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an IT Management eBook

The Pros and Consof Outsourcing

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contentsThis content was adapted from Internet.com'sDatamation and CIO Update Web sites.Contributors: Lionel Carrasco, Sashi Reddi,Claudio Muruzabal, Julie Craig, and Larry Marion.

The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.

2 How to GetOutsourcing RightLionel Carrasco

5 Outsourcing's Seven-Year ItchJulie Craig

10 The Case forNearshore OutsourcingClaudio Muruzabal

12 Five Things Every CIO ShouldKnow About OutsourcingSashi Reddi

15 Outsourcing: SMBs areDoing It, TooLarry Marion

The Pros and Cons of Outsourcing[ ]

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Outsourcing is one of those terms inherently tied toglobalization. Essentially, companies go the out-sourcing route as a way to reduce costs, but often

they spend too little time considering its strategic value,often overstated bymany outsourcing providers.

The truth is one of outsourcing's main values is torelieve IT staff of time-intensive duties and createopportunities for them totake on truly strategic initia-tives.

It's widely known that com-panies pursue outsourcingwith the cost-reduction fac-tor in mind. Some also lookfor outsourcing to improveservice levels or to createbudget flexibility.

To fulfill the cost reduction promise that most business-es expect from outsourcing, many outsourcing firmshave responded by becoming more efficient and seek-ing out cost-effective resources in the global market-place.

Navigating the MazeThe question is, despite the cost advantages of out-

sourcing IT, why do so many companies tell tales ofpartial or complete failure in successfully managing thisprocess? Why is it so complex?

Many companies will find that IT outsourcing is com-plex because it can turn into an "operational labyrinth"simply given the nature of the required services to sup-

port complex businessprocesses, as well as thematurity of the IT process-es.

There is a significant differ-ence between outsourcinglow-value services such ashelp desk, which are highlystable and standardized,and outsourcing softwaredevelopment or even thewhole IT operation; keep-ing hold only of high

value-added or strategic value projects.

Of course, there isn’t a universal recipe that applies toall companies developing an outsourcing strategy, buta consistent and moderate-risk strategy can get youmuch closer to "Right Sourcing."

Consider the following 10 factors to improve the oddsof success when planning your outsourcing strategy:

2 The Pros and Cons of Outsourcing, an Internet.com IT Management eBook. © 2008, Jupitermedia Corp.


How to Get Outsourcing Right

By Lionel Carrasco

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It's widely known that companies pursue outsourcing with thecost-reduction factor in mind.

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1. Identify your team's ability to do the same jobtoday in a different way.Get to know the tasks your operation is truly effectiveand efficient in performing, including operational sup-port.

Tasks should be segmented into different categories,such as client-facing vs. internal activities; sales-relatedvs. business-speed related activities; and centralized vs.geographically dispersed activities

2. Define your processes clearly.Start by describing the way the tasks are accomplishedtoday, and review the performance indicators and thepolicies for each process.

With geographically dispersed processes, it's importantto clearly establish the borders between activitiesdeveloped in a different part of the business, or inother countries.

3. Identify your true IT costs.You will have to get into the weeds to calculate theprice you are paying on each maintenance ticket anddevelopment project but it will be worth it because it'svital to compare your current operation with theexpected financial benefits of outsourcing.

4. Take a guess about which processes you may out-source, and picture an outsourcing partner manag-ing them.This exercise, which you can do with an outside con-sultant or take on internally, requires time to evaluate"What if part of X of process Y is done differently thanit is today?"

Think about the dispersed activities your team carriesout today, and if they were handled in a building acrosstown. Will it work? Look for the most painful processes— the real IT bottlenecks — and the most costly prob-lems.

Finally, imagine these processes upgraded through out-sourcing, freeing up time for the IT staff to devote toother more strategic tasks.

5. Think globally.Outsourcing has really grown up and the market is ripewith competent companies — large and small, nearand far.

Keep in mind there are a number of markets with com-petitive and skilled labor around the world, includingoften-overlooked places like Eastern Europe and LatinAmerica. Most outsourcing firms can service you frommultiple locations, which helps reduce the need towork with more than one provider.

