Outsourcing to Foreign Countries can sometimes create the Illusion of Saving Money

India Outsourcing

Outsourcing Web Development to other countries can create the Illusion of Saving Money

A lot of people talk about saving money by outsourcing to foreign countries such as India. However, my personal experience is that it actually costs way more than doing it in the US if you are a resourceful entrepreneur.

I’m sure there are some firms out there that are truly good and cheap. I also know that there are way more US development firms that overcharge, but if you can find the cost efficient in the US, the effects are much better than the good in many foreign nations.

This post is not about how the miscommunication, off hours and what not could make development more expensive. No, I’m talking about pure projected spending at the beginning. Here are my experiences:

Outsourcing to offshore teams I estimates takes 3x more hours than my in-house developer

There was one point where I seriously looked for an outsourced company as backbone developers for Viralogy. After looking around, I found a firm that seems really professional, has been around for close to a decase with dozens of engineers, and built all the websites for National Geographic in each country.

More importantly, their programmers charge $10-15/hour. Compared to a full-blown traditional development firm in the US, that’s a tiny fraction of what it would cost. It all sounded very promising (besides a tiny bit of that language barrier).

However, very safely, I asked them to do an estimate of a project that we were working on. My in-house programmer previously made an estimation, which was about 88 hours(which he didn’t exceed much afterwards). The foreign firm gave me an estimate too, and it was shockingly 350 hours.

WHAT?

How could it be so different?

After weighing the cost, we decided not to use them.

Another outsourced offshore firm is by far the best out of a dozen firms my friend worked with

Almost a year later, I was talking to a entrepreneur friend who seemed to have a lot of experience working as and with software engineers. He recommended me an Indian firm too. I told him about my last experience and I was skeptical about it.

He told me that it’s normal that most of the offshore development firms are terrible and not well trained, but sometimes you can find that one good one that is just smack better than everyone else. He said he worked with over a dozen of them and finally found that one firm that is reliable and substantially stronger than the rest.

I thought, hmm, well if a person has been through the trial and errors and found a good firm, then why not check them out.

They told me they charged $18/hr. More expensive, but not mighty terrible. But from my last experience, I asked them to do an experimental project first.

Outsourced Firm II estimated a project to take 20x longer than my friend in the US

My friend wants to create a minimum barebones job listing site that is focused on startups called Mart of the Start, and asked me for help/reference. I looked at the screenshots and decided it was easy enough and could be finished within a week.

I then forwarded these screenshots to the off-shored firm and asked them to first give me an estimate.

Now I rarely get astonished, but this number pretty much astonished me.

215 hours.

That’s 215 hours x $18/hr = $3870.

True, this is a relatively normal price for a full website, but like I said, this is a super simple website. I estimated this to take less than 5 hours for a really experienced web developer. The firm told me it would take 35 man days.

OK, think that the project is harder than I believe it to be? After this offshored firm game me these numbers, I immediately referred my friend to another friend I have who I know is reliable and charges $25/hr.

After looking at the project, my developer friend in the US said that he would charge around $200-300 and finish it over a weekend.

The funny thing is, after I told the offshored firm this and said that I can’t work with them, they said, “Thank you for the response. We however would like to mention that a test project just to check our coding capability can certainly reduce the efforts by around 50%.”

Oh, now you realize I’m evaluating you and so your “efforts” can decrease by 50%? What is that? Also, even if they were 50% off, they were still ripping us off. And remember this is supposedly the good offshore firm that was WAY better than the other dozen that my friend worked with.

Still consider offshoring your development but be extra cautious

Again, I’m not saying all these firms are bad and would make you lose money. There are certainly firms in the US that charge $150/hr and would say it takes 100 hours to complete. There must be some good solid firms in various countries that would accelerate your business like no other.

However, I want to remind all of you not to get fooled by the hourly rate they pose. Just because they are working from foreign countries and the hourly rate is low, doesn’t mean they are saving you money.

