Companies seeking to offshore application development to reduce headcount and save money could risk major reductions in productivity, as poor knowledge of the business reduces efficiency, according to Compass Management Consulting (CMC).

The recession has given firms an excellent opportunity to replace legacy systems and streamline software development operations, but many are repeating common mistakes by assuming that offshoring is the answer to all their problems.

CMC services director Nigel Hughes argued that companies could see productivity losses of up to 60 per cent when the full cycle of application development is outsourced, leading to longer development times.

"There is an inherent danger with doing this because, if you move the interface you have with the business, you could lose that functional domain knowledge," he explained.

"There are opportunities to reduce costs with offshoring and outsourcing application development, but it tends to be used as a blunt instrument. The real problem is the lack of understanding that a 'lift and shift' approach will create problems."

The risk associated with outsourced developers having poor knowledge of the business can be exacerbated when firms have accrued applications over time under the radar of their IT department, according to Hughes.

"There has been unconstrained development of applications and, if you're moving that offshore too, there is business risk there," he said. "One company I know had over 400 separate payroll systems."

A considered approach to outsourcing or offshoring application development requires firms to prioritise their applications according to criticality, and then make a decision about which development projects they should choose for this treatment, while retaining the core business analysis skills in-house, said Hughes.