Fung Institute for Engineering Leadership | UC Berkeley
Insights in Engineering Leadership
Offshoring Operations
Matt Johnson, NetApp
Patrick Chan, Yahoo
Mark Christensen, Yahoo
Dave Barrow, Yahoo
Steven Sprouse, Sandisk
Advisor: Ikhlaq Sidhu, UC
Berkeley
Revised Sept 28, 2012
M
The practice of offshoring has become an integral part of how most
high-technology companies are operating today. The choice of
whether or not to engage in offshoring is an issue companies deal
with in various stages of their development. For some, to offshore is a
choice; for others, it is a practice essential to their success. How
companies approach expanding their existing model to incorporate
offshoring is unique to each. There are, however, common mistakes
that need not be repeated. This paper seeks to expand
understanding of effective offshoring practices by presenting
examples of the most common errors, a framework of effective
execution and two case studies.
Pitfalls
Complexity of project requirements
When deciding which projects to execute with an offshore team,
company leadership must consider of the size and complexity of the
product requirements. Projects involving numerous or complex
requirements tend to require a higher degree of interaction between
the product team and the customer/product management team.
To ensure that the offshore product team can maximize time spent in
development and design rather than waste time waiting on feedback
for a specific feature or customer-use case, the team must plan
functional requirements carefully. The greater the complexity of the
project, the more often the design team will have to validate project
assumptions or direction with a particular development feature or
item.
If the offshore team has simple and clear requirements for a product,
it can work far more efficiently without having to be in constant
communication with customers or product management.
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Overestimating cost savings
Many teams begin estimating cost savings from offshoring a project with the premise that the
offshore team can complete the entirety of the project.
This premise fails to take into account the management and direction of the project. According to Dr.
Jones, a basic rule of thumb is that at least 20% of a project should be performed on-site.1 This
ensures a measure of “control” and direction over the project as a whole.
Another common pitfall in the area of perceived cost savings is the misconception that using offshore
personnel on-site will cost less than US based workers. In reality, the cost differential between
offshore staff and US based workers is typically insignificant. Jones recommends that no more than
30% of the work should be done by on-site offshore personnel.
Cultural mismatch
According to Eran and Tija, organizational and team culture are malleable, but national culture is
very difficult to change.2 This becomes potentially problematic when we consult the table above of
countries listed by Power orientation index, a measure of the emotional distance between
supervisors and subordinates. Cultures with high indices are structured from the top down and thus
have greater emotional distance, whereas cultures with lower indices place less import on hierarchy.
It is imperative that business leaders pay attention to the types of national culture supervisors and
subordinates are from respectively to facilitate effective collaboration and minimize conflict.
1
Offshore Outsourcing: Trends, Pitfalls, and Practices (Part 1 in a Series), Sourcing and Vendor
Relationships Advisory Service by Dr. Wendell Jones, Senior Consultant, Cutter Consortium, sourced
from pdfbookfiles.info/ebook-files/offshore-outsourcing-trends-pitfalls-and-practices.html
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The figure above compares three nations’ dimensions of national culture as defined by Geert
Hofstede.2 They are, from left to right, as follows:
1. Power Distance: The degree to which individuals accept a hierarchical order.
2. Individualism: The degree to which a people identify with “I” as opposed to “We”.
3. Masculinity: Assertive vs. cooperative
4. Uncertainty Avoidance: The degree to which members of society are uncomfortable with
uncertainty and ambiguity.
5. Long-Term Orientation: Short-term oriented societies believe in absolute truths and focus on
quick results. Long-term oriented societies believe truth is situational and are more inclined to save
and invest.
This research provides a guideline for understanding the origin of intercultural conflicts. For
example, a work environment in which employees from a country with a higher Power orientation
index are expected to collaborate with employees from a country that favors individualism and
rejects managerial hierarchy may be prone to conflicts.
Likewise, if one team is from a culture that is averse to uncertainty, its members may favor more
modeling, feasibility, and up-front specification. A culture that tolerates uncertainty, on the other
hand, may be inclined to “dive in” and undertake rapid prototyping and an iterative design approach.
"GEERT HOFSTEDE." Countries. Web. 04 Apr. 2012. <http://geerthofstede.com/countries.html>.
