Total Cost of Engagement

The Real Total Cost of Engagement in Outsourced Software Projects

Offshore outsourcing vendors like to highlight hourly rates because they sound pretty low when compare to the equivalent rate for US-based engineers. But that is far from the reality of the Total Cost of Engagement (TCE), which is what you are going to end up paying.

To the cost of the engineering talent you must add the cost of additional management, travel costs, the painful cost of staff turnover, and a certain amount of productivity loss due to the distance and degraded communications. When you add it all up, the cost of doing development at an offshore location can be as high as 80% of the US cost. The claim that you can get two to three engineers offshore for the cost of one US engineer does not hold true, it’s an illusion.

For example, a team of 16 engineers would have a TCE of $ 2.8M in the US, $ 2.2M in India, and $ 1.6M in Mexico (i.e., 80% and 59% of the US costs, respectively).

You could try and hold back on some of this overhead (e.g., skip on assigning an onshore Engagement Manager). You could. But nobody will remember these “savings” when the project fails.

Engagement Manager

No matter what the size of the project, you need to have a US-based manager in charge of the outsourced project to keep track of every aspect of it and to make sure that everybody is in sync. This is true regardless of the outsource locale, be it offshore, nearshore or onshore.

Tech Leads

You need to have a technical lead for every five or six offshore engineers. These leads act as the bridge between the offshore and US teams and must, therefore, work a shift that overlaps both teams. They must be senior enough to be able to track the work done by both teams without becoming a burden to either team. They must also understand the implications of daily decisions, and be able to clarify any misunderstandings before they create a crisis.

For a nearshore or onshore location, this ratio can be much higher, or even eliminated altogether, lowering the overhead cost. That is because the proximity (i.e., within two time zones) allows the local and remote teams to communicate throughout the day, as needed (e.g., using IM or voice). This casual style of communication just about eliminates the need to hold formal meetings at off hours.

Many offshore projects fail for not paying attention to this role, or worse, for not staffing it sufficiently or at all.

Without the appropriate talent in this role, a few things are likely to happen,

  1. The teams will play email ping-pong, sending questions and counter-questions back and forth. One team will ask a question today only to get a request for clarification to the question the next day.
  2. As the email trail grows longer and more frustrating, after a while, the teams will quietly detach from one another, making more and more local decisions without closing the loop with the other.
  3. The work of each team will eventually divert from the other and by the time anybody notices, it may be too late.

Having US-based technical leads will avoid this trap and give the project a chance to be successful.

Staff Turnover

An ugly, unspoken component of the overall cost is staff turnover. Losing an engineer means that you’ve lost all the training you invested in him/her and now you have to spend time and money to find and interview a replacement. Then, you have to train the replacement.

This is very negative for team morale, for both the offshore team and the US-based team.

Productivity Loss

For every three engineers in India, expect the output of two US-based engineers. There are plenty of great engineers the world over and particularly in India, but most of the people your outsourcing vendor will attract (and retain) will be entry level people with modest skills.

India’s outsourcing industry has boomed and this has resulted in a shortage of experienced engineers.

Another source of productivity loss is the overhead in communications between teams which must be formalized to be effective. It requires extra time to prepare documents and slides that would not be necessary were they able to communicate often, throughout the day.

Travel

Two words: expensive and grueling. But it’s absolutely necessary.

The engagement manager must visit the remote site at least once every six months. Lots of thing can change in that time and it may be very costly not to take a look for yourself on a regular basis. This is also good for team unity and morale which needs to be boosted regularly.

As of the time of this writing, a trip to Bangalore cost $1,700. Coach. Without delays, the trip takes 22 hours (which you won’t want to do in coach class a second time). For less time and money you could travel every other month to Mexico. Without the jet lag.

Once you commit to a 22-hour trip plus the additional adjustment time, you’ll want to stay for at least two weeks. Your trips to Mexico or other nearshore locations could be as short as one or two days, which is about what it would take to check status and do team building (particularly if you do it often enough).

The smart money says that you will also want to rotate offshore engineers through the US location in extended stays. This is a big morale booster and it will help each team think of the other as people, not “them.” The rotating engineers will take back with them a lot of the subtleties that can only be acquired and appreciated in person.

The best video conference yet to arrive on the market will not eliminate the need for regular, face-to-face interaction.

With a nearshore team, the equivalent effect can be accomplished by shorter and more regular visits, scheduled around significant events (e.g., design reviews, start of alpha testing).

Summary

The Total Cost of Engagement (TCE) for outsourcing projects includes more than hourly rates. Management overhead, degraded communications, travel costs, the cost and pain of turnover and just plain inefficiencies add dramatically to TCE.

Most of these costs are directly related to the separation in time between teams.

Depending on these factors, TCE can be 20% or higher between a nearshore and offshore location.