Software and web development and web design consulting services company in Dallas, TX.

Businesses spend billions of dollars on IT outsourcing for obvious reasons:

• Lower the cost of IT development and maintenance;
• Free up internal IT stuff for more high-level work;
• Raise the skill level of internal IT staff thru the transfer of knowledge from outsourcing providers;
• Free up in-house staff from IT services and focus on the core business competencies.

According to analyst firm Aberdeen Group, reducing IT costs remains the main driver behind outsourcing for 82% of companies in the US that engage vendors in developing countries.

But how much do you really save when you outsource?

Surprisingly, companies report only a 26% average cost savings on outsourced projects, with nearly half of outsourcing projects failing outright, or failing to meet expectations.

According to Aberdeen:

• 76% of companies said that vendor management effort and costs were much higher than expected
• 30% reported ongoing issues with outsourcer management processes (e.g., inadequate governance and conflict resolution procedures)
• 51% reported that outsourcer was not performing to expectations

What are the main barriers that reduce success of outsourcing down to such numbers?

A lot of companies fail to recognize that $25/hour in India versus $100/hour in the US for IT development work doesn’t simply translate into a linear 75% cost reduction for the overall project. Since a successful project goes beyond writing code that compiles, it has to include a set of other important factors and processes that have to be managed, at least partially, in the US:

• Thorough understanding of your business, your competitors' strategies and your industry in general.
• Proper communication of your business goals. Is it speedy and cost-effective time-to-market and adding more functionality later? Or is it building a full-functioning product from the start? What functions are less relevant and could be sacrificed now in order to get the best value for your dollar?
• Properly set Service Level Agreements that clearly define expectations and responsibilities
• Detailed Discovery phase and proper documentation throughout the project
• High commitment on the home front to keep the strategy and processes on track

• Overall look and feel of the application fails to meet the industry standards or is unintuitive
• Certain requirements were simply assumed as common sense, but weren’t spelled out and therefore weren't delivered
• Screen flows and process flows are not as smooth as expected, and at times just plain awkward
• Items that should be easily editable are hard-coded instead and require significant effort to modify
• The application "works" overall, but is buggy. Some of the "bugs" are due to miscommunication.

As a result, the client company would attempt to revive the project by pumping in more money and dedicating a higher management effort. This becomes a problem since making changes to the "existing application" is not the same as designing a good system from the start. The original architecture may not withstand the new changes, and some of the existing functionality gets broken in the process.

At this point the original developer may have already moved on to the next project, or to the next development firm.

A few months later the client company is ready to turn over the code to a local consulting company in the US.

So what is the cost of an outsourcing failure?

Lets say, the original bid was 400 development hours at a cost of $25/hour ($10K total).

The actual cost of the failure might be as follows:

• $10K initial offshore development
• $10K additional offshore development
• Project management performed by Company A at Discovery phase of the project (say, a typical 20% of the development hours): 400 dev hours * 20% * $75/hour = $6K
• Project management performed by Company A at "Recovery" phase of the project:
  (another 20% of the development hours): 400 dev hours * 20% * $75/hour = $6K
• Bill received from the local IT consulting company for auditing the code: $2K

This doesn't mean that every outsourced IT development project has to turn into a nightmare. But for an outsourced project to be successful, domestic client company needs to engage a strong local management resource to oversee and actively participate in the project.

Strong local control of the process is absolutely crucial:

• A local resource is more likely to understand your industry and your business goals, plan for changes in the future, act as a consultant and recommend the best solution for your dollar.
• A human that lives in the same culture is likely to experience the same pressures as you and distinguish between the important objectives and the less urgent ones. The dollars get spent where it really matters.
• A local resource is more likely to feel accountable for the outcome of the project and be interested in building a strong long-term business relationship with you versus making a quick and easy profit and then disappearing and moving on to another client when working relationship with you gets bumpy. This is especially true if you are a small company.
• And then there is the "look and feel", something you may not be able to explain intelligently, but you know it when it doesn't feel quite right. It may be an awkward wording of the "thank you" message that your system sends out to your customers, or perhaps the overall feel of your application is dry "cutting edge, yet trustworthy".

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Also: join the discussion on outsourced development on our blog at http://elkore-blog.blogspot.com.