By Christopher Kenton
And this brings up the third area of hidden costs I've discovered with my own outsourced projects -- quality control. While the general quality of projects I've outsourced overseas has been high, I have employed local programmers to provide oversight on both the outbound and inbound side of project deliverables. Call me crazy, but I don't think it's smart to deliver a code base with comments and variables written in a language you don't understand.
A general strategy that some companies use to deal with all of these risks is to outsource the project to a domestic company with overseas development partners. The local company takes on all the risk and accountability for the project. But there are risks here, too. One of my clients who took this route discovered that while their localized vendor was passing along savings on programming labor, it was front-loading costs on project management, which is where they make their money. I don't say that impugn every domestic outsourcing agency, as I'm sure there are some good ones, but you better know the pitfalls before you sign up.
EXPANDING EQUILIBRIUM. All of this has led me to be very particular about the types of projects I'm personally willing to outsource overseas, and to be increasingly diligent about my own project management process to ensure that I actually realize the margins I expect. In general, I'm outsourcing non-sensitive projects that include a significant programming labor component. Anything sensitive, including projects with intellectual property or risky e-commerce components, goes first to a trusted American partner who can, in turn, outsource whatever they're comfortable sending out. To me, it's just not worth the risk of winding up in court over something that provides marginal savings -- savings that seem to be diminishing regularly.
I mentioned in one of my contentious articles on outsourcing that I didn't believe the trends that have caused the epidemic of outsourcing would continue indefinitely (see BW Online, 4/25/03, "Grasping, Greedy, Unpatriotic? Not Me"). My major arguments were that overseas labor costs would rise with increasing demand, and that increasing patronage would gradually empower workers overseas and inspire more of the local labor regulations and controls that add to labor costs in the U.S. One of those trends is already happening, at least in the labor markets I've been exploring.
Six months ago, I could find high-level programmers in India willing work for $15 an hour, vs. the $100-plus an hour I was paying Americans for the same work. In only six months, that rate has climbed to $25 an hour in India, while my domestic rates have dropped to around $35-$50. On the last project I bid out, two proposals from India came in higher than domestic contractors. Admittedly, I'm in a very small sector of the larger market, and it's too soon to tell even here whether the trend will last, but I've heard similar reports from other businesses (see BW Online, 12/2/03, "U.S. Programmers at Overseas Salaries").
COLD COMFORT, HIGH HOPES. The speed with which this trend popped up suggests not so much that outsourcing overseas is already losing it's value, but that the factors driving cheap labor in foreign markets are a lot more fluid than we may believe -- especially in countries with the talent and infrastructure to provide quality of service.
In the end, I believe labor markets will equalize more rapidly than we might think -- just how long that takes is a question I can't honestly address. I realize that's of small comfort to the American developers who are out of work this holiday season, or to those taking a much smaller wage than they enjoyed three years ago. If you're one of them, I can only say that I understand your circumstance more than you might think.
Despite what some readers seem to think, writing this column doesn't make me wealthy or successful. The truth is that I'm still struggling mightily to recover my own business after the recession, and glowing economic numbers notwithstanding, the outcome is still far from clear. All I can do is continue to work as hard as I can in the new year, and to try to understand what it takes to run a viable and honorable business in a global economy that I truly believe in the long run will provide a better world for my son. Happy New Year.
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