#5 High turnover

One of the major challenges facing the Indian IT services industry is the high rate of turnover among Indian IT professionals.

I will start this article by telling a story.

Recently, we were approached by a software vendor that had outsourced its new product development to India and were looking to have someone else take over because they were fed up. They were 14 months behind schedule, had spent well over $1M, with 20,000+ high severity defects and were facing the loss of funding to move forward, which would cripple their business. But they choose their vendor wisely. They invited the team of 8 senior people over from India to engage in knowledge transfer for 3 months and sent their own people to India for several weeks.

So what happened? Well, besides the obvious time and cultural challenges of outsourcing software development to a far off land, they also had 100% turnover of the original 8 people that spent 3 months on knowledge transfer. The customer ended up spending much more time explaining what they wanted, retraining, and fixing bugs to no avail.

So, the point is that vendor attrition can seriously damage your project and even your business.

Why is this happening?

Rapid growth among outsourcing industry has created a dynamic labor market, especially in Asian countries. For example, companies in India have turnover rates exceeding 30% and for small companies it is not unusual to see offshore staff turnover rates exceeding 50%.

This attrition rate is primarily due to the restricted career options or growth opportunities that workers have. Some leave their career pursuing a higher education, but some others leave their current job looking for higher pay and more benefits.

Higher skilled resources generally have the highest attrition, because of the low payment and stressful work schedule. While working with an Asian country in a software development project, teams sometimes have to work night shifts or have calls in the middle of the night. All this is done to cope with the overhead caused by the time zone differences.

Staff attrition (or turnover) represents significant costs for the companies that obviously are charged to the client, increasing the cost of the project. “Some companies believe that the attrition rates in India—and the costs associated with them—are so high that they can override the benefits of lower wage costs.”

Even large companies, as Wipro, have to deal with this attrition rate. According to a report by Reuters, “Bangalore-headquartered Wipro said high staff turnover rates had forced it to replace 90 per cent of the 14,340 employees in its largely call centre-focused BPO business in the last year”

What to Do?

Before choosing a partner for an outsourcing software development project make sure their turnover rate is not more than 10-15%, thus ensuring that your project is completed in the agreed time and quality. Some customers seeking outsourced software development also specifically asked for the resource names to be designated in the agreement. In the end, it is a risk that should be considered.

*Turnover calculator

Back to: 10 Ways to Fail at Outsourcing

#4 Low skilled or under qualified resources

Offshore service providers faced with high demand and pressure margins, leveraged skilled, customer-facing resources to win deals and then assigned the work to low skilled resources that were simply order takers with little or no relevant experience.

Following the Waterfall development lifecycle, companies spent months producing detailed functional and technical requirements documents that were then thrown over the wall to vendor teams.

The results were often catastrophic. Projects took twice as long and cost twice as much. Quality suffered as buggy software plagued the release plans. The delivery resources were unable to provide insight and guidance to customer teams who believed their expectations were perfectly clear. Many vendor team members feared looking bad in front of their peers or the clients and would keep quiet about project challenges and delays. Extensive travel by both teams (customer and vendor) was required to put projects back on track.

Typically the results showed that projects cost 40-50% more than anticipated and there was a 30-50% loss of productivity caused by time zone and cultural differences, and the lack of experience, which goes to show, you get what you pay for.

Some companies, fearing the loss of control and poor quality, decided to setup their own captive development centers, hoping to get better results.

Even Google had some problems finding skilled development resources as they were competing for the best software talent. The company's Founder and Director Kavitark Ram Shriram admitted: “Google, which is considered to have a very low attrition rate even in the high-job-hopping Indian IT space, has found it more challenging to hire certain talent in India as compared to other parts of the world”.

Apple in April of 2006 commenced operations in India, but one month later shut down. Some of the reasons cited were: India isn't as cheap as it used to be, the turnover is high, and the competition for good people is strong. In the end, Apple felt it could do it more efficiently elsewhere.


How to Avoid Unskilled Resources

Later, wiser companies choosing to outsource to Asia, turn to outsourcing consultants to help them prepare RFIs, RFPs, and select responsible vendors. RFI questionnaires typically ask for the number of resources with a specific skill set, forgetting to ask how many might be available when their project is set to commence. Really savvy customers with more mature vendor selection processes choose to visit the final contenders and individually interview each resource that is tentatively allocated.