2
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Lack of clearly documented agreements
When engaging with an offshore company, it is important to establish contracts that govern the
expectations of both the offshoring and offshored entities. There are numerous areas that, if taken
for granted, can present significant risk of failure of the offshore relationship.
Agreements between companies need to cover many areas3:
Area
Legal
Scope and cost
Examples
Intellectual property rights, brand protection,
arbitration
What is delivered, cost, overruns, penalties
Measurements
Security
SLAs, benchmarking
Access control, authentication, encryption,
source code management
Quality Standards
Test procedures, software development
practices
Agreements can take time to author, but if they are left incomplete or error-ridden, it can lead to
poor execution of the project, cost overruns, or the termination of the offshore project before its
completion.
On a day-to-day level, agreements determine the interaction between the on-site and offshore teams.
Defined procedures for specific test environments, test procedures, development practices and etc.
are necessary to meet the expectations of the outsourced team.
Finally, differences in culture and methods of communication can endanger the project.
Documenting project discussions clearly via email or formal documents can resolve many of these
risks.
Time zone differences
Accommodating time zone differences is one of the most challenging issues that companies face
when offshoring. Often, it is the degree of time difference between potential teams that drives many
of the organizational decisions involved in setting up an offshore team. The problem is exacerbated
when more than two teams need to collaborate. While teams in either site can extend work hours to
maximize work time overlap, it is often better to find ways to minimize inter-site dependencies and
make each site as self-sufficient as possible.
Several techniques have been developed to deal with time zone differences, such as:
1. Timeshifting
2. Nearshoring
3. Follow-the-Sun
4. Round-the-Clock
“Risks, Benefits, and Challenges in Global IT Outsourcing: Perspectives and Practices”, Dhar &
Balakrishnan, 2006.
3
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Timeshifting is the simplest and most common strategy. One team will shift their work hours so as to
achieve overlap with another team.
According to “nearshoring” strategy, work centers are be established in lower cost countries that are
in roughly the same time zone as the home office. For example, Japan nearshore to China, and US
companies nearshore to Mexico or Central America. This strategy seeks to minimize the time zone
difference between on-site and offshore teams.
Follow-the-Sun breaks an ongoing task into hundreds or thousands of smaller tasks. Each site works
on a portion of the tasks, then hand it off to another site. This approach allows for almost constant
progress on the project. Follow-the-Sun is appropriate for “ongoing, well-suited tasks”4 and requires
the team to follow a structured process with daily documentation and communication.
Round-the-clock coordinates schedules of teams so that there is someone working at any point in a
24-hour cycle. Work is routed to sites that are operating in their local time zone. This technique is
well suited for “highly granular transactions that typically take just a few minutes to complete.”4
High turnover rates
The attrition rate on any outsourced project can be expected to be at least 15% within a year,
according to Schwartz5 and a study by Yiu and Saner6. All trends indicate that this voluntary job
change rate is increasing. According to both Schwartz and Yiu, the cause of this high attrition rate
can be attributed to the enormous success of outsourcing and the finite number of candidates.
The critical cost of this turnover is manifested in the recurring cost of training new personnel at the
price of the overall productivity of the respective team. Senior members of these teams are expected
to train new personnel at the cost of their personal productivity.
The secondary effect of this high turnover rate is the amount companies are obliged to spend on
salary packages to attract new candidates or to keep current staff from leaving. This not only adds to
the cost of the project, but it also diminishes the value proposition of cost reduction from on-site
employees.
Confusing operational effectiveness and strategy
One of the most basic mistakes companies make in offshoring considerations is to confuse
operational effectiveness with company strategy. Stated best by Bean5, “Operational effectiveness is
about working cheaper or faster. Strategy is about the creation of a long-term competitive advantage,
which for technology companies is usually the ability to create innovative software.”
Companies move into offshoring relationships with the intention of creating their product in a more
cost-effective environment. However, these companies often lack thoughtful planning as to what
parts of the products or service can be outsourced effectively. Outsourcing the core of a product
without being able to sustain innovation or the core value of the product would be a grave mistake.
Underestimating level of training necessary and the need for an onboarding plan
Carmel, Erran, and J. Alberto. Espinosa. I'm Working While They're Sleeping: Time Zone
Separation Challenges and Solutions. [United States]: Nedder Stream, 2011. Print. 83.
4
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When considering a new site, companies must pay attention to the process, costs, and opportunity
costs of the time taken by the incumbent team to train the offshore team. The training plan should
account for reduced productivity of the new employees as they adapt to their new roles.
