Communications of the ACM

Communications of the ACM

A Risk Profile of Offshore-Outsourced Development Projects

By Charalambos L. Iacovou, Robbie Nakatsu
Communications of the ACM, June 2008, Vol. 51 No. 6, Pages 89-94
10.1145/1349026.1349044
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As part of a development initiative, Life Time Fitness, a U.S.-based health club chain, outsourced the implementation of a software application to an Indian information technology (IT) services vendor. The application was a decision support system to evaluate prospective gym locations. The company's decision to pursue offshore outsourcing for its development was motivated by the opportunity to tap into low-cost, well-trained IT talent.

Life Time Fitness pursued this initiative with fervor. The vendor was evaluated carefully and the project was planned in detail, but despite these efforts the development initiative ran into problems. The quality of the early deliverables was poor due to inadequate knowledge transfer between the U.S. resources and the Indian professionals. Moreover, miscommunication between the two groups compounded the project troubles, resulting in delays and overspending. The woes continued to escalate until Life Time Fitness terminated the contract and brought the system back in-house for its own programmers to rework [10].

While this story is troubling, it is not atypical in the offshore outsourcing of software development [1]. Unless an organization is well-equipped to deal with the challenges of offshore outsourcing, its projects are bound to go awry. Indeed, a survey reveals that eight out every 10 businesses that have entrusted application development to an offshore vendor have experienced major problems due to inadequate preparation and ineffectual management [3]. Still, given the significant economic benefits that companies can potentially reap, it is not at all surprising that offshore outsourcing is growing in size and importance. According to Forrester Research, 65% of American and European enterprises (with 1,000 or more employees) currently use offshore providers for application development; another 13% plan to begin doing so in the next year. Two years ago, only 45% of such organizations utilized offshore vendors to develop applications [7]. Given this trend, there is a clear need to better understand how to manage offshore projects more effectively.

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As a recent ACM report suggests, outsourcing "magnifies existing risks and creates new threats." Thus, offshoring clients will be well advised to spend the resources needed to assess the increased exposure to risk and its sources, and to identify ways to mitigate it.

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While problems can develop in both in-house and domestically outsourced projects, offshore-outsourced projects are especially prone to failure. This is a significant concern for IT managers who are constantly seeking ways to increase the success record of their development efforts. To assist such managers, we conducted a study of the risk factors of offshore-outsourced development. These factors refer to conditions that can present a serious threat to the successful completion of a project if left unmanaged [9]. Given the evidence linking project risk factors to outcomes [11], we believe that a clear identification of the risk profile of such projects will help managers steer their projects to successful completion [1].

While prior studies have examined the risks of software development [9], such investigations did not specifically consider the offshore outsourcing context. Rather, these studies focused on in-house and domestically outsourced initiatives. Due to the increased complexity and the distinctive managerial challenges that exist in offshore outsourcing environments [1, 2, 4, 6], we expected that the risk profile of offshore projects would be somewhat different from that of non-offshore ones. Thus, our goal was to produce a set of project risks that specifically applies to offshore outsourcing by building upon the earlier research.

To identify the risk factors, we sought the input of the individuals that companies recruit to manage offshore projects: experienced senior project managers and directors. To identify such experts, we contacted certified project management professionals (PMP), who are senior IT executives and members of the Project Management Institute (PMI). We asked these managers to complete a form summarizing their experience. After screening the qualifications of 57 such individuals, we selected 15 of them to participate in our study. Each of the selected executives had managed multiple offshore projects in the past; in total, the panelists had managed 135 such projects. On average, each panelist had over 17 years of IT-related experience and over 15 years of project management experience, and had managed 51 projects, nine of which were offshore development ones. This level of expertise suggests that the selected panel was well-qualified for the task.

To solicit the input of these experts, we utilized the Delphi survey method. A brief description of how their input was collected and analyzed is provided in the sidebar "How the Study was Conducted." Table 1 summarizes the risk factors as identified and rated by the experts.

