The decades-old approach of shipping IT work offshore in order to cut costs has serious limitations when exposed to the "pressure-cooker environment of today's IT function," according to Catalyst DevWorks.
The US-based software engineering firm spoke to a number of companies that have evaluated or used offshore application development, which yielded four hidden costs that can cancel out the anticipated gains of paying lower hourly programmer rates.
The first hidden cost stems from communication gaps which arise from teams working out of diverse locations. Agile software requires frequent iterative releases, which are dependent on rapid real-time collaboration, development of trust, and shared understanding between developers and line-of-business project owners.
However, differences in time zones do not make for seamless communication and can act as a major barrier to developing the teamwork and trust critical to effective execution, Catalyst DevWorks' report claims.
It also suggests the distance between teams could cause budgetary pressures when it comes to distributing systems or processes. While Catalyst DevWorks acknowledges costs will inevitably rise as projects unfold, it's likely they'll see a dramatic rise if operations have to be coordinated across borders.
Another major hidden cost of IT offshoring is being required to rework elements of a project due to errors in development. The report notes how this will often result in employees having to work additional hours, which can impact on staff morale, as well as project deadlines and budgets.
The fourth hidden cost highlighted in the report revolves around research which shows that offshore providers face a higher than average turnover rate: up to 40% per year, according to the National Association of Software and Services Companies.
This is the product of high demand intersected with a relatively limited talent pool in these countries, according to the report. The impact back home for a business is higher costs, as it means an outsourced team would be completely turned over approximately every two years.
These hidden costs have promoted firms to bring strategic business projects back within their home country – a practice called 're-shoring' in the manufacturing world, the report concludes.