Is Offshore Outsourcing Really Cheaper?

Offshoring software development has become a common practice for many companies, having gained immense popularity over the last 10-15 years. So much so, that in India alone, outsourcing is now a nearly $150 billion industry. Why? It’s simple: offshore labor is much cheaper. But in reality, the hourly rate that you pay is just one factor when it comes to determining the actual cost of offshoring. Read on for four areas of potential hidden cost that may make you think twice about considering an offshoring investment.  

Project Management Costs                     

A critical component to ensuring a successful outsourcing engagement is the ability to manage the project effectively. Time zone differences, frequent and fast-paced requirement changes, plus the inherent nature of agile software development means additional management and oversight needs can pop up unexpectedly. This leads to the possibility of teams getting stretched too thin while trying to coordinate communication among developers and stakeholders, across multiple time zones. Often, additional management resources must be put in place, which means additional cost.

Resource Ramp-Up/Turnover Rates                   

Depending on the offshore provider and your ability to command their attention, it may take much longer to ramp up the right resources necessary to meet your requirements. Unless you are a very large enterprise, you may have to wait in line for the best people. Additionally, if you’re working with a smaller or midsize offshore company, retaining top talent can be a problem which causes project delays due to the variability of resources being used on a project.

Cultural and Communication Barriers

The ability to communicate effectively with your outsourced development team has a direct impact on the timeliness and quality of deliverables. Cultural differences or misunderstandings can also affect how well teams work together, and sometimes cause unnecessary friction. In fact, in some cultures, maintaining positive relationships with clients is so important that in order to avoid any sort of tension, sometimes overseas colleagues will simply say what they think the other person wants to hear, instead of the true state of affairs. This is in stark contrast to the United States, where employees tend to value being straight forward and specific in order to get the job done as efficiently as possible. Additionally, a lack of understanding of how business is conducted in the U.S. or unfamiliarity with regulations can slow processes down. There may be less application of best practices and fewer innovative ideas as a result.

Geopolitical Risks

Economic, social or political strife can cause additional risks (and costs) when you’re offshoring. We’ve seen trade disputes between the US and China, more stringent H1-B visa restrictions in the U.S., terrorist attacks in Sri Lanka and most recently political tensions in Belarus. In other countries, health crises, ongoing violence and petty crime may make you less inclined to send employees to these areas, reducing important local training and vendor management time, and adding risk to service delivery.

While there’s no doubt that the offshore model for software development has been an effective resource for many companies, it may not be the right fit for every organization or for every project. To determine your true cost of offshoring (TCO), use our free TCO calculator to help understand which outsourcing option may work best for your organization.