Cheaper by the Rupee
The pitch is tough to pass up: Get access to thousands of talented software developers in other countries, instead of paying higher rates for scarce U.S. programmers. But be sure to add up all the costs involved; the savings might not be as large as you think.
By one count, nearly two out of every five Fortune 500 companies are using offshore programmers. The roster includes Boeing, J.P. Morgan Chase, Nike, Reebok and Stanley Works. India stands out as the strongest supplier of talent, although other countries such as Canada, China, Ireland, Russia and the Philippines offer alternatives.
No one disputes that application-development projects can often get done more cheaply when offshore programmers are used; the cost savings range from 30% to more than 70% in ideal circumstances. It comes down to labor costs: Just as it's less expensive to have someone stitching a blouse in Mexico City than in Manhattan, so is it less expensive to have someone writing code in Bangalore than in Boston. A programming job that would pay $65,000 in the United States might pay $12,000 to $14,000 in India.
But long-distance relationships have their price. Companies often need to pay as much as $2,000 a month per developer for phone and other telecommunications costs. And international travel can make even more of a dent in cost savingsif the need for such travel doesn't altogether quash the IT world's enthusiasm for offshore partners in the wake of the Sept. 11 terrorist attacks in New York City and at the Pentagon.
Indeed, if a country's political stability once seemed like a minor factorand still may be in places like Canadait is a more urgent issue in other programmer-rich places, such as the Philippines and Pakistan.
"Pakistan has had a growing market that held a lot of potential, but I think in the short term, people will be more cautious about doing projects there," says Rita Terdiman, research director and a VP at consulting firm Gartner of Stamford, Conn.
And there are other drawbacks to using offshore developers, as even those who've benefited from the practice readily acknowledge. "Sometimes there is a communication problem," says Shikhar Ghosh, CEO of Verilytics, a Burlington, Mass., software maker that employs programmers in two cities in India. For example, a company might want to try to set up a security system for credit-card transactions. But "because credit cards are not nearly as ubiquitous in India as they are in the U.S., problems can arise from the start in getting the message across," Ghosh says.
Still, Ghosh is sold on the idea. "There is a constantly replenished supply of qualified workers in India to do the work," he says. That supply is bringing big business to companies such as Cognizant Technology Solutions, Infosys Technologies, Syntel, TATA Consultancy Services and Wipro.
While many Fortune 500 companies are using overseas programmers for limited-duration consulting projects, others have seen fit to hire them as full-time staff. Deutsche Bank, IBM and AOL Time Warner, for example, are setting up or investing in their own software development centers in India.
In any event, the benefits of tapping offshore programmers can go beyond cost savings. "They have a tremendous amount of resources in India to throw at a project," maintains Dan Bentzinger, senior vice president, information technology, at Irvine, Calif., startup Transportation.com, a client of Infosys. "They can staff up or down to hit [your] deadline targets." He's worked with four to 15 offshore programmers at various times to develop an online tool for quoting, booking and tracking global shipping.
Boeing makes an entirely different case for using offshore resources. The airplane manufacturer believes that any company that wants to build its international business needs to reach outside of the U.S. to obtain services and supplies.
Boeing has hired Luxoft, a part of the Russian consulting firm IBS. "There are great talent pools in other countries. The diversity and skill mix is exciting," says Robert Jorgensen, a Boeing spokesman. Considering the advantages, he asks, "Isn't the question, 'Why isn't everyone doing it?'"
Those who have used offshore programmers successfully offer some advice for their peers:
Walk before you run. Before it signed up Infosys for a $50 million, two-and-a-half-year project, Kansas City Southern, a rail freight service, participated in a couple of 300- to 500-hour pilot projects. Scott Arvidson, the company's CIO, urges other companies to do the same to assess how communications and technical infrastructures mesh.
Do your homework. "Make sure you have people you can trust. I would check their references to get other people's experiences," says Bentzinger of Transportation.com.
Communicate with your U.S. team. Allan McLaughlin, chief technology officer at LexisNexis Group, says it takes time to build trust and fine-tune communications with offshore companies. McLaughlin warns that it's important to let in-house employees understand that their jobs aren't threatened by outsourcing contracts. "We go offshore for commodity aspects that just about anyone can do," says McLaughlin, whose company has been using programmers in India, the Philippines and elsewhere for nearly 15 years. That leaves McLaughlin's in-house IT staff, which numbers 800, to work on the most important applications.
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