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The Pros and Cons of Offshore Outsourcing
14 November 2003
THE battle lines were drawn from the first moment. Billed as the "Great Debate," two Gartner analysts went head-to-head (or in this case hat-to-hat) in a tussle over offshore outsourcing. They looked at the benefits and ills of mature economies, in the name of cost efficiency, sending software application work to emerging economies such as India, the Philippines or Russia. On one side of the stage was services analyst Rolf Jester, wearing his Australian bushman's hat. Opposite, stood Partha Iyengar, wearing a white turban with gold trim.
Both men took part in the debate with great spirit, but there could be no mistaking that beneath the intellectual banter they agreed offshore sourcing was a reality and everyone should get used to it.
Mr. Jester passionately warned of the economic perils of mature economies stripping away IT development from their own nations. Such strategies are creating a painful loss of jobs, he said. In the long term, a nation's IT workforce would diminish, losing skills and capabilities that were essential to keep a domestic IT sector relevant.
"Salaries in India may be a fifth of those in developed economies," Mr. Jester said. "But that is a gross simplification and over-statement of reality. You need to look at the true costs."
He said offshore code is delivered with perhaps with only 85 percent of the code complete, compared with similar work undertaken in mature economies. "And then you have all the communications costs, management bandwidth and travel time to take into account," he said. "Careful consideration must be given to the risk adjustment cost, too."
Mr. Jester cited other problems such as the lack of business certainty in emerging economies and the fact that India, in particular, is surrounded with geopolitical instability.
"Indian outsourcers are claiming they can provide savings of between 30 and 40 percent," he continued. "But that is only if a project is large. For a small project, the relatively minor savings are just not worth the risk."
The local audience was also reminded that while such savings might be claimed in the U.S., the benefits in Australia and New Zealand would be around 20 percent because of the comparatively cheaper labor prices.
Mr. Iyengar took all this is good spirit. However, as an advocate of offshore outsourcing, he disputed the notion that somehow Indian software development is inferior. "For years, the Indian product has been seen as shoddy and we struggled to get traction with the offshore sourcing model initially," he said.
As a result, quality has been "ingrained" into the application development process in Indian through adherence to the Capability Maturity Model (CMM) methodology.
"Quality is not an added process. To fail to adhere to a process is cause for instant dismissal for an Indian software developer. I don't know anywhere in the world where this is the case", said Mr. Iyengar.
"The quality of Indian work is better than any end-user could ever produce anywhere in the world. And we have had the vendors on the backfoot with our investment in CMM."
"What India is offering is low cost and high quality—how much more of a recommendation do you need, Rolf?" he added, drawing laughter and light applause from the audience.
A show of hands from the audience indicated approximately 40 percent of delegates felt offshore outsourcing would mean the loss of jobs in their market over the next 12 to 24 months.
That did not seem to bother them, however. Moderator Bob Hayward estimated some 65 percent raised their hand when asked whether they would investigate the option of offshore outsourcing in 2004.
At this point, Mr. Jester moved to the CMM argument, again disputing its credibility. "CMM relates to well-structured work," he said. "It does not apply to unstructured requirements, or ill-defined procedures, which are all part of a software project. A high level of skills is required to meet those challenges and offshore outsourcers are out of their depth. They don?t necessarily understand our business culture, let alone our business."
In the spirit of goodwill, the moderator then told both men to swap hats. Mr. Iyengar, now doing his impression of the Crocodile Hunter, was ill at ease with making the argument against offshore sourcing.
Mr. Jester, on the other hand, made for a pretty good Indian, forcefully arguing the case for undertaking software development in the most suitable and efficient manner available, regardless of where the job had to be completed.
Both analysts expressed concern for the IT industries of the mature economies as a result of offshore sourcing—particularly in the long term. They agreed a loss of jobs would diminish the skills base. The argument that mature economies should adjust to provide higher value software services was facile if the skills base was falling.
"Creating such services is not easy if people are seeing employment in IT in decline," Mr. Jester said. "I have already seen reports that enrolments in IT course in Australia is down. This is a direct reflection of the perceived lack of opportunities in the industry."
In his final attempt to prosecute his argument, Mr. Iyengar offered an historical perspective. "This is not the first time we have seen the outsourcing phenomenon," he declared. "Semiconductors moved from the U.S. to Asia in the 60s. Electronics made the journey from America to Japan in the 60s and 70s. Then we saw low-skill manufacturing going to China. Now, IT service jobs are moving to emerging economies such as India."
Asked which analyst had presented the best argument, delegates gave the decision to Mr. Iyengar.
Hats off to both of them for a great debate.
Mark Hollands
Gartner Staff
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