JANUARY 5, 2004

By Christopher Kenton
Christopher Kenton is president of the marketing agency Cymbic.

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KENTON'S CORNER
By Christopher Kenton


The Changing Face of Offshore Programming
Yes, it's still the cheaper option -- but the price differential is shrinking fast, and the hidden costs can be fierce

After nine months of exposure to the overseas outsourcing market, I'm ready to give an update on the realities of outsourcing for small businesses. This is an emotionally charged issue for a lot of people in the U.S., so let me start by saying up front that the results are mixed. Like a lot of larger businesses, I've discovered a number of hidden risks and costs. While I don't think those issues will end the trend of sending jobs to cheaper labor markets, I do think the wholesale enthusiasm for outsourcing overseas is quickly waning.


I'm not going to recount all the issues and arguments about why I started exploring overseas labor markets, as it tends to spark an explosion of angry mail. Instead, I'm going to stick to the results I've experienced, and some trends that I've seen that confirm my belief that while outsourcing represents a serious risk to the stability of our economy, I doesn't spell the end of American enterprise, as many critics claim.

Let's start with the details. Since the first project I outsourced to Argentina and wrote about in this column, I've worked on projects outsourced to Brazil, to multiple groups in India, and I've reviewed proposals from China, Poland, the Philippines, Taiwan and Russia (see BW Online, 4/11/03, "The Woman behind the Code"). On every project that I considered outsourcing, I also solicited bids from American programmers, and about 60% of the time, Americans won the business. I see no sign of that success rate diminishing for American programmers, and in fact, I see a few signs that lead me to suspect it may grow.

A big disclaimer here: I'm dealing with outsourcing on a per-project basis. There are forces shaping my market that don't apply to big companies outsourcing overseas, so my views are limited to small businesses and not to the market as a whole. The one thing that I believe applies to both small and large businesses is that hidden costs add up quickly.

CUT-PRICE EDUCATION.  The first thing area of hidden costs relates to project management -- costs that are included when you have a development team under your own roof. That sounds obvious, but in practice, it's eye-opening. I've spent a lot more time than I expected in project management, quality assurance, contract issues, and communication. These issues have added significantly to the bottom-line costs of outsourcing. In some ways, however, they have also provided me with a valuable education.

I've realized that with programmers under my own roof, I used to get away with a lot of shaky project practices in scope management, discovery, documentation, and testing. If you don't have these processes well under control, outsourcing will burn you severely. If you don't know what I'm babbling about, don't even think about outsourcing overseas. It may sound cheap and easy, but I've seen two companies get in over their heads, and with disastrous results.

The second area of hidden costs relates to business risks and requirements. As many outfits doing business overseas for the first time are discovering, there are few reliable standards for intellectual property protection and contract enforcement. A contract is only as strong as your ability to effectively enforce it. If you can't afford the enormous costs of fighting an international legal battle, you should think twice about sending anything proprietary overseas. In a future column, I'll tell you about two companies I know fighting legal battles over intellectual property (IP) stolen by overseas vendors.

RISKS AND REWARDS.  One strategy for dealing with IP risks is to break a project up into components that can be outsourced to different vendors, all blind to the complete project. One of my clients requested this kind of arrangement so it could benefit from cheap labor costs on a piecemeal basis, but the added cost of project management and integration required to bring the separate pieces back together eliminated most of the savings while introducing new risks in quality control.

Continued on next page>>  | 1 | 2



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