6. Analyze your business.Only then pre-select the possible geographic locationsthat it would make sense to outsource to, based on theunique criteria of your business.

It is very important that you move tasks to locations ormarkets in which your company already does business.By doing so, you have the opportunity to create wel-fare to foster your own operations in those countries,while also ensuring that your outsourcing partner isaware of your business and concerned about providinggood service.

7. Make the business case for outsourcing.Don't short-change yourself in this process: Includeboth quantitative and qualitative elements in your strat-egy.

It's important to quantify the real benefit of going intooutsourcing and to know where the estimated savingscome from. For instance, if you discover that an activitywill represent less than 30 percent in savings, it is advis-able to postpone it for a later stage of the outsourcingcycle.

8. Make sure to interview your possible outsourcingproviders in their own facilities, no matter wherethey are located.This is not a time to cut corners. Go beyond the mar-keting hype, trade-show buzz, and third-party opinions.Develop your own short list by analyzing each compa-ny's capabilities. You will be amazed at what you find.

9. Be up-front about your expectations.Think about your definition of a successful relationshipand be open about the critical elements for successthat both parties will need to keep in mind.

Communication is the key. Be sure your potential part-ner clearly understands the way you want to design theoperation and particularly the benefits you seek inmoving to an outsourcing model.



Take the time to develop a transition plan, assigningthe tasks to be performed in each geographical loca-tion by each company, the times of interaction, and themeans of control.

10. Consider the benefits of a short-term contract tostart your outsourcing project.You can always renew it for a longer-term commitment.Though the legal conversations can be uncomfortable,contracts are integral to ensuring an effective transitionand partnership.

Talk about outsourcing usually starts with cost reduc-tion, which often is the driving force par excellence, butit is very important for you to know that cost reductionhas a price in terms of money and time. The true bene-fits of outsourcing will come to fruition only after youand the outsourcing provider figure out how to worktogether in the best possible way. �



Whilewe laugh about the alcohol-based tonics soldfrom the backs of wagons in the 1800s, whoamong us has never placed a bet at a blackjack

table? And, while we scratch our heads trying to imaginewhy anyone would send their retirement savings to astranger in Nigeria, most of us have been taken in at somepoint by promises that a stock will rise, a real estate venturewill succeed, or a tax cut will really put money in our pocket.

Hope springs eternal, and thepromise of getting somethingfor nothing is almost irre-sistible.

Let's be clear here — I'm notcalling outsourcing snake oil.What I am saying is that, inthe past, it has beenapproached by some as amagic potion that will cure allills. IT executives are as sus-ceptible to the quest for amagic bullet as everyone else.However, the vision of lower-ing costs, maintaining orimproving service quality, and decreasing service man-agement oversight is a myth at best, and one right upthere with the likelihood of consistently beating thehouse at blackjack. (There is a good reason why LasVegas is crammed with billion-dollar casinos.)

Transfer of Execution,Not ResponsibilityAccording to Wikipedia, outsourcing is "the transfer ofthe management and/or day-to-day execution of anentire business function to an external serviceprovider." Obviously, this definition covers a broadrange of products and services. At one end of thespectrum is software as a service (SaaS), in which an

outside company assumesthe execution of a givenservice, such as ERP or CRM.At the other is wholesaleoutsourcing of an entire IToperation. This is often acase in which an outsourcer"hires" a company's ITemployees and, in return, iscontractually obligated todeliver IT services at a speci-fied cost.

There are multiple grada-tions between the two, andthese gradations offer a

broad menu of options for IT organizations looking forways to optimize service delivery. The important thingto keep in mind when considering outsourced servicesis that every company is different. There is no "one-size-fits-all" outsourcing strategy. Picking and choosing



Outsourcing's Seven-Year Itch

By Julie Craig

The important thing to keep in mind when considering outsourced services is thatevery company is different. There is no "one-size-fits-all" outsourcing strategy.

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from the multiple offerings on the menu requires busi-ness knowledge, understanding of the industry verticalin which the business operates, the kinds of IT servicesneeded to stay competitive in that vertical, and theavailability of skills and expertise.

