Is your off-shore engagement profitable


Is your off-shore engagement profitable

Joseph Vargheese PMP CISA CSM

Atlanta GA USA

joevgh@gmail.com

Dated: 2012-03-09

 (This article is a qualitative assessment, so please don’t quote anywhere)

 

Background

Most companies do off-shore software development to save cost.  But in most cases it is not effective to have off-shore environment unless closely monitored. Even some of best run environment are not as profitable as perceived. Following method will help to measure off-shore effectiveness.  This model used to measure T&M offshore model. It can also be extended to use for outcome based as well as fixed cost models.

Perception  

Perception is deceiving.  Attraction of lower cost compared to onsite cost alone does not determine the cost effectiveness. There are overhead costs, not figured into this perception.

Early warning signs

  • Are you hearing your manager’s complains about off-shore management difficulties?
  • Are you hearing that your team members are not happy with off-shore software delivery?
  • Are you hearing off-shore communication difficulties?

It is the time to measure your offshore productivity.

Understand variables

The first step is to understand following variables

  1. Communication overhead (Communication overhead is due to time zone and cultural difference  generally calculated at 10% of cost. This is the time spend by your onsite team to communicate work required from offshore)
  2. Capacity utilization (Billed hours vs actual productivity hours reported against task assigned)
  3. Onsite governance cost (Cost of onsite governance to verify the deliverables produced from offshore environment estimated as high as 10%)
  4.  Employee Productivity (Productivity of the offshore employee compared productivity of onsite employee)
  5. Software rework cost on offshore created issues (case by case basis)

Measuring these variables

                Client should start measuring these variables on regular basis.

Average offshore operations is at 6$ loss per resource hour

How is that possible?  Let us examine some average numbers.

Capacity Utilization: 75%

Resource Productivity: 75%

Communication overhead: 10%

Onsite Governance: 15%

These numbers look very attractive to any normal user.

Let us assume your onsite cost per hour is 75$ your offshore cost is 25$ per hour. 

Your overall productivity is 75% * 75% which is approximately 50%

Your earned value is at 75$ * 50% = 37.5$

Your expense is 25$ + 75$ * (10%+15%) Onsite governance cost = 43.75$

In effect your offshore center is at loss of 6$ per hour of a resource

Steps to improve

  1. Negotiate reasonable offshore rates.
  2. Improve capacity by scheduling available capacity and tracking on regular basis (Target: 90%)
  3. Improve your productivity by having KT programs and frequent onsite and offshore travel programs (Target: 85%)
  4. Reduce onsite governance cost to 5% (Convert your offshore coordinator to a contributing resource)
  5. Reduce communication overhead by having overlapping working hours (5%)
  6. Reduce or avoid rework by putting together KT and close feedback mechanisms

Conclusion

Client required to have constant monitoring of these numbers to ensure minimum variance on achieved performance.  It is recommended to add a part-time role of offshore performance manager to monitor and govern the progress achieved.

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About Joseph Vargheese
email:joevgh@gmail.com.

2 Responses to Is your off-shore engagement profitable

  1. Sreeju says:

    Good article. Offers a different perspective.

  2. Pingback: Countries and Rates for off-shore software development | josephvargheese

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