OK, I wasn’t going to write on this for a while until I read the article “Outsourcing ban: Who gets hurt?”.  Viral Thakker (Head of Sourcing Advisory, KPMG) and Sudhakkar Ram (CEO, Mastek Ltd.) make such knuckle-headed statements as “off-shoring is one of the most proven strategies to optimise costs” and “Studies by McKinsey have shown that outsourcing has lead to economic advantage in the US.”  Now granted this is the Indian Economic Times so I will grant them a little space for their biased opinion . . . as they have a vested interest.

I don’t oppose outsourcing in total, it is why we outsource that bothers me.  Call centers are outsourced regularly and the prevailing reason for US businesses is to reduce the cost per transaction.  Call center management rarely considers that the transactions increase with more failure demand (defined as the transactions that have to be done again because of rework and progress chasing).  By outsourcing our failure demand in call centers we increase costs as we add volume, contracts to manage, teaching the outsourcing company our business, turnover and even language lessons (heard from a tier one bank executive).  There are probably other costs I have not accounted.

IT outsourcing strategy has similar reasons as it is a business cost reduction exercise based on cost per head.  However, with software a production mentality of the development of software must exist.  An approach I whole-heartedly disagree with.  Software development is not a production line, it is not born from scientific management theory.  The value work in software development lies with the software analysts and coders, these people that have industry knowledge are routinely outsourced with great regularity in the US at great cost.  This overseas shuffle prevents the ability to work with customers to “see” the work, communicate effectively and in general work as a system to produce quality software.

We may be fooled into thinking by lowering transaction and per head costs we are winning the cost reduction game with outsourcing.  There may be times to outsource (and there are);  But when we look at transaction and per head costs as the driver . . . the end-to-end costs are frighteningly high.