How To Eliminate the Five Hidden
Costs of Offshore Outsourcing
By Sieena
We are now in the third wave of offshore
outsourcing.
The first wave began in the 90’s and was
personified by heady exuberance from
the supposed massive cost savings that
firms could achieve by outsourcing part
or all of certain operations to offshore
vendors. Towards the turn of the
century, success stories were abound of
Fortune 100s who trimmed the bottom
line while building massive operational
centers in countries led by India. Some
pointed to potential cost savings of up to
80 percent.
The second wave began as a ripple of
discontent, not only from companies,
but by customers as well. Firms began to
find the actual cost of offshoring to be
quite a bit higher once “hidden” costs
were factored in. Customers began
complaining of declining service
standards and quality issues.
Disenchantment led many to re-examine
the gospel of offshoring. Those who had
experienced offshoring shared stories
ranging from midnight conference calls,
undecipherable customer service
representatives, and repeatedly missed
milestones without warning.
The third wave of outsourcing has
begun, spurred on by companies no
longer willing to accept the pains of
traditional offshoring but still seeking
cost competitiveness versus their
competitors. For many, “nearshore”
outsourcing has emerged as a viable
alternative. Initial reports are positive,
and many have begun to take a closer
look at the nearshore phenomena with
the pains of offshoring still fresh in their
minds.
This paper looks to address how
nearshore outsourcing can mitigate and
eliminate five common hidden costs that
offshore outsourcing typically incur,
many of which were documented in a
recent CIO magazine article. While
nearshore may imply Canada, our focus
will be on Mexico primarily due to the
parity of the Canadian dollar versus the
US dollar.
The Cost of Selecting a Vendor
The main premise in “Selling the
Invisible” by Harry Beckwith is that
service companies face a challenge
unique to them. Unlike companies that
produce actual goods, it is difficult for
prospects to evaluate the quality of a
service firm due to the ephemeral nature
of a service. Likewise, outsourcing
companies face a large hurdle to
convince prospects that their
deliverables are of top quality and their
service is impeccable. This is the main
reason why studies have shown that the
cost of selecting an offshore outsourcing
vendor can range anywhere from 1 to 10
percent.
The larger the project, the greater the
time and money spent on vendor
selection. But the key advantage for
nearshore outsourcing outfits is their
proximity to the United States. This
alone significantly reduces travel costs
for teams of personnel sent to meet with
the nearshore firm face to face. In fact,
key technological epicenters in Mexico
such as Monterrey are a short distance
from most major US cities, making day
trips completely possible. Contrast that
to the 14 or 20 hour marathon flights
from the US to India, not to mention the
severe jet lag and time differences.
Beyond the hard savings of travel costs,
there is something reassuring in working
with a firm located on the same
continent. The barrier of a vast Pacific
Ocean creates a psychological wall that
makes the selection process of an Indian
offshore outsourcer a more meticulous
one. Thus, the greater the time spent,
the higher the costs climb. Finding a
nearshore partner with strong
references and examples of work can
significantly reduce the time to select.
The Cost of Transition
With a vendor chosen, the real fun
begins. Companies then need to begin a
smooth transition process, not only in
staffing and training personnel, but
infrastructure as well.
Most agree that the quickest way to
ensure that new employees or
contractors are brought up to speed is to
bring them Stateside for training. The
more proprietary and complex the
project or application, the greater the
number and the longer the stay. Again,
close proximity of Mexico versus India
keeps costs low during this phase.
Going with a nearshore firm in Mexico
also does away with the need to lay
expensive infrastructure such as
networking a US location with an Indian
location via transoceanic data lines,
which could take months and cost in the
six figures, not to mention monthly
maintenance costs.
The Cost of Layoffs
One of the biggest mistakes a company
can make is looking to make wholesale
replacements of existing employees with
new outsourced people. This is typically
done when executives are blinded by the
false promises of offshore outsourcing
without fully understanding the total
costs. Instead, look to outsourcing to
compliment existing project teams or for
participation in future initiatives.
Blended teams, if managed correctly,
and indeed add talented staff at a lower
cost.
There are many costs associated with
laying off existing employees, both
financial and psychological; both should
not be underestimated. Terminating
employees incurs severance payouts,
accrued vacation payouts, potential legal
action defense and lost productivity
during the transition. The psychological
impact on the morale of remaining
workers can include fear of future layoffs
leading to an unwillingness to take risks,
pent up resentment towards
management and ‘survivor’s guilt’.
The Cultural Cost
Recent experience has shown the
differences in culture between India and
the U.S. to a major sap on development
efficiency, with some numbers reaching
20 percent according to a Meta Group
study.

Indian workers traditionally look to avoid
what they see as conflict, and instead
agree to everything even if a goal is not
achieveable. Thus, many a project team
has been puzzled as to why milestones
are continually being missed even
though the offshore team is reassuring
that everything is fine. Nearshore
workers in Mexico are much closer to
their American neighbors in terms of
communication.
Another sap on productivity is the high
churn rate at offshore firms. Look for a
nearshore outfit that has a strong
leadership team and a consistent core
membership with stable lengths of
employment.
Finally, communication issues have led
to frequent travelling for face to face
interaction. With nearshore firms, trips
can be planned in short order and
completed quickly and cost-effectively.
Close proximity allows for greater in-
person collaboration between the U.S.
and Mexican nearshore team.
The Cost of Ramping Up
There are two scenarios where ramping
up outsourcing efforts can run into
issues. The first is if your own company
does not have procedures and processes
in place for writing application specs,
requirement docs and manage the
development process. The second is if
the outsourcer does not have these
same processes and procedures.
Look for a nearshore team that can
clearly explain a proven software
development process and methodology
to minimize, mitigate and manage
project risk. Having such a process is a
key element to ensure the successful
delivery of projects on schedule. The
process should incorporate elements
such as discovery, planning,
development, stabilization and
deployment. Ask for examples of actual
projects where their process facilitated a
successful outcome.
Summary
Careful planning, proper expectations
and open communication can make
outsourcing a success. The risks involved
in outsourcing operations or application
development to India can be largely, if
not completely, migitated by choosing a
nearshore outsourcing partner such as in
Mexico. Look for more companies to
turn to nearshore as their method of
choice in seeking to keep costs low.
About Sieena
Sieena was founded by Mauricio Duran
and Fernando Gutierrez with the goal to
deliver high quality IT consulting services
to US organizations. Since its inception
Sieena has established a culture of hard
work and strong commitment to its
clients.
Sieena’s successful results allowed the
company to grow rapidly and the strong
relationship between Sieena and its
clients provided the foundation to offer
a wider variety of services, including:
Content Management Systems,
Collaboration Portals, Systems
Integration and Product Development.
Visit www.Sieena.com to learn more.