On again, off again

At Nielsen Media Research, the TV and radio audience measurement company, offshore outsourcing plays a part in nearly every link of the product chain. But it's not the whole chain.

"We choose to outsource a lot of different things, but we manage these projects as if there's a single staff made up of three groups - an offshore team, an onshore team and a core group that remains internal to the company," says Nielsen CIO Kim Ross. In so doing, Nielsen is pioneering a new and more selective approach to outsourcing that relies less on transferring IT jobs abroad and more on using overseas talent in tandem with IT personnel stationed closer to home.

Offshoring is growing

By all accounts, more companies are shifting IT functions overseas. AMR Research reports that 20% of U.S. IT organizations already have moved portions of their technology services offshore. Gartner says the real percentage is twice that and will jump to 80% of large corporate IT departments this year.

"The reason for this growth is really quite simple," says AMR researcher Lance Travis. "Cost savings from offshore outsourcing are too compelling to ignore."

The savings come from farming out work to places such as India, China and the Philippines, where programmers are paid as little as $10 per hour. The salary differential between developers in the U.S. and similarly skilled professionals in countries where wages are significantly lower can mean annual savings as high as 50%, according to James Brewer, vice president of global services delivery at Keane, a provider of application  outsourcing services in Boston.

Michael Doane, an analyst at Meta Group, says the savings is closer to 15% to 20%. "The biggest mistake companies make is to assume that their savings will match the salary differential," he says. "There are other expenses that need to be taken into account, such as the cost of additional project oversight, communications and travel."

But the advantages of offshore development go beyond simple cost reduction. "For new development projects," Doane says, "taking a follow-the-sun approach allows the work to proceed 24-7. Completed work can be reviewed and next steps planned during the onshore cycle, and then coding can move forward during the offshore cycle."

Known as global sourcing, globalization or the global virtual resource, this development model generally involves three groups of IT professionals working closely together: company employees who can work face-to-face with users and translate business requirements into technical specifications; third-party developers who work in the U.S. or in Canada (where wages are lower than in the U.S., but not nearly as low as in a country such as India) and share the same time zone with the internal team; and offshore personnel who perform a variety of functions at a fraction of what it would cost in the U.S.

Nielsen learns

Nielsen discovered early on that offshore development work was about more than replacing well-paid U.S. programmers with less-expensive foreign engineers. The media research firm began experimenting with offshoring in 1995 and now does 25% of its development work offshore through Cognizant Technology Solutions. Nielsen has had success with three types of offshore projects: ongoing software maintenance, software conversion projects (such as Y2K) and original application development.

"Most of our IT work has to do with producing our product - collecting data from 30,000 homes on a daily basis, analyzing that data and packaging it in a proprietary database built by Nielsen," Ross says. "We use Cognizant in every link of this chain except data collection."

Nielsen learned by experience to determine which types of projects were most cost effective to move offshore. "We see little value in offshoring legacy work," Ross says. "Next-generation applications is where the payoff's the greatest."

His reasoning is that Nielsen's internal IT staff already understands the legacy applications and that the time spent transferring that knowledge to offshore personnel would eat any potential savings. On the other hand, new applications are driven by new business opportunities that require a rapid response, which the internal staff is usually too busy to provide. For instance, when advertisers wanted better information on Internet usage, Nielsen quickly launched a new Internet usage measurement business by using Cognizant programmers in India.

Although he says the time saved on project development is difficult to quantify, Ross says new projects can be started more quickly because Nielsen doesn't have to recruit new people. This lets the company respond swiftly to unexpected developments with minimal risk. If a new application fails to pan out, then the cost of the initial design work will have been significantly less than if it had been pursued at home. But if the application bears fruit, then the offshore developer will be in an ideal position to support it, significantly reducing the cost of ongoing maintenance.

But Ross adds that only stable, well-articulated projects should be moved offshore. "That's the first acid test," he says. "If the requirements need continuous end-user feedback and will be defined as you go, then you're better off keeping that project in-house."

Ross also learned that splitting one development project between two teams of programmers - one offshore, the other onshore - does not work well. When Nielsen attempted this, the additional development cycles and overhead required to coordinate the two teams offset any economic advantage. There were also timeline issues. "We found we couldn't manage the critical path quite so well," he says.