Offshoring’s burn victims

RBC’s recent imbroglio over its Indian IT outsourcing practices illuminated the pitfalls of dealing with offshore providers.  Unfortunately, the Bank’s experience is not unique.  Contrary to conventional wisdom, IT offshoring has not been a boon for every North American firm pursuing that strategy.   Quality and service have struggled to meet stricter North American performance and service standards. Moreover, India’s labour cost advantage is declining for a variety of macro economic reasons. Finally, pervasive business and brand risks remain.  Leaders need to relook their existing offshore relationships to ensure they still make business sense and consider new compelling, ‘Made-in-Canada’ alternatives.

Offshoring IT operations have always been difficult and risky; the RBC/iGATE flap is merely the public tip of the iceberg.   Alex Rodov, CEO of a leading Canadian IT testing firm QA Consultants, has seen the damage of these arrangements first hand:  “Offshoring is no longer the bargain it once was.  It is not uncommon to see higher – not lower – costs, more hassles, delayed time to market and compromised quality.”

Our research uncovered the following example of an offshoring ‘burn victim:’

Financial Services project is “A Bridge Too Far”

A leading financial services company was looking to launch a major, new online offering.  The firm did not have the internal capabilities to build this platform themselves.  They chose to outsource the initiative to a large Indian IT services provider.  This is where the problems began. The Indian firm underpriced the project to get the deal.  They also took the client’s business and technical requirements ‘as is’ without vetting its feasibility.

Ultra low cost pricing is a common strategy for offshore providers to gain market share.  In this case, unfortunately, it did not leave them much margin room to validate the client requirements or assign enough experienced staff.  As a result, the provider missed gaps in the software architecture and did not fully understand the client’s needs and expectations.  Not surprisingly, each version of the delivered code did not meet quality expectations.  Furthermore, the cultural, time and language differences hampered alignment around expectations and trouble-shooting. The provider tried to redress the quality issues by throwing more staff at the problem – and then tried to get the client to pay for them.  Not only did this generate more friction in the relationship but it also failed to address the root cause of the problem namely misaligned goals, poor Indian staff quality and an unbridgeable cultural and linguistic divide.

This is not a case of a single deal gone bad but rather one example of the real difficulties commissioning knowledge-based work thousands of miles away.  This story did not end well.  The initiative had a target budget and delivery of $3.2 million and 7 months respectively.  It eventually was delivered in 22 months for a total cost exceeding $65 million.

Declining India…

Blaming one party or another is too simplistic.  Failure has many fathers.  Business conditions have fundamentally changed – and not in India’s favour.  For one thing, India is losing its luster as the lowest cost place to undertake IT activities. According to 2010 U.S. Bureau of Labour Statistics, India’s average per hour cost advantage has shrunk to only 6-7x U.S. rates (versus a 20x times advantage 10 years earlier).  Furthermore, the quality of the Indian workforce has never lived up to expectations.  The Wall Street Journal has reported that 75% of technical graduates are unemployable by their IT sector. Finally, bridging the relationship/cultural divide has proven to be more challenging and pervasive than anticipated.   In all its forms, distance really does matter.

…Emerging Canada

At the same time, Canadian IT service companies have become more competitive, taking advantage of moderating Canadian wage rates, a steadily increasing, educated (and stable) workforce and a growing sentiment that we need to cultivate strong local businesses. The emergence of globally competitive Canadian IT services firms is giving North American companies more choice, not to mention highlighting the value of good old fashion Canadian innovation and hard work.  To wit, QA Consultant’s roster of blue chip clients such as Loblaw, Bank of America, Praxair and Canadian Tire, demonstrates that leading North American firms recognize the business and reputational advantage of staying closer to home when outsourcing key processes.

Most likely, the optimal outsourcing strategy will include a mixture of local and offshore operations, with the ultimate decision based on an assessment of total delivered cost, the importance of local control and predictability and; a prudent evaluation of brand and intellectual property risk.  Managers should approach these decisions objectively and not be afraid to challenge conventional wisdom that lower cost and higher performance can only be found offshore.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.


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