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IS6600 4

• Global IT BP Outsourcing and Offshoring

There are no IT projects there are just
business improvement projects in which IT is a
critical enabler CEO British Airways
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Learning Objectives

• Familiarisation with offshoring and outsourcing
• Focus on IT services and system development
• Plans for the Offshore process
• Cases and trends in organisations, globally

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Outsourcing

• This is an increasingly common practice
• It means that (usually) non-core-competence
  activities are undertaken by a third party
• Typical examples include
• ITrelated services ITO
• New software development
• Business process services BPO
• E.g. data entry, customer call centre

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Outsourcing

• The work may be undertaken in a variety of
  locations
• Inshore within the same country
• Offshore at a more distant location
• Nearshore at a nearby country or time zone
• Backshore return the work to the home country
• Multisourcing and Microsourcing
• Split your project into many (small) parts and
  assign each one to a different provider
• Mobile or Nomadic software providers can be
  located anywhere, yet still provide services

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Insourcing

• Insourcing implies that the work is done by an
  affiliate of the organisation, but not done
  centrally.
• Insourced work can be inshore (same country) or
  offshore (overseas), or nearshore (a nearby
  country)
• E.g. HSBC gets BPO work done by a subsidiary in
  China (Nearshore insourcing)

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Offshoring

• Offshoring often implies the involvement of a
  cheaper and less developed country
• E.g. a US firm outsources software development to
  India
• E.g. an Indian firm outsources software
  development to Vietnam
• But there are many hazards as well
• Managerial, HR, Work Style, Political, currency
  and wage fluctuations, competition for employees,
  regulatory issues
• Offshoring should be a strategic choice, not an
  accidental mistake
• Failing to plan for it is planning to fail at
  it!

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Offshoring is a Huge Activity

• Global total US80 Billion annually
• India had 58 Billion
• Growing at 15-20 annually
• By 2020, look for 0.5 trillion
• Though the potential total market would be approx
  1.75 trillion
• So, it is no wonder that offshoring is seen as a
  great opportunity.
• In 2008, India had 65 of the ITO and 43 of the
  BPO markets.

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The Provider Perspective

• Providing IT services is big business
• The BRIC countries 120 more
• Industry Technology parks
• China graduates 4 times as many engineers as the
  US
• Globally, communication costs have fallen
  dramatically
• Internet bandwidth and costs have increased
  dramatically

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Diversification or Centralisation?

• Diversification has long been a good practice in
  the financial investment industry but in
  outsourcing, the same is not true.
• Most providers are located in a single country,
  and even a single location, concentrating the
  risks.
• Diversification can help to reduce the impact of
  risks.

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Diversification - Example

• A French company offshored 2,000 high-end IT jobs
  
• Initially it planned to locate them all in
  Bangalore, India.
• Later decided to adopt a more diversified
  approach
• 65 in India _at_ 20k/year/head,
• 15 in Romania _at_ 25k/year/head,
• 15 in Egypt _at_ 20k/year/head
• 5 in France _at_ 40k/year/head.
• Why these countries?
• Romania - closer proximity to European markets.
• Egypt - new talent availability.
• Total cost slightly higher than an all-India
  approach, but diversification reduced risks.

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Diversification Issues

• In the more popular offshore locations, the
  providers compete with each other for the best
  talent this produces a lot of turnover, as well
  as higher wage costs.
• Few locations are better than all others on all
  counts diversification brings in new skills,
  new languages, new values.
• India is obviously highly penetrated by offshore
  work, yet there are many other providers in South
  America, the Middle East and SE Asia.
• Time zone issues, suitability of the local skill
  base, proximity to key customers, government
  initiatives can all play an influencing role.

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Strategic Issues 1

• Cost
• In India, we can get three security engineers
  for the cost of one in the U.S.
• But, is cheaper really strategic?
• Total Cost of Engagement?
• China is cheaper than India for programmers, more
  expensive for Supervisory Mgt staff.
• There can be many hidden costs
• If you always worry about cost, you will get poor
  quality solutions. Quality costs!

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Strategic Issues 2

• Talent
• Access resources unavailable at home
• But employee churn and provider reliability is a
  major problem
• Resource quality (esp at smaller providers)
• Knowledge transfer and the risk of IP loss/theft
• Do you share values with the provider?
• Good governance? Ethics? Efficiency? Flexibility?
  

