The 2005 Offshore Outsourcing Research Report, produced by Ventoro LLC, an outsourcing consulting and market research company based in Portland, Ore., found that only 9 percent of any cost shavings from offshore outsourcing was the result of lower overseas labor costs.
Overall, the report, which was publicly released this week, found that the cost savings from offshore outsourcing was not the 35 percent to 40 percent or even higher that many corporations assumed they would gain went they decided to go overseas, said Phillip Hatch, Ventoro president.
Hatch, who prior to founding Ventoro two years ago, worked as a market researcher and executive with Luxsoft, a Russia-based outsourcing company, said that one of the key reasons why outsourcing programs fail is because customers have absurdly unrealistic expectations about cost savings.
It was not unheard of, Hatch said, for customers to go into an offshore outsource engagement expecting to received 80 percent cost savings.
Instead, the Ventoro survey found that savings averaged slightly less than 10 percent for all the offshore outsourcing projects that Ventoro reviewed, Hatch said.
The average cost savings increased to 19 percent when Ventoro excluded offshore engagements that were deemed to be a failure by executives or engagements that didnt have a prior baseline to compare cost savings.
However, the report concluded that cost savings of 30 percent is a realistic target for well planned and managed offshore outsourcing projects.
"The big reason why people achieve cost savings is not because of low-cost hourly cost of labor," Hatch said.
Instead, the savings is coming from the quality of the systems that the offshore outsourcing and software development firms are producing, he said.
"The sophistication and execution of offshore firms is very good at this point," he said.
Both corporate executives and even the vendors have to get away from the notion that per-seat costs or overall employee costs are what is going to generate savings or return on investment from an offshore outsourcing program, said Hatch.
The survey found that 46 percent of the cost saving was generated from process improvement that resulted from the outsourcing project and 45 percent from the quality of the system or service provided, according to Hatch.
However, generating any cost savings proved difficult for more than 50 percent of the offshore engagements that Ventoro reviewed.
The survey found that 28 percent of the offshore outsourcing or offshore development project actually increased costs and 25 percent did not generate any significant savings.