Offshore Outsourcing: The Three- or Four-Year Itch

CIO — There’s a sense of relief in Scott Testa’s voice as he talks about terminating the last of his company’s offshore outsourcing contracts this summer.

As COO and CIO of Mindbridge, an intranet software provider, Testa has overseen engagements with a handful of Indian IT service providers since 1999. In the beginning, the lure of lower costs from offshore outsourcing was hard to resist. And indeed, through 2002, Testa couldn’t have been happier with the results. He was saving his mid-market company 30 percent on the application development and maintenance work he otherwise would have sourced domestically.

But by 2003, Testa began to see the benefits slip away. Staff turnover at the Indian vendors increased. The quality of work on offshored projects decreased. And Testa’s internal staff was growing weary of the time and travel required to keep the relationships on track.

Things finally reached a breaking point last year. "[Offshore outsourcing] made a lot of sense for us at one time," says Testa, who will sever ties with the last remaining Indian vendor in June. "But it made a lot less sense for us in 2003. And by the end of 2004, it was right there in our face. It just wasn’t nearly as cost-effective—or effective—for us anymore. We’d get better quality and lower costs by doing the work domestically."

Testa’s experience is a sign of the outsourcing times. In the late ’90s and early part of this decade, many CIOs jumped on the offshore outsourcing bandwagon. They were either feeling the lure of potential savings or being pushed by CEOs or boards with similar dollar signs in their eyes. A surprising number of companies ended up going offshore first and figuring out a strategy later.

Now, as marriages arranged during the heyday of offshore outsourcing have matured, offshore outsourcing satisfaction rates have dropped. Last year, IT consultancy DiamondCluster International reported that the number of buyers satisfied with their offshoring providers fell from 79 percent to 62 percent, and the number of buyers prematurely terminating an outsourcing relationship doubled to 51 percent. Also in 2005, PricewaterhouseCoopers found that half of the financial services executives it surveyed were dissatisfied with offshoring.

Several years into the craze, expectations about offshoring have come crashing down to earth. In a recent study of offshore outsourcing results among financial services companies, Deloitte Touche Tohmatsu discovered that although offshore performance during the first few years was consistent with expectations, many companies encountered an alarming drop-off in both cost savings and quality after three years. "It is a lot of work to manage these relationships. If you don’t put the resources and the work into managing this relationship well long-term, you are destined to have issues," says Testa. "That, quite frankly, is what happened to us."

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