Why Inshoring is the New Offshoring

Mitchell Osak

Getting more out of Information Technology (IT) has moved to the top of every corporate agenda. Large, global companies have reached a wall where they cannot be improve their customer experience or connect better with partners without improving their IT capabilities. Since the turn of the century, this has meant using offshore (particularly Indian) service providers to write and deploy new applications and upgrade their infrastructures. For a while, offshore providers were effective at delivering rapid project scalability, lower IT costs and faster time to market. How the times have changed, and its not longer wise to put all your IT development eggs in the Indian basket. Prudent marketers and CIOs would be wise to consider North American-based providers.

Getting customer-facing IT right is a unique challenge in every organization. It usually carries significant revenue and brand risk; when it comes to new technologies like social media and Big Data, poor design and implementation can spell the difference between winning and losing in the marketplace. It has become apparent that offshoring is no longer delivering enough value to justify the business hassle and increased project risk. There are more than a few anecdotes around poor quality of work, project delays and service challenges that struggle to meet increasing North American standards. Thought leaders like BCG and McKinsey are already questioning the wisdom of sending all IT services overseas. Furthermore, India’s labor cost advantage is declining for a variety of macro economic reasons.

Offshoring IT work has always been difficult and risky, especially for mission-critical customer facing applications. Alex Rodov, CEO of a leading North American IT testing firm QA Consultants, has seen the damage of these arrangements first hand: "Offshoring is no longer the bargain it once was. It is not uncommon to see higher – not lower – costs, more hassles, delayed time to market and compromised quality."

Our research uncovered the following example of an offshoring ‘burn victim:’

Financial Services project is "A Bridge Too Far"

A leading U.S. financial services company was looking to launch a major, new e-commerce offering. They chose to outsource the initiative to a large Indian IT services provider. This is where the problems began. The Indian firm underpriced the project to get the deal. They also took the client’s business and technical requirements ‘as is’ without vetting its feasibility.

Ultra low cost pricing is a common strategy for offshore providers to gain market share. In this case, unfortunately, it did not leave them much margin room to validate the client requirements or assign enough experienced staff. As a result, the provider missed gaps in the software architecture and did not fully understand the client’s needs and expectations. Not surprisingly, each version of the delivered code did not meet quality expectations. Furthermore, the cultural, time and language differences hampered alignment around expectations and trouble-shooting. The provider tried to redress the quality issues by throwing more staff at the problem – and then tried to get the client to pay for them. Not only did this generate more friction in the relationship but it also failed to address the root cause of the problem namely misaligned goals, poor Indian staff quality and an unbridgeable cultural and linguistic divide.

This is not a case of a single deal gone bad but rather one example of the real difficulties commissioning knowledge-based work thousands of miles away. This story did not end well. The initiative had a target budget and delivery of $3.2 million and 7 months respectively. It eventually was delivered in 22 months for a total cost exceeding $65 million.

Declining India…

Blaming one party or another is too simplistic. Failure has many fathers. Business conditions have fundamentally changed – and not in India’s favor. For one thing, India is losing its luster as the lowest cost place to undertake IT activities. According to 2010 U.S. Bureau of Labor Statistics, India’s average per hour cost advantage has shrunk to only 6-7x U.S. rates (versus a 20x times advantage 10 years earlier). Furthermore, the quality of the Indian workforce has never lived up to expectations. The Wall Street Journal has reported that 75% of technical graduates are unemployable by their IT sector. Finally, bridging the relationship/cultural divide has proven to be more challenging and pervasive than anticipated. In all its forms, distance really does matter.

…Emerging North America

At the same time, Canadian and U.S.-based IT service companies have become more competitive, taking advantage of moderating wage rates, a steadily increasing, educated (and stable) workforce, innovative practices and a growing sentiment that cultivating strong local businesses is needed to quickly and effectively leverage new customer-facing technologies. To wit, large system integrators like IBM are bolstering their North American operations. Furthermore, a number of globally competitive but 100% locally operated businesses like QA Consultants (for software testing) is giving companies more choice. The market is beginning to respond. Leading firms like Bank of America, Honda, Aviva and Delta Airlines are repatriating significant portions of the IT spending back to North America. Many others in banking, consumer products, IT, insurance and manufacturing are evaluating local software development and testing approaches that tightly mesh with their customers and operations.

Leaders need to relook their existing offshore relationships to ensure they still make business sense and consider new and compelling, ‘Made-in-North America’ alternatives. The stakes are only going to rise as Marketers and CIOs look to launch and integrate more social networking, big data and mobile computing applications.