IT Offshore Outsourcing

1
IT Offshore Outsourcing

• Todd Budin
• Akin Ola
• Ryan Moore

7 Nov 2003
2
IT Offshore Outsourcing

• The sharing or transferring of responsibility for
  some or all IT services to a third-party vendor
  that operates in a foreign country. 16

3
IT Offshore Outsourcing

• The practice of moving IT work, or spending IT
  dollars outside North America12.

4
Offshore Outsourcing

• Nearshore outsourcing is outsourcing to Canada
  and Mexico12.

5
Companies Using Offshore Providers
InformationWeek study of industry sector revealed
over 50 of IT companies are offshore
outsourcing13.
6
Jobs

• 360,000 jobs outsourced offshore.20
• Demand to exceed 1 million by 2005. 20
• 60 of Fortune 500 firms are outsourcing.21
• As of 2002 GE had 7,000 software professionals
  offshore.21

7
Offshore IT Spending
17
8
Reasons for Outsourcing

• Cost
• Quality
• Skills
• Speed Development
• Globalization

9
Cost

• Cost of Labor in vendor countries is lower than
  that in the US. 22
• 93 of financial services executives interested,
  to reduces cost.22
• Wages can be as much as 80 lower. 23

10
Quality

• Offshore developer have standards equal to or
  higher than that of the US.24
• 64 of financial services executives cited
  improved productivity.25
• 42 cited enhancing service quality. 25
• India has twice as many technical graduates as
  the US. 24

11
Skills

• High demand for IT skills
• Y2K and e-Business revolution
• Forecasted shortage

24
12
Speed Development

• Allow companies to focus on core competencies
• Increase productivity
• Reach market sooner

13
Globalization

• Companies are competing in a global economy
• Internet and Telecommunications
• International Standards and Metrics
• Capability Maturity Model
• ISO9000

14
Capability Maturity Model

• CMM or SEI-CMM
• Developed by Software Engineering Institute,
  Carnegie Mellon University
• Five levels of competency

27
15
ISO 9000

• International Organization of Standardization
• Standard for assuring, managing and improving
  quality
• Companies can be certified in ISO 9001 or ISO
  9002, ISO 9003 or ISO 9004
• ISO 9001 for design, development, production,
  installation and/or servicing.
• ISO 9002 for development, production,
  installation and/or servicing.
• ISO 9003 final inspection and testing.
• ISO 9004 similar ISO 9001 but also includes
  guidelines for continual improvement.

www.iso.ch Accessed Oct. 29, 2003
16
ISO 9001 Certification Steps
Define policy objectives and measures
Build quality management system
Develop quality manual
Identify and document required measurements
Review and improve
On-Site Audit
Implement quality system
On-Site Audit
ISO 9001 Certification
www.cionline.net Accessed Oct. 29, 2003
17
Vendors

• Countries
• India
• Russia
• Malaysia
• China
• Companies
• Government

18
Countries 95 of Outsourcing
Russia
Canada
EU
China
Israel
Japan
Mexico
Philippines
India
Singapore
Brazil
Australia
15
19
Countries Significant
Hungary
Estonia
Czech Republic
Ukraine
Latvia
Slovenia
Lithuania
Poland
Belarus
Bulgaria
Romania
Korea
Taiwan
Pakistan
Cost Rica
Malaysia
15
20
Countries Little Outsourcing
Yugoslavia
Croatia
Jordan
Cuba
Bangladesh
Egypt
Caribbean
Vietnam
El Salvador
Sri Lanka
Chile
South Africa
Argentina
15
21
Country - Comparison
24
22
India

• Best vendor country
• Low labor cost
• Vast resource of highly skilled professionals
• Cooperative effort between government and
  businesses
• Indian based multi-national companies
• Wipro
• TCS Tata Consultancy Services
• Infosys
• Cost of labor is rising.