This is where today's CIOs have an opportunity to earntheir keep, because this "big picture" perspective isone that requires significant experience, knowledge,and judgement. Within high-performing IT organiza-tions, strategically selecting outsourcing options, andskillfully combining them with in-house expertise andservices, is high art. Such organizations understandwhat outsourcing is and what it is not: an opportunityto cede responsibility.

While execution can be outsourced, responsibility can-not. And from a management perspective, many cantestify that outsourcing creates as many challenges as itsolves.

Managing contracts, service levels, and acting as anintermediary between IT and the business are all activi-ties that have to be resolved. These activities fall on ITorganizations traditionally focused on technology andgeared towards delivering services rather than manag-ing them. This can result in both a skills and an expec-tation gap.

If IT doesn't have the skills it needs to manage this newdelivery model, and, as a result, expectations of theoutsourcing's benefits go unmet. Once this happens,the bloom fades from the outsourcing rose, reality setsin, and the company struggles with a whole new set ofchallenges that bring with them multiple unfamiliarroles.

Where Outsourcing is SuccessfulGeneral Motors (GM) is the poster child for outsourc-ing, and has been since the 1980s. At that time, GMoutsourced virtually its entire IT organization toElectronic Data Systems (EDS). Over time, as GM's out-sourcing model has evolved and diversified to multipleproviders, one thing has stayed the same, GM's inter-nal IT team.

Currently consisting of almost 2,000 people, it isresponsible for managing outsourced services. WithinGM, the role of IT hasn't diminished — IT is still


The Pros and Cons of Outsourcing[ ]Outsourcing ROI Good,Satisfaction LackingBy CIO Update Staff

Astudy from Deloitte reports that enterprisesentering into outsourcing arrangementsare focusing too heavily on reducing costs

through labor arbitrage alone, resulting in highlevels of disappointment and conflict even thoughmost companies are realizing significant cost sav-ings.

The Deloitte Consulting study, Why Settle forLess, found that 83 percent of companies sur-veyed had achieved an ROI of more than 25 per-cent on their outsourcing projects. However, 49percent of the executives surveyed said theywould have defined service levels that aligned bet-ter with their companies' business goals if theycould start their outsourcing projects over, andonly 34 percent of respondents reported that theyhad gained important benefits from their serviceproviders' innovative ideas or transformation oftheir operations.

In addition, by a three-to-one margin, the out-sourcing service providers polled felt that theirclient companies did not have a solid outsourcingplan, lacked the operational data needed to makesound decisions, and did not understand how theto-be organization would really work. Such contra-dictory findings could be the result of a failure toproperly define the goals of the outsourcing proj-ects as being more than saving money.

"Outsourcing is working financially for a majorityof companies in this survey, however, executives’propensity to lead with cost reduction and laborarbitrage without emphasizing the need for over-all optimization stymies their companies' chancesto realize the full benefits of outsourcing," saidPeter Lowes, a principal with Deloitte ConsultingLLP and the leader of its Outsourcing AdvisoryServices group, in a statement. "The themes ofunrealized potential and lost opportunities to useoutsourcing as an opportunity to innovate echothroughout this report."

Lowes noted that these lost opportunities mightalso be the result of the companies’ setting theiroutsourcing goals too low. He said companies

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responsible for delivering business services — but ithas changed.

There are a few areas where such an outsourcingmodel tends to be particularly successful. One is whenIT organizations utilize it to address those areas of thebusiness that are outside their key competency. ForGM, that core competency is automobile manufactur-ing, not IT. Kudos to GM for realizing this early andmoving towards an outsourcing model ahead of muchof the market.

What is appropriate for GM, however, is not necessarilythe best solution for Google. Google's core competen-cy is technology, and companies like Google excel atdelivering IT services. The likelihood that an outsourcercan provide the same combination of leading edgetechnology, expertise, and innovation that Google hasin-house is pretty small.