Anyone else have experiences with outsourced development firms that you want to share (any country) so the rest can learn from?

12 thoughts on “Outsourcing to Foreign Countries can sometimes create the Illusion of Saving Money”

  1. @Yu-kai Chou  
    Conmen are there everywhere in the world and so do the sincere guys. It depends whom you meet. I am an Indian from India. I have seen the offshore / outsource industry growing here. The issue is whom do you approach and who gets successful in selling his services to you.
    Yu is putting his views on budgetary issues of hourly rates and time estimates which have sense, but that is not a general statement. There are very good firms in India who have provided long lasting and quality services to their offshore clients in budgets.
    You have met or deal with people who were either new to the market or were less experienced, but that is NOT India on larger scale. You could have quoted few of the Indian firms you met….
    As per the theory of conflict management the issue is wrong estimates and over budgeting and not which country is good or bad or do you know better than me.

  2. Hi,

    I would have to generally agree with the comments made by Yu-Kai, even though his own experience of the Indian outsourcing industry is relatively minor.

    I would add that one of the main problems we tend to have on large scale outsourced projects is staff retention. A good developer working for an Indian firm will be able to garner a much higher salary at a Western company based in India such as IBM or Oracle. Local Indian firms would generally not match these salaries to retain their staff.

    Neil

  3. Hello Hari,

    Thanks for the reasonable arguments. I welcome them so keep’em coming! 🙂

    My post is meant to say that some companies think that now they outsourced to India with very low cost/hr, they are saving money for sure. They end up paying a lot of money when in fact they could find solutions in the US that are 10x cheaper. I agree with you that in India you can find cheaper “developer friends”, as you see from my response to the first comment to Jerome M up there saying that finding a good Indian developer through eLance may work out better. So what I am saying is not the US beats Indian firms for sure, or Indian firms are bad to work with (I actually clarified twice in my post that there are great ones out there), but companies have the illusion of saving money just because they didn’t know a project could take 10 hours to complete instead of 300. The companies would think, “Wow, the project takes 300 hours! We saved 300 hours x $80/hr by outsourcing to India!” when they didn’t really save that much.

    I disagree that an illusion just lasts for a few months. If that is true, how come large firms everywhere that have been operating for decades still have tons of internal optimization to do? Some of the departments are completely wasting their resources and not creating any value, but the company doesn’t see it until they hire some expensive consulting firm to point that out to them. You can only see through an illusion if you spent time researching it and understanding it thoroughly. The fact that a company outsources sometimes means they don’t want to think about it at all, let alone understand it.

    I think your response has an unnecessary disdaining tone, but hopefully it’ll be gone as I answer your points 🙂

    In terms of how many datapoints I used, I agree I didn’t do a full-fledged market research project interviewing 500 firms and investigate if they pushed way beyond the time they needed to take to complete it. I’m simply sharing my own experiences (although you can somewhat add the other dozen firms that my friend experienced since I did work with the best one out there). Again, I’m not saying all firms are bad. My conclusion at the end is to “be careful” since just because a firm seems professional and has a low hourly rate does not mean you are saving money. That’s why I also asked people to share their own experiences and it would be wondrous if they shared their good experiences too.

    Also, the same principle applies to any other outsourced countries too. I just happened to try out India, and I don’t mean to say negative things on the country in general. Tons of my friends are Indians, including some great people in my company. All I am doing is sharing my experiences with those who read my blog so they can make decisions based on it.

    If your friend came to you and said, “I tried buying this product twice, and all of them were really bad. Maybe you should be careful when you buy it.” Would you answer, “Your conclusion it completely baseless because you have such few data points” ?

    Again, thanks for the comments. More is welcomed!

    Yu-kai

  4. Hi Yukai

    I am not trying to defend my brothers n sisters back in India who is doing all the outsourcing jobs. Just couldnt resist pointing out some errors in your conclusion.

