I've worked at numerous clients who've done offshoring projects, and for the most part I've watched the potential savings evaporate due to various factors (typically a ton of rework on the back end, as the clients ended up spending months "fixing" the software so it would actually meet their needs).
Having watched that happen, I always wanted to write a blog post detailing the issues, risks and costs. Now I don't have to because a fellow Magenicon has done a really nice job with this article:
Latest in Offshoring to India: Considerations in Evaluating Onshore vs. Offshore Software Development
Interestingly enough, I would be that a lot of that rework I've seen happen at these clients would not have been necessary if they'd recognized the real costs and risks ahead of time - most of which are covered in Matt's article. By recognizing the real risks ahead of time, it would have been possible to put procedures in place, and assign local resources to the project up front to help mitigate or manage those risks. Sure, doing those things does eat into the savings, but would almost certainly help avoid the incredibly costly rework that is otherwise required on the back end of the project.
My brother manages a global team. His team exists in the US, France, India and Japan. They do 24 hour development. He has a lot of interesting stories to tell about cultural communication barriers (missing deadlines because a US phrase meaning "we'll get it done" means "we'll think about it" in another country, that sort of thing). And the joy of rotating conference calls through all hours of the day and night so the team can coordinate and so no one nation's team has to get up at 2 AM all the time. I've stayed at his house when he had to get up for a 2 AM conference call - what fun!
But his team is successful. After years of working through the various issues, and using a high level of process and formalization (he's a Six Sigma Black Belt and instructor), they have been able to get this all working. Prior to having that level of formalization and rigor of process though, I know they really struggled.
So the costs and risks associated with offshoring are very real. Whether they make local resources cheaper or not is a case-by-case thing, but it is clearly ridiculous to expect a huge savings by offshoring after you factor in all the issues involved.