Levers for Managing Offshore Outsourcing Costs

The success of offshore outsourcing has made for a hot Indian IT labour market, and that means costs for offshore resources are rising. Salaries in India for IT personnel, according to a senior executive at one of the major offshore firms, have risen 15% this past year, with recent college graduates seeing the largest increase at 20%. The good news is that attrition rates have fallen from 2004 and the higher paid workforce has stabilized.

The Bottom Line: Despite salary increases in India, you can work with your offshore service provider to keep your costs from increasing.

What It Means: Users of offshore services have certain levers they can use to manage their costs despite the salary increases, such as the following:

· Modify the ratio of onsite to offshore resources. Most companies outsourcing application development or maintenance work end up with a ratio of approximately 30% onsite resources to 70% offshore resources. By pushing more the work offshore, you can increase savings. Doing so may require you to reexamine your processes to minimize the amount of work that must be performed locally.

· Negotiate a longer term contract that specifies a fixed number of resources. Longer term contracts insulate you from upcoming cost increases (but may require you to pay more than last year's contract). Longer term contracts also allow the service provider to better manage their employee utilization rates, which reduces their costs. Use improved employee utilization as a justification for better rates.

· Increase the level of automation. Rather than just throw low-cost resources at a problem, work with the service provider to invest in or develop tools that can automate a process and replace labour. There may be an up-front investment required for the tools, but the longer term savings should more than compensate. Most Indian service providers have internal groups focused on tools development-find out what they are doing.

· Increase the process rigor within your organization. Use your service provider's process expertise for application development and IT operations in order to reduce the amount of rework generated by poorly communicated requirements.

Conclusion: Cost savings are not the only reason to engage in offshore outsourcing, but they are an important reason. Despite recent salary increases, offshore outsourcing in India remains a low-cost alternative to in-house staff or onsite contractors. But by working with your service provider on process improvements and automation, you can not only absorb salary increases, but improve the overall quality of the work received from India. ( reprint of the publication in AMR Research by Lance Travis)

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