The results of our study represent a set of conventional risk factors that have been previously identified by well-cited research [5, 9, 11], as well as threats that are more distinctive to offshoring. On average, the risks that relate to long-established factors (risks 1, 2, 4, 6–10, 12, 13 and 16) have been ranked higher than the factors that are relatively unique to offshoring (risks 3, 5, 11, 19–21 and 23–25). This suggests that, for the most part, offshore initiatives experience the same fundamental issues that affect non-offshore ones. However, as the panelists' ratings and insights reveal, these traditional risks are likely to pose more severe threats in the offshoring context due to the complexity and the specific challenges that are inherent in multinational, distance-based working teams. While the novelty of some of the risks could be questioned, their importance to effective project management should not be discounted. As a recent ACM report suggests, outsourcing "magnifies existing risks and creates new threats" [2]. Thus, offshoring clients will be well advised to spend the resources needed to assess the increased exposure to risk and its sources, and to identify ways to mitigate it [2].

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Important Risk Factors in Offshore Projects

While we recognize the significance of all identified risks, we concentrate our discussion on the top 10 factors as described and ranked by the experts in our panel (see Table 2). These 10 were rated as "very important" or "important" by the expert panel in its final evaluation. Given the significant level of consensus among the experts, we believe that this list represents the most notable set of risks salient to offshore projects.

As the findings indicate, the risks focus on three major areas of concern: the communication between the client and the vendor, the client's internal management of the project, and the vendor's capabilities. The identified risk factors for each of these areas are discussed next. Our discussion focuses on insights by the panelists that highlight the factors' significance to offshoring.

Client-vendor communications. The panel was of the opinion that most offshore projects are susceptible to miscommunications that can complicate the transmission of the original set of requirements and subsequent information exchanges and change requests. These concerns were expressed in three related risk factors.

Miscommunication of the original set of requirements (factor #2) was identified as a major risk because, as a panelist pointed out:

"Language, environmental, and other factors play a huge part in how people read and understand things. No matter how specific the requirements, there is often a window for assumptions to be made. This is especially dangerous when you are talking about long-distance collaborations."

Nonetheless, according to the panel, getting the requirements straight is essential because "with less opportunity for interaction with development resources offshore, a much higher premium is put on the quality of the requirements." Another expert identified a related danger associated with the highly structured processes that are instituted by many vendors: "you will get exactly what you asked for, so you better make sure you are asking for exactly the right thing."

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"You will get exactly what you asked for, so you better make sure you are asking for exactly the right thing.

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Language barriers in project communications (#3) also received extensive attention by the experts. This is not surprising given the language and cultural differences that exist in multinational teams and the difficulties of remote collaboration [6]. As an expert pointed out, such challenges exist even when all project members speak the same language: "even when both parties speak English, there is a major chance for misunderstanding because much of our language is based on cultural assumptions." Due to these differences, even simple information exchanges during the project execution can become lengthy and complex as "frequent give and take" is needed before the parties understand each other.

The final communications-related risk was poor change controls (#7). Ineffective controls can lead to scope creep, a recognized threat that affects all types of projects. However, the experts suggested that this risk takes on a more prominent role in offshoring because of the communications issues identified above. Moreover, physical distance (and the lack of informal interactions between developers and users) is likely to affect the handling of change requests as "offshore destinations, being remote and distant, do not have the same sense of urgency as the client organization about the need for changes."

Client's internal management issues. Three traditional client-related risk factors (lack of top management commitment, inadequate user involvement, and difficulty in managing end-user expectations) were deemed important by the experts. In addition, they identified two other risks rooted in the newness of the offshoring phenomenon: the lack of relevant project-management know-how, and the inability to fully consider all relevant costs.

Consistent with prior research [9], lack of top management commitment was ranked as the #1 risk. Several panelists noted that for all types of IT projects, offshore-outsourced or not, senior management support is essential. As a panelist wrote, "this issue is not unique to offshore projects, but is rather a generic project issue faced by all projects regardless of the location of the different management and staff."

Inadequate user involvement (#4) was also identified as a critical threat. Several panelists noted that many offshore projects are frequently directed by IS groups with inadequate user participation. Given the significance of such involvement and its positive impact on system acceptance and usage [9], it is imperative to meaningfully engage users in the project. As a panelist pointed out, involvement is also important because of its political value.

"Most offshore projects are stewarded by IT groups on behalf of the users. If you think your IS department is far removed from the development work, you will probably find that your user (who is paying for the software) is even farther removed. If there is a vendor problem, then it is much better that the user sees the vendor messing up, so that the IT group does not end up with the entire blame for the failure."

