First-time offshoring customers often encounter a rash of unexpected difficulties, such as lower-than- anticipated cost savings and the need to send IT managers overseas for extended periods to resolve project problems. So serious are these issues that more than half of customers end outsourcing contracts prematurely, according to a recent survey.

Nevertheless, some offshoring customers that have encountered problems with overseas engagements have stuck with their providers, learned from their mistakes and applied the lessons to strengthen those relationships.

Offshore surprises

Organizations that send some of their IT work overseas have to contend with all sorts of challenges, including time zone, cultural and language differences.

As a result, dissatisfaction with offshore outsourcing is on the rise, according to two independent surveys of IT managers and businesses conducted earlier this year.

Last spring, Chicago-based DiamondCluster International surveyed 210 senior IT executives at Global 1,000 companies and 242 executives at outsourcing service providers and found that over the previous year, the percentage of users satisfied with offshoring providers fell from 79 percent to 62 percent. Even more telling was the number of customers who prematurely ended domestic or offshore outsourcing contracts within a year: That figure jumped from 21 percent in 2004 to 51 percent this year.

Several factors have contributed to dissatisfaction with offshore outsourcing agreements, says Tom Weakland, a managing partner at DiamondCluster. Fierce competition for top talent among offshore providers has led to increased employee turnover, and the type of work that customers are sending overseas is becoming more complex. Both of these elements are leading to a rise in troubled projects and missed deadlines.

Moreover, because the number of offshore providers has risen dramatically, buyers are facing increased risks, such as the possibility of vendor financial instability or the inability of new entrants to attract and retain top talent at low costs.

And customers often underestimate the changes wide-scale outsourcing deals can entail. "You're talking about complex business change and transformation," Weakland says.

It's not surprising that PricewaterhouseCoopers reported similar results in a study released in September. The firm surveyed IT and business executives at 156 financial services firms, and only half of the respondents said they were satisfied with offshore providers, citing problems with cost overruns, staff retention and cultural differences.

But dissatisfaction doesn't seem to be slowing the offshoring trend. In the PricewaterhouseCoopers survey, 74 percent of the respondents said they plan to increase their use of offshore contractors.

While some dissatisfied clients have jettisoned their offshore agreements, others have hunkered down to learn from their mistakes.

At one point in his career at Cable Scope, Bret Brase worked with Indian outsourcing companies whose sales pitches would include the claim that they were able to do work while their U.S. customers were sleeping. But Brase discovered that following the sun isn't all it's cracked up to be. "The difficulty is that you need to collaborate," and that's a problem when one party is asleep, says Brase, now a partner at the New York-based provider of spot advertising for cable television.

So when Cable Scope decided last year to modernize a 16-year-old automated system that enables its customers to buy and sell media content, it didn't turn to India. Instead, it looked a little closer to home and asked Argentina-based Globant to put together a needs assessment, straighten out the business logic and revamp the system from its IT center in Buenos Aires.

Although Cable Scope has benefited from being only two hours behind Globant's IT workers, Brase and his colleagues still had a rocky road early on. "We weren't nearly as prepared as we should've been to manage these guys, and it's going to cost us time," says Brase. For example, on the front end of the system modernization effort, the Globant team created a set of data prototypes that met Cable Scope's requirements, says Brase. But when the Globant team developed graphical user interface (GUI) screens afterward, the information on the screens didn't meet expectations. So he and other Cable Scope executives had to fly to Argentina for a few weeks to "pound through the communications," he says.

Lesson learned: "We should have asked for detailed mark-ups [of the GUI screens] because a picture is worth a thousand words," says Brase. "Business owners often can't describe what they want until they've seen it."

Because the Globant team is working efficiently, Brase estimates that the project should be finished within 14 months, or one month later than expected.

Now, Cable Scope is looking to hire someone to oversee all of its key projects and essentially act as the IT liaison to companies like Globant.

Lesson learned: Never underestimate the time or resources needed to manage an offshore contract.

In addition to communication problems, lower-than-expected cost savings can also disappoint novice offshore outsourcing customers. Part of the problem is that many new customers buy into the hype that they're in for huge savings, when offshore vendors tout development rates of US$15 per hour while US$90 is common in the U.S.

But those per-hour charges are only the tip of the iceberg, says Lee Jones, CIO at Stratex Networks in San Jose. That's because many clients of offshore contractors fail to account for time zone differences and project delays that lead to extra travel for the customer, says Jones. As a result, actual costs can end up being closer to US$45 an hour, he says.

Lesson learned: Time and travel equal money.

The quality quandary

The quality of code is another sticking point. Jones, who uses offshore developers for special projects to supplement his own internal IT department, says code produced offshore doesn't necessarily meet domestic standards.

"There is a difference between people who can code and people who can write production code," says Jones, explaining that someone writing code for a production application should be able to ensure that the code has the ability to "fail gracefully" when it runs into trouble.

To address that issue, Jones has learned to put together detailed coding specifications for vendors, along with rigorous acceptance criteria for the code that's produced.

Lesson learned: Make your needs extremely explicit.

Security is another concern. Brian Chess, chief scientist and security researcher at Fortify Software Inc. in Palo Alto, Calif., says he's seen code written by offshore providers that could potentially expose customer records.

"If you don't ask [offshore providers] to pay attention to security, they don't think about it," he says. "The code that I look at from a security standpoint is just awful."

Lesson learned: Assume nothing. Detail all security requirements.

For five years, United States Cold Storage has been building a successful relationship with Cognizant Technology Solutions, a developer based in N.J., that has teams in the U.S. and offshore. It began with a project to connect all of U.S. Cold Storage's warehouses over a WAN using Web programming tools.

Since the initial collaboration in 2000, the N.J.-based provider of refrigeration warehousing and logistics has since tapped Cognizant to maintain its IBM AS/400-based warehouse management system. It's also integrating radio frequency identification technology into the company's existing electronic data interchange and warehouse management systems, says director of information systems Tim Brennan.

"We experienced a learning curve and a cultural learning period," says Brennan.

"We were pretty intuitive, and I felt strongly that [Cognizant] had to be part of the IT team," he explains.

So Brennan visited the Cognizant offices in Chennai and Bangalore in January 2000, and he and other executives at U.S. Cold Storage encouraged the Cognizant team members from both the U.S. and India to visit its plants in California, Illinois and Texas to gain a better understanding of its business. "They were an amazingly quick study," says Brennan.

"They were up to speed and coding within a couple of months, which is amazing given the complexities of our business."

Lesson learned: Taking time upfront to get a head start on the learning curve pays off on the back end.

The more U.S. companies deal with offshore outsourcers, the more complex and demanding the relationships prove to be. But among the many lessons to be learned from offshore experiences is that, like any vendor relationship, offshore partnerships need time, resources and patience to develop properly.