Another State Looks Offshore

Computerworld ^ | DECEMBER 22, 2003 | PATRICK THIBODEAU

[Mini-14]

A decision by the Washington State Health Care Authority to use offshore labor for a major IT project was based in part on some pretty simple arithmetic: The contractor's bid was about $3 million below the next lowest bid.

But the project hasn't worked out as planned. It's running over budget, and an internal state document written in October warns of a "significant risk" that it won't meet the agency's requirements. The project has also prompted state legislation that would effectively bar state agencies from future use of offshore contractors.

"I don't think that Washington state tax dollars should be used to create jobs overseas, when we've got skilled workers here," said State Rep. Zack Hudgins, a Democrat. When the Washington Legislature reconvenes next month, Hudgins plans to introduce a bill that would block the state from sending work offshore.

"I think we may save money in the short term by going to our lowest bidder," Hudgins said. "But in the long term, we undermine our communities, our job base, our tax base." Similar bills restricting government offshore work are under consideration in New Jersey, Michigan, North Carolina and Indiana. Indiana made headlines recently when a state jobs agency signed a deal that could have brought in Indian coders [QuickLink 42838].

Tom Neitzel, the health care agency's IT manager, said that while he's aware of the political implications of the bid award, his agency has to make decisions based on a project's business case, not on where the work is performed. "There are very emotional issues associated with offshore contracting," he said.

The winning bid of approximately $3 million by Healthaxis Inc. -- the Irving, Texas-based prime contractor that has been working with India-based outsourcer Satyam Computer Services Ltd. -- was the only bid to come in under the $3.6 million budget set by the legislature for building a new insurance benefits administration system. Written proposals were received from PeopleSoft Inc., Oracle Corp. and Physmark Inc., and Deloitte Touche Tohmatsu.

The savings came chiefly from reduced salary costs, said Neitzel. For instance, Healthaxis listed per-hour rates for programmers at $34; other bidders' rates started at $178.

The contract, which was set at about $2.6 million after the state agency decided to take responsibility for purchasing the systems hardware, was signed in May 2002 with the expectation that the system would be in place by the end of June 2003. That deadline has been moved to next June.

But the delay is costing the agency about $1.4 million in maintenance and support costs for running its health benefits applications on a system hosted by another state agency, said Neitzel. That's money the Washington State Health Care Authority didn't expect to be paying.

Healthaxis isn't seeking additional money and has so far been paid just $930,000. Neitzel said it's to the firm's credit that it's sticking with its contracted cost.

The project's problems were revealed last week by the Seattle-based Washington Alliance of Technology Workers, which obtained state documents about the project and posted a detailed account about it on its Web site [QuickLink a3910].

The documents list problems with testing and design quality, as well as usability. In interviews, both sides cited issues with the project's requirements that may not have been evident at the outset. "This project was more than what both parties had anticipated," said Neitzel.

"This has been a large, complex project," echoed Emry Sisson, executive vice president of technology and operations at Healthaxis, who noted that this is his company's first project for a state government. "We maintain a good relationship with the state, and we are committed to delivering and meeting their systems needs. We remain convinced that we will be able to deliver the system."

Although Neitzel doesn't blame offshore workers for the delay, he said there have been problems. While the workers have technical skills, they don't have insurance subject-matter expertise, he said. And that has affected testing.

Satyam spokesman Abhijit Roy said the company has sufficient experience and has "time and again demonstrated its business knowledge.

"Understanding unique and business-specific requirements on a project of this magnitude is not something that would be different for offshore vs. onshore technical personnel," said Roy.

But Stan Lepeak, an analyst at Stamford, Conn.-based Meta Group Inc., said concern about the business knowledge of offshore companies is a common complaint, especially as offshore firms increasingly take on more complex projects. Gaining that business knowledge "is a major challenge for them" and may lead to more acquisitions -- both in the U.S. and among overseas companies -- as they seek to add depth to their skills.

Asked what he's learned from the project, Neitzel said, "I would be certain that clear requirements, written requirements, are developed and agreed upon. Make sure that clear deliverable dates are documented and agreed upon by all. Assume nothing. That is what I am learning here, and it is being reinforced."

As for the effects of outsourcing the project, "I could have had the same thing happening if everybody had been based in Dallas," Neitzel said.

[Southack]

"But the project hasn't worked out as planned. It's running over budget, and an internal state document written in October warns of a "significant risk" that it won't meet the agency's requirements."

This is typical of what our entire industry has been seeing from most of the low-budget offshoring of high-tech projects. Very low initial bids followed by poor quality work that comes in late, if at all.

Quite a few CEO's are going to get burned because of this fact, too (especially as the global drop in the foreign exchange value of the Dollar destroys even the proposed financial savings angle).

If this saga was made into a porn video, it would be called "Fads Gone Wild" with gullible CEO's jumping from one naked fad to the next in some lame attempt to prove that they are hip and youthful.