Finally, customers demand fixed bid project engagements with performance based compensation to incentivize the vendors to get it done right the first time. While this helps the customers control the costs, the delivery deadlines still get pushed out and the vendor is just happy they got the deal.

Ultimately, the best way to ensure that you will not get under skilled resources on your project is to do all the above and check with recent references.

Back to: 10 Ways to Fail at Outsourcing

# 3 Cultural differences – 10 ways to fail at outsourcing

How can cultural differences affect project success, you ask? Well, we begin explaining what culture is. Culture is defined as the shared patterns of behaviors and interactions, cognitive constructs, and affective understanding that are learned through a process of socialization. So, when talking about outsourcing, cultural differences have been regarded as one of the most serious challenges. In the context of this blog post, we are speaking from the perspective of North American businesses outsourcing software development.

Countries not only have their own cultures but also have certain work cultures. A good example is a meeting with Indians, that is typically lead by the most senior person in the team and sub-ordinates don’t speak unless their boss ask them to do so. On the other hand, in UK all team members have the same opportunity to talk at anytime if they have a valuable contribution. The same comparison could be made for many Asian counterparts.

Asians typically do not say “no”, especially if you are a client. They are used to satisfying their clients even if they can’t do it. Many dislike giving bad news, even though your project is having some difficulties they will probably hold this information back, hoping to resolve the issue on their own. However, what often happens is that problems are not resolved and some Asian outsourcing counterparts will continue to hide the problem until it is impossible to hide any further. Unfortunately for you the paying customer, this sometimes means finding out when it is already too late to fix it.

At first glance, this doesn’t seem as a problem, but when you are working with outsourcing teams this can turn into a headache. Why? Outsourcing requires excellent communication and a near perfect understanding of what is wanted and needed. This is difficult enough amongst same culture teams on the same office, let alone with different cultures in different time zones and in different countries.
Especially in the age of web-based software such as Software-as-a-Service (SaaS), when talking about the user interface, the look and feel is vital. All messages and content should be written to the intended audience. Even though programmers are from other country, they should speak and write with the customer’s language and understand the culture.

To mitigate these differences it is recommended to analyze various providers to choose the best for your specific business. For programming, be very specific in the requirements and be sure that it was well understood. A pilot project is highly recommended prior to a long term commitment.

The US has more cultural similarities with neighboring countries such as Canada and Mexico, while Japan shares more cultural similarities with India and China. Intermingling histories and borders make them more compatible and facilitate the work.

Back to: 10 Ways to Fail at Outsourcing

India, Still Cheapest Outsourcing Destination - Everest Group

"According to Everest Group, an outsourcing consultant group, India is expected to forge ahead in the offshoring landscape among top outsourcing countries. This is despite some stiff competition making waves in Brazil, China and the Philippines.

What would be the advantage that is unique to India, one might ask, apart from having six billion or more of the world’s population, unbridled poverty and a rising middle class? And the answer is: India scores high on the IT outsourcing checklist in three important categories – the massive talent pool (India is commonly dubbed the ‘world’s largest democracy’), very low cost structures, and most importantly a higher degree of cultural alignment to Western markets than outsourcing in China, for example.

In that regard, it is fair to say that the world buys Chinese goods because it’s cheap, but buys Indian services because they’re ‘West-aligned.’

Everest Group’s Managing Principal for Research, Eric Simonson told The Hindu’s Business Line, “We are in the process of wrapping up a survey we did, for which we have preliminary results from 400 responses. We asked people about their perception of different countries. On a scale of 1-5, India is the only country that scores five…If you look at other offshore locations, the volume is more ‘complimentary'. India is the hub, will be the hub.

Everest also noted that other countries are well poised and are aggressively pursuing the offshore market with some degree of success. However, when companies consider adding units, they tend to add units in India.

Research from the group suggest that of 116 new offshore delivery sites set up in 2009, a whopping 35 centers were cornered by India. Apparently, this was the largest number of new offshore delivery sites in any geography in 2009 with the Philippines trailing with 15 delivery centers – just 13% of the total offshore market.

The recent debate about India losing dominance as an offshoring site and the prominence of new outsourcing hotspots, i.e. Brazil, China, Pilippines, Poland and Vietnam has been offset by the results from the Everest Group.

