chapter  3
16 Pages

Costs

WithJohann Rost

American and Western European companies receive offers for software development from emerging countries such as China, India, and Eastern European nations almost every day. Sometimes the prices put forward are as low as 25 percent of the price offered by onshore providers for the same services — in extreme cases, even below this rate. These numbers suggest that cost reductions of at least three quarters should be expected if software projects are outsourced to offshore vendors. Nevertheless, most case studies report savings of only 15 to 30 percent. Even these considerably smaller savings are achieved only after the offshore relationship has been established and the cooperation has found its rhythm; the first few projects frequently involve no savings at all and sometimes entail even higher costs than in the case of onshore workers. This raises the issue of the reasons why this could happen.

Offshore projects include a number of hidden costs of which first-time customers are frequently not aware — e.g., costs for governance and communication. In failed offshore scenarios, adequate governance often was lacking. In other cases high communication costs led to reduced communication and consequently to compromised management quality.