Avoiding internal competition
As responsibility is transferred from one site to another, the incumbent team’s concerns about job
security and status will become an issue. In many cases, where offshoring is undertaken to allow the
incumbent team to work on higher value projects, it is important to ensure that they understand the
benefits of offshoring to themselves as well as the company.
Framework
In order to best address the what, where, and how of foreign outsourcing, a methodology will be
presented. The most effective framework came from “Strategic Outsourcing” by Maurice Greaver.
Greaver outlines a multi-step methodology to be followed to achieve successful outsourcing,
summarized below:
8-step methodology
1.
Planning
a. Form a Cross Functional Team to study, explore and implement the outsourcing
option.
i. Evaluate the proposed project/process to be outsourced against certain
criteria to verify its “outsourceability”
1.
Does it require significant management involvement?
2. Does it require significant communication and interaction with other
parts of the company?
3. Does it have complex requirements? Answers of yes to any of the
above 3 items would mean the project is a poor candidate for
outsourcing. In general, the following fields tend to be offshoreresistant: Healthcare (Doctors, nurses), Real estate sales,
Construction, Marketing, Government, Law.
ii. Project leader selection is critical
iii. Ensure all necessary functions are represented on CFT
iv. Engage advisors
v. Hire external consultants/experts
b. Risks should be identified and understood, and should contain mitigation plans
c. Ensure regular project status reports/communication
2. Exploring Strategic Implications
a. Determine how outsourcing fits in with your company’s long-term strategies
i. Corporate Vision
ii. Current and future core competencies
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iii. Current and future competitive advantages
iv. Current and future cost structures
3. Analyzing costs/performance. Cost is by far the number 1 reason for outsourcing. A
comprehensive make vs. buy cost comparison must be made. The “make” costs should take
into account “activity costs” for a specified volume, inclusive of labor and overhead; raw
materials, inclusive of shipping, storage, handling and overhead; and cost of invested capital.
The “buy” costs should take into account the providers quote for a specific volume;
anticipated future pricing adjustments, ongoing costs that don’t disappear when outsourcing,
plus one-time costs associated with outsourcing.
a. Measure existing
communications)
costs
of
activities
(including
salaries,
benefits,
travel,
b. Develop cost comparison models
i. Include future costs and capital costs
ii. Careful not to overestimate cost savings
1.
Rule of thumb is substantial savings accrues only when 70% or more
of the work is performed off-site
c. Analyze current and future performance
i. Measure current performance (Productivity, Quality, Cycle Times, Output)
ii. Estimate cost of poor performance (Impact of poor quality and longer cycle
times on overall organization’s costs)
4. Selecting Country/Location. China and India are current undisputed champions of
offshore outsourcing due to their low wage levels and enormous pools of labor. Up and
coming countries are Israel, Ireland, Australia, Indonesia, Canada, Singapore and the
Philippines.
a. Cost Considerations
i. Raw Materials
ii. Labor
iii. Communication
iv. Transportation
v. Capital
vi. Energy
b. Workforce Considerations
i. Skilled workers/engineers
ii. Education
iii. Language
iv. Understanding of Culture
v. Communication
vi. Time zone differences
c. Business Environment
i. Government policy/Political Stability
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ii. Tax benefits
iii. Economic growth
iv. Infrastructure
v. IP
5. Selecting Providers
a. Develop evaluation criteria
b. Identify qualified providers based on evaluation criteria
c. Prepare detailed RFP’s
d. Provider visits
e. Evaluate proposals and select a prime provider candidate
6. Negotiating Terms
a. Reach an agreement on specific terms
i. Well-defined scope of service
ii. Performance standards
iii. Pricing
iv. Management and control
v. Binding agreement clearly documented
vi. Exit provisions
7. Transitioning Resources
a. Addressing human resource issues
b. Transfer factors of production to outsource provider
i. People
ii. Equipment
iii. Facilities
8. Managing Relationships
a. Monitor performance and employee turnover
b. Set up oversight council
c. Evaluate results
d. Resolve problems
e. Build strong, committed relationship with provider
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Case Studies
Dell
Michael Dell founded Dell Computer in 1984 while he was attending the University of Texas at
Austin. Dell's initial success led to the company’s rapid growth in both domestic and international
markets. Since then, Dell has grown to become one of the largest Personal Computer manufacturers
in the world. However, during its development, Dell committed many of the common mistakes of
offshoring. In the 1990s, the leaders at Dell saw that credit card and airlines companies were
successful in reducing operating costs by opening customer support call centers in India. Lured by a
huge talent pool and potential savings, Dell opened its first customer call center in Bangalore, India
in 2001.
