Keen to save 15% on software development costs in a large project, many companies jump at the opportunity of the offshore option, according to Powerlan managing director Tomislav Matic. However, those savings, he said, are soon spent on simply managing a long-distance contract.
As the MD of a company that is made up of six software development and services businesses, Matic is on the frontline of the outsourcing debate but his view has an interesting twist.
Powerlan is one of the few successful Australian software development companies whose customer base is predominantly made up of overseas clients including one or two from India.
"We have Indian customers paying us thousands of dollars a day and that is because Australian software engineers are better skilled," Matic says. "What Australian developers can do in an hour would take an entire day in India."
Matic believes the cost of software development shouldn't be more than 30% of the total project cost.
"You might save 15% on cheaper offshore rates but you will spend those savings managing a remote contract; companies like Telstra will learn the hard way."
Matic says it is easy to underestimate the amount of effort, energy and resources required to effectively manage the relationship. This is especially true, he says, for companies that have hired multiple outsourcing vendors for different functions.
Abdicate management to the service provider and expect to pay the consequences, he says.
One option is to establish an in-house team to manage the contract.
For example, Nielsen Media Research, which in 1995 began outsourcing select application development work to Cognizant Technology Solutions, an outsourcer in India, created an in-house employee "anchor team" responsible for project control and quality assurance. Such initiatives can certainly erode any offshore labour-cost savings, Matic says.
"If a large project can be broken up into components and you pay on delivery this can work," he says, "but only as long as the pieces aren't interconnected, because if they are, you need control and visibility."
When contractors are located offshore, Matic says organisations incur extensive travel expenses for visits to evaluate services or to visit the contractor's site for weeks at a time.
Moreover, organisations that are replacing employees with outsourced staffs through layoffs or attrition could face human resources costs for severance pay and employee benefits.