The pros and cons of IT offshoring

The pros and cons of IT offshoring

What to consider before you send your IT overseas

Keep the work local and spend the extra money or send it overseas and get near the same value at a lower price? For many budget-conscious CIOs, the latter makes sense. But that doesn’t mean offshoring isn't a panacea for cost-constrained IT department; it can involve risks and potential long-term downfalls when it comes to business agility and innovation.

Scott Watters, CIO of Zurich Australia, late last year set up an IT team in Malaysia as an extension of his IT team in Australia. The offshoring came about when Zurich purchased Malaysian Assurance Alliance Berhad and rebranded it as Zurich Malaysia. Watters saw an opportunity to leverage the resources in Malaysia to support the growing technology needs of the business locally.

The main benefit of offshoring some of his IT, Watters says, was not immediate cost reduction.

“The whole idea was not necessarily about cost savings; it was more about capacity increasing," he says.

Read Where is IT outsourcing heading in 2013?.

"We had a need for more people and we didn’t want to go to market and spend more money in Australia so we basically put in more resources for around the same cost. You can cost cut to a point, but it’s trying to get as much change for your dollar as possible."

Gartner analyst Rolf Jester warns of the hidden costs that offshoring and outsourcing can involve. Additional costs in communication, travel, training, knowledge sharing and management are just some areas that can be overlooked when offshoring. He says if organisations are looking to merely cut labour costs with offshoring, then they are selling themselves short in the long run.

“People are often just driven by costs,” he says. “If you’re just saying, ‘I want to cut my costs by X per cent and therefore I’m going to employ this company in Bangalore or Vietnam, for example,’ then that’s the wrong decision. If that’s your only reason and that’s all you are setting out to do then you will probably fail. If you are just doing it for costs, don’t.”

Beyond the appeal of trying to do more with less, there are some less obvious benefits, says Deloitte Consulting technology leader Robert Hillard. Offshoring can force organisations to be more disciplined when it comes to tracking work and measuring inputs and outputs, which can result in productivity gains. However, he sounds a note of caution: organisations need to be aware that productivity will take a hit during the handover of work to a service provider.

Zurich’s Watters says that with offshoring, there is a management and communication overhead, but being able to align his team to the business strategy and have his team report directly to him helps ensure that it's not out of control.

“I think you get more benefit [in doing it this way] because they will feel part of the same organisation and will try to deliver the one strategy globally rather than it being the strategy of a vendor which might be different to the strategy of the organisation," he says.

"I feel it’s quite important to have them as part of the same team.”

He admits managing a huge team offshore may be impractical; he has a staff of some 44 he manages in Malaysia.

“I think if it’s a small enough team it works. If it’s a large enough team it’s probably better to go to a service provider.”

Watters set up a virtual desktop environment for his IT staff in Malaysia to be able to connect with the IT team in Australia using thin client devices. He says as the infrastructure is based in Australia, it made the fit-out of the office in Malaysia quick and easy, and means he can control the applications and development tools locally. He also uses videoconferencing and collaboration tools to help him work more closely with his Malaysian team.

Watters says that communication and culture have been the main challenges he has experienced from offshoring.

“Culture has been a challenge," he says. "The Malaysian team seems to be slightly different; whereas in Australia you might find one resource that has a variety of skills. In Malaysia we tend to find resources that stay in that single skill [set]. Sometimes you have got to pay for two resources, whereas in Australia you could have one. But these are things you can work around by structuring the team correctly.”

“I would never assume you would take a resource from Australia and replace the exact same resource in Malaysia, for example,” he adds.

“You are never going to get the equivalent productivity because there will be some degradation in terms of the communication process overhead. You have always got to plan for that, so you might have more than one resource over there to cover a role here in Australia.”

However, Deloitte Consulting’s Hillard says having more staff with specialised skills can increase productivity instead of having a number of staff with general skills to cover a broad range of roles.

“In opening up to an offshore pool, we have the ability to get to a much larger pool of specialised resources,” he says. “Rather than have a generalist solve a problem and have to spend a lot of time researching, you can have a deep specialist who does a particular task. That’s got to be more productive and potentially provide a different and better outcome.”

Offshoring — but to where?

Gartner analyst Rolf Jester says that infrastructure and political stability are both key criteria for selecting a destination for offshoring.

“Good infrastructure, telecommunications and reliable power – those are the factors that you would take into account if you are going to locate a service like maybe a cloud service somewhere,” Jester says.

