As this particular case illustrates, it can make more sense to develop a product here than abroad as high offshore attrition rates and lower productivity could negate savings:

The Fortune feature Pulling the Plug on Outsourcing details how one Silicon Valley entrepreneur decided where to develop his product, a software-hardware package. His two choices…in his local Northern California or in his native India.

While Ajit Deora, 48, had offshored much of the engineering work for his previous three startups, this time things were different. First of all, Bangalore, he realized, had gotten a lot pricier, with office rents closing in on those in many midsized American cities and with tech salaries up from around 10% of U.S. wages in 2000 to some 20% today.

Second, high offshore attrition rates and lower productivity would easily offset the estimated 80% savings in labor. Deora believes that he would have had to employ nine engineers in Bangalore to do the same amount of work that three engineers could accomplish in Fremont, California.

Third, Deora would have had to spend a lot more on quality control in Bangalore, either by sending a U.S. manager to live there (which would cost about $250,000 a year) or making a constant trek to India himself to take on development work on top off his fundraising and marketing duties in the U.S.

“India has changed a lot in the last ten to 15 years,” he tells Fortune. “You can’t be a small-time operator there anymore.” His total costs in Bangalore would have been as high as $1.5 million. In comparison, at a cost of $500,000 over 14 months, his three-engineer team in Fremont has developed a working prototype of the software-hardware package, which allows users to access their computers from any site through the Internet.

According to Fortune, despite its growing popularity, “offshoring still makes more sense for larger companies than it does for startups. Big companies can take advantage of economies of scale and are better equipped to handle the daunting challenges of managing a global IT supply chain.”

And according to a separate news item, a recent survey of more than 5,000 corporate executives around the globe suggests that saving money through offshore outsourcing is not as simple of an equation as many people believe.

The offshore outsourcing survey, conducted by Ventoro LLC, an outsourcing consulting and market research company based in Portland, Oregon, discovered that organizations that expect to get huge savings simply from cheaper IT labor are in for a letdown. In fact, the report found that only 9% of any cost savings come from lower overseas employee costs.

Overall, the report discovered that offshore outsourcing savings are usually disappointing, below the 35 to 40% or even higher that many corporations expect, says Phillip Hatch, Ventoro president. In fact, the survey found that savings were on average a little less than 10% for all offshore outsourcing projects examined by Ventoro, according to Hatch.

So what’s a reasonable expectation for offshore outsourcing? The report concludes that cost savings of 30% is an attainable goal for well planned and managed projects.

Says a veteran Wall Street IT manager to Fortune, “The people who love outsourcing the most are the people who don’t have to deal with it.”

Sources:

Pulling the Plug on Outsourcing
Richard McGill Murphy
Fortune, July 1, 2005
www.fortune.com/fortune/subs/print/0,15935,1072668,00.html

Offshore Outsource Savings Can Be Elusive, Survey Shows
John Pallatto
eWEEK, July 15, 2005
news.yahoo.com/s/zd/20050715/tc_zd/155991