Fierce Debate About “Offshore Productivity Gap” Exposes Big Disagreement Over Evaluating ITO Costs

A recent article about the complexities of modern ITO pricing, featuring commentary from Pace Harmon Principal Marc Tanowitz, has created quite a stir among the industry experts who …

A recent article about the complexities of modern ITO pricing, featuring commentary from Pace Harmon Principal Marc Tanowitz, has created quite a stir among the industry experts who read Nearshore Americas. In particular, numerous readers have taken to the forum of the LinkedIn group for The International Association of Outsourcing Professionals (IAOP) to discuss a controversial statement by Tanowitz that cost calculations should factor in “it can take from 1.5 to 2.5 offshore IT developers to do the work of a single US developer.”

Almost unanimously, readers were curious as to where the data backing the claim came from (Tanowitz cited unspecified studies). In addition, readers expressed a wide range of opinions, some agreeing completely with the assertion, others vigorously denying it, and some taking middle ground. Here are a few representative responses:

“I don’t agree with the ‘study’ completely. The offshore developers in India , China and other outsourcing destinations will work 12-14 hours / day for the same wage without complaining (It’s kind of culture there), if necessary whereas the US developer is done in eight hours – no more no less. I am not sure if that factor is taken into account! If you do the math that way, they will complete the same job in same man-days’ time if not man-hours. This is reality. They compensate by working longer hours.” – Sampath R, Global IT/Marketing Sales Professional, Business Software Solutions, based in Singapore and US.

“In general I agree to the quote – if a company doesn’t have experience with ITO they’ll probably need to hire two offshore developers instead of one local. But I think that the root of the problem is not that the offshore developers are less skilled or too different (from cultural point of view) but in the communication. If a company adjusts its processes a bit, uses modern development methodologies, integrates offshore developers into their team, they can move from f ‘1.5-2.5’ closer to one. – Oleg Feferman General Manager at Existek (Offshore application development services), Ukraine

“I would agree. Communications challenges alone, plus cultural factors argue that 2x personnel are needed. In my own first-hand experience in Content development offshore, I do find that this is reduced over time – meaning that as tasks become repetative, the factor goes down to 1:1, but development is by its nature a unique task set each time, so there are almost never economies of scale. So yes, in fact 1:2.5 may be low; on past projects I found it to be one to four.” – Dr. Tim McGuinness Content Creation / Process / Content Marketing Consultant, Miami/Ft. Lauderdale

“Of particular concern isn’t how many offshore/nearshore developers it takes but rather have buyers sized the engagement based on the delivery needs. You can’t go into these things and say, we used 30 developers so now we either want 10 or we are willing to do the same work with 45 because they are 1.5 times cheaper. YOU MUST size the engagement and go for the delivery of value irrespective of the costs. Once you have all of the facts then and only then can you start figuring out exactly what needs to be done to achieve end goals.” – Jerry Durant, Chairman Emeritus – IIOM (International Institute of Outsource Management), Philippines

So where exactly did the data supporting Tanowitz’ insight about an onshore/offshore IT labor gap come from? With assistance from the helpful people at Pace Harmon, Nearshore Americas determined Tanowitz actually obtained the data in a Forrester Research presentation that used data from domestic technology outsourcing provider Systems in Motion. Debashish Sinha, Chief Marketing Officer of Systems in Motion, agreed to shed a little more light on the ratio in a phone discussion with Nearshore Americas.

“The data is in the context of a discussion on the productivity of application development/enhancement outsourcing,” said Sinha. “The productivity of offshore IT outsourcing varies dramatically by the kind of work being done.”

According to Sinha, the productivity of individual offshore IT development teams can vary dramatically, but in general onshore teams are 1.5 to three times more productive. He said the data comes from both an empirical study Systems in Motion commissioned at the University of Michigan as well as experiential data based on Systems in Motion’s own experience and that of its customers.

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“The reasons include time zone differences, cultural issues and communication barriers,” Sinha said. “You’re not working face to face. It creates lower productivity due to cycle times. A cartain amount of the discrepancy is also structural. A lot of offshore development teams leverage a large number of junior resources, who have much less productivity than senior resources.”

Ultimately, Sinha said he is “not quite sure” offshore IT developers can ever fully close the productivity gap with onshore developers. “It can take people earning $30 an hour offsite more time to do something than one person making $70 an hour onsite.”