Hidden costs, high staff turnover and poor cross-cultural communications are the key causes of offshore outsourcing failures, according to new research from analyst house Gartner.

The analyst report predicts global spending on offshore outsourcing services will top $50 billion by 2007 but it warns too many companies are rushing into deals on the promise of unrealistic cost savings.

The biggest mistake that is common to all offshore outsourcing failures is to base the business case solely on reduced labor costs.

"Many hidden costs--including expenses associated with infrastructure, due diligence, communications, governance, overseas travel and cultural training--will offset the cost advantage of wage differentiation," the report said.

Organizations are also warned that a disproportionate amount of costs are incurred during the planning and start-up stages and that any savings will take longer to materialize.

"As a result, long-term offshore deals do not realize the projected savings until the 'steady state' stage 12 to 24 months into the engagement. For the same reasons, short-term offshore deals lasting less than one year are unlikely to realize any cost savings," the report said.

The high turnover of offshore staff, particularly in countries such as India, also has a negative impact on productivity.

"Such turnover contributes to productivity loss because new staff must be trained and overcome the learning curve for dealing with customer applications and relationships," said Gartner.

Poor communication between the onsite and offshore project teams as well as between management and employees is also picked out by Gartner as a critical failure factor.

"Effective communications are critical in offshore outsourcing projects. The reason many offshore deals fail is because of the propagation of misinformation and confusion due to inadequate communications among the project team and its contacts, as well as within the general employee population, executive ranks and local community," the report said.