Total Cost of Offshore Outsourcing

We believe that Rural Sourcing is a cost-effective alternative to offshore outsourcing models, and for good reason. Rural sourcing providers establish offices in domestic rural locations to combine the value of a domestic provider with the advantage of lower-cost labor, loyalty and quality. Wage and cost of living are only a few of the components making up the total cost of outsourcing. Later in this article, we’ll dive deeper into the cost components that differentiate Domestic Rural Sourcing from offshore outsourcing.

Through research on outsourcing cost factors, we’ve found a few interesting resources we think you’ll enjoy. See references below.

CIO Magazine Article

CIO Magazine published a detailed article covering the Hidden Costs of Offshore Outsourcing. Published in 2003, the article still has much relevancy to today’s outsourcing world. We went through the article trying hard to debunk each scenario and cost factor. Unable to do so, we soon realized that there has been a lack of innovation in the offshore outsourcing market over the past 10 years. This lack of innovation is key in understanding the difference between domestic rural sourcing and offshore outsourcing. Domestic rural sourcing providers are cropping in small towns all across America. They are hungry and offering their customers more than cheap labor. The old way of outsourcing – focusing on cost optimization to the extent of all else – gives way to new creative opportunities to drive value from the market. We recommend you read the article from CIO Magazine to better understand nuances and background on cost factors other than wage.

ReshoreNow – Reshoring Initiative

Harry Moser of ReshoreNow.org, is leading a nationwide Reshoring Initiative. “The mission of the Reshoring Initiative is to bring good, well-paying manufacturing jobs back to the United States by assisting companies to more accurately assess their total cost of offshoring, and shift collective thinking from offshoring is cheaper to local reduces the total cost of ownership.”

Patrick Cummings, CEO of Opshore Technologies, met over several conference calls with Harry Moser. Patrick realized synergies between the Reshoring Initiative for Manufacturing jobs and the trends around domestic rural sourcing for IT & Software Application Development.

Many of the same problems existing in the IT & Software offshoring world overlap with that of the manufacturing world.
Patrick Cummings, Opshore Technologies

As part of the reshoring initiative, Harry Moser has launched a helpful tool called the “Total Cost of Ownership Estimator.” The TCO tool enables aggregation of all cost and risk factors into one cost for simpler, more objective decision making.

Let’s explore the benefits of domestic rural sourcing to help your organization evaluate options, better understand rural delivery and make the most appropriate sourcing decision for your business.

Summary of Benefits:

While offshore outsourcing providers offer a greater savings in terms of wage arbitrage, there are many other cost factors which may cause offshore outsourcing costs to exceed that of rural domestic sourcing providers. These cost factors should be considered regardless of whether your company utilizes domestic rural sourcing or offshore outsourcing.

Wage & Cost of Living – Rural Sourcing providers located in rural areas are able to pass on lower cost of wages, living costs and real estate in these locations to customers, providing a cost-effective alternative to offshore outsourcing models. Based on our experience for IT and Software Application Development roles, we find that rural sourcing centers can pass on %20 to 25% savings over development centers located in urban areas of the U.S.

Language, Business Culture & Time Zones – Domestic rural sourcing ensures that your outsourced work is done in complementary time zones, with staff that understands U.S. business culture and speaks American English, which can facilitate communications and minimize operational challenges. Misunderstandings over a 12 hour time zone can literally cost any given project a day slip.

High Collaboration for Complex Work – High-touch work, such as agile development, or complex systems integration requires a high degree of interaction with the business to deliver quality services. Having local resources enables rural sourcing providers to deliver faster and with higher quality.

Access to the Local Talent Pool – Rural sourcing providers have established excellent working models partnering with local colleges and universities to deliver highly skilled, loyal workers. This partnership provides many benefits such as talent scale for the provider, local economic boost, college graduate placement, and the building and retention of STEM knowledge in America.

Data Privacy Regulations – Some companies and government agencies that work with private customer information or classified data must keep all operations within the U.S. to comply with customer agreements, company regulations or data privacy and intellectual property laws.

Corporate Social Responsibility – Some U.S. based companies use rural sourcing providers because the want to create and support local job creation during challenging economic times, while other companies use local resources due to political pressure. As a result, many companies have policies that require them to use a certain percentage of local or domestic suppliers. Companies that want to show their investment in the local market can link their decision to move work to rural locations to an “Invest in American” marketing campaign, and well, we like this!

American WorkersRural sourcing is a growing trend in the U.S. because it offers tangible and intangible benefits around cost, compatibility (working in the same language, business culture and time zone), corporate social responsibility, data privacy regulations and geopolitical stability. In addition, travel costs for any on-site (at the client location) delivery are generally less than travelling from another country.

