In times of recession there is always scrutiny of costs, and one popular way to try and achieve savings is by outsourcing IT functions.

We are all familiar with the call centres that so many companies use, but what about software development and support? On the face of it there are significant savings to be made: despite wage inflation over recent years, as of today, the fully overheaded cost of an experienced software developer in Bangalore is around one third of the cost of the same person in the UK. But is that the whole story and, if you are to go down this route, what pitfalls are there?

I had a fascinating conversation recently with the head of software development at a software company. A few years ago this company decided to cut costs by moving significant product maintenance and testing functions offshore, and initially went the fully outsourced route with a well-respected Indian company. The outsourcer sent a small team across to the US to work with the software company for several months in order to do knowledge transfer, and initially things seemed fine: the individuals the Indian company provided were very impressive, the contract was duly signed and a team put in place in India to take over the work.

However, it quickly became apparent that there were problems. The maintenance and testing work that was outsourced was fairly mundane and so attrition in the Indian team was high. Worse, the outsourcing company swiftly moved the initial team of star performers off to win new contracts elsewhere, so quality of work plunged. Service level agreements were in place, but in reality proved meaningless. There were targets for the number of defects fixed per developer per week, but in practice the quality level was so low that in many cases each apparent defect fixed caused knock-on problems elsewhere. After some months it became clear that the situation was, to use the words of the development manager, “a train wreck”.

The software company then changed tack. It recruited a senior development manager already living in Bangalore and gave him the task of establishing a full company subsidiary there, with staff that would be hired directly. As those who have ever filled in an Indian visa form will be aware, the level of bureaucracy in India can be daunting, but as a local person the new manager was able to navigate the system, incorporate the subsidiary and find local office space.

What was interesting was that the software company, which is known for its rigorous interview processes, was determined not to repeat its earlier mistake. The parent company sent its head of development over to Bangalore for an extended period which included him interviewing every candidate personally: this was a lengthy process, as the company actually hired just one person for every 25 interviewed. However, this investment in time proved completely worthwhile as the standard of staff proved to be much higher than had been the case with the outsourcer.

This new operating model has been in place for a couple of years and is working so well that the company is looking to transfer even more functions across to their Indian subsidiary. What about those cost savings? The company has found that developers in Bangalore are essentially as productive as those in their main development centre, so there is a genuine 3:1 cost saving (minus some travel costs and management time). In the case of support, which requires deep product knowledge, it found that the Indian team are about half as productive as experienced support staff in their main group, though with a 3:1 cost difference this is still cost-positive, and as the Indian team’s product knowledge grows this productivity gap is closing.

There are cultural differences which need to be taken into account. In India there can be a reluctance to admit that something cannot be done or that something has not been fully understood. This can cause problems, and means that communication is particularly important.

This company’s experience resonates with other stories I’ve heard. It is critical to treat the offshore group as an integral part of the parent company and to instil your culture into the offshore team. Just as with any team, if the only work allocated is routine drudgery then morale will plummet and attrition will occur, so a balance of work needs to be considered.

Above all, it is not good enough just to sign a carefully worded contract with an outsourcer and hope it guarantees quality. This would apply if you were outsourcing to a local company, so it is hardly going to be any easier dealing with a firm several time zones away.

Invest the same effort as you would do if you were recruiting a local team. If you are prepared to put in the effort, then you can achieve a successful outcome.