Bridging the Productivity Gap

Offshoring is still mainly driven by cost arbitrage, but a deficit in
IT-worker output may offset that gain. Look closely at who bears the brunt, and
plan for it

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 Trailing Indicators). 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.

Mapping Productivity

Global Services finds that the productivity gap is largely restricted to
IT services, particularly to software development and not so much to BPO
services. This is because BPO is more process oriented where chunks of processes
are migrated and where improvements can be made more easily. Comparatively, ITO
is a much more complex phenomenon that requires not just specific skill sets but
also knowledge about the client's business and the IT environment.

However, it would be
wrong to rule out the possibility of productivity gaps creeping into BPO
services. “Productivity gaps can occur in any function that requires some
level of decision making, including higher levels of BPO functions,” says
Meena Ganesh, CEO Tesco Hindustan (the offshoring initiative of UK-based
retailer, Tesco, providing both IT services and BPO support), Bangalore, India.

Second and more
importantly, our research finds that customers of global services are still
majorly preoccupied with the low-hanging fruits of offshoring which include cost
arbitrage, availability of skill sets, and a follow-the-sun concept.

“However, as the
maturity curve increases, these gains will level off and the issue of
productivity will become a significant issue in the next couple of years,”
says Atul Khosla, former Head of Everest Group in India. 

“If you talk to
clients, you will find that they are typically happy with cost savings,” says
Helen Huntley, VP, Research, Gartner. But in reality that cost saving is fast
disappearing. Highly productive offshore workers are seeing compensation gains
to narrow the wage gap with U.S. employees. In order to have a sustainable
framework for global delivery, one has to look beyond labor arbitrage. The focus
has to be clearly on underlying issues like lower productivity that will have a
great impact in the long run.

Defining Productivity

Productivity appears to be a complex issue and measuring it is even more
so. Despite metrics, productivity is an abstract notion in the eyes of many
managers.

That is why TPI
contends in its report that most companies are unable to develop proper metrics
to measure productivity. “Measuring productivity and effectiveness of
Applications Development and Maintenance (ADM) activities remain elusive....This
is a result of failed efforts within the ADM community to successfully measure
software-development productivity in a consistent manner, along with a perceived
lack of cost benefit of such measurement,” the report states.   

While assessing
offshore productivity companies should look at the overall value it brings to
companies. “It is important to measure the productivity of overall processes
and not individuals,” says Sarvesh Goorha, CEO, Six Sigma Consulting, an
offshore-consulting firm, Dehi, India. “Offshore companies are strong in
processes and have demonstrated enhanced productivity by improving processes.”
Besides, he says, lower worker productivity is actually a concern for vendors
who must bear the brunt of higher labor costs.

Customers should keep
business imperatives in mind while prioritizing metrics for productivity
measurement. For instance, productivity wasn't the most important factor for
Norwich Union, a UK investment bank, in how it structured its deals with Indian
service providers.

Gap In Process Maturity

A disparity in process maturity between customers and service providers
causes confusion, and hence a productivity gap, says Gartner. For example, it
says that four out of five customers' development teams are at level CMM
Software or Integration Levels 1 or 2, while most global service providers have
higher process maturity at Level 5. 

“One of the reasons why Extreme's relationship with EDS failed was because of lower productivity, which was due to its shared resources.” Paul Hooper,                            CIO, Extreme Networks

At
the lower CMM capability levels, customers typically fail to properly document
development or business processes. This immature approach becomes a nightmare in
IT outsourcing when the in-house team has no idea what applications might be
running on the systems it wants a service provider to manage.

Training and Investment

Extreme Networks, now happy with its offshore productivity, was careful
not to repeat its initial mistakes. CIO Paul Hooper says, one of the reasons why
Extreme's relationship with EDS failed was because of lower productivity,
which he attributes to its shared resources. At HCL, the company has dedicated
resources. “It costs more but I have my priorities and I know what I want.”
Hopper is clear that offshoring is not about labor arbitrage but the value the
partner can bring in, and says that upfront investment is important in
offshoring.

Although global
service providers are known to speak of 40% cost-reduction, savings accrue over
a period of time. Service providers must invest in adequate training before
offshore workers can become productive. These are hidden costs that can push up
initial investments.   

Understanding the
business context forms an important part of training for which onsite exposure
is important. How else can the offshore team design a custom application without
understanding the business imperatives?

Balaka Baruah Aggarwal

Republished with permission from Global Services   

(www.globalservicesmedia.com)

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