Why Corporate IT is Broken - Outsourcing and the Myth that it is Cheaper

The "Why Corporate IT is Broken" series is a collection of blog articles originally intended for a low-cost eBook. It may go ahead one day!

"It costs $800 per day for an onshore staff member but I can outsource an offshore person for $400 so it's cheaper, right?"

In my experience, and the experience of many others, this is rarely true. The "unit cost" may be less, but the number of units needs to be considered, along with the efficiency (the output per unit) you are able to achieve.

A hand holding burning cash

First, the number of units. I was contacted by someone once to rebuild 4 Excel-based calculators into web pages. I built and tested the 4 calculators in about 7 business days and it was in production in 2 weeks. Due to regulations in the organisation, it had to be "rebuilt" by an approved offshore vendor. I found out later from a project manager that the bill came to about $250k and took around 6 months to complete. The exact same output in the end, and a lower cost per day, but a lot more days!

Next, what I call the unit multiplier, which is the number of people you are paying for. Some outsourcing companies have strict role segregations. Where a staff member may be happy to elicit requirements, design, build, and test an application, some companies insist that in the same scenario you have a business analyst, an architect, a developer, a tester, and a project manager. These roles will have different unit costs (for example, a business analyst may be $300 per day while a project manager may be $700 per day), and you need to pay for all of them, usually for the whole length of the project. So even if an internal staff member costs $1000 per day, once you add the separate outsourced staff members, the cost per day becomes higher.

Finally, let's discuss the efficiency. This isn't about trivial metrics like lines of code per day, but rather the overall productivity and coordination challenges. If an Australian company outsources to a company in India, the offshore workers won't start until around 2:30pm, so if the Australian workers finish work at 5pm, you only have 2.5 hours per day of overlap for meetings, and answering questions. When the offshore person needs a question answered at 6pm AEST, they will then be limited in their output for the rest of their working day (perhaps until 11pm AEST). When the Australian worker responds the next morning at 9am, the offshore worker doesn't see the answer until they start work again at 2:30pm, and so the cycle continues. It's an inefficient way of working having people in vastly different time-zones as interactions to solve problems are spread out across 2 or 3 days that otherwise may have been solved in 1 day if everyone was working at a similar time.

There may be isolated instances where offshore outsourcing makes sense, however the blanket statement that outsourcing is cheaper is mendacious.