23
Russia

• Two-thirds of suppliers are IT related

28
24
Russia

• Strong technical, research, innovative and
  problem solving culture
• Attractive labor cost, 18 per hour
• Expected annual growth of 50
• Poor government support and infrastructure
• English language barrier

25
China

• Good with legacy type systems.
• Attractive labor cost
• Large Labor pool
• No regard for intellectual property, proprietary
  and confidential data

29
26
Malaysia

• Strong government support
• Infrastructure
• Education
• Shortage of highly skilled and experienced
  developers

27
Philippines

• Labor cost, annual salary 10,000 - 15,000 26
• Good job market with 40,000 computer technology
  graduates each year
• Familiar with state of the art technology

28
IT Offshore Outsourcing

• Considerations

29
If there was Justice in the world..

• Sorry, the Board is Outsourcing your job to guy
  in India wholl be CEO for a 10th of your salary.

30
Everybodys Doing It!

• More than 300 of the top fortune 500 companies
  tap IT services in India to run data centers1.
• CEOs see the IT department as a huge expense.

31
Everybodys doing it!

• In the year 2000 there were 27,000 jobs moved
  overseas.
• By 2015 Forrest Research estimates that number to
  grow to 472,000 American jobs.
• Other sources say 3.3 million jobs by 2015.
• The average computer programmer in the U.S. costs
  a company 100.00 per hour. In India the same
  hour costs 20.002

32
A large cost savings?

• 80 cost savings per hour.
• CEOs see this a way to cut expenses dramatically
  and improve the companys numbers to the
  shareholders
• Executives must look deeper into offshore
  outsourcing before signing the contract with the
  supplier.

33

• Offshore IT outsourcing started to soar during
  the economic downturn. With shareholders
  screaming bloody murder, many CEOs mandated some
  IT work be sent overseas.30
• But when you parse it all out, the total cost of
  offshore outsourcing a given IT job is generally
  comparable to getting the work done domestically,
  it is just that few companies are aware of the
  real costs, most just look at wages31

34
Considerations

• Unions
• The U.S. Government
• Loss of future talent and intellectual assets
• Security
• Expenses involved in all phases

35
Unions

• There are two main Unions Alliance IBM and
  Washtech
• Washtech newsletter circulates to 14,000 members3
• Both are associated with the powerful CWA union,
  the Communication Workers of America.
• Once resistant to joining a Union because of the
  IT workers white collar status, many are joining
  this e-movement.

36
UnionsConsiderations

• Executives may have to deal with Union employees
  when deciding to outsource.
• The company could face protests and public
  scrutiny by Union officials and members.
• Union members could boycott the companys
  products.
• The entire IT department could strike.

37
The United States Government

• U.S. Companies BEWARE!!!
• Laid-off IT workers are asking state and federal
  governments for help.

38
U.S. Government

• U.S. Senator Jeff Drozda (R-Indiana) introduced a
  bill on October 9, 2003 that would restrict state
  agencies from offshore outsourcing4.
• The bill goes a step further and restricts state
  agencies from using any vendor that uses the
  services of offshore IT supplier.
• .and tax breaks for companies who do not utilize
  offshore suppliers for their IT function.

39
U.S. GovernmentConsiderations

• If a large portion of your revenue comes from a
  state or federal agency beware. If this
  legislation is voted into law, a company that
  uses offshore outsourcing will see its government
  contract dissolve.

40
U.S.Government and Visas

• On October 1, 2003, the number of visas that the
  U.S. makes available to foreign professionals
  fell by 665.
• This program is called the H-1B visa program.
• The program was established by Congress in 1990
  to supply U.S. businesses with specialized
  knowledge that was unavailable domestically.

41
U.S.Government and Visas

• Original number in 1990 was set to 65,000
• From 2001-2003 congress tripled the ceiling to
  195,0005
• As of October 1, 2003, the number is back to
  65,000.

42
U.S.Government and VisasConsiderations

• Workers from the offshore suppliers come to the
  U.S. to make the transition go more smoothly.
• Executives may have less workers from the
  supplier available for the sometimes lengthy
  transition period.

43
Loss of future talent

• College students are noticing that the IT field
  is not as attractive as it was 5 years ago.
• Top students are choosing careers other than IT.
• Having our best and brightest go into other
  fields gives foreign companies an advantage.

