Date: Tue, 16 Dec 2003 22:01:28 -0800 From: Norm Matloff To: Norm Matloff Subject: told ya so To: age discrimination/H-1B/L-1 e-newsletter Firms sending work offshore sometimes regret it, pay dearly Cleveland Plain Dealer 12/14/03 Chris Seper Plain Dealer Reporter Bill Julka thought there was a fortune to be made in India. What a price he paid to find out. Four years ago, Julka, the president of Smart Solutions Inc. in Bedford Heights, hired a batch of Indian programmers to create a software program. After missing the deadline by a year and losing hundreds of thousands of dollars, Julka was so shellshocked he didn't try overseas work again until this year. Sending technology work to places such as India, China and Eastern Europe, commonly known as "offshoring," won't automatically cut costs or boost a company's bottom line. While labor costs drop when you send work overseas, other factors - cultural chasms, communications issues, shoddy work, poor management and unforeseen costs that include bribery in some countries - can quickly eat away at potential profit. "There are a lot of pitfalls and a lot of gotchas' and a lot of lessons learned when dealing with offshore companies," said Thomas Weakland, head of outsourcing advisory services at DiamondCluster International, a management consulting firm. As it turns out, many companies will - at least once - come away disappointed with their overseas work. Seventy-eight percent of companies in a DiamondCluster survey said they ended at least one outsourcing job early. Offshoring countries have the technical know-how to do high-tech work. But many overseas companies lack the business, organizational and management skills to deliver on what they promise, according to a report by the PA Consulting Group. In addition, companies sending the work overseas don't properly prepare themselves for working with foreign nations, the report says. Cleveland's Eaton Corp., which employs about a dozen Indian workers, has brought some of its work back. Company spokesman Gary Klasen said technology and communications issues caused those projects to fail, but he did not elaborate. Eaton has strict guidelines for the offshoring work its does, Klasen said. It limits work to projects that last longer than two months or involve software that needs only minor tweaking and improvements. "We look at trying to meet benchmarks for quality and cost efficiency," he said. "We ask, 'What kind of things can you have done in India that won't sacrifice an overall standard of quality?' " John G. Mays, an offshoring consultant in Avon who specializes in the former Soviet states, said some U.S. companies just aren't ready to deal with business done on the fringes. For example, firms should in many instances set aside 1½ percent to 3 percent of their overseas budgets for bribery. "There's a guy who will physically yank a wire out, and you have to give him $100 to put it back in," said Mays, a former computers and telecommunications officer for the CIA. "Companies are not ready for that experience." Mays can quickly tick off a laundry list of expenses many companies don't think of. Getting secure, consistent phone lines ("Overseas phones can be a party line") and scheduling regular trips to measure progress are rarely in the budget of a company considering offshoring for the first time. Sometimes the tax on bringing in foreign currency is so high that it's wise to set up accounts in a third country, he said. There are problems unique to every nation. China, for one, has notoriously lax intellectual property laws. William Lewis, an international liaison for Lexis Nexis in Dayton, tells companies not to send any software work to China they don't want copied 500 times. But logistical mishaps bury companies more often than extortion or corporate espionage will. According to PA Consulting, companies that begin offshoring work need to establish a strong team back home to manage the project, provide specific direction for the overseas staff and in essence reorganize the company to deal with its new overseas dimension. Businesses incorrectly think they will save up to 70 percent by sending a project overseas. Those margins are actually more likely 10 to 30 percent if a project is managed correctly, according to consultants. In Julka's case, he retained an Indian company in 1999 to write a complex, comprehensive software application for a financial services company. Julka's Smart Solutions was to be paid as deadlines were met. But the Indian company rarely made a deadline. "Here when we say 10 a.m., we mean it," Julka said. "There, 10 a.m. may mean 5 p.m." Telecommunications costs also spiraled out of control. Julka would lose phone connections as the Indian firm would transmit information, forcing him to spend more than expected on Internet bandwidth and overseas calls. Julka also said he was wrong to give the Indian programmers such a complex project instead of starting with a small, more manageable one. Months later, he moved the job to Russia, where it was finally completed, though he struggled there, too, because few programmers had adequate English-language skills. Work that was supposed to take six months took 18, and Julka said he lost hundreds of thousands of dollars - several times the cost of the project. "It took us four years to sum up the nerve to try it again," he said. But his tale is as instructive as it is cautionary. Four years ago, India had a nascent information technology industry. While many of the same problems exist today, bandwidth costs are cheaper and companies can handle larger projects. When Julka tried offshoring again this year, he built his own company in India, which he completely controls. He hired a staff in Ohio to oversee work with his company there. Both the Ohio and Indian employees make regular trips to each other. "Outsourcing takes constant collaboration," he said. To reach this Plain Dealer reporter: cseper@plaind.com, 216-999-5405