IS5600 9

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IS5600 9

• 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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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
• Backshore return the work to the home country
• Insourcing implies that the work is done by an
  affiliate of the organisation, but not done
  centrally. This too can be offshored
• 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
• Technology parks, IT parks, lots of engineering
  graduates
• China graduates 4 times as many engineers as the
  US annually
• The cost of calling IDD has dropped 80-90, if
  you still call, with VOIP at 100 below.
• Bandwidth has increased similarly, with
  developing countries now connected by gigabit
  lines. Only 10 years ago, it was close to 0.

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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, focusing 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 planned to locate 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
• It should be cheaper but is this strategic?
• If you are in an offshore or die situation,
  then is it really sensible to offshore?
• 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.
• Key industry sectors for captive operations
• banking/finance
• computer/electronics

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Captive Centres 2

• Three Captive Centre 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 in the first place and what is its
  longer term objective?
• Overall, the Captive Centre model is growing
  about 9B of work was moved to Captive Centres in
  India in 2006.

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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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Who is offshoring? - US

• IBM
• RD in US, IL, CH 16 sw devt centres
• MS
• most RD in the US, but also IN, CN, IL UK.
• Google
• RD in IN.
• All the top 20 US tech firms do offshoring, but
  only about 10 of the Fortune 1000 devote more
  than 10 of their budget to offshored activities

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Who is Offshoring? - Europe

• Fewer than in the US, due to more conservative
  business culture, as well as stricter labour laws
  (redundancies)
• Language is an issue few Indian programmers can
  read or build in French or Danish
• UK - much work outsourced to IN, PK, BD, LA
• Germany
• 80 of the large firms have yet to offshore
• 60 of German offshoring is to E Europe
  (nearshoring)
• Dutch extensively to 35 countries, India
  preferred

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And what about Nearshoring?

• Germany to E Europe
• Japan to China, Vietnam, S Korea
• NEC started offshoring to China in 1982, with 40
  firms and 3000 employees now involved
• Several JP firms are spending US10-30M/year in
  China
• Dalian is now a hub for JP-focused work
• US to CA and MX growing potential here

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The Big Three China, India 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, PO, 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 Restructuring 1

• A decade ago, Indian firms like TCS set up
  offshore operations in places like Shanghai.
• However, this bright idea seems to be
  undergoing a re-evaluation. TCS has now moved its
  Asia-Pacific HQ to Singapore, hired new
  management with direct experience in Asia-Pacific
  and China, and moved the other employees back to
  India.
• Indeed, firms like TCS are cutting back on all
  their China operations.

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Indian Restructuring 2

• Initially they thought that existing MNC clients
  operating in China, who were also their
  world-wide clients, would like to have their
  local (in China) work done in China. But it seems
  that the MNCs would still prefer to have the work
  done from other centres.
• However, two factors have made them change their
  minds
• They have lost their IP in China
• Their Chinese employees are setting up parallel
  and competing operations with the stolen 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.
  Otherwise press 2, it will be done in the US,
  and will take a lot longer
• 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 various 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
• In this respect, China has a lot of catching up
  to do.
• But can you understand Indian English?

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Languages, Skills and Govt Support

• Dubai and Singapore IT security skills
• PH, LA, 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.
• Some government are actively encouraging
  offshoring work, e.g. UY and CL.
• Central and Eastern Europe is similarly
  benefitting from Western European work.
• In sub-Saharan Africa, e.g. KE BW, there are
  similar trends.

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What do IT Professionals cost?

• US, Canada
• SG, JP
• Eastern Europe
• Brazil
• Russia
• India
• China
• SE Asia (VN, TH, PR, MY)
• Mexico

• 40,000 60,000
• 40,000 50,000
• 20,000 40,000
• 25,000 30,000
• 20,000 25,000
• 15,000 25,000
• 10,000 25,000
• 8,000 25,000
• 8,000 15,000

All salaries US/year and fully loaded
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What are the Costs?

• Salary is a major component, but also consider
• Housing
• Medical insurance
• Local transportation
• 13th month bonus, etc.

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And what about?

• 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 (not that special)

• 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
• Why are we doing this? (specifically why?)
• 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 in your country!
• 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
• 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. Too good to be true is
  almost certainly too good to be true. Quality
  costs.

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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 already 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
• 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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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 market is double that
  of the Indian market.
• China has 18,000 software companies, strongly
  supported by government policy and economic
  growth.
• Chinas 1000, 100, 10 plan (1000 new software
  firms with global sourcing expertise, 100 global
  software firms to set up business in China, and
  10 cities within China to be 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 smaller
  firms).
• Market consolidation is now likely to result.

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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 around
  the world
• 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 within 5 years
• 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 increase

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Concluding Remarks

• ITO and BPO are rapidly changing areas
• There is huge potential as well as considerable
  risk
• Careful planning is essential
• But ITO/BPO is not only for large firms anyone
  can play