HP, IBM, Apple and Dell dominated the PC and laptop market in 2003. One of the differentiators
between the major players was the customer support provided to customers who bought a new
desktop or laptop. Apple had been at the top of the American Customer Satisfaction Index (ACSI)
during this period with scores in the 80s out of 100. HP and Dell were second and third in customer
satisfaction, respectively. However, in 2003, Dell had a rapid decline to an index score of 62 and was
forced to take action. In November 2003, Dell stopped routing all technical support calls to the
Bangalore center for the Optiplex desktop and Latitude laptop lines. The calls were routed to US
based call centers, and the event became a black eye for the company. The media latched on to the
story and portrayed Dell’s attempt at offshoring as a failure. Despite the negative press in the US, the
call center was still fielding calls from other parts of the world.
There were a number of factors that contributed to the call center’s failure to satisfy US based
customers. One factor was hiring practices of the management in Bangalore. They were not
identifying and retaining talent. This led to training issues, and managers tried to cover their tracks
by giving staff scripted answers, which customers did not appreciate. A second factor was the rapid
growth Dell was experiencing at the time. There was simply more call demand than offshored call
centers could handle at their staffing levels, exacerbating the first factor. Call volume also led to
extremely long hold times and very poor quality connections to the customer. The last factor was that
fundamentally, Dell lost sight of the key metric for the call center: customer satisfaction. Staff
measured call volume levels, number of calls handled and tickets processed, but failed to take
customer satisfaction into account.
Despite this setback, Dell pressed on and expanded its operations in India. Then CIO Randy Mott’s
goal was to continue to reduce operational cost. Mott’s goal was to drop the IT budget from 1.91% of
revenue to 1.44% of revenue. After the Bangalore event, he was quoted as saying “[Dell] has learned
its lesson”. Dell opened its second call center in Hyderabad India in the same year it opened the
first. Two more call centers were built in the following years, in Chandigarh (2004) and Gurgaon
(2006).
Dell also capitalized on the demand for US base technical support centers. In December 2008, Dell
asked that customers pay $12.95 per month for a guarantee that their technical support center would
be US-based. They also offered a similar $99 option new PC owners’ first year.
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T-Corp
T-Corp is a Fortune 500 company whose name and description has been changed to protect its
identity. Bobby Sanders leads the Global Services Division of T-Corp and oversees six captive
offshore centers in India, Singapore and elsewhere. Most of the software developed by T-Corp is
embedded software. In 2000, the Strategic Software Division (SSD) decided to try moving lower
value work offshore of their Ohio engineering site. Their adherence to the appropriate methodology
of offshoring led to success with little complication.
The Ohio site had 30 engineers working on embedded software for new and existing products. The
offshoring plan involved moving the Modification Request work (MR) to a site in Singapore. TCorp’s management knew that the MR work was distracting the engineers from being able to work
on new product lines. There was over 2 millions lines of code with almost no documentation.
Eventually Sanders and the director of the SSD division used the engineer’s timesheets to deduce
they were spending 33% of their time on MR.
They then calculated the costs associated with an offshore venture. In the US, the cost of an engineer
is 150,000 USD. At 33% of their time x 30 engineers, Sanders and his team found that T-Corp was
spending $1.5M USD on MR work. Sanders estimated the initial efficiency factor of offshored
engineers would be 50%, i.e. a new engineer from Singapore would only be half as efficient as their
already-trained US counterpart. By the end of the first year, however, they estimated offshore
engineers’ efficiency increasing to 95% of that of their US colleagues. They estimated the initial cost
of knowledge transfer to be 92,000 USD to train 5 engineers in the US for up to 5 months, including
lodging, airfare, and a per diem. The amount of production lost by engineers who would spend time
training new employees was also included in the calculation of cost as 45,000 USD. Other costs, such
as leased communication lines, software licensing, hardware purchases, and tax considerations were
also included. Though initial costs were high, calculations projected that 2M USD would be saved
over 5 years. The positive cumulative savings started accruing by the 18th month.