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Strategic Issues 3

• Agility
• Respond to opportunities and get products to
  market faster
• If you can overcome the differences of language,
  communication style, culture
• Anything strategic requires a corresponding
  investment of resources and a long term vision.

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Strategic Issues 4

• Take advantage of time zone differences
• Send work from time zone to time zone
• US to S or SE Asia to Europe
• Non-stop work
• But coordination must be perfect
• Few success stories
• Small and simple tasks are more suitable

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Captive Centres 1

• Captive centres wholly owned subsidiaries that
  work for the parent company.
• For the Fortune Global 250 companies, 153 had
  Captive Centres in 2008.
• A 60 failure rate for CCs
• Created for the wrong reason
• Need investment cannot save money immediately

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Captive Centres 2

• Three Captive Centre Development strategies
  Hybrid, Shared and Divested.
• Hybrid The Captive Centre outsources (inshore)
  work to a local service provider, so that some
  work for the parent is done internally, some
  externally.
• Shared The Captive Centre also takes on work
  from other clients, making it a profit centre
  and rendering it liable for acquisition by an
  investor.
• The Captive Centre may be sold (divested) if the
  parent is assured that it will not lose quality
  of service under new management.

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Captive Centres 3

• The management of a captive centre should depend
  on a strategic position
• Why was the Captive Centre set up?
• What is its longer term objective?
• A poorly managed captive centre can be a drain on
  finances, as they have large fixed costs
• There are many examples of failed CCs
• Citigroup, Deutsche Bank, Unilever, Dell
• And successes
• ANZ, WNS, Genpact

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For Example ANZ Bank 1

• Developed an integrated Captive Centre offshore
  in Bangalore for ITO and BPO operations.
• The bank set out to create ANZ in Bangalore with
  fully integrated ANZ culture.
• Work includes back-office processing for
• credit cards,
• mortgages,
• wealth management products,
• a/c payable
• HR.

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ANZ Bank 2

• IT graduates in Bangalore are paid at A8k/annum,
  compared with A45-50k/annum in Australia.
• Although India is getting more expensive, labour
  costs are still sufficiently low to mean that
  India is an attractive destination for offshored
  work.
• By focusing on culture, ANZ Bangalore is also
  producing individuals who can move out into other
  parts of India and further instill the culture
  there.

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The Big Three India, China and Russia

• Large number of engineering graduates and
  well-qualified employees
• Thousands of software exporting firms
• But around 120 countries provide some offshoring
  services (RO, BR, PH, VN, PL, HU, MY, AR, FJ,)
• The Indian firms in particular are now global
  firms in their own right with offshore
  operations to service clients locally.
• Offshore sites in AU, CN, HU, JP, UK, US, UY
• A significant threat to US- and Europe- based
  firms

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Indian Structuring Restructuring

• A decade ago, Indian firms like TCS set up
  offshore operations around the world
• Around 50 countries to date (www.tcs.com)
• In China, around 90 of employees are local a
  very high level.
• However, there are some concerns, notably with IP

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Offshoring IT Services

• If you want the loan application processed
  today, click 1 and it will be done in Fiji
  today. Otherwise press 2, it will be done in
  this country by next month.
• What clicked 1?
• There is increasing offshoring of IT services
• Application processing, telemarketing,
  help-desking, airline reservations, data entry,
  etc.

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Offshoring IT Services

• All these services are highly dependent on both
  IT and language
• The relevant data is mobile it can be sent
  through the Internet easily
• HSBC employs thousands of staff in China, India
  and Malaysia.
• English speaking countries (populations) have a
  distinct advantage
• But can you understand Indian English?

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Languages, Skills and Govt Support

• Dubai and Singapore IT security skills
• PH, LK, IN, English language call centres
• Morocco French language call centres
• Central/South American countries Spanish call
  centres for Spain and Hispanic USA, e.g.
  help-desking, patient scheduling, data entry,
  helped by synchronous time zones.
• Active govt support in UY and CL.
• In sub-Saharan Africa, where English is spoken,
  e.g. KE BW, there are similar trends.

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Relative Costs of IT Professionals

• US, Canada
• Singapore, Japan
• Eastern Europe
• Brazil
• Russia
• India
• China
• SE Asia (VN, TH, PR, MY)
• Mexico, Fiji

• Higher
• Mid
• Lower

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Its not just Salaries

• Salaries are a major component, but also consider
• Housing
• Medical insurance
• Local transportation
• 13th/14th/15th month bonus, etc.
• And lots of hidden costs, such as

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Hidden Costs?

