percent
to 3 percent on transition costs.
By Stephanie Overby