Project Management - Calculate Risk

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Date Submitted: 05/27/2010 02:25 PM

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Calculated Risk

As corporate interest in the cost savings and benefits grows, CIOs prepare to manage the risks and pitfalls of offshore outsourcing.

Several years ago, a CIO from a large financial-services institution began outsourcing a hefty portion of his legacy-programming resources to an overseas provider. And with expected savings of 40% to 50%, who could blame him? But strangely, this early adopter's savings never fully materialized. After replacing his onshore programmers with an offshore staff, he had to hire managers to maintain the engagement, adding costs. Then the CIO realized he'd need a larger percentage of onshore programmers than originally projected, further reducing his expected savings. In fact, after he accounted for the turnover from the offshore teams, his anticipated windfall of 40% to 50% had shrunk to less than 20% in all.

This CIO is in good company. Corporate interest in offshore outsourcing is huge, as the size of the market attests. But the reality doesn't always live up to the hype. Many companies that have embraced the practice haven't realized the promised savings; they're now wondering if and when they'll see the real value from their offshore investments.

For some companies, offshore outsourcing's initial appeal lies purely in the numbers. Success is measured by the ability to reduce costs as much as possible. It's not hard to see that by paying $20-plus per hour in India versus $80-plus in the United States a company's savings can be at least $60 per hour for every position outsourced. That math can be misleading, however. Instead of the 80% cost savings that those hourly rates suggest, companies are reporting far lower numbers. According to a recent AMR Research report, companies using offshore resources for development projects can see no savings at all or up to 50% savings. The majority report savings in the neighborhood of 25% to 30%.

What happened to the rest of the anticipated savings? As many CIOs are...