    Have you heard of ECONOMIES OF SCALE? What is true for a small operation is not true for big operation. The cost advantages of outsourcing in large scale is clearly demonstrated and made use by several big companies. They dont do those things for so long just based on mere ILLUSION !!!. Come on…Illusion just lasts for couple of months. Companies cannot put illusion on their earnings report (apart from Madoff, ENRON and some other hedge funds lol).

    When you do small projects say for 5000$, no matter where you go, you will get quotes that vary 1000% from each other. You will get the same response if you try to look for people here in USA. Also you are comparing companies in India with your developer friend. I am sure you can find millions of “developer friends” in India who will do this way cheaper and faster and BETTER than the US counterparts.

    Your general conclusion of outsourcing to India with just three data points (that too projects with just 5000$ budget) is totally baseless. And also your reference point being your “DEVELOPER FRIEND” in US is also totally random.

    I would have given the same response if it involves Philippines, China or any other country.

    1. a very typical indian comment. always assume that your counterpart is a fool (“have you heard of economies of scale?”), and make comments with absolutely NO data points, and yet sounds like you are the know-it-all guy (I am sure you can find millions of “developer friends” in India)

      geez. go back to your lovely homeland and get an outsourcing job dude. you are 1000 times better than 100,000 developers in the US and China and Philippines.

      1. @John Sullivan. a very typical US comment. ridicule anything that is not US … hmm small minded? uhhh … closed minded! I have used both US based and Indian based consultants for many years. I have found both bad and good from both sources. One constant is “buyer beware”, no matter where and what you buy. And the better you understand your vendor, the better off you’ll be. Getting software programmed is not like buying something “off the shelf”.

  5. Pingback: Outsourcing Tasks Instead of Projects at Optask
  6. I’m a young entrepreneur that just launched the private beta of my website, http://www.that1spot.com. The direction I went for the development of my site was that I outsourced it to India. I had been working on the planning and building of the site for awhile. I struggled to find developer(s) that I trusted, that had the time, and that I could afford. Time was ticking and I wanted execute and build on this idea I had. I decided to use elance.com to find developers to build that1spot.com. It was a tough decision to choose someone to develop my site for me. I had to base my decision on previous work, previous client feedback, and if the developers actually understood the project. I ended up awarding the project to a team of developers in India that was within my budget.

    Some of the issues that I ran into were the language barrier and the time difference (which were expected), and the project took them longer to complete than what they had told me it would take. It was somewhat difficult getting things changed on the site in time frames that one would like. Also maintenance and support is not as available as it would be if you had a local or developer in-house. It wasn’t all bad, they were good in getting the site developed and within my budget albeit a late delivery. They were good in dealing with my needs and requests. In the future, I may have them work on a few minor changes or features to the site, but in the long-run I do plan on finding a local developer. My suggestion would be to try and find someone local or get someone in- house for your development. You will be able to communicate with them a whole lot more and a whole lot better. Execution can be completed faster and probably with greater satisfaction.

    that1spot.com is a social network for sharing your restaurant recommendations with your friends.

    1. Haha, that’s the best comment I’ve ever seen with a plug, so I’ll let that through Jerome 🙂 Thanks for commenting and sharing your experience btw.

      Oh I do want to add, sometimes I think getting a talented individual developer from India is more productive than hiring a big firm, IF you are able to figure out their quality. Big firm engineers are guaranteed to be OK, but often slow/corporate. More or less, OK is not what you want when you are putting your life on a startup that is life or death.

      On elance or such you can find individual ambitious and smart developers from all countries, and if you can see their past work is excellent, it might work out better.

      Don’t take my word for it though 🙂

      1. haha, thanks for letting it slide. I just wanted to share the site so that others can see the development of an outsourced site from developers from India. Also, I felt I needed to explain what the site was.

        Thanks again. I enjoy your blog. Great and helpful content.

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