SMBs embrace offshoring with caution

"This is the first time we've done a major release with all outsourced testing, and I'm pretty happy with what we've gotten for the money," said Journyx CEO Curt Finch, whose Austin, Texas-based company provides Web-based project management software that helps companies track employees' time and expenses for projects.

Outsourcing jobs overseas is a commonly accepted business practice in the U.S. Approximately 3.4 million jobs will move offshore by 2015, according to Cambridge, Mass.-based Forrester Research Inc.

According to Boston-based AMR Research Inc., about 38% of companies with revenue of less than $1 billion

We see a lot of offshoring deals go bad because the company hiring an outsourcer doesn't have a clear vision of what it is trying to outsource. Lance Travis AMR Research

have hired offshore consultants at some point to help re-engineer business processes. That is a slightly higher percentage than companies with revenue of more than $1 billion (35%).

That difference is about the same when it comes to custom application development, with 42% of small companies choosing offshoring, versus 40% of large companies.

But small and midsized businesses (SMBs) still face challenges in sending work overseas. Not surprisingly, SMBs tend to spend less per contract on offshore deals than large companies, said Lance Travis, AMR's vice president of outsourcing strategies. As a result, large offshore providers tend to bypass SMBs in favor of juicier deals with Fortune 500 firms.

"SMBs tend to go to smaller service firms because they get more attention from them," Travis said. "If you're representing only a $500,000 or $1 million deal, it can be hard to get the attention of multimillion-dollar offshore providers."

SMBs that are considering going offshore should also note the lessons learned by their larger counterparts. These include problems that arise from language barriers and cultural differences with the work habits of offshore contractors.

Although India remains the leader in overseas outsourcing, other countries are making headway. Ireland, the Philippines, Russia and China all are emerging as influential offshore players.

"One of the challenges with outsourcing is managing a project in which people are scattered all over the globe," said Stefano Stefan, assistant director of business, management, legal and IT programs at the University of California Irvine Extension. "What we're hearing is that work is being sent overseas and then doesn't get done the way the company expects, so they have to bring it back. A lot of that has to do with different work styles."

India has been a flashpoint in recent years for outsourcing thousands of U.S. IT jobs. Stefan said many U.S. companies choose India for offshore projects because its workers are fluent in English and possess highly sought technical-engineering skills. Nevertheless, he said, outsourcers in India tend to be deferential to clients, rarely challenging their engineering or design concepts.

"If there's a problem or a specification that's not clear, they'll spend extra time, and, of course, charge extra dollars, to come up with different scenarios. Rather than go back to the customer, as happens in the States. That sometimes frustrates project managers who are accustomed to U.S. work styles," Stefan said.

Management a must

Companies too often mistake outsourcing as a panacea for all their ills, Travis said. They expect offshore projects will lower development costs and simplify management by making third-party vendors responsible for some portion of the work.

"There's this myth that if I outsource something, I can reduce my management focus on it. The reality is, you've got to manage that relationship just like anything else, and the more you're prepared to invest in managing that relationship, the more successful that relationship is going to be," Travis said.

Journyx took great pains to outline its expectations in detail when sending work offshore. "It forced us to have a more rigorously defined test plan, because we can't just get on the phone with [offshore providers] and work things out," Finch said.

Agreements with offshore providers should include details such as project schedules, the scope of the work to be performed, service-level agreements and expected quality levels. Travis said many companies fail to clearly describe their expectations at the outset.

"This is a big problem. We see a lot of offshoring deals go bad because the company hiring an outsourcer doesn't have a clear vision of what it is trying to outsource," Travis said.

Not for everyone

But not everyone sees the value of going offshore. Ed Rogers, vice president of engineering at Amherst, N.H.-based Ektron Inc., fields an average of three calls a week regarding moving some of his content management software company's software development offshore. Rogers thus far has resisted and said he intends to keep all development in-house.

Ektron has roughly 60 employees and about $10 million in annual revenue. Rogers said it gains more from the close proximity of its engineers, quality assurance specialists and technical support staff than it would by sending work overseas.

The arrangement allows Ektron to nimbly make changes to new software products, especially as unexpected situations arise. Large geographic distances lead to inefficiencies that cancel out any potential cost savings, Rogers said.

Such inefficiencies include the need for re-engineering work and constantly managing a far-flung team of independent contractors, while also maintaining quality control. Rogers said he wouldn't send work offshore unless he was willing to assign a project manager to oversee the process.

"If you don't have someone who is wearing the business hat who is going to represent your interests, then any problems that arise are going to be approached in a way that's easiest for the [offshore] engineer. And that's not always the right thing for the product or the customer," Rogers said.

His advice: Proceed with caution. "My view is if you do have a strong project manager and you can send him [overseas] to work with a group, you can actually be very effective in having this model work. But offshoring does not necessarily mean you are going to reduce your costs."

Garry Kranz is a freelance technology writer in Richmond, Va.