Coordination Costs Of Offshoring

Failing to understand the full range and costs of managing an offshore workforce is one of the primary reasons companies bring work back home. Erran Carmel, associate professor and chair of the information technology department of the Kogod School of Business at American University in Washington, developed a list of offshoring “coordination” costs that frequently surprise companies that don’t look beyond the lower wages of foreign workers. “These extra costs range from 12 percent to 57 percent of a project’s total cost,” Carmel says. Lower wages do offset some of these extras, but Carmel says total return on investment has to be figured on a case-by-case basis.

    Extra coordination costs come from:

    •Communications: These include telephone, fax and other straightforward costs of staying in contact with a remote workforce; the time involved when one or more people have to be available outside of work hours for communication with people on the other side of the world; collaborative software to enable people at multiple locations to work together; multiple software site licenses; other miscellaneous software. Finally, costs arise from the personnel needed to manage and troubleshoot all the technology and processes.

    •Process changes: Processes that are both explicitly and implicitly understood by the offshoring organization must be identified, formalized and documented for the remote workforce. A new methodology may be used to formalize these processes, involving training and implementing on the methodology. New processes, like working collaboratively with a remote workforce, may be implemented. All these involve additional costs and must be done for successful offshoring.

    •Transitioning work: Possible layoffs and the costs associated with them must be handled. Necessary information, methods, work processes, etc. must be transferred to the remote workforce, and that group may require some type of training.

    •Lost efficiency: When offshoring is first begun, companies often have the domestic and foreign workforce handling the same work in parallel. This doubles personnel costs and reduces efficiency until the remote workforce completely assumes the tasks.

    •Travel: Managers without international experience are often unpleasantly surprised by the extent of travel necessary for coordination. Because travel costs are easy to identify, they are often the first coordination expense to be cut. Carmel says travel is a necessity, not a luxury, and cutting it to save money is a mistake.

   •Governance: Many points of contact, including individuals and committees, are needed for coordinating between domestic and foreign work sites. New positions may be needed to communicate with the offshore group, monitor its work and manage its contracts. Guidelines, contracts and other documents are also required. These governance expenses typically represent 5 percent of a project’s overall costs.

    •Turnover at the offshore site: Again, for managers without international experience, the rate of turnover in “hot” offshore markets like India can be dismayingly high. Maintaining personnel numbers and constantly training new hires can be expensive.