The Real cost of Offshoring
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The Real cost of Offshoring

Do you think Offshoring is always cheaper?

Offshoring seems to be a “Huge Idea”, after all you pay much less than if directly hiring or nearshoring, right?

Well, … not so fast!

A typical case of potential Offshoring is India, where in the past one could find highly skillful resources bearing a very low price tag. That lead to growing demand which (according to market laws) implied rates started to rise. In fact, over the last decade, the labor cost in India has been rising at an average of 15% per year.

If instead of being in the Services area, we consider companies that Offshore the production of goods to those geographies, there is also the associated logistic costs that are much lower when Nearshoring.

Maybe the most intuitive way to look at the potential cons and risks is to lay them in a listing format, so, in no particular order we have:

  • Culture – Mankind’s cultural diversity is what makes us so rich and interesting, now when speaking of Business, this may prove to be a huge advantage just as easily as it can represent a great risk. Coming back to India and the IT context, developers tend to take on a “hands-on” approach, jumping into code development without planning, methodology or integration testing, which means that afterward there is an additional effort concerning the code integration and deployment that can be mitigated if done either locally or Nearshoring. VA’s in the Philippines will not point out any faults in your process unless you strongly stress them to pursue such attitude, because their culture teaches them from an early age that it is rude to contradict your boss. In both herein referred cases the risk potential is to foster mistakes and be spending money in non-effective processes, with no constructive feedback or operational improvement.
  • Overhead – If you Offshore it is a very good idea to invest in someone close to you that acts as the “Project Manager”, someone who checks progress and steers the project evolution, promptly acting upon errors or required changes, while promoting awareness where relevant; and, such profile needs to be an expert profile if you want to make sure things move forward with minimum disruption. As a matter of fact, you can try and do this role yourself, but in such case, often that means even higher costs, for your role, is not to a Project Manager but one of a Business Manager and every hour that you spend managing project tasks is one hour not invested in growing your Business.
  • Communication – Besides the ongoing communication, that must be assured by the Project Manager, Offshoring implies a needed additional effort to promote crystal clear requirements to someone working remotely with whom one may only speak in some limited time windows. So, you need to invest extra time preparing well-planned communication support materials like Video tutorials or other with specific care and attention to potential “lost in translation” issues, and that means extra costs.
  • Project Delays – The “follow the sun approach” while Offshoring, meaning to have resources performing tasks during your night time, so that on following day’s early morning time you have results to show, may prove to be a priceless competitive edge before the competition. Nevertheless, the opposite may also be the truth; if the work developed overnight is not well done or compliant, by the time you need someone to act in order to correct it, that person will be sleeping so you need to wait one work day to get back to them. Have you ever come across a situation where the client is not happy with a given deliverable and demands you to fix it within a couple of hours? What then?

 

Offshoring

 

  • Client Satisfaction and “bad mojo” – Having an unsatisfied customer can cost you dearly. Besides having to incur additional costs to accomplish what is not working properly or having to pay compensation to your client driven from any potential impact on its Core Business, having someone spraying the marketplace with negative feedback about you may prove to be fatal. Almost like Voodoo, your start seeing clients vanishing despite your best efforts while not being able to understand what is happening.
  • The Vanishing Freelancer Syndrome – Outsourcing from cheap geographies, where prices are very low (when compared to nearshoring or on-site options), bears the additional risk of having such resources easily attracted to other work opportunities that pay off better and in some cases, the freelancer just vanishes leaving you empty handed.
  • The redundancy approach – Some companies mitigate the risk of errors, noncompliance and vanishing freelancers with the redundant workforce. Basically, you hire the same task to two or three freelancers, hence raising the successful outcome potential. Obviously, such approach also means higher costs by having to pay double or more, plus having to invest more in coaching and steering effort.
  • Security – Some Offshoring options represent a real security risk that derive either from the freelancer’s “easy attitude” (it can be as simple as Antivirus represents a cost that is simply unbearable) or even from country policy and attitude (some countries do not take cyber security under tight regulations which allow Internet Service Providers to be more relaxed about it towards the domestic market which is exactly where your freelancer fits in). Some freelancer also uses their workstation for family or leisure purpose, allowing the kids to play games or access the internet via those assets while not assuring proper backups.
  • Utilities cost – Some countries are highly dependent on foreign supply concerning energy or other utilities which may pose a risk for work continuity and cost. Just to give one clear example let’s look at Argentina; the country is so dependent on external electrical energy supply that during the course of a year it is common to have power blackouts to residential areas that can last up to two days. Needless to say, that this would render any project ineffective. Additionally, and still concerning Argentina, the inflation rate over the last 5 years has been of around 200% per year, so if you hire someone for a project that takes 3 to 6 months, it may happen that just concerning electricity and Telecom costs the freelancer will be losing money working for you at the agreed rate just after a couple of months into the project.
  • Force Majeure – In Business lexicon, Force Majeure relates with events or incidents that may happen unexpectedly and cannot be prevented by means of human preemptive action. To give you an example, some geographies (like the Philippines) are highly exposed to natural violent phenomena such a hurricanes or typhoons not having redundant infrastructures that can account for mitigating the impact of such events. Under such circumstances, you may lose contact with your freelancer for weeks until he/she is able to “be on-line”.

Now, I am really not vouching for a ban on any and all Offshoring activities whatsoever! Far from it. I do still believe that Offshoring is highly beneficial for Business, but it is relevant to have in mind what is herein mentioned since it represents potential risk and when facing risks the right course of action is not to move away, but to plan for contingency and properly evaluate if the risk is worthwhile taking.

Faith favors the prepared mind.

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