• Transaction costs
• Infrastructure costs
• Knowledge transfer costs
• Currency movements and fluctuations
• Dispute resolution
• Travel costs in the early stages
• Unpredictable risks wars, financial collapse,
  terrorism, regulatory changes (e.g.
  nationalisation, tax breaks), IP theft,
  corruption, proprietary knowledge, etc.

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The IT Offshoring Journey

• SunnySystems (SS) is a small sized HK software
  house. It needs to reduce costs, so it decided
  that the next version of its software would be
  developed in India. The project manager met a
  rep. of a large India provider at a US IT fair
  and decided to sign a contract. Problems started
  almost immediately SS used a development
  platform called Progress, but this is little used
  in India. SS overlooked the fact that the Indian
  programmers had no experience with the latest
  version of Progress. Knowledge transfer from SS
  to India was fraught with problems. One year
  later, the project was written off as a failure
  and abandoned. Clients now started to lose
  confidence in a company that could not deliver.
  The project manager had already lost his job.

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Is It Too Dangerous?

• Offshoring can be exciting or scary
• Depends on your appetite for adventure, for the
  exotic, for risks
• Many lessons have already been learned, and can
  be read, so companies considering offshoring have
  no excuse not to know in advance what they are
  getting into.
• But are the risks over stated? Is it really that
  dangerous?
• What should be done?

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Three steps (Common Sense?)

• Laying the foundations
• Do we have a plan, a strategy? Who is involved?
  Are we ready? a year? 18 months?
• Identifying the providers
• Which country? Which providers? Selection
  criteria? RFI and RFP. 6 months
• Assessing Selecting the Provider
• Visit the offshore location. Meet the people.
  Observe their work. Sign the contract. at least
  a month

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Laying the Foundations 1

• Assessing if we are ready
• How good is our project management?
• Can we manage an offshore project?
• Can our people work with them?
• Are changes in work norms acceptable?
• What is our appetite for risk?
• The hardest step is re-engineering internal
  processes so as to ensure that they are ready.

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Laying the Foundations 2

• The launch team
• Offshoring is complex it needs a powerful team
• Build a strategic vision, commitment and push for
  implementation
• Agile and able to make quick decisions
• Expertise in offshoring
• Learn from others experiences (including
  consultants)

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Laying the Foundations 3

• Strategy Plan
• Precisely why are we doing this?
• How are we going to achieve this goal?
• What are the risks?
• Operational issues
• HR costs, skill sets, current future
  operations, exactly what are we offshoring,
• Develop a business case for offshoring
• With performance indicators to measure later
  success
• Costs, satisfaction rates, productivity rates,
  delivery times, benchmarking against competitors,
  
• Planning for resistance to change
• How to keep key people, retrain some, let others
  go

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Identifying the Providers

• In India, there are thousands of providers!
• Many have offshore agents
• Globally, there are tens of countries that do
  offshore work
• Which one do you want?
• General skills or specific? Language?
• Risks? IP protection? Security? Culture? Time?
• What is your strategic concern? Cost, quality,
  efficiency?

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Selecting a Country

• While selection of the provider is often done
  carefully, selection of the country is the
  subject of much less care.
• It may relate to personal factors or connections.
  
• Who is going to have to go and work there, to
  supervise and control? Can they cope?
• So many expats dont like their assignment
• Spousal/family issues.
• Is makes no sense to select a country that no one
  wants to visit or live in.

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Provider Selection Criteria

• General Criteria
• Company size stability
• HR policies
• Quality management
• Technical expertise
• Business domain knowledge
• Track record
• Methodologies used
• Costs
• Quality initiatives ISO, CMM, 6 Sigma, etc.

• Extra care criteria
• Infrastructure
• SW production environment
• Interntional experience
• Language skills
• Employee turnover
• Org culture flexibility, responsiveness, soft
  skills
• Global presence
• Disaster recovery backup
• 24-hour support

Weight the criteria matrix the providers
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Send an RFI, using the criteria

• Who we are
• What we are looking for
• Questions about the provider
• History, customers, management, geo-locations,
  turnover, infrastructure, security
• Questions on services offered
• Domain expertise, platforms, skills,
  subcontractors
• Questions on strategy
• Vision, market share, alliances

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Send an RFP to the most promising firms

• What we expect in the proposal
• How are you going to undertake a specific project
• Need to provide sufficient project details
• Need to do a good requirements analysis
• Try to stimulate the providers creativity by
  asking more specific/difficult questions
• Ask for references of work they have done.

