Drouin says Satyam has put some processes in place to help ease the impact of turnover. "The vendor has put a sixth person on a five-person project team as a buffer," he says. "If someone leaves the project, they have a resource ready to jump in who's already up to speed." Ultimately though, says Drouin, turn-over is simply something he has to factor into the cost of doing business offshore.
Indeed, Hatch's research reveals a dramatic upswing in turnover on the vendor's team during the second and third year of offshore outsourcing engagements. Testa of Mindbridge also found that the replacements his offshore vendors put on his projects were increasingly less skilled and experienced but cost just as much. "The best people were being wooed away for more money," says Testa. "And the quality of people we got in their place wasn't equal to the price we were paying."
Lehman Brothers CIO Jonathan Beyman says turnover rates are part of the reason why he doesn't send work that requires company-specific knowledge to third-party vendors in India. "They're not putting someone on my account who's going to stay there for the rest of his career. After a couple of years, I know there is going to be churn," says Beyman, who has two contracts worth a total of $US70 million with Tata Consultancy Services and Wipro. "Having subject matter experts is something that's very important to us. We've got employees internally that have worked on our systems for years and years, and we have not been able to duplicate that with a third party offshore."
And that's a big part of the reason some IT executives eventually turn to a captive model, where the company owns and operates the offshore centre as its own subsidiary and employees report directly to them (see "The Captive Option", page 80). Beyman himself has gone to a hybrid model, with a captive centre handling high-level work and vendors working on things like QA testing and infrastructure support.
Offshoring Is Hard Work
Ultimately, it's clear that for offshore outsourcing to be successful long term, it requires continued re-evaluation and renewal. The hard work is not over after the first couple of years; it's only just beginning. Hatch advises CIOs to consider that and factor it in before they sign a contract with an offshore IT services provider.
"You have to make a holistic evaluation of the offshore proposition that looks at total costs long term," Hatch says. "Not just the launch costs, but the mature operational costs, including the relaunch that needs to take place every three years or so."
Drouin builds long-term costs for increased turnover into his metrics so that he isn't taken by surprise. "Don't assume that the task of closely monitoring is limited to the start-up phase. You're going to have to maintain that level of attention - or close to it - throughout the relationship," he says.
Beyman of Lehman Brothers made headlines in 2003 when he re-insourced the help desk he had offshored to India after nine months of terrible service levels. "The places where it works for us, it works because we spend a lot of time and attention on it," he says. The places where it hasn't worked, it hasn't worked because it wasn't managed well."
Gentle of Deloitte and Touche says he saw a broad range of results in the cost savings being achieved offshore and the quality being delivered. Some companies were getting quality offshore that was 15 percent higher than onshore. Others were seeing quality about equal to that delivered domestically. And, "some were seeing quality start to dip below the level of quality available onshore, which defeats the whole value proposition of going offshore in the first place", he says.
That's where Testa found himself at Mindbridge. A once-beneficial offshore outsourcing arrangement deteriorated over time until he ultimately ended up in a situation with inexperienced offshore staff delivering him buggy software at no net cost savings. Unlike Drouin and Vinod who continue to work at offshore outsourcing and derive value from it, Testa called it quits. He is in the process of staffing up internally to meet Mindbridge's application development and support needs, supplementing that with some domestic outsourcing. "I don't plan to do any more offshoring in the foreseeable future," Testa says. "It's time-consuming and draining and, at times, extremely frustrating. You spend half the time patting people on the back and half the time kicking people in the ass."
As the offshore outsourcing market has matured, the lesson for CIOs is clear. "Offshoring is not for the fainthearted. You can't dabble in it," says Deloitte and Touche's Gentle. "You have to have a long-term strategy."
Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.