According to a CIO article published in 2003, if you're sending $10 million worth of work to India, selecting a vendor could cost you anywhere from .2% to 2% of the price each year -- $20,000 to $200,000. Likewise, it stated that the transition costs could be the most expensive aspect of the offshoring endeavor. Should vendor selection be that expensive? What are the reasons for the high cost of transitioning work? In this article, we discuss some of the reasons for the high price tab for these phases of offshoring and provide you with some best practices for reducing the expense.
A common approach for companies new to offshoring is to task some manager with responsibility for the vendor selection. Frequently, it's somebody chosen because he or she originated from one of the countries under consideration -- not because that person has the ability to understand the dynamics of offshore outsourcing.
This presumably highly paid manager spends anywhere from three to nine months learning about the offshore industry, talking to 20 or 30 vendors, implementing a detailed vendor selection process with multiple short-listing phases, and finally in site visits, contract negotiations and selection of the vendor. This method is often filled with risks. There are many hundreds of offshore service providers spread across India, China, Russia and other parts of Eastern and Central Europe. Even though most of the vendors claim that they can do everything, the needed domain expertise typically only resides with a select few. There's a high probability that the vendors that will quickly fall out of the running are those that have contacted the company directly or those the company heard about via the media.
Companies spend anywhere between $20,000
and $70,000 on the salary of the internal
vendor selection manager. (That assumes that
vendor selection is one of several projects
handled by that person.) Travel, communication
and the time-cost of senior management and
engineering resources increases the price
tag.
Companies are increasingly starting to hire consultants to advise them in their offshore strategy and help them select the vendor. The high price of the consultants oftentimes offsets the advantage companies gained in reducing the internal management time and overall vendor selection time. Frequently, the consultants hired don't have an offshore presence and lack timely knowledge of current offshore market realities.
2. Use specialist consultants. Another emerging option
is the use of consultants that specialize in developing
an offshore strategy and doing vendor selection.
Offshore consultant costs are often only a fifth
to a third of the expense of an onsite consultant.
Due to their geographic proximity to the vendors,
they often have current information about prospective
vendors and can help companies make better choices.
Companies that follow these cost reduction strategies
can effectively bring down the cost of service provider
selection to $10,000 to $20,000 -- a considerable
reduction from the $20,000 to $200,000 quoted by
CIO.
The success of the transition process often defines the success of the offshore initiative. To be on the safe side, companies are increasingly spending more during the transition process. Arranging for onsite or offshore team visits or a combination of both is a key transition mechanism that has proven to have a high success rate. However, the associated costs can sometimes be prohibitive.
1. Frequently, companies can find expert members of the client team that want to move back to the country to join the offshore team. Those people should be leveraged for knowledge transfer and to act as liaisons between the onsite and offshore teams.
2. Only a part of the offshore team should
be hired during the transition phase. The
rest of the team should be hired only after
the knowledge transfer to the core offshore
team is complete. This will save as much
as 4% to 5% of the transition cost.
3. Use collaborative tools such as Webex, Microsoft Office Live Meeting, Windows NetMeeting and other video conferencing technologies to lessen the need for people to be present at the same location. These technologies can be used to conduct training sessions and code walkthroughs to help in the transition process.
4. A few members of the client's team should be moved
offshore for at least a year so that they can take
ownership of the offshore projects and accelerate
the knowledge transfer. The salary for the resources
moving offshore should be structured competitively
to the existing offshore salary, not to their onsite
salary. If not, cost savings from going offshore
will be reduced.
5. The offshore team should be involved in projects
that will provide value add from the first day
and still help them in the knowledge transfer.
Some examples are architecture review, bug fixing,
and source code and functional documentation.
6. Using online tutorials or webinars, you can devise a mechanism for the offshore team to become certified based on the requirements (technology, product familiarity, etc). This certification process can speed up the transition cycle and address a possible skills gap with offshore resources.
7. Service providers usually want the client
to pay the transition costs against actuals.
However, it's possible to negotiate the contract
with the vendor to achieve some of the following:
These best practices can help reduce transition costs to 2% to 3% of the entire project cost and shrink the initial investment needed for those expenses.