Keep the work local and spend the extra money or send it overseas and get near the same value at a lower price? For many budget-conscious CIOs, the latter makes sense. But that doesn’t mean offshoring isn’t a panacea for cost-constrained IT department; it can involve risks and potential long-term downfalls when it comes to business agility and innovation.

Scott Watters, CIO of Zurich Australia, late last year set up an IT team in Malaysia as an extension of his IT team in Australia. The offshoring came about when Zurich purchased Malaysian Assurance Alliance Berhad and rebranded it as Zurich Malaysia. Watters saw an opportunity to leverage the resources in Malaysia to support the growing technology needs of the business locally.

The main benefit of offshoring some of his IT, Watters says, was not immediate cost reduction.

“The whole idea was not necessarily about cost savings; it was more about capacity increasing,” he says.

“We had a need for more people and we didn’t want to go to market and spend more money in Australia so we basically put in more resources for around the same cost. You can cost cut to a point, but it’s trying to get as much change for your dollar as possible.”

Gartner analyst Rolf Jester warns of the hidden costs that offshoring and outsourcing can involve. Additional costs in communication, travel, training, knowledge sharing and management are just some areas that can be overlooked when offshoring. He says if organisations are looking to merely cut labour costs with offshoring, then they are selling themselves short in the long run.

“People are often just driven by costs,” he says. “If you’re just saying, ‘I want to cut my costs by X per cent and therefore I’m going to employ this company in Bangalore or Vietnam, for example,’ then that’s the wrong decision. If that’s your only reason and that’s all you are setting out to do then you will probably fail. If you are just doing it for costs, don’t.”

Beyond the appeal of trying to do more with less, there are some less obvious benefits, says Deloitte Consulting technology leader Robert Hillard. Offshoring can force organisations to be more disciplined when it comes to tracking work and measuring inputs and outputs, which can result in productivity gains. However, he sounds a note of caution: organisations need to be aware that productivity will take a hit during the handover of work to a service provider.

Zurich’s Watters says that with offshoring, there is a management and communication overhead, but being able to align his team to the business strategy and have his team report directly to him helps ensure that it’s not out of control.

“I think you get more benefit [in doing it this way] because they will feel part of the same organisation and will try to deliver the one strategy globally rather than it being the strategy of a vendor which might be different to the strategy of the organisation,” he says.

“I feel it’s quite important to have them as part of the same team.”

He admits managing a huge team offshore may be impractical; he has a staff of some 44 he manages in Malaysia.

“I think if it’s a small enough team it works. If it’s a large enough team it’s probably better to go to a service provider.”

Watters set up a virtual desktop environment for his IT staff in Malaysia to be able to connect with the IT team in Australia using thin client devices. He says as the infrastructure is based in Australia, it made the fit-out of the office in Malaysia quick and easy, and means he can control the applications and development tools locally. He also uses videoconferencing and collaboration tools to help him work more closely with his Malaysian team.

Watters says that communication and culture have been the main challenges he has experienced from offshoring.

“Culture has been a challenge,” he says. “The Malaysian team seems to be slightly different; whereas in Australia you might find one resource that has a variety of skills. In Malaysia we tend to find resources that stay in that single skill [set]. Sometimes you have got to pay for two resources, whereas in Australia you could have one. But these are things you can work around by structuring the team correctly.”

“I would never assume you would take a resource from Australia and replace the exact same resource in Malaysia, for example,” he adds.

“You are never going to get the equivalent productivity because there will be some degradation in terms of the communication process overhead. You have always got to plan for that, so you might have more than one resource over there to cover a role here in Australia.”

However, Deloitte Consulting’s Hillard says having more staff with specialised skills can increase productivity instead of having a number of staff with general skills to cover a broad range of roles.

“In opening up to an offshore pool, we have the ability to get to a much larger pool of specialised resources,” he says. “Rather than have a generalist solve a problem and have to spend a lot of time researching, you can have a deep specialist who does a particular task. That’s got to be more productive and potentially provide a different and better outcome.”