Divining Outsourcing's Hidden Costs

In the mad rush to save on wages by outsourcing IT projects, companies are not only failing to spot the hidden costs - they risk losing precious corporate knowledge in the process.

Not long after five graduates of the California Institute of Technology (Caltech) founded automated error prevention software provider Parasoft, the fledging company turned to offshore outsourcing to moderate its development costs. To the privately held company, founded in 1987 by the research team that developed the first parallel computer, Poland looked like a pretty attractive place to source low-cost IT professionals.

"I was looking for a way to find cheaper developers than you find in the US," says CEO Adam Kolawa. "In 89 Poland switched from communism to a 'normal' system, and there was a great opportunity, because they were really, really inexpensive. We're talking about prices lower than you find in India."

But looks can be deceptive, and since offshore outsourcing was barely on most organizations' radar back then, there was no one to warn Kolawa about any hidden costs. The upshot was that for the first five, or even seven years, Parasoft got very little out of the arrangement. The Polish developers, he says, did not understand the need for a process and infrastructure to back their software development efforts. Corruption was endemic. The developers were overly inclined to stick to contract specifications, and ill-prepared to show the flexibility needed to put quality ahead of specifications. Overall, the culture was just plain wrong.

Although that offshore team is now very efficient, thanks to Kolawa's dedicated efforts at changing that culture, hiring and training the right people and putting the infrastructure in place, he asserts that although he might have had more control had he outsourced to an organization in the US, many of the other problems would have remained. "I would have been able to control what is going on, but we would have had similar problems," Kolawa says. "The misunderstandings between the two organizations, the mis-definitions, are general problems with outsourcing, because contractors always try to do minimum amount of work to get maximum pay. That's how they are structured. So they are going to stick to their contract as much as they can because they want to be paid and go on to the next contract - that's how they make money."

A growing number of studies now confirm Kolawa's assessment. For instance, according to Tom Weakland, a partner at management consultancy DiamondCluster, when you parse it all out, the total cost of offshoring a given IT job is generally comparable to getting the work done domestically. It is just that few companies are aware of these real costs. "Most companies can't accurately measure their productivity and costs prior to and after outsourcing," Weakland says. "Most look just at wages."

Consideration of the hidden costs of outsourcing run in a different direction over at the Australian Customs Service (ACS), where CIO Murray Harrison struggles to find a nuanced response to allegations that one of the major reasons the agency's massive Cargo Management Re-engineering (CMR) project has run into so much difficulty is that the agency has lost much of the corporate knowledge needed to keep the project on track since it outsourced to EDS in 1997.

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