Date: 10.02.2004

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In the first part of this paper we have discussed the advantages of off-shore outsourcing and particularly outsourcing off-shore our software development operation or part of it.

In the second part we look at the factors which might increase costs directly or indirectly - and unfortunately eat up that dream of ours to cut 60% of our costs by relocating our software development off shore - and carry risks. Often the strongest part of an off-shore outsourcing offer is the promise of cutting 40 - 50 - 60% of our costs.

In the third part of our risk management series we shall look at the outsourcing process and the risks involved in each step as well as possible risk mitigation strategies.

Communication: Communication is one of the most crucial issue in off-shore outsourcing. Communication (or rather the lack of it) can kill projects and the whole outsourcing relationship. There are various sources of communication problems, such as language barriers, inability to communicate bad news or problems, cultural differences, etc.  Miscommunication,  misunderstanding and language barriers are also contributing factors to communication problems. When work is outsourced off-shore the time spent on communication will increase considerably.

Project management: the time spent on project management activities increases significantly. Related to this issue is the fear of loosing control, overview and influence on the project.

Global team management: when a software development team is dispersed globally, through many time zones, it is often difficult to manage and synchronize teams and pay attention to team and individual needs. Resources and time spent on these activities usually increases.

Cultural fit: here we have to think of, among others, work ethics, work style and corporate culture as well as more general cultural issues. In some parts of the world 9:00 AM means "around 9:00 AM" which might not be sufficient enough for our purposes. We also have to consider the fact that weekly, public and religious holidays are at different times in different countries. This can cause quite serious timing problems and even communication breakdown. Cultural differences influence management and work style as well as the way people deal with problems, deadlines and stress.

Time zone difference: as we had seen in the first part of this paper time zone difference can work for us (near 24 hour work cycle) but it can also cause odd working ours for our teams.

Security: these days security concerns are paramount which influences off-shore outsourcing. Questions like "Is this a safe country/city?" are asked more often and people expect an elaborate and reassuring answer. These questions also relate to the general business climate and political stability in the country in question. But security could also mean other measures a company is taking or required to take in order to meet certain requirements. On-site access security: security cards are used to access the premises and also for instant personal identification, or the building has 24 hour guard for example. Network and IS security - measures could include hardware and software firewalls, virus protection, power supply, backup and fall back operation, fire control, redundant hardware and software, etc.

Intellectual Property Protection (IPP): a very important question as IT off-shore outsourcing almost always means the creation and/or maintenance of intellectual property. Often, developing countries do not have the best reputation to protect intellectual property. It is very important to learn about the IPP law in the target country before the start of an off-shore outsourcing operation.

Training costs: at our off-shore outsourcing partner people often must be trained or re-trained to meet our requirements. It can be cross-cultural, general management, communication training for the top management, technology, process, project management, language training for the technical staff. In case training must be provided it will definitely increase our direct costs and can cause delays and timing problems.

Managing the outsourcing relation: the outsourcing relation does not work itself. It must be adjusted and evaluated regularly. Changes must be applied, contracting terms must be reviewed, etc. These activities will carry added costs.

Provider selection: selecting an off-shore service provider is a time consuming, and very often costly, process. It usually includes a "Country risk assessment" and "Service provider assessments". Finding reliable and up-to-date information is quite difficult.

Legal fees: off-shore operation might include quite considerable legal fees on-, and off-shore as well. Cost items include, contracting, agreements, IPP, company registration, etc.

Cost of redundancies: at the transition to off-shore we might not be able or do not want to immediately shut down our local operation or we have redundant management staff and functions. This means increased costs we have to bear.

Travel and relocation: usually travel costs will increase. It might also be necessary to relocate a few people off-shore from our company even for an extended period of time.

Service level: there is a very real risk that while we are busy relocating our IT operation off-shore our service level at the home ground will drop. Clients are lost, new clients are not acquired because of dropping service level. And news travel fast to the competition... The fear from dropping service level is one of the main reason why companies have decided not to go off-shore with their IT operation.

Employment: in these days, when unemployment in the IT sector returned to Europe and the US, employment became a very serious domestic and political issue. Social tension is growing against relocating jobs off-shore. The issue is often linked to globalization. Gartner predicted that by 2006 one out of 10 IT jobs will be relocated to a low cost country.

Staff turnover: influence on staff turnover and other HR issues is very limited. It carries the risk, for instance, that one day a key project manager just leaves the company without any notice, leaving a gap behing which might cause delays and cost increase.

Slower innovation: as increasingly complex and valuable tasks (design, R&D) go off-shore , technology innovation at the home ground might slow down.

Geopolitical risks: global and domestic political, economic and social issues play a serious role in off-shore outsourcing decisions. The key issues are stability, reliability and security. Unfortunately we do not have to go too far to see how SARS,  threat on global terrorism or the war in Iraq have influenced decision makers.