Hidden Costs of Offshoring

The media is full of reports of tech companies going offshore for their software development and support capabilities. While this is a real phenomenon that is happening, and the dollar cost savings can be compelling, there are several downsides that don't seem to be brought up very often. These can have a tremendously detrimental impact on a company's products and brands, and without careful consideration can lead to shortsighted decisions that ultimately take down a company.

Here are a few of the considerations:

1.) You may stifle and inhibit your product efforts

Truly great products are created by innovative engineering teams that work very closely with Product Managers and other groups in a company. As a Product Management professional I've worked with some great teams that have delivered some incredible products. Products like these aren't something you can simply write a spec for, deliver it to engineers overseas, and get something exceptional back. Sure, for simple and VERY straightforward coding work you can farm it out. But if you want to create truly breakthrough products you need a team that has great ideas AND that works closely with your Product Management folks to ensure customer needs are being met. The best situation is where you get a team that looks at the MRD (Market Requirements Document) and figures out a way to deliver far more than what it calls for in a way that Product Management could never have thought up.

2.) Your brand and customer relationships may suffer

The cost of losing a customer and ruining your brand as a result of offshoring can be very high. Consider this example. My wife Sarah (VP of Sales for the 280 Group) recently had a software problem and contacted technical support for a well-known brand name product. She ended up exchanging email five or six times with them. After the second message it became painfully obvious that the person on the other end didn't speak English very well, and that they had little chance of even understanding the problem let alone solving it.

Now if this was an isolated incident it would be one thing, but this company gave me the exact same lack of service when I had a different problem. Sure, they saved a lot by having the support handled by someone in India. But now that they've lost us as customers, the question is, how much are they going to have to spend to attempt to win us back?

Smart companies are realizing this - that's why Dell pulled their India tech support efforts recently. The long-term value of a customer is FAR higher than any short-term savings they can realize by having someone less-expensive answering support questions.

3.) Managing offshore development can take a huge toll.

A friend of mine recently returned from a trip India where he is managing an engineering team and was investigating finding new facilities. He goes there about once a quarter. During this trip he got violently ill, and suffered the usual jet lag and loss of personal time when travelling. Upon returning he informed his boss of the progress, and was told that he needed to return again in 2 weeks to finalize the deal on the office space and make sure the team was on track.

The cost of this? Well, I can tell you that if he gets the chance to work for a different company where he doesn't have to travel he'll be the first to jump ship.

Incidentally, he mentioned that they are having problems with attrition of staff in their India office, and that office space is no longer as cheap and widely available as before. While it had been easy and cheap to offshore two years ago, it had become more complicated and time-consuming recently.

4.) Lack of accountability

I'm working with a team that is remote right now for a client. Every day we have a team meeting conference call and people call in from multiple sites. Though good in theory, we end up having to repeat many things that are said because the phone lines are questionable. Additionally many people skip the meeting, or delay us because they don't have the project files to look at when we put them up on the projector. I also suspect that a good part of the team is doing work (or other things) on their computer while on the phone, since when they are asked a question it is clear they haven't been listening.

There is something to be said for making your team show up in person, look you in the eye when you are having a difficult discussion about schedules and features, and not be able to hide their facial expressions behind a phone line. True accountability makes for great product teams.

THE BOTTOM LINE

One has to wonder, when the laws of supply and demand begin to catch up with the situation, and the hidden costs of offshoring begin to become more apparent, will companies come to regret their cost-conscious post-bubble offshoring choices?