Sending Jobs Overseas Isn’t Always Worth It, U.S. Companies Find

Christina Oliver and Kristen Kuhns scoured the globe for the same thing: cheap computer programmers.

They found them in different places -- Oliver in Australia, Kuhns in India -- but learned the same lesson about the global economy: For all the hype and hand-wringing about U.S. companies shipping jobs overseas, outsourcing to foreign countries can be a mind-boggling chore that doesn’t always save much money in the end.

It took Kuhns four years to make the move pay off for TierSolution Inc. of Pleasant Hill, Calif. Oliver gave up after a few months and reeled the work back to the Hollywood headquarters of Legacy Interactive Inc.

“We ended up with a much better product, but it ended up taking too much work,” said Oliver, a senior producer at Legacy. “Plus, when you add up the extra costs -- the delays, the extra money we had to pay above the contract amount and such -- it turned out to be less expensive to do in-house.”

Big corporations have spread jobs around the world for decades. Only recently have advances in technology and telecommunications made it possible for small outfits like TierSolution and Legacy to do the same -- or to try to. In a recent survey by technology research firm Gartner Inc. of 100 companies of all sizes that had outsourced overseas, 18 said they had saved nothing by sending jobs offshore and nine saw their costs rise.

Oliver’s mission in September 2002 was to find foreign animators for Legacy’s computer game “Law & Order II: Double or Nothing,” based on the NBC police drama. She was confident because of Legacy’s positive experience two years earlier with a Russian programmer who churned out a complete video game for $8,000 -- about $42,000 less than the work would have cost if done in the U.S.

“It was on time, on budget, and I heard no complaints,” said Ariella Lehrer, chief executive of Legacy, which has 35 employees and annual revenue of more than $4 million. “I was thrilled.”

The economics of the video game business, particularly for titles that play on personal computers, demand aggressive cost control. Titles are quickly discounted at stores and may sell only a few thousand copies.

“To make a PC game in today’s world, nobody wants to spend more than $500,000 to $1 million,” Lehrer said. “To be competitive, you have to figure out how to get more done with less money.”

On “Law & Order II,” that task fell to Oliver, who needed programmers to produce the computer animations that move the game’s story along. The producer received bids from studios in Hungary, New Zealand, Australia, India and Russia.

She didn’t go with the lowest bidder, an Indian shop with little experience. She ruled out the Russian and Hungarian firms because she wasn’t certain their fledgling outfits had the infrastructure to handle the volume of work she needed. New Zealand was too expensive.

The Australian team, which Oliver declined to name, “had high quality at a good price. They worked really hard to convince me, so we went with them.”

A month later, Oliver’s troubles began. Oddly enough, it was one of outsourcing’s most touted benefits that vexed Oliver most: the 24-hour workday.

The widely held belief is that staffing programmers around the globe enables work to continue around the clock -- with a team of programmers in California at the end of their day handing off to counterparts in India, who at quitting time let Hungary take over, and so on.

But that work relay isn’t easy to coordinate. Oliver’s project involved creating hundreds of animated mini-movies and, because the animators in Australia were still in bed while she was at the office, she had to write lengthy memos describing what she wanted done.

“I’d want a certain gesture or a tilt of the head,” she said. “Instead of being able to just show it, I’d have to write these long descriptions.”

In one e-mail sent in April 2003, she had painstakingly typed instructions that could have been explained in seconds with facial expressions and body language: “Please change the pleading-looking gesture on ‘I didn’t do it’ to one that has the arms spread apart -- as in ‘where?’ -- with the palms of the hands facing upwards and a little outwards. Elbows should be closer to the ribs. Head nod on ‘maybe’ should be more of a tilt sideways, with a slight shrug of the shoulder. Please add more motion to the fingers as well as some finer motion on the pelvis. The arms should reach their stopping point at the end much slower -- with an ease-in -- so it won’t look like they’re stopping very hard.”

Missives like that had become all too familiar to Kuhns, vice president of operations for 44-employee TierSolution. The company, which designs and installs customized computer systems, began sending work overseas in 1999 to avoid rising costs in Silicon Valley. It got headaches in Bangalore, India, instead.

