Last week I read this article on an experiement a team did to compare off-shoring to co-location of the team. Pretty good summarizes my experiences. I've only ever seen two acceptable off-shoring projects.

The first one was not really off-shoring. It was when I first joined Microsoft and our team was located in Sweden and one by one the team members moved over to the US so for a while half the team was in the US and half in Sweden. We definitely saw some of the bad things of a distributed team and we definitely saw some of the good things with having different time zones since severe bugs could be worked on around the clock. But I think the main reason this worked was because we were a co-located team that got distributed so we were already working well together and knew each other so syncing across the pond was easier. Still an overhead, but not as bad as I imagine hiring random people across the world.

The second good implementation I saw was a partner company my old (pre Microsoft) company had. What hey did is that they flew in parts of their off-shore team a few months each year and had them work co-located with the rest of the team. This way the team got to know each other better and the team culture in Sweden could spread to the off-shore team. The second thing they did was to give the off-shore team separate things to work on as much as possible making daily synchronization between the different time zones minimal.