Like a lot of companies, Intentia International, a $430 million business-software maker with operations in Stockholm and Palo Alto, Calif., was looking for ways to cut costs. So two years ago, it farmed out a software-programming project to a small outfit in India, expecting to cut expenses by 40%. But the savings never materialized. The main reason: The code the Indians delivered was riddled with errors. Intentia's own engineers had to re-do it from scratch. "Indian companies are very aggressive," says Linus Parker, president of U.S. subsidiary Intentia America Inc. However, leaders of this Indian company, which he would not name, "overstated their technical skills."
These days, it's all the rage among corporations to shift a wide array of computer-programming and customer-service operations to low-cost countries. They expect to cut their labor costs 25% to 75% by using workers in India, China, and the Philippines. But as Intentia's experience shows, these shifts overseas carry risks that need to be considered along with the potential rewards. Shoddy quality, security snafus, and poor customer service often wipe out any benefits.
Until recently, the downside of "offshoring" wasn't clear. But recently published studies by Forrester Research Inc. (FORR) and Gartner Inc. (IT) suggest that the practice shouldn't be undertaken lightly. Gartner says that based on a survey of 219 clients who outsource projects offshore and domestically, it expects half of such projects undertaken in 2003 to fail to deliver anticipated savings. The main cause of problems, according to analysts, is poor project management by the companies shipping work overseas. "It's all about how you monitor," says Dale L. Fuller, CEO of Borland Software Corp. (BORL) in Scotts Valley, Calif.
There are still plenty of good reasons to shift some tasks offshore. In addition to low labor costs, companies can tap into a skilled workforce that in many cases is just as effective if not more so than in-house staff. Indian programming, for instance, is fast reaching U.S. levels. A June, 2003, survey of 104 software projects by the Center for eBusiness at Massachusetts Institute of Technology found that the median Indian project had just 10% more bugs than comparable U.S. projects. So it's not a matter of whether to send work offshore but rather under what circumstances and how to minimize risks.
CHOOSE CAREFULLY. Figuring out what tasks to move overseas is a critical first step. Jobs that involve repetition and are predictable work best. Any job that requires strong English-language skills, deep knowledge of U.S. accounting rules or law, or think-on-your-feet decision-making, probably won't fly. Nemo Azamian, senior vice-president for customer service at Gateway Inc. (GTW), says Gateway does not send business customers to its Indian call center because they require a more nuanced level of communication than many offshore companies may be able to provide. "No matter how hard you try to Americanize a non-American, it's just not the same as talking to someone in Salt Lake City," he says.
Once you've decided to send work offshore, picking a reliable partner is the next key step. Most analysts say the largest providers, such as India's Infosys Technologies Ltd. (INFY), generally do quality work. But smaller companies that have jumped into the business recently may be riskier. Sunil Mehta, vice-president of NASSCOM, the leading Indian technology trade group, concedes there are differences in the quality of Indian tech shops. "You have to do due diligence on the vendor," he says. That means checking the company's customer references, financial health, and software-certification levels.
Companies that have done extensive offshoring say it's best to start with a small project. That cautious approach saved Brookfield (Conn.) Web-hosting company Web.com when it ran into trouble after farming out some of its customer service to 24/7 Customer, based in Bangalore, India. Hundreds of customers began leaving, complaining that service reps didn't understand the technology. It could have been worse. Web.com had handed over only night and weekend service calls. When Web.com pulled the plug last summer, it took just eight weeks to hire and train U.S. staff. 24/7 Customer blames Web.com for the problems. "It's a very small company," says CEO P.V. Kannan. "They did not have well-defined processes."
Security is also a thorny issue. It's simply harder to safeguard projects handled by other companies thousands of miles away. One reason is differing legal systems and values. India, for instance, has the world's 16th-highest piracy rate. Outright theft can also be a problem. Last year, after SolidWorks Corp., a software maker in Concord, Mass., outsourced programming to India-based Geometric Software Solutions Co., a Geometric employee allegedly stole SolidWorks' intellectual property and tried to sell it to the company's rivals. The FBI helped Indian authorities make an arrest, and the programmer is awaiting trial.
Despite the theft, SolidWorks continues to send work offshore. It even stuck with Geometric, which beefed up security and says it wants to make amends. "The efficiencies are so compelling that we're not willing to give [offshoring] up," says SolidWorks counsel Holly Stratford. For SolidWorks and other American companies under pressure to cut costs, the trick is learning to manage the shift overseas closely. If they don't, they'd better brace themselves for some nasty -- and costly -- surprises. By Spencer E. Ante