The Problems and Risks associated with IT Offshore - Essay Example

Outsourcing Software Development Reasons why a Company such as Toysmarket may choose to outsource software development to India. Cost advantages: This is one of the main reasons due to which companies outsource software development to lower wage countries such as India. This may result in significantly reductions of the overall total project budget by a factor of 40 to 50%, assuming there is acceptable level of quality. Optimizing value of internal resources: Outsourcing software coding allows the internal IT department to utilize their time by concentrating on business analysis that adds value for the companies better. By outsourcing software development, the IT staff can utilize the time spent on coding and testing to concentrate better on the functional parts of the IT system. Faster work pace: Companies, relying on outsourcing software development, may be able to develop and deploy software applications faster than they would if developed locally because the cost savings enable them to employ bigger teams with lesser cost, which speeds up the process. Specialized skills required not available locally: The company may outsource software development, if the specialized skill required to develop it is not available locally. High demand short term phases: When larger quantities of resources are needed for relatively short bursts, it is easier to outsource it than go through the process of hiring and then firing or finding personnel to do contract work. India's advantage: Thanks to its long tradition in offshore software development, a high percentage of English literate population and the availability of high level IT education, India is a popular choice for outsourcing software development. It also commands growing infrastructure and very competitive rates of software development. The potential problems and risks associated IT offshore outsourcing and discuss how the risks you have outlined can be minimized. Vendor characteristics: Picking the right vendor is crucial. Ability of the vendor to deliver, history and integrity of the vendor, financial background and quality of service are all determined by choosing the right vendor in order to arrive at the benefits. An incapable vendor is often unable to deliver and may cause more problems than solutions. Managing the project: Often the hidden costs of managing the project are overlooked. This is a necessity to monitor the vendor and make sure milestones are met. In addition cost of communication and connectivity as well as training need to be factored and this will all add up bit by bit. Communication gaps: Cultural differences, time zone differences and work ethics often lead to communication gaps and misunderstanding project deliverables. These cause costly errors and failure to meet expectations that defeats the purpose of outsourcing. Transparency : Vendors often have the opportunity to manipulate the Time and Materials contracts, state the usage of more resources than actually used, add more hours logged than actual etc. trying to bump up revenues thereby taking away the cost advantage of the companies that outsource. Lower quality of end product: This may be the direct result of a high attrition rate in the vendor company, high employee rotation in the project and lack of continuity among the vendor resources. All these will result in loss of technical expertise resulting in poor output quality. Data security: Cultural differences and lack of strict standards governing Intellectual property rights often result in data piracy and safety breaches. If the vendor breaches statutory laws, without the company knowing they are still is held responsible for the violations. Much of these risks can be mitigated by executing due diligence to the research before the work is outsourced. Choosing the right experienced vendor ensures half of the success of the project. Asking earlier clients about satisfaction of qualitative timely deliverables. Choose a certified vendor with ISO 2000 or CMM level certification that assures a minimum quality level in the processes and hence the output. Vendors with Disaster Recovery plans and risk mitigation plans are definitely less risky. Having realistic delivery schedules that promise commitment without overstretching resources and causing low quality of output. Find vendors with low attrition rates and low employee turnovers with a comfortable surplus, sufficient security measures like Firewall, Access Control and Data Encryption in place coupled with non-disclosure agreements. A realistic cost estimate the project including obvious and hidden costs involved. An on-going vigilant management of the vendor by company to track progress. The above measures will help mitigate risks largely and will contribute to the success of the outsourcing software development and justify the action. Prepare a net present value table for this project itemizing costs, benefits, cash flows and present values. Use a 7% discount rate for your calculations. Comment on your result and whether or not you would recommend this project to proceed. (a) Costs and net present value of costs: The total costs of outsourcing to India over 3 years will be 168,300 (NPV of 154,398) and if the existing labour is continued the total costs over 3 years will be 360,000 (NPV of 309,600). Therefore, there is a savings of 191,700 with a Net Present value for the savings in cost totalling 155,202. (b) Benefits and net present value of benefits The benefit excluding costs is the sum of 250,000 in inventory holdings that is released to cash. This has a net present value of 232,500 (c) Cash flow and net present value of cash flow Cash flow Current year Year 1 Year 2 Year 3 Inventory 1,000,000 750,000 750,000 750,000 Expenses One time costs Hardware costs 0 120,000 Software costs 0 30,000 Training 0 1,500 Ongoing costs Ongoing training 0 600 600 600 Hardware maintenance 0 0 0 12,000 Software maintenance 0 0 1,500 1,500 Labour costs 120,000 0 0 0 Total expenses 152,100 2,100 14,100 Income Savings in inventory 250,000 0 0 Total cash requirements (new) -97,900 2,100 14,100 -81,700 Cumulative cash requirements (old) -97,900 -95,800 -81,700 NPV of cash (old) -91,047 1,806 11,139 -78,102 Total cash requirements (old) 120,000 120,000 120,000 360,000 Cumulative cash requirements (old) 120,000 240,000 360,000 NPV of cash (old) 111,600 103,200 94,800 309,600 Net NPV savings 387,702 The total cash flow of outsourcing to India over 3 years will be cash positive 278,300 (NPV of 387,702) and therefore with a net present value savings of 387,702 due to reductions in inventory levels at the end of first year to the tune of 250,000, the outsourcing is an extremely viable option. (d) Recommendations The outsourcing to India saves costs to the tune of 168,300 (NPV of 154,398) over 3 years with inventory reductions to the tune of 250,000 at the end of the first year. This savings in yearly operational costs and reduction in inventory levels cumulatively lead to Net Present value cash flow savings of 387,702 and therefore this transaction of moving to India is highly recommended. Sufficient background research on vendors short-listed to award the project is recommended to mitigate associated risks as discussed. 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