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Assessing Selecting the Provider

• Evaluate the RFPs
• Identify false promises, too good to be true
  offers
• Learn that yes means yes, no and maybe.
• Often all simultaneously
• Check the references
• Ask what worked, and what didnt.
• Technology always has problems.
• Soft issues culture, values, trust, wavelength.
• Dont only look at cost.

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The Offshore Visit

• Important for large/complex projects, long-term
  cooperation and situations where there is a high
  degree of dependence on the provider (i.e. it is
  hard to switch)
• Launch team members should be involved, but also
  other members of senior management and those who
  are not yet convinced about offshoring.

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Offshore Things to Do

• Dont just visit the HQ, but also the work site,
  national software association,
• Talk to other foreigners who are there
• Plan the site visit carefully not on the plane
• Dont visit too many and dont only listen to
  sales pitches they are all the same.
• Do speak to project managers and programmers
  how good are their soft skills?
• Walk around literally

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Recommendations Contract Negotiations

• To offshore or not.
• Project objective, functionality scope,
• Comparison of providers
• Financial justifications to top mgt.
• Legal/contract issues price, IP
  confidentiality, penalties incentives

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Contract Specificity

• It would seem sensible to have specific contracts
• More quality and satisfaction??
• Consultants report that a less than complete
  contract means more room for creativity and
  flexibility
• The vendor can then work within a framework and
  be creative which is more satisfying for vendor
  staff
• They are not just being told what to do
• An onsite supervisor can help
• It requires the client and vendor to have similar
  cultural values tolerance for uncertainty
• A client-vendor matching process is needed

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Insourcing and Outsourcing

• You need to do the requirements analysis
• Dont trust others to know your business better
  than you do
• Outsource the software development
• Software testing must be done by the users, not
  the developers
• Developers tend not to do such a good job here
• And if the software is not carefully tested, the
  chance of rejection is higher.

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Summary

• Dont underestimate the importance of careful
  planning, or of allowing enough time to lay the
  foundations carefully.
• The project launch team should be small, agile,
  open-minded and pro-offshoring
• A low-risk pilot project will help a company find
  out if it is ready for offshoring
• Contracts are important, but developing a
  relationship with the provider is probably more
  critical.
• The two parties need to align their business
  interests for the duration of the project.

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Chinas Progress

• Currently only 10 of Chinese software is
  exported, compared to 78 of Indias, though the
  dollar value of the Chinese software market is
  double Indias.
• China has 18,000 software companies, strongly
  supported by govt policy and economic growth.
• China plans to have
• 1000 new software firms with global sourcing
  expertise,
• 100 global software firms to set up business in
  China
• 10 cities within China identified as locations
  for world class software development

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Chinas Progress

• The top ten Chinese software firms engaged in
  offshore work have, together, about the same
  revenue and headcount as the 5th largest Indian
  firm.
• Together, these top ten firms account for less
  than 30 of the total Chinese market.
• This indicates a considerable degree of
  fragmentation in the market (too many micro
  providers).
• Market consolidation is now likely to result.

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Key Chinese Providers

• CVIC SE (1991)
• iSoftStone (2001)
• Neusoft (1991)
• Beyond Soft (1995)

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Future Directions 9 Pressures

• Large Indian players move up the value chain
• Best-shoring (to the most appropriate location)
• Vendors buying up smaller operators and moving
  into new markets
• Large players offering services across many
  sectors
• Client pressure towards multiple suppliers
• Further development of offshore services globally
• Continued downward pressure on costs
• More sub-contracting
• Neverending search for new sources of skills

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Future Directions 6 Trends

• Rising revenues for offshore work, with BPO
  passing ITO soon
• Multisourcing will continue to be a dominant
  trend, with increased focus on nearshoring (for
  control and proximity to market)
• India will continue to dominate and China will
  rise, but may struggle to achieve scale in NA and
  EU markets
• More competition between emerging country
  providers some will succeed, others fail
• Knowledge process offshoring will increase as
  providers move up the value chain
• Captive activity will continue

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Concluding Remarks

• ITO and BPO are rapidly changing areas
• There is huge potential and risk
• Careful planning is essential for success
• Anyone can play at ITO/BPO
• India is far ahead Brazil, Russia and China
  have a long way to catch up