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CIO Insights: IT offshoring/outsourcing — how much is too much?

Rebecca Merrett | Sept. 19, 2013
Three Australian IT leaders share their advice

When it comes to offshoring, if you focus purely on what looks to be cheaper salaries then you could have some nasty surprises. There can be unexpected additional legal costs and compliance costs particular to other countries. The rules around pensions or social security provisions may be different or non-existent. Also, in some developing countries salary CPI increases are quite high by comparison to what we experience here.

Turnover can be challenging, particularly if you're moving capability to very competitive markets like China and India, where good people are sought after by competitors and may be offered good salary incentives to move. So you could be chasing your tail building capability and then trying to retain qualified people once you have them sufficiently developed. If you or your provider are constantly replenishing the organisation, you'll have challenges around capability and therefore performance.

Offshoring or outsourcing IT functions that rely on collaboration can mean challenges to both formal and informal communication between the remote IT organisation and either the business or the local IT organisation. Things are harder because people are not located with each other.

Additionally, the remote organisation may not be part of your business, introducing challenges around culture and shared values. You just don't have that same ease of operation as you do when you are in person and part of the same business. There is more bureaucracy and overhead in terms of setting up meetings, too. These things are not insurmountable, but it does take time to build the connection and the associated trust.

You'll also undoubtedly have challenges from a cost point of view around extra travel. You can't do everything remotely; there will be some occasions where people visit the offshore or outsourced location and vice versa.

There has been a trend to move functions out of businesses in search of savings or to remove non-value-added work. IT capability has also been on a path to greater centralisation as technology has allowed it. Now that we have things like cloud and virtualization, we take this next step to move capability outside of businesses or to 'cheaper' locations.

But by centralising and virtualizing your people as well as your technology, it makes it harder for people to count on long-term careers in IT. It potentially also makes it harder for people coming through to get a traditional set of IT experiences in their development.

There's some loss of business knowledge and capability when moving your IT off-premise as well. I guess this is change though, and the nature of it is that people have to and do adapt to a changing marketplace.

If your business is prepared to take a long-term view, or if you have other good reasons for moving some of your IT overseas or to a third party — for example, moving to a location where your business is growing and it's very important to have capability in that country — then they are stronger reasons for doing it than purely cherry picking on a cost basis with a short-term return in mind.


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