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    Sep. 1, 2003Issue ofCIO Magazine | Offshore Ou

    SPECIAL REPORTOFFSHORE OUTSOURCING> THE MONEY

    The Hidden Costs of Offshore Outsourcing

    Moving jobs overseas can be a much more expensive proposition than yomay think.

    BY STEPHANI E OVERBY

    Read thexecutive Summaryf this article

    Have something to saybout this article? Add

    your comments

    below.....

    Offshore Outsourcing

    Backlash

    The Radicalization ofMike Emmons

    Offshore OutsourcingThe Money

    The current stampede towardoffshore outsourcing should come as

    no surprise. For months now, thebusiness press has beenregurgitating claims from offshorevendors that IT work costing $100an hour in the United States can bedone for $20 an hour in Bangaloreor Beijing.

    If those figures sound too good tobe true, that's because they are.

    In fact, such bargain-basementlabor rates tell only a fraction of thestory about offshore outsourcing

    costs. The truth is, no one saves 80percent by shipping IT work to Indiaor any other country. Few can saythey save even half that. As just one example, UnitedTechnologies, an acknowledged leader in developingoffshore best practices, is saving just over 20 percent byoutsourcing to India. (For more, read "Inside Outsourcingin India.")

    That's still substantial savings,to be sure. But it takes years ofeffort and a huge up-frontinvestment. For manycompanies, it simply may not beworth it. "Someone working for$10,000 a year in Hyderabadcan end up costing an Americancompany four to eight times thatamount," says Hank Zupnick,CIO of GE Real Estate. Yet all

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    NTERACTIVEWORK SHEET

    You can figure out your

    own best and worst casescenarios for going

    offshore when youcalculate the costs for

    yourself. Use our online

    calculators.

    Detailed version: Use

    his to include thendividual amounts to be

    spent in each category.

    Summary version: Usehis if you want to enter

    one overall cost for the

    entire contract.

    Talk to DavidRaspallo

    Outsourcing

    too often, companies do notmake the outlays required tomake offshore outsourcing work.And then they are shocked whenthey wind up not saving anickel.

    In this article, we will explore a

    new TCOthe total cost ofoffshoring. We will uncover allthe hidden costs ofoutsourcingareas in whichyou'll have to invest more upfront than you might think,places where things such asproductivity and poor processescan eat away at potentialsavings, and spots where, ifyou're not careful, you couldwind up spending just as much as you would in the U.S.of A. (For more on how to calculate your own TCO, see

    the worksheet "Do the Math" on bottom of this page.)

    "You can't expect day-one or even month-six gains,"Zupnick says. "You have to look at offshore outsourcingas a long-term investment with long-term payback."

    The Cost of Selecting a VendorWith any outsourced service, the expense of selecting aservice provider can cost from .2 percent to 2 percent inaddition to the annual cost of the deal. In other words, ifyou're sending $10 million worth of work to India,selecting a vendor could cost you anywhere from $20,000to $200,000 each year.

    These selection costs include documenting requirements,sending out RFPs and evaluating the responses, andnegotiating a contract. A project leader may be workingfull time on this, with others chipping in, and all of thisrepresents an opportunity cost. And then there are thelegal fees. Some companies hire an outsourcing adviserfor about the same cost as doing it themselves. To top it

    off, the entire process can take from six months to ayear, depending on the nature of the relationship.

    Vice President of ProgramSolutions and ManagementRon Kifer spent severalmonths on vendor selectionbefore contracting withBangalore, India-basedInfosys to handle a whopping90 percent of developmentand maintenance work forDHL Worldwide Express, ashipping company. "There's a

    Hank Zupnick, CIO of GEReal Estate, found that

    because of cultural

    differences you cannotsimply replace one

    American w orker with oneoffshore worker.

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    is a

    tangled, more expensive

    web than you think. What

    are the real costs ofgoing offshore? David

    Raspallo, CIO of TextronFinancial, knows. Until Sept.

