Offshore outsourcing can offer significant advantages in software development, including cost savings of 50 to 70 percent compared to internal development or onshore development firms. Yet virtually everyone has heard of or had first-hand experience with the less-attractive aspects of offshore development-costs are often far higher than predicted, delivery timetables continually have to be modified, and delivered software is so defective that it virtually has to be redone.

Often these problems occur because companies fail to conduct the proper due diligence into an offshore outsourcer’s background and expertise to determine if it can really live up to its promises. This kind of due diligence requires going beyond obvious factors, such as hourly rates and workforce size, and into issues such as culture, communication and even the legal structure of the outsourcer. You don’t need the investigative skills of Sherlock Holmes to gather this information, however. In fact, there are a few simple approaches to ensuring a long and happy relationship with an outsourcer.

Determine the vendor’s true cost

Cost, of course, is often the main motivator for outsourcing a project. But hourly rates have to be multiplied by the vendor’s productivity to determine its true costs. Factors that determine a vendor’s productivity include:

Experience

Look for an average of at least 5-6 years experience.

Attrition rates

Attrition rates of an offshore developer should be no more than 20 percent higher than your own.

Culture and communication

Look for offshore centers where developers can effectively speak your native language and share at least some of the same cultural experiences as developers in your organization. Where communication and cultural differences are small, or at least manageable, productivity levels typically approach 90 percent of U.S. developers.

Incremental and transition costs

Look for an outsourcer that can assign its own U.S. resources to the project and seamlessly communicate with your project management personnel so you don’t need to micro manage projects or divert your staff from other work. And to speed up the transition period, look for a partner that has experience in the applications you develop and can quickly grasp your business and marketplace issues.

Contractual costs

Many offshore developers structure their contracts like cell phone contracts; you get what seems like an attractive rate, but you’re forced to commit to long-term agreements and pay a heavy penalty for canceling contracts. So look for offshore vendors who don’t require minimum durations or numbers of resources and who allow you to terminate contracts with reasonable notice.

Evaluate the risks

The risks involved in offshore development must be carefully balanced against project cost savings and the criticality of the development project. Factors to consider include:

Legal considerations

Many companies prefer to work with a single U.S. business that has a wholly owned entity in the country where the development work is done. If you are ever dissatisfied with the work, you have one point of management contact, and legal recourse in the U.S. court system. And such a vendor can transfer knowledge and project requirements faster and more effectively than a U.S. company that, in effect, throws a project over the wall to a separate foreign entity.

Skills and expertise

Don’t rely on vendor claims about specific development tools expertise, such as .NET or Java. Rather, look for specific application expertise. If you are developing a new product, you’ll need a vendor with specific expertise in product development. The same is true for package implementations, testing and QA, or maintenance and application support.

It may also be critical to select a vendor who can work in an Agile development environment. The vendor must be able to communicate directly in English during U.S. business hours, and have experience working in teams and demonstrating initiative, rather than just completing tasks.

Process controls and interdependencies

Companies with small IT staffs or companies that haven’t established a formalized software development process may have relatively weak process controls. This can require daily collaboration and strong communication among team members, who need to make gut-level decisions instead of following a series of well-specified and tightly controlled tasks. If this describes your company, you’ll need an outsourcing partner that provides a good cultural fit, strong English skills and a daily window of at least 3 to 4 hours of overlap for direct communication with the offshore team members. And if your internal deliverables are dependent on the outsourcer’s deliverables, you’ll need to work with the offshore team members on a daily basis, making teamwork all the more important.

Test the waters

There is a definitive way to determine whether a vendor’s “sales pitch” bears any resemblance to what it is actually capable of delivering-conduct a small trial project that gives you first-hand experience with the vendor and allows you to answer questions about skills and expertise, communication and collaboration capabilities, and whether or not the vendor is the right overall fit with your internal team. The answers to these questions can help you decide if you want to work with the vendor on more important projects or even establish what may turn out to be a long and happy relationship.