In 2004, the model was revisited and evaluated for accuracy. The operations in Singapore were
operating at closer to 100% efficiency by this time because the engineers there focused solely on MR.
The engineers in Ohio had a third of their time back to focus on the new product lines in
development. The costs of a single MR was calculated at 7000 USD to fix in Ohio, and 4500 USD to
fix in Singapore. T-Corp considered this a largely successful offshoring project.
In contrast to the Dell case, T-Corp had a very specific goal in mind, which was to reduce the costs of
a modification request. They had setup metrics and cost models to ensure that they were on track to
meet their goal. They invested heavily on the knowledge transfer up front, to realize the longer-term
gain over time.
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Bibliography and References


Carmel, Erran, and Paul Tjia. Offshoring Information Technology: Sourcing and
Outsourcing to a Global Workforce. Cambridge: Cambridge UP, 2005. Print
Offshore outsourcing: Trends, Pitfalls, And practices – Dr. Wendell Jones, 2003,
http://www.michigantechnologyleaders.com/pdfs/CutterOffshoreOutsourcingPartI.pdf

“Risks, Benefits, and Challenges in Global IT Outsourcing: Perspectives and Practices,
Dhar & Balakrishnan, 2006,
http://www.isqa.unomaha.edu/dkhazanchi/Teaching/ISQA45908596/Readings/Supplemental%20Readings/week%2012/RisksBenfits%20and%20Challenges%20in%20Global%20Outsourcing.pdf

“The Pitfalls of Outsourcing Programmers”, Michael Bean, sourced March 30, 2012,
http://forio.com/resources/article/the-pitfalls-of-outsourcing-programmers/

Offshore attrition on the rise, Ephraim Schwartz, Infoworld, January 23, 2007,
http://www.infoworld.com/t/business/offshore-attrition-rise-972


public.kenan-flagler.unc.edu/Faculty/swaminaj/research/.../NS2.pdf
Talent Recruitment, Attrition and retention: Strategic Challenges for Indian Industries in the
next decade, Dr Lichia Yiu and Dr Raymond Saner, March 2011
http://www.nationalhrd.org/uploads/saner-Yiu-Turnover-in-India-V6.pdf












Blunden, Bill. Offshoring IT: The Good, the Bad, the Ugly. Berkeley, CA: Apress, 2004.
Greaver, Maurice F. Strategic Outsourcing. New York: AMACON, 1999.
http://timesofindia.indiatimes.com/business/india-business/Michael-Dell-to-openthird-call-centre-in-Mohali/articleshow/1054106.cms
http://www.silicon.com/management/cio-insights/2003/11/25/dell-drops-india-callcentre-39117062/
http://www.itworld.com/041110dellindia
http://articles.latimes.com/2008/dec/11/business/fi-callcenter11
http://www.infoworld.com/t/business/dell-sets-fourth-indian-customer-supportcenter-033
http://www.icmrindia.org/casestudies/catalogue/Marketing/Dell%20Customer%20Con
tact%20Center%20Operations%20in%20India.htm
http://www.itworld.com/050816dellrating
http://www.zdnet.com.au/growing-pains-hit-dells-customer-service-139116249.htm
http://en.wikipedia.org/wiki/Dell_computer
http://en.wikipedia.org/wiki/Market_share_of_leading_PC_vendors
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National rankings consistently place UC Berkeley’s undergraduate
and graduate programs among the world’s best. Berkeley is home to
top scholars in every discipline, accomplished writers and musicians,
star athletes, and stellar scientists—all drawn to this public
university by its rich opportunities for groundbreaking research,
innovative thinking and creativity, and service to society.
The Coleman Fung Institute for Engineering Leadership, launched in
January 2010, prepares engineers and scientists —from students to
seasoned professionals—with the multidisciplinary skills to lead
enterprises of all scales, in industry, government and the nonprofit
sector.
Headquartered in UC Berkeley’s College of Engineering and built on
the foundation laid by the College’s Center for Entrepreneurship &
Technology, the Fung Institute combines leadership coursework in
technology innovation and management with intensive study in an
area of industry specialization. This integrated knowledge cultivates
leaders who can make insightful decisions with the confidence that
comes
from
a
synthesized
understanding
of
tec hnological,
marketplace and operational implications.
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