Now that we have a better understanding of the benefits to rural outsourcing, lets have a deeper look into the cost factors involved in outsourcing. Many of these cost factors only apply to offshore outsourcing due to unique conditions such as language, or extended travel.

Some of the cost components below will have a tangible cost impact, while other components may impact employee morale and productivity. Opshore will soon add these cost and risk factors to the Total Cost of Ownership Estimator so that CIO’s and management can leverage the tool to make better decisions around their outsourcing strategy.

Cost Component Cost Inputs
Wage Input Wage Offshore wages steadily increasing. When measuring, also review productivity – output.
Defect Density (rework) Input Defect Density Measure of defects by lines of code (Compare onshore with offshore) * cost to detect, fix, test, repackage, deploy
SLA Penalties Penalty / Credits Measure # of times SLA not met. SUM potential penalty risk. Credits typically measured by time missed, severity of issue, loss of service
Employee Turnover 3% Measure attrition rate by cost to process exiting employee, recruit, train, and ramp up replacement (Offshore as high as 35% attrition rates)
Ramp Up 2% Cost to ramp up resources (training, documentation, mentor, travel) maturity, ISO, QA test automation, Build automation, FOSS, Agile
Travel Input SUM International Travel is more expensive: Exec site selection, transition stage, operational meetings, ongoing project, training & ramp up
IP Loss Input SUM Lost revenue, costs of IP protection, damage to brand, decreased incentives to innovate because of potential theft
Management/Governance 2% Governance meetings, Project management, Program management, Travel
Communication (Systems + People) 3% Misunderstood requirements, Design Mistakes, Phone Systems
Infrastructure Input SUM Network, Data Center, Space
Transition 2.5% Infrastructure, Knowledge Ramp Up 2x cost (US employee training offshore, + offshore pay), Travel, 3 to 12 month time to transition
Resource Redundancy Input SUM HR, Project manager, Dev manager, Test manager, Pubs manager, Site manager
Disaster Recovery Input SUM Data Recovery, Network, Hardware, Bandwidth if streaming backups
(QoS) Network Latency & Outages Input SUM Loss of work time, customer outage causing calls / escalation, loss of service, availability, performance, uptime SLA risk + penalties
HR Change Management Input SUM Recruiting, change management costs
Offshore Vendor Selection 2% Documenting requirements, sending RFPs, evaluating responses, negotiating contract, project leader cost, legal fees
Layoff Costs 3% Severance, retention bonus, low morale, work slowdown
Offshore Contract Management 7% Invoicing, auditing, ensuring cost centers are charged correctly,  ensure time is properly recorded, project management cost
VISA Issues Input Sum VISA costs associated with L1 B Processing +, VISA rejection causes delay on Project & Training, Immigration reform – unknown outcome

 

Cost Component Cost Inputs
Public Image Consumers attracted to Made In America
Customer Experience Issues Language Barriers, Documentation Inaccuracies, Cultural Issues
Misunderstood Requirements Language barrier, Culture, Lack of governance cause requirement issues, extra cost in redesign, missed market
Communication Issues (Language Barriers) Can cause design issues, missed requirements, missed market timing, frustration on calls
Cultural Issues Cultural issues can be handled by good management. Some teams lack governance causing frustration
Data Privacy Issues Companies requiring data privacy may have issue with hosting or enabling access to offshore
Excessive Escalations Based on trends, code & infrastructure managed by offshore causes more escalations, outages, defects, instability
Lack of Innovation Offshore not incented to innovate. Task oriented (no pushback, or forward thinking to make a better product)
Time Zone Issues Late night & early morning calls cause U.S. team to burn the candle at both ends, morale hit, burnout, flight risk
Missed Time to market Misunderstood requirements, low quality cause major delays & missed GA dates, possible missed market timing
Productivity Volume is higher, quality is low causing rework, missed requirements, missed GA dates, missed market timing
Low Morale Some U.S. based workers do not want to train replacement, fear layoffs, search for incompetency of offshore
Retention Program (Top Performers) Top performers become frustrated with lack of skill & knowledge engaging offshore, become a flight risk
NSA (National Security Agency) Costs NSA regulations around customer privacy, worker travel, approval process
C Team Resources Offshore centers providing “C” team experience, talent, skills. Makes ramping up difficult and slow
Missed Expectations on Savings Market Impact, Financial Obligations not met
Long Calls / Work Hours Long calls explaining technology & process, after hours, weekends, holidays > burnout for U.S employees