Sigh...

[RiflemanSharpe]

The buzz I hear is that this is frequently the case. They lowball the bid, then cost overruns run wild and when/if they deliver it is crap. If I had a twenty for evey one of these I have heard of I would buy the part to build that new desktop PC I want.

[Doohickey]

Could it be that you get what you pay for?

[RiflemanSharpe]

Could it be that you get what you pay for?

Ya Think!

[Snuffington]

As for the effects of outsourcing the project, "I could have had the same thing happening if everybody had been based in Dallas," Neitzel said.

Lol... sure you could have. Because we all know the cultural gap between white collar Dallas workers and white collar Washington workers is roughly the same as with white collar workers in Bangalore, right? I mean, it's so close, why even mention it as a risk? The culture-gap couldn't possibly have created problems like...

"...the expectation that the system would be in place by the end of June 2003. That deadline has been moved to next June."

or... "problems with testing and design quality, as well as usability"

or... "issues with the project's requirements that may not have been evident at the outset,"

or... "While the workers have technical skills, they don't have insurance subject-matter expertise..."

Nope. Lots of smoke here. But no fire. Move along. Nothing to see here. American tech workers are easily replacable by Indians. That's our story and we're sticking to it.

[bigfootbob]

This from a state that mandates the biggest responsibility for the state is education in the Constitution. We are also home to Microsoft, RealNetworks, and other tech biggies not to mention the bio-tech firms instate. MS and Boeing have publicly stated this state can only fulfill 8% of the staffing needed because we are producing DUMMIES in our government school system. 53% high school graduation rate!

Don't you imagine the 47% that doesn't graduate are in competition with the illegals for "work American's" won't do? Wonder who has the advantage?

[Uncle Miltie]

"the project hasn't worked out as planned. It's running over budget"

I do not believe a single Washington State computer system has been on budget, ever. I have heard of many examples of multi-million dollar waste in IT spending there.

[Nick Danger]

"Fads Gone Wild" with gullible CEO's jumping from one naked fad to the next in some lame attempt to prove that they are hip and youthful.

Bingo! Every so many years the Finance Boys (junior G-men from the VC firms, etc. that they stick on your board) get caught up in one of these fads and there is no stopping them. These are guys who don't know anything, but who think they do because they talk to a lot of other people (who also don't know anything, but who think they do because they talk to a lot of other people). As soon as the dumb idea acquires a buzzword like "outsourcing" or "downsizing," the wind starts blowing through the heads of these guys and that's the only noise they make until they've wrecked a couple hundred companies.

It's been almost two years now since this fellow I know was bragging about how he had hired Ph.D. mathematicians from the Russian Academy of Sciences to do his new product. He was getting these geniuses for $25,000 a year and they were doing a bang-up job. Like I say, it's been two years... and he still doesn't have his product. In a competitive industry, being late is as good as being dead.

Bogus accounting savings alert

But the delay is costing the agency about $1.4 million in maintenance and support costs for running its health benefits applications on a system hosted by another state agency, said Neitzel. That's money the Washington State Health Care Authority didn't expect to be paying.

The agency might be paying that, but it's in-house "funny money" that probably represents very little extra expense to the state or to the taxpayers. Odds are, when they finally do pull this benefits application off that other system, the other system will cost no less to run. It will just have idle capacity.

[Dominic Harr]

Very low initial bids followed by poor quality work that comes in late, if at all.

That's been my experience.

Interestingly enough, we tried used Satyam last year, for a small Lotus Notes project, expected to take 6 months total. Same thing happened. Based on an initial low bid, they got the contract. But 6 months passed and all they had produced was a very unacceptable design doc. They spent the entire project budget just trying to figure out what they were supposed to build, and in the end failed at that.

[Southack]

"It's been almost two years now since this fellow I know was bragging about how he had hired Ph.D. mathematicians from the Russian Academy of Sciences to do his new product. He was getting these geniuses for $25,000 a year and they were doing a bang-up job. Like I say, it's been two years... and he still doesn't have his product. In a competitive industry, being late is as good as being dead."

It's been my limited experience that "geniuses" are concerned about one thing: making their One Big Breakthrough. Mundane things such as delivering a quality product on time means little or even nothing to them, though your mileage may vary.

But the Market for solving some "unsolvable" math equation from the 14th Century isn't exactly attractive to most businessmen, to say the least. Oh sure, GO Team! We've got math geniuses now in our programming department. Yeah, but what's that really going to get you?? Are these math geniuses concerned about churning out copious quantities of high-quality, mundane code, or do they want to develop innovative algorithyms that you may not even *need* in your current design cycle?!

Sigh... I know, I'm preaching to the choir. You should see the looks that I get from executives. "You just keep delivering on time and on budget, and let us worry about our future direction."

