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Monday, July 03, 2006

Tactics For Managing Offshore Costs While Deriving Enhanced Value

I wrote an op-ed piece for sandhill.com on the tactics for managing offshore costs.As it could be seen, with all of the excitement about the benefits of offshoring software development hitting the news over the past few years, everyone knew the "hype" pendulum would no doubt begin to swing in the opposite direction. And it has. There is mounting evidence that the bloom is off the offshoring rose, so to speak. Yet despite the challenges, offshoring remains a compelling option for many software companies. The vast majority of vendors continues to offshore and realizes significant competitive advantages for their companies. As their sophistication and experience with offshoring increases, many offshorers are seeking out new ways to control costs while retaining business value. The fact of the matter is that "lowering costs" is only one of many reasons why enterprises offshore work. Many experts say the key to deciding between outsourcing and in-sourcing is the overall differentiated value that outsourcing can bring. This takes into account the maturity levels of internal competencies - not for just today's needs but for maintaining a certain degree of edge in this dimension for the near future. That's one reason why offshoring studies find that even dissatisfied offshorers are as likely to continue offshoring in the near future as satisfied ones. When large enterprises leverage the global delivery model, the range of their offshore utilization increases. As this happens, the focus typically moves beyond back-room functions into more strategic areas of the business. In this way, the standard bidding process becomes a less preferred model for offshore vendor selection. Instead, more companies are realizing that their best partner is the one that offers them the greatest value - not necessarily the lowest cost.

The growth of offshore outsourcing has made for a hot Indian IT labor market - one of the main reasons costs for offshore resources are rising. The average salary increase is in the range of 15 percent per year. The reality is that there are multiple ways for customers of offshore service providers to better manage their cost equations:

- Have a Clear Plan
- Increase Contract Length
- Continually Re-evaluate On-Offshore Ratio
- Continually Optimize the "Basics"
- Employ a Shared Risks Model
- Monitor Management Needs
- Leverage Vendor Tools & Reporting
- Employ a Shared Risks Model
- Invest in Sourcing Advisory Firms
- Adopt an Integrated Approach to Cost Management

Having said that,like in any other business, such strategies need to be dynamically re-evaluated as the business needs, strategies, models and execution methods keep changing. Clearly for the foreseeable future, despite the higher salaries experienced in India and other offshore markets, customers can continue to work with their chosen offshore service provider to maintain the cost advantage besides reaping a set of other known higher-order benefits in offshore outsourcing opportunities. Read the full article here.

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