44
Loss of future talent

• Any new project or product that a company wants
  to introduce to the marketplace requires an
  innovative IT department.
• Top IT developers help a company get a product
  out better and faster than the competition.
• The best and brightest to help in this process
  will be in other professions in the future.

45
Loss of future talentconsiderations

• Executives should consider (not offshore
  outsourcing) because they cannot afford to have
  domestic talent dry up6
• When the economy finally rebounds, U.S. companies
  may be at a global disadvantage.

46
Security

• Security is a concern domestically. Security
  risks do increase when you take an IT function
  offshore.
• Risks can be divided into two categories
  Physical and Technological.

47
Security Physical

• Terrorism and war in the foreign country where
  your IT department resides.
• Post 9-11 companies must realize the global
  terrorism threat.
• Delta Airlines cancelled an IT outsourcing deal
  to the Philippines on October 10th of this year
  due to Muslims separatist groups including Al
  Queda being active in the area7.

48
Security Physical

• Nuclear threat between India and Pakistan
• Nuclear threat between N. and S. Korea
• Consider the threats in the Middle East

49
Security Technological

• According to analyst Stephanie Moore at Giga
  Information Group, it is prudent for companies
  to wait until offshore companies mature their
  services.8
• Moore points to the concern in the lack of
  infrastructure in India due to the
  nationalization of the IT industry by the
  government in the late 1970s which drove
  companies like IBM out of India in 19788.
• India is still trying to catch up with the US.

50
Security considerations

• Executives must take into account the offshore
  suppliers security for their intellectual assets.
  
• Consider the risks involved with both the
  political environment and IT infrastructure of
  the country.

51
How Much Will This Cost?

• 1. Cost of selecting a vendor
• 2. Cost of the transition
• 3. Cost of laying off domestic IT workers
• 4. Managing the offshore contract

52
Selecting a vendor

• Ranges from .2-2 of the entire deal9
• Costs include documentation requirements,
  attorneys fees, in-house project management
  team.
• Opportunity cost Selection could take up to one
  year the in-house team could be working on other
  projects to increase company revenue.

53
Selecting a vendor

• Hidden danger in taking the lowest bid
• Vendors try to outbid one another to win the
  contract. They end up outbidding themselves11.
• This could lead to a vendor not fulfilling
  contractual obligations leading to
  renegotiation (), buying more services from
  the vendor (), or ending the agreement.

54
Transition costs

• The most expensive stage of an outsourcing
  endeavor9.
• U.S. companies keep all their IT staff to train
  the supplier.
• Cultural barrier for custom applications
• Transition period can take several months.
  During this period, a companies IT budget will at
  least double10.

55
Transition costs

• Near the end of the transition, the company wants
  to realize their cost-savings so they lay-off IT
  employees.
• Severance pay and retention bonuses are paid to
  keep domestic workers through the transition
  phase.

56
Transition costs

• Executives must also consider cultural barriers.
• American IT workers are often more efficient
  because they know the American consumer. In
  addition they helped build their companys IT
  function. A foreign worker must be trained to a
  companies custom applications
• Once the suppliers workers are trained, they
  often quit. Attrition rates in India average 35
  per year9.
• This can lead to decreased efficiencies!

57
Managing the offshore contract

• Invoicing and auditing to ensure cost centers are
  charged correctly.
• Many domestic employees are retained whose sole
  job it is to ensure that the foreign supplier is
  living up to the contract

58
Total Cost

• Can be up to 15.2 of the cost of the contract9.
• Lets do the math

59
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Conclusion

• It is not simple math when making decision to
  offshore outsource a companys IT function.
• Considering all the risks associated with going
  offshore is just as necessary as considering the
  rewards.

61
IT Offshore Outsourcing Best Practices

• Many aspects of Offshore IT outsourcing use
  similar best practices as traditional
  outsourcing.
• Establish a clear offshore strategy.
• Research, understand and know the supplier
  market.
• Plan for everything, including an exit strategy.

