Outsourcing is not always a bargain, JMSB prof says

By Jason Gondziola

The old adage “out of sight, out of mind” may serve you well when avoiding that nagging pile of dishes, but it’s hardly a wise practice when outsourcing business functions overseas.

That’s the view of Bouchaib Bahli, an assistant professor in Decision Sciences and Management Information Systems at the John Molson School of Business, who will receive JMSB’s Distinguished Junior Researcher Award.

Many businesses hope to reduce the high cost of labour in the IT industry by hiring offshore companies. It’s a growing trend in North American business, and Canadian companies are increasingly turning their gaze to India, the Philippines and Eastern Europe to handle their custom software needs.

Potential risks

It’s clear to see why: programmers in developing countries charge nearly one-tenth of their onshore counterparts. But eager companies may not be aware of the potential risks involved.

“You have to quantify those consequences,” said Bahli, who received his PhD from HEC in 2002. “You have to look at what kind of mitigation you can use to attenuate those scenarios.”

Bahli, working under a $200,000 grant from FQRSC, NSERC and SSHRC, has developed a model for risk assessment in IT outsourcing. He cautions that many businesses deal with overseas software companies in the same way as with software developers at home: they put all of their programmatic eggs into one basket and assign an entire application to one company.

“If there is some problem with the application, you have no choice but to go back to them,” he said. “You become a hostage. They know that you become hostage. You depend on them. Then they start increasing the price, and you have no choice but to pay them more.”

Bahli identified a number of risk areas for offshore outsourcing and developed models to help companies assess risks and make more informed decisions.

For example, the more specific the application, the more risky it is to have it developed exclusively by one outsourced company. It’s not unlikely for a custom application to exceed one million lines of code, according to Bahli, and that can put the Canadian company at a distinct disadvantage.

Joint team

One solution is to put a joint team between the offshore and onshore companies to aid with supervision and planning. Another would be to break the software contract into more manageable pieces and outsource the work to multiple companies.

“You can take the application and send small chunks to different vendors, and if a vendor starts playing around you can send it to another vendor,” he said, adding that the practice is common in the restaurant business. “They don’t order 20 boxes of lettuce from one business. They usually do it from two or three suppliers. You keep your options open.”

In mediating these risks, it’s possible that a Canadian company won’t be saving the money they thought. Distributed management or joint teams can lead to inflated costs that may discourage offshore outsourcing.

“The only thing we gain is cheap labour,” Bahli explained.

“If you add up all the management and transition costs, you might find yourself paying $30 an hour. In Montreal, you’re paying maybe $45 to $50, but at least you can control it.”