Executive Summary (Netgains)
Offshore outsourcing can lower some costs, but it comes with additional expenses like vendor selection and the cost to transition work to outsourcing providers. While application development is sent offshore more frequently than other IT activities today, business process and help desk/support are areas where offshore outsourcing will grow dramatically in the coming 12 months.
The majority of the 101 CIOs surveyed said their offshore outsourcing contracts would increase in the coming year and that on average, offshore outsourcing contracts will increase by 18.7%. Currently, application development is far and away the most frequently outsourced activity. Other functions frequently sent offshore include call center, system administration/support and help desk.
The majority of IT executives surveyed cited lower IT costs as the main reason for outsourcing offshore, and further reported that the greatest savings were realized in the areas of labor costs and reduced project timelines/time to complete work.
While offshore outsourcing can lower some costs, it creates new expenses for the organization, including vendor selection costs, legal/contract costs and transition costs. Additionally, sending IT functions offshore creates challenges for CIOs like managing communication, cultural differences and a lack of internal processes for specifying work.
Key Findings according to CIO Mag (Netgains)
The Three Ws of Offshore Outsourcing – When, What and Where
The majority (67%) of respondents say their company began outsourcing offshore after 2000. Twenty-three percent said they started offshore in 2000 while 17% said 2001. Twenty-seven percent started outsourcing in 2002.
Eighty-six percent of IT executives surveyed said they currently outsource application development offshore and 26% outsource the call center offshore. Other applications frequently sent offshore include system administration/support (23%), help desk (17%) and business process (such as HR or financial applications) (17%). On average, the value of current offshore outsourcing contracts is $16.2 million in the 101 organizations included in this study.
When asked if there were processes or applications that their organization would not outsource offshore, IT professionals most frequently answered systems and architecture planning (45%), research and development (43%) and business process (38%).
India was the most frequently cited country for offshore outsourcing, with 89% of respondents saying they outsource in that country. Other countries listed included the Philippines (10%), China (8%), Ireland (7%) and Russia (6%).
Project Management
When asked how the offshore outsourcing relationship is managed, 38% said the relationship is managed by a dedicated manager within the IT department and 35% said it is managed by a project sponsor for the IT department. More than half (54%) of those surveyed said their organization has a steering committee of senior IT and business executives that governs offshore outsourcing decisions.
Costs of Offshore Outsourcing
Survey respondents report that vendor selection costs, legal and contract costs and transition costs were in-house costs for the most part whereas the costs for application development and ongoing application maintenance costs were more frequently paid to the offshore outsourcing provider. The table below indicates what percent of costs were in-house versus paid to a provider:
| Activity/cost | % of cost in-house | % of cost paid to offshore outsourcing provider |
| Vendor selection | 77 | 23 |
| Transition costs | 65 | 33 |
| Project management costs | 62 | 37 |
| Application development costs | 31 | 68 |
| Integration costs | 59 | 40 |
| Ongoing/application maintenance costs | 45 | 56 |
| Legal/contract costs | 80 | 19 |
Benefits of Offshore Outsourcing
According to 78% of the IT executives surveyed, lower cost was the main reason for outsourcing offshore. The greatest savings were realized in the areas of labor costs (86%) and reduced project timelines/time to complete (37%). Other benefits experienced as a result of offshore outsourcing included increased IT department productivity (44%), competitive advantage (30%) and internal customer satisfaction (20%).
Challenges of Offshore Outsourcing
Survey respondents said their greatest challenges in offshore outsourcing were managing communication (67%), cultural differences (51%), a lack of internal processes for specifying work (40%) and a lack of internal customer management skills (32%).
The Year Ahead
The majority (68%) of survey respondents said their organization’s offshore outsourcing contracts would increase in 2003 compared to 2002. IT executives surveyed expect their offshore outsourcing contracts to increase by 18.7%, on average. Thirty percent said their offshore outsourcing to stay the same year to year while 2% expect it to decrease.
According to the 101 IT professionals surveyed, offshore outsourcing will increase over the next 12 months in all areas. The chart below lists what functions or processes are outsourced offshore currently, the percent of this function that is outsourced offshore (versus in-house) today and the percent of this function that will be outsourced offshore in 12 months:
Survey respondents expect to outsource 35% of their application development offshore in 12 months.
| % of respondents that outsource function offshore | % of function outsourced offshore currently | % of function outsourced offshore in 12 months | |
| Business process (such as HR, finance) |
17 | 6 | 14 |
| Call center | 26 | 23 | 29 |
| Data center | 11 | 10 | 15 |
| Application development/maintenance | 86 | 27 | 35 |
| System administration/support | 23 | 16 | 27 |
| IT infrastructure (hardware, networking equipment, operating systems) | 10 | 11 | 18 |
| System and architecture planning | 11 | 7 | 11 |
| Research and development | 14 | 13 | 16 |
| Help desk | 17 | 14 | 30 |
| Other | 6 | 0 | 2 |