62
Outsource Projects Wisely
Consider how much effort and interaction is
required before outsourcing
24
63
Finding the Right Supplier

• Which countries are the closest fit?
• Talk to other U.S. companies.
• Use a consultant familiar with the country.
• Go and visit the offshore companies and countries
  youre most interested in.

64
Finding the Right Supplier Cont.
14
65
Researching the Market

• Think about Cost, Quality, Control and Risk20
• What is the total cost to offshore outsource?
• Is the quality level sufficient?
• Who is really in charge of the offshore site?
• What risk factors are involved in hosting the
  operation abroad?

66
Investigating Potential Suppliers

• Find out about the company?
• Current financial status and future growth.
• A measure of the products and services available
• Infrastructure (internal and external)
• Company culture
• HR (recruitment, training, compensation,
  retention)32

67
Various Offshore Business Models
Captive
Joint Venture
Build-Operate-Transfer (BOT)
Facilities Management
Outsourced
An offshore center fully owned by the firm
facilities management (real estate, security,
transportation, cafeteria, etc.) provided by a
third party .
Popular choice for low-end business processes or
contact centers. Could have ttwo or more vendors
and multiple countries
Firms own offshore shared service center.
Examples include GE, American Express and HSBC.
An offshore center with joint ownership of the
firm and a third party
An offshore center built and operated by a third
party for a finite time period after which the
ownership transfers to the client firm.

• Requires robust vendor management
• Heavy management focus in the multi-vendor model
• Opportunity to employ Best of breed providers

• Helpful when a firm wants to retain control but
  lacks local knowledge
• Also appropriate when vendors lack domain
  experience
• Opportunity to realize full value as a captive
  facility

• Helpful when a firm wants to retain control but
  lacks local knowledge
• Also appropriate when vendors lack domain
  experience
• Opportunity to realize value as a captive
  facility

• More complex to set up
• Moderate investment
• Opportunity to share reward
• Local knowledge of the JV partner helpful

• Highest investment
• High management commitment
• Potentially high risk if no local knowledge
• Greatest opportunity to realize value
• Potential to insource

18
Extended Organization
68
Fail to Plan, Plan to Fail

• Plan for managing the transition
• Plan for managing the offshore relationship
• Contingency planning

69
Planning the Big Move

• Communicate the coming changes with shareholders,
  employees, customers and the press
• Develop a detailed plan for the transfer of
  knowledge.
• Transferring cultural, industry, and legacy
  systems knowledge
• Knowledge transfer should be completed without
  business disruption

70
Plan on how to Manage the Relationship

• The supplier isnt going to maintain the
  relationship
• Set expectations and performance benchmarks from
  the beginning
• Put a team in place to monitor the suppliers
  performance, financial health, personnel status
  and contractual conformance.

71
Contingency Planning

• You need two hot sites, not merely a
  theoretical failover site.19
• Transition methodology for moving functions
  between sites, including the U.S.
• Offshore exit plan

72
Questions?
73
References

• 1Alore Gilbert, Protestors Decry outsourcing to
  India, NewsTech, September 9, 2003
• 2Peter Engardino, The New Global Job Shift,
  Business Week, February 3, 2003, pgs. 46-53
• 3 David Beckman, IBM Plans to Accelerate Offshore
  Outsourcing, WashTech news, July 22, 2003
• 4Paul McDougal, Indiana Senator Pushes for
  Anti-Outsourcing Measure, Information Week,
  October 9, 2003
• 5Manjeet Kripalani and Bruce Einhorn, Global
  Designs for Indias King, Business Week, October
  13, 2003, pgs. 56-58
• 61 Diane Morello, U.S. Offshore Outsourcing
  Leads to Structural Changes and Big Impact,
  Gartner, July 20, 2003

