Laying off American employees as a result
of your offshore outsourcing contract poses
other sometimes unanticipated costs. To begin
with, you have to pay many of those workers
severance and retention bonuses. "You
need to keep employees there long enough to
share their knowledge with their Indian replacements," Zupnick
explains. "People think if they give generous
retention bonuses it will destroy the business
proposition. They cut corners because they
want quick payback. But then they lose the
people that can help with the transition and
incur the even bigger cost of not doing the
Layoffs can also cause major morale problems
among in-house "survivors," in
some cases leading to disaffection and work
slowdowns. Companies with experience in offshore
outsourcing factor productivity dips and
potential legal action from laid-off employees
into the cost-benefit analysis.
"You can never underestimate the effect these issues will have on the
success of [your offshore venture]," says Textron Financial’s Raspallo.
CIOs must take time to communicate with their staffs, being "brutally
honest," he says. "If your intention is
to lay off some workers and move work offshore, let
them know. If you want to move legacy systems offshore
and retrain staff for other systems, tell them that.
And constantly reinforce what the vision is."
Raspallo sets aside time for a monthly meeting
with all staff (offshore included) by video. "In
the beginning, we spent the whole time
talking about the offshore proposition," he
says. "If you don’t spend that
time doing that, your staff is going to
make up stories about what’s happening
Without this kind of effort, offshore endeavors
"Internal people will refuse to transition to the offshore model because
they have a certain comfort level, or they don’t want their buddy to
lose his job," Renodis’s Manivasager says. "There has to be
a mandate. Trying to build consensus can take a very, very long time." Manivasager
has seen some relationships take as long as three years to get off the ground
because the strategy was neither shared with nor embraced by employees.
Bottom line: Expect to pay an extra 3 percent
to 5 percent on layoffs and related costs.
The Cultural Cost
One of the biggest impediments to offshore
outsourcing savings is productivity. "You
simply cannot take a person sitting here in
America and replace them with one offshore
worker," GE Real Estate’s Zupnick
says. "Whether they’re in India
or Ireland or Israel."
One reason for that is the American workers’ comfort
level with speaking up and offering suggestions. "A
good American programmer will push back and
say, What you’re asking for doesn’t
make sense, you idiot," Zupnick says. "Indian
programmers have been known to say, This doesn’t
make sense, but this is the way the client
wants it." Thus, work takes more time
and money to complete. And a project that’s
common sense for a U.S. worker—like creating
an automation system for consumer credit cards—may
be a foreign concept offshore. Additionally,
offshore vendors often lack developer experience
(the average experience of offshore developers
is six years).
On average, IT organizations going offshore will
experience a 20 percent decline in application development
efficiency during the first two years of a contract
as a result of such differences, Meta Group Vice
President of Service Management Strategies Dean Davison
says. According to Meta Group, lags in productivity
can add as much as 20 percent in additional costs
to the offshore contract.
Another productivity killer is high turnover at offshore
vendors. Attrition rates climb as high as 35 percent
in India, according to the National Association
of Software and Service Companies. "Unless
you can somehow address that in your contract,
you’re paying for someone to learn your product
and then they’re gone," Zupnick says.
Turnover can cost an additional 1 percent to 2