In The World Is Flat, author Thomas Friedman describes how the “connected” world created from the accelerating advances of the digital revolution has made it possible to do almost anything collaboratively with people around the planet. This globalization enables companies not only to distribute low-wage manufacturing and information labor around the globe, but also to engage in high-end design and knowledge.

As a result, you’d imagine that decisions to outsource technology projects would mostly come from chief technology officers and chief information officers. But increasingly, the decision to outsource seems to be coming from the chief financial officer.

Most companies working on large-scale software projects are offshoring in some fashion to take advantage of cheaper labor rates. But are companies really achieving lower costs on offshore projects? My colleagues and I at Quantitative Software Management examined the time-to-market, effort/cost, and quality profiles of some recent offshore and U.S.-based software projects contained in our industry database of completed projects collected worldwide. We discovered the following trends:

Offshore projects generally demonstrated higher productivity than did U.S. projects. They tended to be staffed with larger teams, in response to tight deadlines. Given these two primary characteristics, they achieved faster schedules.

However, the results exhibited more defects—nearly three times more for outsourced projects than for projects done in-country.

Factoring in the added time and effort needed to resolve these higher defects made offshoring nearly as expensive as doing projects in the U.S. Moreover, the extra time needed to resolve the defects reduced the faster time-to-market by half.

Given these trends, we recommend U.S. managers and their companies consider the following strategies when electing an offshore option:

Resist the urge to rush the code. On many offshore projects, there’s a high degree of parallelism between the requirements and the build/code/test phase. Many offshore teams try to compress time this way, only to have to rework the code.

Don’t ramp up too fast. Since data shows that defects on software projects tend to rise geometrically with the square of the team size, large-staff projects experience more—not fewer—defects as a result of offshore staff piling onto the project early.

Make sure you have enough testers. Many projects that ramp up too fast show a premature ramp-down of staff during the last third of the project, when testing occurs. If you have too few testers, many bugs will remain in the code when the system is placed into service.

Negotiate a fair warranty. It seems odd that many offshore contracts that I’ve seen have only a 30-day defect warranty after delivery. Think about this carefully when negotiating warranty terms, since bug fixes starting on Day 31 and beyond will be coming out of your pocket.

Many people think offshoring is here to stay. If it’s going to be successful, companies must be aware of the pitfalls in managing the design of complex systems across multiple time zones with partners on the other side of the world. It’s not as easy as the accountants think, because when we look at the numbers from a macro-conceptual point of view, it’s not just about cheaper offshore labor rates. If you do it right, you may well achieve your goals, but if you get it wrong, it can actually cost you more than expected.

Michael Mah is a senior consultant with Cutter Consortium and owner/partner at QSM Associates Inc. You can view his complete bio at www.cutter.com/consultants/mmbio.html.