How offshoring software development hinders innovation, exacerbates communication issues, lengthens ramp-up time and precludes the creation of future in-house technology leaders
For decades, U.S. companies have shipped IT work offshore to cut costs. The practice began with simple and highly predictable help desk type services. Offshoring then spread to services like software development as companies discovered lower labor costs in countries like India, China and Ukraine.
But, in a consumer-driven technology environment, offshore software development doesn’t work. The rapid iteration, innovation, communication and specialized knowledge needed to quickly produce quality products isn’t suited for offshoring.
In this high-pressure and unforgiving environment, companies are frustrated with offshore software development solutions for all but the most mundane and repetitive tasks. They’ve discovered that the hidden costs of offshoring outweigh the benefits.
Four hidden costs
Companies that have evaluated or used offshore software development have discovered four important hidden costs that can negate the anticipated gains of paying lower hourly development rates.
1. Communication barriers inhibit innovation and collaboration
Significant time zone differences create communication lags and decrease productivity. The inability to communicate clearly and in real time is a major barrier to developing the teamwork and trust critical for effective execution.
Because technology is at the heart of how well a company performs, development teams need to participate in and contribute to the business conversation. It’s a challenge for offshore teams to provide that input.
Modern applications generate large amounts of data. The ability to effectively manage and analyze big data yields valuable business insights. However, companies can only harness the power of big data if the teams building the systems to manage it can participate in the conversation about how it will be used and what it can do. When teams are separated by great geographic and cultural distances, those critical conversations can’t happen.
Offshore development providers often don’t fully comprehend project objectives.
Offshore development providers often don’t fully comprehend project objectives. They can read the requirements, but they are rarely customers of what they develop. This inhibits their full participation in the project and product strategy. More fundamentally, it means offshore providers frequently don’t understand what is left unsaid: the context of, or an error in a requirement or user story.
The absence of iterative interaction between offshore development teams and business stakeholders exacerbates the issue of context. Without deep knowledge of project and business value, along with changing business requirements, offshore developers are unable to provide insight and recommendations critical to improving end user experience. As a result, product architecture, design and functionality suffer. Offshore development, therefore, misses opportunities for collaboration that could lead to improved outcomes.
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Development teams need to participate in and contribute to the business conversation. It’s a challenge for offshore teams to provide that input.
Offshore development providers often don’t fully comprehend project objectives. They can read the requirements, but they are rarely customers of what they develop. This inhibits their full participation in the project and product strategy. More fundamentally, it means offshore providers frequently don’t understand what is left unsaid: the context of, or an error in a requirement or user story.
The absence of iterative interaction between offshore development teams and business stakeholders exacerbates the issue of context. Without deep knowledge of project and business value, along with changing business requirements, offshore developers are unable to provide insight and recommendations critical to improving end user experience. As a result, product architecture, design and functionality suffer. Offshore development, therefore, misses opportunities for collaboration that could lead to improved outcomes.
2. Offshore teams take longer to ramp up
As projects unfold, organizations should expect a ramp-up period which incurs significant costs. These costs include project scoping, requirements setting, onboarding of team members and knowledge transfer. When considering offshore teams and the need to distribute systems or processes across borders, these costs can rise dramatically.
The perception of low-cost labor in core offshore countries is misleading. In fact, offshore software development costs are rising at an alarming rate. According to NASSCOM (India’s leading software and IT trade association), two-thirds of offshore providers are actively seeking a price increase for existing projects. In fact, 90% of Indian offshore software development providers are asking for a higher rate, with an average increase of 10.6%.
90% of Indian offshore software development providers are asking for a higher rate.
The attrition rates of offshore providers can significantly impact ramp-up costs. If you face an attrition rate of over 20% every quarter, you are paying to constantly retrain new developers for the same project, while also losing valuable knowledge at a high rate.
Also, consider differences in productivity levels between offshore and onshore teams. Real-time communication and collaboration enhances productivity. Without it, offshore providers consistently require significantly more resources and hours to complete a project.
