Shifting staff offshore better than rate cuts: Forrester

Firms’ ability to shift more staff offshore drives more savings than the 5 per cent to 10 per cent rate reductions they have been seeking from their IT vendors, according to the latest Forrester report on IT offshoring.

The report notes that more and more firms are now looking to shift away from the traditional offshore pricing approach of an hourly rate to a fixed price model.

The Forrester report titled “Assessing your onshore/offshore staffing ratios” by its vice president and principal analyst John McCarthy, states that the economic downturn has hit IT budgets full force, and as a result, firms are scrambling to react and optimise their offshore spend.

“Our recent Enterprise IT Services Survey (North America & Europe, Q2 2009) shows that renegotiating IT services rates is the top priority of these firms. 80 per cent of the 931 respondents list it as their critical priority. And on an average, we see clients getting actual reductions in the range of 4 per cent to 7 per cent based on current rates, type of work, and volume of spend” says McCarthy.

The report advises such firms to move beyond short term strategies and invest in better specifications and change management processes, which will enable them to move more work offshore and recognise the associated savings.

Forrester notes that clients move through four distinct stages in their offshore maturity namely Bystanders, Experimenters, Committeds, and Full Exploiters.

During this evolution, clients not only build up trust with their IT vendors, but more importantly for the offshore mix, they also mature and add more rigor to their specifications, incident management, and governance processes.

“This improved process acumen on the part of the client, coupled with the domain and tool investments of IT vendors, has increased the amount of work that can be sent offshore by 10 per cent to 20 per cent over the past three years,” says McCarthy.

After the rate renegotiation, the second primary strategy firms are adopting in the short term is transition to fixed price model from time and materials (T&M) pricing model.

“They want the certainty of a fixed price,” notes the report. The report also reveals that the budget crunch has encouraged firms to look at more than just rates.

“Over the past four to six months, we have seen a dramatic rise in the number of inquiries related to IT services governance best practices, specifically around the most cost-effective mix of onshore and offshore staff from IT suppliers. And our research demonstrates that adjusting Onshore/Offshore ratios is the best way to increase savings,” adds McCarthy.