The case for offshoring business and technology services often rests on a foundation of cost savings, quality, efficiency and higher productivity. But upon closer review, it appears that many global-sourcing companies require higher numbers of workers in offshore locations to complete the tasks that had been performed by fewer employees in their company offices.

This productivity gap is one of the risks in offshoring. A recent TPI study contends that lower productivity in offshore locations is an issue that should be taken into account when developing a framework for global-services delivery. The report says that only 27% of respondents are satisfied with productivity levels at their firms’ offshore-delivery centers (see Exhibit 1). The data indicates that companies with five or more years of experience don’t necessarily have higher productivity-satisfaction levels; they have simply adjusted their expectations.

The most startling revelation of the TPI report is the fact that one-third of experienced companies are planning at least a two-to- full-time employee (FTE) ratio in measuring offshore-to-in-house productivity. If these numbers hold true, expected cost savings can quickly evaporate. Of course not all companies employ at a two-offshore-to-one onshore ratio, and engagements that structure deals calling for annual productivity gains of 10% or more are becoming increasingly more commonplace. It’s not unusual for productivity gains to exceed expectations — not surprisingly, training and style of governance are major variables.

Embracing Disparity

So why is productivity higher for staff rather than outsourced workers? “In-house productivity is higher because those people are working in a familiar environment on the same applications year after year,” says Girish S Paranjpe, President, Financial Solutions, Wipro Technologies, India.

However, a contributing factor beyond environment, is that the level of expertise of staffers is often far higher than that of replacement workers; global service providers often hire inexperienced workers because that is all what is available to them. Global service providers attempt to offset this difference in various ways including team training and certifications (that include incentives) coupled with management-imposed standards and metrics that yield continuous productivity improvements. In short, constant pressure is applied to employees of service providers to improve their output.

Yet, lower productivity is also mitigated by the fact that global-services delivery is often a round-the-clock — or multishift — implementation. Thus the same amount of work can be performed in the same amount of days, often for less money — paradoxically with more workers.

But simply throwing more bodies at a project is a risky idea. A Gartner report entitled Five Reasons Why Offshore Deals Fail enumerates lower productivity as one of the reasons why offshore deals occasionally go bust. The authors contend that customers not only have unrealistic expectations about cost savings but also about productivity levels at offshore locations. The report then goes on to explain that companies often do not take into account issues such as disparity in process maturity between the customer and the service provider, higher attrition levels, low development experience, lower morale of employees and lack of clear cut expectations.