Perhaps one of the biggest attributes of India is that it is one of the most inexpensive destinations for offshore operations in comparison with the aforementioned countries. For instance, BPO operations is about 85 percent cheaper in India in comparison with Tier 1 locations like Atlanta in the U.S. Similarly, operating cost in Brazil is about 50% less when compared to the U.S." Jacob Cherian

However, Everest Group is not focusing on Total Cost of Engagement (TCE), just the hourly rates.

The Total Cost of Engagement (TCE) evaluates the total expenditures of outsourcing projects. In addition to the hourly rates of engineering talent you must consider the cost of additional management overhead, travel costs, the painful cost of staff turnover, and a certain amount of productivity loss due to the distance and degraded communications. Most of these costs are directly related to the separation in time between teams.

In the end, outsourcing to India could be more expensive because of the TCE.

10 Ways to Fail with Outsourcing

What would happen to you and your company if you choose the wrong development partner? Perhaps you already have, perhaps you are about to. There are several intricacies of working with an outsourced product development or application development provider that every company should be aware of. Each one of these factors below can have an impact on your project, either causing it to be late, over budget, or a technical mess to manage. Most of important of all is that focusing on the cheapest rate will probably NOT get you the best results. Companies seeking outsourced software development partners should be aware of these issues and tactics:


1. Underbidding to win the deal

2. Time zone differences

3. Cultural differences

4. Low skilled or under qualified resources

5. High turnover

6. Lack of experience with a particular technology

7. Unexpected overhead / expenses

8. Attempting to Fix the Price, Scope, and Timeline

9. Poor quality in architectural design and coding

10. Poor quality in documentation


In the following weeks, I will post more details about how the factors above can affect your IT project and how you can avoid such issues with your outsourcing partner.

Nearshore Software Development in Mexico

Scio Consulting a Nearshore and Agile Software Development Company with expertise in SaaS

Nearshore Software Development in Mexico

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IT Trends for 2010

IT Trends for 2010 say that despite of the ecomonical crisis from 2009, American technology companies will start hiring more IT workers this year but with caution.

"Current predictions of a fragile recovery for 2010 don't reveal the necessary strategic business changes and tough decisions that will be needed to make that happen across all sectors," said Cliff Lineker, BCS strategic business development director.

According to a Robert Half Technology Study to 1,400 CIOs, the 7% will be hiring IT staff in the 1st quarter while 4% will be decrease its workforce. The net 3% increase is up 3 points from last quarter’s forecast. However, IT Executives seem to be careful about hiring because they need to go slow.

BCS says that one of the key priorities for IT Heads in this year are “…to know exactly what skills their IT team possess going into 2010” and “…making sure they have the skilled staff in the right roles to exploit the value of IT consistently and effectively to move the business forward”. After knowing their needs about the IT Staff they could decide to remain the same or add more personnel.

However, many CIOs have recognized that hiring new people has more risks than expanding with an outsourcing partner. When you hire someone directly, you incur in all the overhead that this implies: recruiting processes, benefits, equipment for the workplace, training, payments, etc. with the latent risk that at any time the employee could decide to leave the company.

In the other hand, if you decide to go with an outsourcing partner, you can afford to choose whom to hire, depending on the benefits, qualification and the proposition that is given to you and the one that better fits your needs. In some cases, outsourcing partners can be responsible for the entire process and project, with SLA-like rewards and penalties that are difficult to implement with employees.

The options of outsourcing software development are: Onshore, Offshore or Nearshore. The disadvantages of outsourcing offshore are time zone differences, jetlag when a travel is required and total cost of engagement, etc.

While Nearshore Software Development to Mexico or LATAM Countries give many benefits for the IT Team, especially with regard to software and agile development referred. Indeed CIO magazine has identified 6 IT outsourcing HotSpots for 2010, which includes Mexico.

Same time zone: The tip of the iceberg of Nearshore

Although we are gradually emerging from the economical crisis, companies are constantly looking for ways to reduce costs. When I speak of these cuts, is not only related to the financial cost but also the challenges of working with teams that are behind schedule.

When people think of “Outsourcing Software Development” the first thing that comes to mind is India. However, in recent years India has begun losing its competitive advantage compared to other countries. While the cost of labor is not as cheap as it used to be, the current geopolitical climates and the difficulties caused by time zone differences are the main concerns of American executives.

Meanwhile, Latin America is improving its position as an Outsourcing Hub. American companies are starting to look in countries such as Mexico, Brazil, Costa Rica, etc. and happily discovering the importance of working in the same time zone, the excellent quality assurance, and vast knowledge about software development.
Latin America countries, such as Mexico are developing expertise not only in software development but also in cutting-edge methodologies such as Agile and Software-as-a-Service (SaaS) application development.