This pain is often felt during the requirements gathering and documentation phases of a project. While there is always back-and-forth during these stages, the inability to collaborate in real time can cause miscommunication. Without clarity in the requirements, teams can quickly develop down the wrong path. This leads to backtracking and wasted money, time and energy, which could have been avoided with a simple conversation.
3. Rework of low-quality offshore software development
Another major hidden cost of software development offshoring is repeating a project onshore, or reworking elements of projects that were developed incorrectly. These setbacks can have disastrous consequences for project deadlines, budgets and staff morale.
According to the International Journal of Software Engineering and Applications, rework consumes 40-70% of a software development project’s budget. Some rework costs can be mitigated through effective and organized development processes. For example, requirements gathering and agreement on requirements prior to each sprint reduces the rework required when stakeholders change requirements during project development or, worse, after a project is completed. But, the ability to collaborate and foster a team environment to come to agreement on per-sprint requirements is compromised with offshore teams.
In addition, when problems arise from offshore development, they require additional managerial and quality control efforts that burn through valuable employee time. This is rarely budgeted or accounted for in project timelines. These efforts can represent significant lost opportunity cost in terms of other work the employee was slated to do.
If employees are required to meet original deadlines while spending unanticipated hours troubleshooting, they may have to work late or on weekends to do so. This creates morale issues and is likely to create a negative attitude toward the offshore development team, further hindering productivity and collaboration.
4. Offshore developers don’t become future company leaders
What onshore developers offer, that offshoring can’t and won’t ever be able to, is the ability to retain knowledge and expertise within your company. With offshoring, you are utilizing a pool of developers halfway around the world. They may be able to solve your needs temporarily, but they aren’t going to reinvest that knowledge and expertise in your business. They aren’t your future leaders.
When problems arise from offshore development, they require additional managerial and quality control efforts that burn through valuable employee time.
With onshore developers and teams, you build an innovation community that you can reinvest into future projects. Having talented, creative and forward-thinking developers located in and around your company allows you to build better products now. Converting onshore developers and having them grow into your future technology leaders ensures long-term innovation and market competitiveness. It helps attract the best and brightest to your company. Not reaping these benefits is a hidden cost of offshoring.
Converting onshore developers and having them grow into your future technology leaders ensures long-term innovation and market competitiveness.
The downstream effect
Jack Bogle, founder of The Vanguard Group, coined the term “the tyranny of compounding costs.” While Bogle was referring to investor’s costs and returns, the tyranny is also evident in the hidden costs just described.
There is an intertwined and cumulative effect of these hidden costs that businesses feel over time. Comparing the cost of offshore development teams, even with the misperception of low wages, to onshore teams is not as simple as apples-to-apples.
- Offshoring may have lower hourly labor costs, but when it takes an offshore team four times as long to deliver, you end up spending just as much, with additional headaches along the way.
- Offshore teams require additional management oversight. That team management function (whether located onshore or offshore) requires real-time, frequent communication about requirements, quality and velocity. The ability to deliver that feedback effectively in an offshore model is compromised by myriad factors, and the additional overhead cost of this oversight, regardless of its effectiveness, must be factored into any cost comparison.
- Communication gaps created by distance produce a knowledge gap. When knowledge is transferred, it is often a result of efforts from non-business stakeholders, starting a dangerous game of “telephone,” where the message delivered may not be complete or accurate. This lack of discussion and clarity creates an environment where backtracking and wasted effort are the norm.
- A direct relationship exists between these hidden costs and project complexity. As the number of offshore resources required to complete a project and turnover rates increase, so too does project complexity. This complexity taxes testing resources and creates challenges down the road for product maintenance or enhancement, resulting in higher product support costs and barriers to new feature development.
- By offshoring work, you bear the cost of building a workforce in a location where it can’t help you in the future. These same teams could be created with onshore developers, helping to fuel innovation and competitiveness for years to come.
The compounding effect of the hidden costs of offshoring can have lasting impacts on a business. Productivity, quality and cost risks threaten to offset gains expected from innovative applications that drive revenue, competitive differentiation and customer loyalty. These hidden costs must factor prominently into any software development outsourcing decision.