And so I do. Why fight the tide of adopting fads as fast as you hear about them, when that's what your clients want to pay for, after all?!

Currency exchange rates?? "Don't tell about those, they've *always* been in our favor. Besides, what could change during the life cycle of a two year offshore development project?"

Oy Freakin' Vey.

[Southack]

"used Satyam last year, for a small Lotus Notes project, expected to take 6 months total. Same thing happened. Based on an initial low bid, they got the contract. But 6 months passed and all they had produced was a very unacceptable design doc. They spent the entire project budget just trying to figure out what they were supposed to build, and in the end failed at that."

Satyam's a perfect example of a firm that won't even show you their bug tracking logs for their software development.

Sheesh, people...*that's* a BIG freakin' clue.

And spending all of their time on phone calls and emails trying to figure out what you want is pretty typical, too...except that like most offshore companies, they keep *telling* you that they KNOW precisely what you want delivered by the end of each conference call...yet they never do.

Man, it burns me up to be told only what I want to hear rather than the truth.

But of course they are getting the contracts and getting to bill, so the longer that they can drag these things out before being exposed as a low-quality provider, the better for them, I guess.

What has happened is that this outsourcing fad has bumped India up above its skill level. India *does* have some good programmers. Most of them can't back up their overt over-confidence, but a few of them really are OK. But as for getting specs both right and on-time, that's another thing altogether. And as for working well with their own staffs to deliver quality code to spec, on time and on budget, well...they aren't *there* yet, culturally.

Turnover alone on Indian projects can easily exceed two thirds of their programming staff per year. How the heck do you get people working well with each other when they won't even know who they are going to be working with by the end of their project?

And data security is a joke over there. Shoot, your *code* that gets developed over in India is going to be made available to anyone else who wants it whether you like it or not, and your data certainly isn't safe.

If this process had gone sanely, without the wet-eared MBA's creating this juggernaut of an outsourcing fad, we could have gradually brought India into the business fold by having them maintain our old projects and programs. It would have given their programmers valid business programming experience, and it would have promoted stability rather than driven their turnover rate through the roof. There was a valid place for outsourcing such old code offshore rather than simply having all maintenance stop on such out-of-date items.

But when this fad finally comes back down to Earth, there will be so many CEO's who got burned that "outsourcing" will be a dirty word for a decade or more.

[Dominic Harr]

Satyam's a perfect example of a firm that won't even show you their bug tracking logs for their software development.

But it's okay, Satyam is a CMM level 5 shop!

I can't believe some of what has gone on around our industry lately. We have the only industry that the project manager and project oversight people don't have to have any actual knowledge of the work they're managing/overseeing.

The foreman of a major construction project has to know all about building techniques. The inspector has to be an expert on all technologies involved. Yet with software, the 'foreman' and the 'inspectors' typically have no actual development knowledge .

We have Chief Technical Officers who aren't technical. Chief Information Officers who have no information.

[Bush2000]

WTF did you think would be the likely consequence of putting cheap PCs and free software tools in the hands of Third World countries?!? They're going to compete and, based on the labor differential, it's a given that they're going to take work away from our fellow Americans. This isn't rocket science. You guys nyuk-nyuk-nyuked the whole open source movement and then stand dumbstruck over what it has produced. Clue, meet Harr and Danger.

[Elliott Jackalope]

"But when this fad finally comes back down to Earth, there will be so many CEO's who got burned that "outsourcing" will be a dirty word for a decade or more."

And the punchline will be when the go to bring the jobs back home, and they find that most of the people who used to work in IT have started new businesses in HVAC, commercial refrigeration, real estate and other, non-hi tech jobs, and that they have zero interest in returning to the IT profession, due to having been so badly treated by the CEO's.

Then they will find that there are no new college grads in the IT field because everyone avoided taking those courses because of the outsourcing trend. Yuk yuk yuk chortle guffaw guffaw.

[Elliott Jackalope]

"when the go" s/b "when THEY go". D'oh!

[Nick Danger]

WTF did you think would be the likely consequence of putting cheap PCs and free software tools in the hands of Third World countries?!? ... . You guys nyuk-nyuk-nyuked the whole open source movement and then stand dumbstruck over what it has produced.

What do you suppose this will produce?

[Bush2000]

You neglected to mention that Microsoft charges $350 US for Visual Studio.NET. Kinda takes a bite out of your argument, Nicky.

[Dominic Harr]

This isn't rocket science.

This nearly is, actually.

Making software isn't like making shoes. These off-shore companies are *not* able to compete with me, period. The evidence is all around us in failed projects. That is becoming very, very clear. Yes, it's cheaper, short term -- because you don't get what you ordered.

Short-term gain for management, long-term pain for the company.

Works for me. Now that the stampede back on-shore is beginnning, I like my position.

[Nick Danger]

Yeah, I know, Bill's rosebuds don't stink.