According to the article “Offshore outsourcing: The Nearshore Advantage begins with Business Hours”, companies outsourcing to Latin America said that the main reason of why they prefer nearshore IT outsourcing is the time convenience.

Mexico has a huge advantage as it’s +/- 2 hrs difference with US makes for easier communication and collaboration.

As many IT executives have found over the years, outsourcing software development to teams across a 12 to 24 hour time difference is extremely difficult and generally results in a massive decrease in productivity. These kinds of projects require constant communications, in a way that problems can be corrected proactive.

Outsourcing software development to a Nearshore location is like having a branch office in other state in a different country, resulting in comfortable communications with people who speak good English and understand your thoughts and needs.

Outsourcing Evolution

Outsourcing is not necessarily a new way of doing trade. However, the recent globalization enabled U.S. companies to seek out new alternatives to fulfillment and as a result we have seen a recent redistribution of power.

In the beginning with what has been called “Outsourcing 1.0” large companies outsourced various tasks to countries where the cost of labor created efficiencies, such as India and China in the IT services space. The result was that companies moved business-process jobs, such as customer-service and human resource processing offshore.

Later, in the early 2000s, as the cost of labor in India and China began to rise, new territories were sought out. In what has been defined as IT “Outsourcing 2.0”, a new service set was established and referred to as Business Process Outsourcing (BPO). Not only large companies, but also SME’s were able to afford an outsourced model. New countries, such as Canada, Mexico, and others in Latin America and Eastern Europe appeared in the IT Services field. The selection became more difficult and the cost was not the main concern, IT companies began to analyze supply chains and outsourcing opportunities in more detail.

There are 3 key forces driving the shift to Outsourcing 2.0 :

1. Universal pain in all dimensions of outsourcing. Access to best practices and processes, peer networking and professional development. These problems of the marketplace have affected both large and small players alike.

2. Changes in who outsourcing and how it is done. Buyers need access to more specialized services, best practices information, case studies and tools to guide them to successful outsourcing contracts and relationships. Objective opinions are needed.

3. The evolution of Web 2.0 and the growing impact it´s having on communication, collaboration and knowledge sharing.

Thus, with its proximity to the USA and with potentially lower cost and time zone problems, Mexico can compete successfully against a country such as India, the market leader.

In the last months a new direction of outsourcing is accessing to the Information Technology Industry, Outsourcing 3.0. This is about Knowledge Process Outsourcing. This new era wants to make outsourcing sustainable. Global corporate bigwigs are beginning to eat entire departments of Companies, with the purpose of cover as much fields and presence as possible. Anyway, Outsourcing 2.0 stills predominating.

Nearshoring Software Development Makes Sense for SMBs

It appears the world is on the cusp of overcoming the worst crisis in recent history. As part of the recovery most companies will seek ways to reduce risks and costs while achieving more with less. For some software companies, outsourcing may be a great opportunity to achieve all objectives.

Most are familiar with the standard alternatives: offsite and offshore. Nearshore has recently been added to the mix. Since offsite is completed in the same country, it’s almost the same cost as onsite.

Then, we have offshore as an option. The difference time zone and the overhead caused for this model make more difficult to manage the resources and the work outsourced. Furthermore, the strains on communication make offshoring less desirable. Over the years software development has moved offshore, but we have also seen it has not worked for everyone.

As I mentioned in the last article, the utopian ideal of the offshore model can only be realized by some large enterprises. So what about small and medium businesses? For them, nearshore could be the solution.

The nearshore model offers an infrastructure that guarantee seamless and virtually uninterrupted communications; a share business culture and a similar time zone (+/- 2 hrs).

Why are nearshore software development advantages so important in the quality of IT services? Clearly, the time and money savings are essential for the success of an outsourced project, but the risks associated with offshoring are reduced through closer proximity, more similar cultures, and a greater overlap of business hours.

Pekka Huttunen, Director of Accenture recently was quoted saying "The primary driver of this shift is not so much labor as it is growing markets and the need to reduce risk by building and buying in multiple locations." He continues, “some companies not only see the economic but also the moral value in keeping software production close – like inshoring or Nearshoring-“.

