Outsourcing can be false economy

Two reports have suggested that outsourcing call centres and other business functions to overseas locations is a false economy.

A report in US-based CIO magazine claims that the business press has been regurgitating claims from offshore vendors that IT work costing $100 an hour in the United States can be done for $20 an hour in Bangalore or Beijing. It says "If those figures sound too good to be true, that's because they are."

Meanwhile in the UK, research from Cambridge-based e-service software company, Transversal, claims that up to half of what it estimates to be £7 billion spent outsourcing call centre functions could be wasted.

CIO magazine

The article 'The True Costs of Offshore Outsourcing' in the US's CIO magazine examines what it calls 'TCO' - the total cost of offshoring. It identifies the hidden costs of outsourcing including areas where more investment has to be made 'up front' than originally considered, places where productivity and poor processes can eat away at potential savings, and spots where, it believes, costs are no different than in the USA.

It concluded that: "Bargain-basement labour rates tell only a fraction of the story about offshore outsourcing costs. The truth is, no one saves 80 percent shipping IT work to India or any other country.

"Few can even say they save half that. What many execs leading the charge offshore fail to appreciate is that it takes years of effort and a huge up-front investment to arrive at even a modest level of savings. Vendor selection and initial travel costs add one percent to 10 percent to the real cost of a deal.

"It takes three months to a full year to hand the work over completely to an offshore partner and set up necessary network infrastructure, adding another two percent to three percent to total cost. Then there are costs from transition-related productivity slumps, on average, application development efficiency declines 20 percent during the first two years of a contract. Once the work is transitioned, the costs of ongoing management contribute another six percent to 10 percent above the contract cost."

Transversal

The Transversal study was based on cost-benefit research with blue-chip organisations such as Sony Computer Entertainment Europe, Fujifilm and Direct Line, and claimed that often as much as 80 per cent of inbound customer contact could be automated at less cost and disruption than outsourcing overseas with no negative impact on service.

It claimed that the average cost of a call handled in India is £1.30, compared with less than 30 pence via web self-service.