“Architects who make decisions during California business hours and dictate them across 11,000 miles of ocean to India, which is 12.5 hours ahead, and then expect to wake up in the morning with perfect software, will be disillusioned,” said Kuhns, who once woke up to find no software at all. A TierSolution contractor disappeared without a word -- and without finishing the job.

“There was nothing we could do, she said. “We realized how little control we had.”

So in 2000, TierSolution established a small four-worker outpost in Bangalore with salaried employees who would be more accountable than contractors. At first, Kuhns sent a couple of TierSolution employees from the U.S. to set up shop and supervise. Now the office runs on its own, communicating with its U.S. headquarters via phone and e-mail.

The company, which is privately held and does not disclose its finances, paid the employees in Bangalore 90% less than programmers in Pleasant Hill would have demanded, but there were unexpected costs at every turn. With the electrical power and Internet connection in the India office routinely on the blink, Kuhns had to buy two backup generators. Cost: $2,000 apiece. Then the building’s air conditioning system started working only intermittently. Employees opened the windows, which brought in thick layers of dust that clogged the computers. So Kuhns had to spend “several thousand” dollars to rewire the office to handle a new, power-hungry air conditioning system.

“All that adds up,” Kuhns said.

Kuhns found that her Silicon Valley style of blunt communication left a wake of bruised egos and wounded feelings. She also found that requests had to be extremely detailed.

“When you say you want something on Wednesday, you have to specify which week, which month, which year,” she said. “Otherwise, it just doesn’t get done.”

Oliver, too, had trouble bridging cultures. Though Australia is culturally similar to the U.S., there were kinks here and there. The accent was sometimes vexing during conference calls: “There were times when they’d say something, and we’d all go, ‘What did he just say?’ ” Oliver recalled.

Then there were the holidays: The Australians seemed always to be on one.

“It’s true what they say about Americans working all the time,” she said. “But it was frustrating to have to wait for them to come back to work before we could move ahead.”

For Kuhns, the biggest frustration was India’s infamous government bureaucracy. As a small fry, she got very little help.

“If you’re Microsoft or Oracle, you’ve got a lot more pull than we do,” Kuhns said. “India bends over backward to accommodate these companies. When you’re us, it’s a lot harder. You have to figure all this stuff out by yourself.”

To get permission to expand her Indian outfit into a branch office last year, Kuhns dealt with the red tape for nine months before she found out by accident that there was a much simpler way -- join a technology park and partner with an Indian company.

This year marks TierSolution’s fourth in India. Its office has grown to 20 employees. Indian wages are still one-sixth of what they are in Silicon Valley, but as other companies vie for Indian workers, wages and turnover are skyrocketing.

“It’s crazy,” Kuhns said. “Turnover now averages nine months. They’re coming in with half the experience and demanding double the salary” that the first workers got four years ago.

Wages are rising almost everywhere. The programmer in Russia who charged $8,000 to design the “Vet Emergency 2” video game for Legacy in 2002 insisted on $14,000 to work on the sequel, “Zoo Vet.” So Legacy found an emigre living in the San Fernando Valley, coincidentally a Russian, who agreed to design “Zoo Vet” for $14,000 -- the same price without the extra time zones.

Legacy’s experience made it easy for Oliver to decide what to do about future animation contracts: The company ended up paying the Australian contractor $185,000 for its “Law & Order II” work, and Oliver figures it would have cost $120,000 for five in-house animators to do the job.

About $35,000 of that was because of the extra work Oliver had asked the vendor to do to get the right level of quality and detail. But the biggest cost, which was not calculated in the vendor’s bill, was the extra time Oliver took to manage the project and the delays caused by the long-distance back-and-forth.

So Oliver hired programmers in Hollywood last year for her company’s current game.

“We can do it faster here because the turnaround time for notes is less, and the process of giving feedback is so much quicker,” she said. “Questions can be answered directly, rather than having people go off in the wrong direction and having to redo a lot of work.”

Kuhns plans to stick with India -- at least for now. Rents in Bangalore are about 70% of those in Silicon Valley. If wages continue to rise and turnover increases, she may begin scouting another location.

“If the conditions in India changed ... we’d rethink it,” Kuhns said. “Or look to another country.” Maybe even the U.S.