The Manpower Myth in the Software Industry

In the beginning, India’s attractiveness as an outsourcing destination was the cheap and vast manpower. Every year thousands of engineer graduate from Indian Universities creating an enormous talent pool.

However, in many cases, they have failed to produce world-class software products. Why? It´s true that many young people graduate with IT degrees in India, but the abundance of IT graduates doesn't guarantee quality work.

India’s booming software industry, which has maintained rapid growth over the last 15 years lacks well-trained and experienced resources which has a greater impact than some companies imagine.

A couple of years ago, for example, Google had some problems finding skilled development resources as many other American companies are also looking for the best software talent.

The company's Founder and Director Kavitark Ram Shriram admitted: “Google, which is considered to have a very low attrition rate even in the high-job-hopping Indian IT space, has found it more challenging to hire certain talent in India as compared to other parts of the world”.

Apple in April of 2006 commenced operations in India, but one month later they ceased activities. Some of the reasons were: India isn't as inexpensive as it used to be, the turnover is high, and the competition for good people is strong. In the end, Apple felt it could do it more efficiently elsewhere.

Today, a large company which wants to recruit people has to have in-house training facilities and extensive training programs. These training programs are expensive and sometimes companies use their experienced manpower for training. That implies a higher cost (expensive airplanes tickets, the long distance, the host, etc.) The trainer can be in more “productive” activities like projects and R&D, instead of teaching.

Perhaps American companies will seek software development outsourcing partners closer to home, such as Canada or Mexico to avoid the headaches of Asian offshoring. At least the training can be much easier and the cost is lower because of the close geographical proximity.

Total Cost of Engagement (TCE)

Undoubtedly, offshore outsourcing has reached a mature level. Countries as India and China have built huge IT hubs, and invested in education for young people to facilitate the acquisition of human resources to meet the growing demand.

The boom of offshoring has been primarily driven by the belief that lower wages decreases the expenditures of the companies. What have frequently been misunderstood have been the hidden costs.

Recent studies have found that despite the low rates per hour that countries like India or China are able to provide, the Total Cost of Engagement (TCE) is higher than outsourcing the same service to a nearshore location. If you compare the cost of labor in India vs. Mexico for example, you will find India is about 10-15% cheaper.

The total cost of engagement (TCE) evaluates the total expenditures of outsourcing projects. In addition to the hourly rates of engineering talent you must consider the cost of additional management overhead, travel costs, the painful cost of staff turnover, and a certain amount of productivity loss due to the distance and degraded communications. Most of these costs are directly related to the separation in time and distance between teams. Below is a detailed explanation of why in the end offshoring typically is more expensive than nearshoring.

1. There is still an important amount of work that needs to be done at the client´s site. No amount of technology can make up for the productivity achieved face to face. Typical offsite leverage for Asian vendors range between 60 -65%, which means 40-35% of the work remains at the client´s site. The percentage of work that can be done offsite when working with a nearshore provider fluctuates around 80%.

2. Overhead. Due to the addition of inexperienced resources halfway around the world and the poor communication that typically occurs, additional resources from the client side are needed to manage the relationship and the work. This creates additional overhead for the client.

3. Proximity. The long distance between the client and the offshore team, make more expensive and difficult the travels between the 2 destinations. Nowadays, close proximity is a key success factor in IT engagements. Close proximity offers an improved cost management, particularly when travel is required, and allows for better supervision and control.

4. Time zone difference. This can be a huge barrier because offshore and onsite teams need to accommodate schedules for call meetings, releases, etc. causing an overtime payment. Sharing requirements documents and communicating entirely by email greatly reduces the likelihood of getting the desired results.

5. Offshore training. Offshore resources need to be trained by onshore teams, so flight tickets, visas, accommodation, etc. become more expensive the offshore model.

6. High attrition. After all the training and learning curve is overcome a the expense of the client, developers return to the development center in India or China and, recognizing their new found skills and value in the marketplace, they seek higher paying jobs, causing a disruption in the project as new, inexperienced resources are added to the team.

As the result of the total sum of these costs plus the man/hour rates is the Total Cost of Engagement (TCE), which certainly is pretty much higher in India or China than Mexico or other LA Countries.

A good calculator for comparing the cost of development between in-house, and nearshore and offshore teams can be found here.

Engagement model calculator

More information supporting nearshore outsourcing can be found here.

Mexico nearshore

Nearshore vs. Offshore Total Cost of Engagement

GSC LOCATION SELECTION APPROACH