Calculating the Extra Costs and the Bottom-Line Hourly Cost of Offshoring

Offshoring software development activities to a remote site in another country continues to be one of the key strategies to save development cost. However, the assumed economic benefits of offshoring are often questionable, due to a large number of hidden costs and too simple cost calculations. This study is a continuation of our work on calculating the true hourly cost that includes the extra direct and indirect costs on top of the salary-based hourly rates. We collected data from an empirical case study conducted in a large international corporation. This corporation develops software-intensive systems and has offshored its ongoing product development from Sweden to a recently on-boarded captive company site in India. In this paper, we report a number of extra costs and their impact on the resulting hourly cost as well as the bottom-line cost per work unit. Our analysis includes quantitative data from corporate archives, and expert-based estimates gathered through focus groups and workshops with company representatives from both the onshore and the offshore sites. Our findings show that there is additional cost that can be directly or at least strongly attributed to the transfer of work, working on a distance, and immaturity of the offshore site. Consideration of extra costs increases the hourly cost several times, while the performance gaps between the mature sites and the immature site leads to an even higher difference. As a result, two years after on-boarding of the offshore teams, the mature teams in high-cost locations continue to be "cheaper" despite the big salary differences, and the most positive hypothetical scenario, in which the company could break even, is unrealistic. The implications of our findings are twofold. First, offshoring of complex ongoing products does not seem to lead to short-term bottom-line economic gains, and may not even reach breakeven within five years. Second, offshoring in the studied case can be justified but merely when initiated for other reasons than cost.