74
References continued

• 7Paul McDougall, Delta Cancels Deal, Information
  Week, October 10, 2003
• 8Mark Willoughby, Offshore Security Considering
  the Risks, Computer World, September 15, 2003
• 9Johanna Amrosio, Experts Reveal Hidden Costs of
  IT Outsourcing, CIO Magazine, April 23, 2003
• 10Stephanie Overby, The Hidden Costs of Offshore
  Outsourcing, CIO Magazine, September 1, 2003,
  pgs. 28-42
• 11Thomas Kern, Leslie Wilcocks, Eric Van Heck,
  The Winners Curse in IT Outsourcing, California
  Management Review, Volume 44, Number2, Winter
  2002, pg 49.
• 12Mary Lacity, Offshore Outsourcing Presentation
• 13Information Week, The Offshore Decision,
  InformationWeek 12/10/2001 Issue 867, p116,
  1/3p, 1 graph

75
References continued

• 14Mapping Offshore Markets, NeoIT.com, Issue 7,
  April 2003, Pg.21
• 15Erran Carmel and Ritu Agarwal, The Maturation
  of Offshore Sourcing of Information Technology
  Work, MIS Quartery Executive, Vol. 1, 2 pg 75
• 16Narender Ramarapu and Monica Parzinger, Issues
  in foreign outsourcing, Information Systems
  Management Sept 97, Vol. 14 Issue 2, p27, 5p
• 17Jaikumar Vijayan, Companies expected to boost
  offshore outsourcing, Computerworld. Framingham F
  eb 17, 2003. Vol. 37, Iss. 7  pg. 13, 1 pgs
• 18Suresh Gupta, Global Perspectives in
  Outsourcing, Presented 23 Oct. 2003 Baruch
  College, New York, NY
• 19Laton Mccartney, a shore thing?, CFO, Spring
  2003, Vol. 19 Issue 4, pg. 60
• 20Onshore Versus Offshore Outsourcing
  Significant differences require unique
  approaches, NeoIT.com, Issue 13, October 2003 pg.
  8

76
References continued

• 20. Larry Greenemeier, Offshore outsourcing grows
  to global proportions, Insurance Technology.
  New York Apr 2002. Vol. 27, Iss. 5 p. A12
• 21. Erran Carmel and Ritu Agarwal, The Maturation
  of Offshore Sourcing of Information Technology
  Work, MIS Quartery Executive, Vol. 1, 2 pg 75
• 22. Greg MacSweeney, Special report IT
  gameplan-outsourcing Offshoring can improve
  quality, Insurance Technology. New York Jul
  2003. Vol. 28, Iss. 7  pg. 39
• 23. Shailen Gupta, Offshore call center
  outsourcing International site selection
  strategies,  Customer Inter_at_ction
  Solutions. Norwalk Jul 2003. Vol. 22, Iss. 1  pg
  . 48
• 24.Inigo Amoribieta, Kaushik Bhaumik, Kishore
  Kanakamedala, and Ajay D. Parkhe, Programmers
  Abroad A Primer in software development,
  McKinsley Quarterly, 2001,Number 3
• 25.Greg MacSweeney, Special report IT
  gameplan-outsourcing Offshoring can improve
  quality, Insurance Technology. New York Jul
  2003. Vol. 28, Iss. 7  pg. 39
• 26Mary Hayes, Paul McDougall, John Soat. Gaining
  ground,  InformationWeek. Manhasset Mar 31,
  2003. , Iss. 933  pg. 34, 6 pgs
• 27Mark Paulk, Bill Curtis, Mary Chrissis, and
  Charles Weber, Capability Maturity Model, Version
  1.1, IEEE Software, Vol. 10, No. 4, July 1993,
  pp. 18-27,

77
References continued

• 28Mary Hayes, Greg Macsweeney, From Russia with
  love. InformationWeek. Manhasset Jul 28,
  2003. , Iss. 949  pg. 59
• 29Winter Wright, New Kid,  Far Eastern Economic
  Review. Hong Kong Jul 11, 2002. Vol. 165, Iss. 27
    pg. 38, 1 pgs
• 30The Hidden Costs of IT Outsourcing, Business
  Week Online, Olga Karhif, October 27, 2003
• 31Quote from Tom Weakland, a partner in
  management consultancy DiamondCluster.
• 32Visiting Offshore Suppliers, NeoIT.com, Issue
  1, June 2003