Jul 262011

If you are a customer who takes (or are planning to take) services of an offshore software vendor, you must be (or will be) reaping a lot of cost saving (average 25-40 percent) after handing over the tasks. Have you considered all the costs, even the hidden costs?

Generally accounted costs of offshoring

  1. Cost of selecting a vendor. It can account for 0.2 to 2 percent of the total contract cost.
  2. Transition cost
  3. Infrastructure cost
  4. Travel and visa expenses
  5. Cost of layoffs for employees. It can be an extra 3-5 percent of total contract cost.
  6. Communication costs. Multiple telecon or video con per day costs for onsite and offshore team to communicate.
  7. Additional task and time reporting for offshore resources. This reporting is required to maintain visibility of offshore resources to customer.
  8. Everyday handshake between onsite and offshore teams.
  9. Some loss of business because your customer is not satisfied with offshore vendor due to performance or accent/cultural issues with vendor resources.
  10. Vendor employee attrition

Hidden costs of offshoring

  1. Communication distortion between onsite and offshore resources. No matter how hard you try, there will always be a communication gap when message moves between continent. The gap widens if there is a cultural difference (same nationality may also have cultural difference).
  2. Working extra time or inconveniently during onsite and offshore handshake. Due to timezone difference, it will always be inconvenient time for one of onsite or offshore person when it is handshake time. Even, if you compensate vendor for that overtime then too there will be some loss of quality.
  3. Hidden team member cost. No matter how hard you try or what reporting arrangements you made, it will always be difficult to monitor whether someone is on leave unreportedly. It should not matter much in Fixed Cost projects, however, it matters in T&M and FTP project. This cost may directly impact the cost, delivery date and quality.
  4. Every functionality cannot be virtual. No matter how portable or remotely managed systems are, there is always some functionality (tool, process etc.) that will not work remotely. Many a times, it is cost effective to let only onsite vendor resource work on that functionality than making that functionality remotely used by offshore resources also. This affects cost.
  5. Difference in process maturity. Many a times, vendor organizations are at higher CMMi level than customer organization. Vendor may need to compensate that difference by putting more resources onsite. This affects cost directly.
  6. Repo loss or repo ramp up time of remaining employees to vendor resources. Before offshoring, other employees could go to the person whose job has been outsourced. This shoulder tapping or meeting over the coffee is not possible with with offshore vendor resources. This cost may affect quality, time and satisfaction of employees.

Do you consider these hidden costs when preparing a RFP or when reviewing a proposal? Do you encounter these costs in day to day operation? Share your thoughts.


  One Response to “Hidden Cost of Offshoring”

  1. [...] Long talk time on phone – Coordination among onsite and offshore requires at least one of onsite or offshore person to burn his evening (or midnight) lamp. This time is that person’s could-be family time for official purpose. Read an interesting article on Hidden Cost of Offshoring. [...]

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