The political environment — some places are less likely than others to be suffer from wars — and a country's record of natural disasters are also important.

“There’s a lot more to it than just ‘where are the cheap people?’ to put it bluntly,” he says.

Jester says there can also be data security risks when setting up in another country, and warns of the potential for losing control of intellectual property.

“Some data, for reasons of privacy, has to be stored in a jurisdiction where the privacy regime is equal or greater to ours here in Australia and that cuts out some locations,” he adds.

Business agility can be a major challenge when it comes to IT offshoring, according to Hillard. He says that IT offshoring contracts can hinder an organisation from being able to quickly respond to changes in an industry.

In Hillard's view, another major challenge is technology innovation. He says not only can offshoring too many junior IT staff lead to a shortfall in replacing senior staff over the long term, but it can also inhibit an organisation’s ability to foster new ideas from the younger generations when staff are contracted offshore.

“Technology people are a core part of the fabric of an organisation; they are actually core to the innovation and the building of general management of an enterprise,” Hillard says.

“If you offshore or outsource too much of your business you actually weaken the innovation DNA of your organisation; you weaken the ability of your organisation to deal with things like digital disruption because you don’t have the technology capability embedded in your organisation.

“You might have the senior executives but you don’t have the next generation coming through and you also don’t have the ‘coffee room chats’ going on with your more junior people.”

Watters says he struggles to find junior staff with the skills to work on the legacy COBOL systems. Hillard says this kind of “skills gap” is a reality many CIOs in Australia face and so it is “not surprising” to see many organisations turning to offshoring as the solution.

“You do see a lot of people comment and say, ‘You say there’s a shortage of skills, yet I’ve been unemployed for X period of time.’ The IT profession is still struggling in its development of professional frameworks and definition of what it is.

“We confuse very, very technical jobs with IT management jobs, with specialised digital jobs and so on. In certain categories of technical jobs we see skills that are out of date that need to evolve or people who are misaligned in what they are doing.

“Regardless of offshoring, the future of Australian technology needs a much larger population of technologists in Australia who are able to take Australian business and government to the next level, what we describe as the ‘post digital revolution’. In the long term there is no solution other than dramatically increasing the number of Australian graduates coming through with technology skills.”

ACS Foundation executive director John Ridge says that with low-level IT jobs going offshore and Australian IT graduates struggling to get their first job, it sends a negative message out to the community about IT careers and turns people off up from enrolling in IT-related subjects at university.

“Despite all the rhetoric about a skills shortage, we regularly come in contact with people who, 12 months, 18 months, two years down the track after they have graduated, still can’t get their first role. Just imagine those people telling their families and friends that they have been graduated for that period of time and not able to get a job. What message does that then send back down the line to people they know? Is it any wonder that enrolments have dropped so much?

“We are never going to be world leading in innovation, research, bio industries, etc. unless we’ve got a strong, dynamic, growing IT sector. You are not going to be able to buy that stuff off the shelf – you’ve got to have the ability and capability to develop it yourself. If we lose that capability, we’ll head down the same track as we’ve gone with manufacturing and to me it’s just a looming potential disaster.”

Ridge says IT offshoring is not a sustainable long-term solution to fill a skills gap in Australia as IT enrolments in China and India – traditionally the two biggest countries for offshoring – dropped 20 per cent last year, and in future those countries may “struggle to satisfy their own domestic demand let alone keep up with offshored work from other countries”.

At the end of the day, Hillard says it’s all about striking a balance. He says more organisations are realising they have offshored or outsourced too much of their IT-business operations where they have seen the consequences and are now finding a much more balanced approach.

Watters says it’s important not to lose control of what differentiates you from others in the market. His IT team in Malaysia takes care of all the maintenance and business-as-usual activities so his IT team in Australia can focus on the projects that matter most, he says.

Watters says IT offshoring can work, as long as you:
  • Understand the market where you plan to offshore and make sure the skills you need are available in that market
  • Understand any cultural differences in how your offshore service provider or team operates compared to your onshore staff
  • Don’t underestimate the stakeholder engagement and change management required to make the transition from an onshore IT team to an offshore IT team that you don’t have as much visibility of
  • Put in place clear processes and controls when managing your offshore service provider or team
  • Put together a five-year plan where in five years you have got to have your benefits from offshoring.

Follow Rebecca Merrett on Twitter: @Rebecca_Merrett

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