    15, go to ASK THE SOURCE

    to query him on offshore

    ssuescostly and

    otherwise.

    lot of money wrapped up in acontract this size, so it's notsomething you take lightly orhurry with," Kifer says. "Therehas to be a high degree of duediligence making sure that the[offshore] company canrespond to your needs."

    Even when there is an existingtie between customer andoffshore vendors, theexpensive and lengthy step ofvendor selection is a must-dofor successful outsourcing.The chairman of TataConsultancy Services (TCS), aMumbai, India-basedoutsourcer, sat on theinternational advisory board ofTextron, a manufacturing

    company that owns suchbrands as Cessna Aircraft andE-Z-GO Golf Carts, for severalyears. However, when DavidRaspallo, CIO of business unitTextron Financial, beganexploring offshore outsourcingin 1999, he still spent five months doing what he calls"the usual Betty Crocker Bake-Off" with service providersCovansys, ITS, TCS and Wipro. Ultimately, he went with

    U.S.-based Covansys, which has three developmentcenters in India. Selecting the vendor took 500 hours intotal, involved Raspallo and three senior managers, and

    cost $20,000 in additional expenses.

    At this stage, travel expenses enter the picture as well. Atrip overseas helps CIOs get comfortable with their

    choice. After all, offshore vendors can send their best andbrightest over for a dog and pony show, but checking outthe company on its home turf provides more insight. JohnDean, the CIO of Steelcase, an office furnituremanufacturer, spent several thousand dollars to send oneof his IT executives to Intelligroup Asia in Hyderabad,India, for a week before signing on the dotted line.

    "You can read everything you want to read and ask for

    advice as much as you want, but you have to make it afact-based decision," Dean says. "So it was important tovisit India to validate our thinking."

    Bottom line: Expect to spend an additional 1 percent to10 percent on vendor selection and initial travel costs.

    The Cost of TransitionThe transition period is perhaps the most expensive stage

    Ron Kifer, VP of program

    solutions and managementat DHL Worldwi de Express,ran into delays and

    additional costs in shifting

    jobs offshore when it tooklonger than expected to

    install the necessaryhardware in India.

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    When the Customersn't Rightndian I.T. vendors have

    an unmatchedcommitment to customerservice, but that positive

    can turn to a negativewhen eager-to-pleasevendors ignore flaws in

    software specifications.

    of an offshore endeavor. It takes from three months to afull year to completely hand the work over to an offshorepartner. If company executives aren't aware that therewill be no savingsbut rather significant expensesduring this period, they are in for a nasty surprise.

    "You have to bring people to America to learn yourapplications, and that takes time, particularly if you're

    doing it with a new vendor for the first time," explains GEReal Estate's Zupnick, who maintains a handful of three-year contracts with offshore vendors, including TCS andsmaller vendor LSI Outsourcing. In GE Real Estate's case,the transition time for each vendor was three months atthe very least and up to a year in some cases, in additionto the money-draining vendor selection period of severalmonths.

    Zupnick, who has seven years ofoffshore experience, says mostof his peers don't appreciate thetime and money it takes to get a

    relationship up and running."The vendors say you can throwit over the wall and start savingmoney right away. As a result,I've heard of CIOs who havetried to go the India or Chinaroute, and nine months laterthey pulled the plug becausethey weren't saving money,"Zupnick says. "You have to build

    in up to a year for knowledgetransfer and ironing out cultural differences."

    CIOs must bring a certain number of offshore developersto their U.S. headquarters to analyze the technology andarchitecture before those developers can head back totheir home country to begin the actual work. And CIOs

    must pay the prevailing U.S. hourly rate to offshoreemployees on temporary visas, so obviously there's nosavings during that period of time, which can takemonths. And the offshore employees have to work inparallel with similarly costly in-house employees for muchof this time. Basically, it's costing the company doublethe price for each employee assigned to the outsourcing

    arrangement (the offshore worker and the in-housetrainer).