Cost efficiency consultancy Compass Management Consulting has warned against a lift-and-shift approach to offshore application outsourcing, saying it will not always generate the level of savings expected and could actually compromise long-term productivity.
“Labour arbitrage isn’t what it used be with inflation rates overseas and the unionisation of labour on the rise, and there are additional costs to be taken into account around governance,” Nigel Hughes of Compass told us.
He reckons that organisations are now normally seeing savings of around 20% as a result of shifting applications offshore, provided they are managed sensitively.
“You have got to understand what you have in place first. Offshore code-cutting makes for good economics. But if an application set is complex and crosses a number of geographies, and has to handle multi-currencies, account reconciliation and inter-company balances, then offshoring that will only be moving the problem elsewhere. Managing it remotely will only add to the complexity.”
Whilst some lessons have been learnt in the rush to offshore applications, productivity losses in development activity alone can still account for deficits of up to 20% due to staff attrition in offshore locations and other factors, according to Compass.
The company suggests that current economic pressures have created the strongest driver for streamlining software portfolios and replacing ageing systems since the year 2000.
“Before any decision is taken to offshore or outsource it is vital to assess the nature of the application from the standpoint of its criticality and importance to the business,” Hughes said.
Studies by Compass of operations where the full life cycle of application development has been outsourced have shown productivity drops of up 60% as poor knowledge of the business function affects efficiency of the development. These losses are particularly high when development is outsourced to an offshore location.
Some IT departments are recognising that application portfolio management could help them reduce the cost of maintaining their business suites, but feel challenged in identifying inventory, collecting the right metrics and applying the resulting analysis toward decision making.
Gartner recommends use of an application triage framework known as TIME (for Tolerate, Invest, Migrate and Eliminate) to evaluate which business applications need the special attentions of on-site software support, and which could be handled effectively offshore or managed by an external service provider.
Top-performing organisations are already taking advantage of the economic crisis to replace legacy systems, modernise the application portfolio, streamline operations and reduce costs with offshoring, Compass has confirmed.
But Hughes warned it has to be done judiciously. “It is important to outsource the right type of development project and ensure that business analysis skills are kept in-house in order to make any savings. The loss of functional expertise – people who understand the business function the software is supporting – has a negative effect on the productivity of application development.”