The Cost of Retrenchments

Retrenching employees as a result of your offshore contract poses other sometimes unanticipated costs. To begin with, you have to pay many of those workers severance and retention bonuses. "You need to keep employees there long enough to share their knowledge with their Indian replacements," Zupnick explains. "People think if they give generous retention bonuses it will destroy the business proposition. They cut corners because they want quick payback. But then they lose the people that can help with the transition and incur the even bigger cost of not doing the transition right."

Retrenchments can also cause major morale problems among in-house "survivors", in some cases leading to disaffection and work slowdowns. Companies with experience in offshoring factor productivity dips and potential legal action from retrenched employees into the cost-benefit analysis.

"You can never underestimate the effect these issues will have on the success of [your offshore venture]," says Textron Financial's Raspallo. CIOs must take time to communicate with their staffs, being "brutally honest", he says. "If your intention is to retrench some workers and move work offshore, let them know. If you want to move legacy systems offshore and retrain staff for other systems, tell them that. And constantly reinforce what the vision is."

Raspallo sets aside time for a monthly meeting with all staff (offshore included) by video. "In the beginning, we spent the whole time talking about the offshore proposition," he says. "If you don't spend that time doing that, your staff is going to make up stories about what's happening themselves."

Without this kind of effort, offshore endeavours are doomed.

"Internal people will refuse to transition to the offshore model because they have a certain comfort level, or they don't want their buddy to lose his job," Renodis's Manivasager says. "There has to be a mandate. Trying to build consensus can take a very, very long time." Manivasager has seen some relationships take as long as three years to get off the ground because the strategy was neither shared with nor embraced by employees.

Bottom line: Expect to pay an extra 3 per cent to 40 per cent (or more in some instances) on retrenchments and related costs.

The Cultural Cost

One of the biggest impediments to offshore savings is productivity. "You simply cannot take a person sitting in [your organisation] and replace them with one offshore worker," GE Real Estate's Zupnick says. "Whether they're in India or Ireland or Israel."

One reason for that is your own employees' comfort level with speaking up and offering suggestions. "A good programmer will push back and say: 'What you're asking for doesn't make sense, you idiot'," Zupnick says. "Indian programmers have been known to say: 'This doesn't make sense, but this is the way the client wants it.'" Thus, work takes more time and money to complete. And a project that's common sense for one of your employees - like creating an automation system for consumer credit cards - may be a foreign concept offshore. Additionally, offshore vendors often lack developer experience (the average experience of offshore developers is six years).

On average, IT organisations going offshore will experience a 20 per cent decline in application development efficiency during the first two years of a contract as a result of such differences, Meta Group vice president of service management strategies Dean Davison says. According to Meta, lags in productivity can add as much as 20 per cent in additional costs to the offshore contract.

Another productivity killer is high turnover at offshore vendors. Attrition rates climb as high as 35 per cent in India, according to the US National Association of Software and Service Companies. "Unless you can somehow address that in your contract, you're paying for someone to learn your product and then they're gone," Zupnick says. Turnover can cost an additional 1 per cent to 2 per cent.

Finally, communication issues can slow things to a halt. "We had to do a lot more face-to-face interaction than originally anticipated because [offshore workers] just didn't interpret things the same way," says DHL's Kifer. "That resulted in a lot more travel there or bringing them onshore to bridge that gap. We did that a lot more often than the model would have prescribed." Language and other cultural differences can cost an extra 2 per cent to 5 per cent, according to Meta.

Bottom line: Expect to spend an extra 3 per cent to 27 per cent on productivity lags.