Lack of offshore project management know-how by the client (#5) was identified as a significant threat because, as a panelist observed, "offshoring is new to many companies, and their lack of experience in dealing with outsourced vendors introduces risks in most areas of the project operation." Another expert pointed out that such a lack of experience makes clients vulnerable because "the vendor tends to 'run the show' and the project becomes a case of the 'tail wagging the dog'." Many experts indicated that specialized project management know-how is needed to deal with the unique challenges of offshore projects. One such challenge relates to the duplicate management structure (the offshore team and the client organization) that is typically found in offshore projects: "splitting management causes confusion at the project level through difficulties in scheduling resources and tasks, determining overall project direction, and adds another full communications layer." Overall, the panelists warned that clients who are inexperienced or ill-equipped to manage remote collaborative environments are likely to experience major project problems.

Managing end-user expectations (#6) was identified as a major project risk as well. As a panelist indicated this is "always in the top risks for any project. It does not matter if it is offshore. Managing end-user expectations is one of the largest and most difficult jobs a project manager is tasked with." Given the distance and communication issues that exist in offshore environments, understanding, influencing, and meeting such expectations can be particularly difficult.

Failure to consider all costs (#10) rounds out our discussion on client-focused risk factors. Participants stated that in offshoring, several communication-related, overhead, and intangible costs are likely to get overlooked because of the newness of the offshore phenomenon. One panelist relayed the following example: "the offshore resources had to come to the states to be trained for several weeks. The cost of airfare, lodging, and food as well as time lost getting the individuals to our local sites, were higher than expected and continued longer than expected." Another spoke about the frequently unanticipated cost of longer working hours due to time differences: "The client project manager should be willing to work longer hours—in addition to doing his or her normal work during the day time at the office, he or she is also expected to handle calls and questions from the outsourced company at odd hours."

Vendor capabilities. The last two factors—a lack of business know-how (#8) and a lack of technical know-how (#9) by the offshore team—relate to the qualifications of the chosen vendor. With respect to business know-how, the panel observed that an uninformed vendor is more likely to miss things or develop deliverables that need rework. As a panelist noted, "technical decisions are made daily by the offshore teams we manage. Their incomplete understanding of business needs almost always results in a high number of flawed technical decisions that must be revisited and corrected at later stages." Thus, it may be useful to work with a vendor familiar with the native business context of the client. This may be especially valuable when the project requirements are not well structured and design decisions will need to be made during the project execution.

With respect to technical know-how, most panelists acknowledged that offshore vendors are more often than not adept in software development work. But the experts also indicated that without easy access to the assigned resources and a clear visibility of their working patterns, assessing vendor capabilities can be tricky. For example, one panelist warned that "any large offshore outsourcer will likely have a claim of a high CMMI [Capability Maturity Model Integration] level. However, this is not fully indicative of the process maturity of the actual team that will be working on the project." Another cautioned that "the available skills and knowledge are sometimes misrepresented by offshore management or are not available when needed on the project schedule." While a pre-contract evaluation can help, the experts commented that assessing a vendor's technical capabilities can be difficult due to the "black box" nature of the offshore team.

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Unless organizations recognize the unique challenges associated with remote management in offshoring and provide appropriate training to their project managers, their initiatives are likely to face increased levels of failure risk.

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Conclusion

Offshore projects are by their very nature risky undertakings. As the study findings reveal, such projects face a combination of traditional project risks as well as a set of threats that are fairly unique to the offshore environment. Unquestionably, fundamental project management skills are essential in guiding such projects. However, such skills alone are likely to be insufficient in directing offshore initiatives effectively. Unless organizations recognize the unique challenges associated with remote management in offshoring and provide appropriate training to their project managers, their initiatives are likely to face increased levels of failure risk.

Because our findings represent the input of a panel of experts with extensive offshore outsourcing experience, we believe these findings are broadly applicable across diverse project types and business contexts. Nevertheless, we recognize that individuals in charge of offshore projects may sometimes face unique organizational settings (such as a heightened sensitivity to PR issues surrounding offshoring, or a lack of needed resources). Such distinctive circumstances will require the development of a customized risk profile for the project, that may differ from the one presented here. We hope that the set of the risk factors and the insights that were generated by the expert panel will provide a useful starting point for such managers.

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The Digital Library is published by the Association for Computing Machinery. Copyright © 2008 ACM, Inc.

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