Targeted outsourcing — particularly of non-differentiat-ing business services — is another sweet spot. In manycases, it makes sense for commodity functions like e-mail management and the help desk to be outsourcedto a provider that focuses on that service for their dailybread. Does this mean these services are unimportant?Not by any stretch of the imagination. They are critical,but, as long as e-mail is available, it provides little orno strategic advantage over business competitors.Companies are starting to look at utility services in thesame way as they see electricity. Just as most of us relyon the electric company to generate our power andthe Post Office to deliver our mail, relying on an out-side vendor to deliver utility services makes goodsense, especially if the vendor can do it cost-effectively.

SaaSSaaS is another option that can become a valuablepiece of the service delivery mix. SaaS is a subset ofoutsourcing in which one or more services described inan IT organization's service catalog are delivered andsupported by an outside provider. SaaS has some realadvantages, especially for organizations with limitedresources and expertise supporting multiple depart-ments and a variety of applications. For a small tomedium sized company, for example, the cost of sup-porting the customer relationship management (CRM)systems used by the sales team, the enterpriseresource planning (ERP) software utilized by finance,


The Pros and Cons of Outsourcing[ ]might have initially perceived outsourcing prima-rily as a tactic to reduce costs as opposed to ameans to fundamentally transform their opera-tions and drive dramatic improvements in efficien-cy, productivity and reliability. Lowes said thatwhile there is no single right way to use outsourc-ing for each company, companies should examinethe following aspects of an outsourcing deal to seeif they need to correct their course even in mid-stream:

Did you clearly define the strategy? Companiesneed to ask themselves if they are outsourcing theright things for the right reasons. Transferring adysfunctional operation to a vendor in hopes ofsaving costs through economies of scale or arbi-trage can be a case of "your mess for less."

Dowe have a solid foundation? Companies need toask if they have defined and quantified what theyexpect from outsourcing. The creation of a businesscase and the establishment of effective service levelagreements (SLAs) should not be given short shrift;but in practice this is too common.

Vendor selection now means something different.Companies need to select the right serviceprovider, one that is capable of delivering strate-gic process improvements as well as cost reduc-tions. When things do not go well in outsourcing,most companies automatically scrutinize the serv-ice provider, but do not recognize that their deci-sion to select a vendor on cost alone may be theactual root cause of their problems.

Before striking the deal companies need to ask iftheir contracting process is mutual and flexible.Contract negotiation is a pivotal point in the out-sourcing process. After the deal is signed, are yougetting what you paid for? It can be tempting tothink the signing of the outsourcing contract isthe culmination of the outsourcing process. But inreality, effective performance management, espe-cially the insistence that service providers activelysearch for, develop, and implement strategicimprovements, is the crowning component of aneffective outsourcing initiative.

MethodologyThe survey included more than 300 senior execu-tives at mid-size and large companies. The execu-tives came from the United States (42 percent), theUnited Kingdom (25 percent), Germany (25 per-cent), and Canada (8 percent). �

and the computer aided design (CAD) systems used byengineering can be exorbitant. Delivering ERP andCRM via SaaS could be a viable option, and one thatreduces the services supported by internal staff fromthree to one.

Not to Be ConfusedIn addition to underestimating the managementrequirements of outsourcing, there are other "gotchas"as well. One is when outsourcing is combined with off-shoring. There is a difference between the two.

Software companies of all sizes are offshoring program-ming to geographically distributed teams, with varyingresults. For example, IBM has opened dozens of devel-opment and competencycenters across the globe.By and large, the peopleat these locations are IBMemployees who just hap-pen to work outside theU.S., offshore employeesrather than outsourcedservices.

In contrast, outsourcedprogrammers aren'temployees, they are contracted providers. On the sur-face, it looks like outsourcing work to such program-mers is cost-effective — wages can be as much as 80percent less than those of their U.S. counterparts.However, multiple companies are reporting that, in fact,the "real" cost of offshore outsourcing approximatesthat of using in-country resources in the first place.

Recently, I spoke with an executive from a softwarecompany best known for its database managementproducts. His company has been outsourcing program-ming work to Eastern Europe, but he indicated that, ifhe had it to do over, he would have kept the work with-in the Western Hemisphere.

He cited multiple problems. The time difference madeit difficult for U.S. staff to collaborate with offshoreresources. They ended up putting in long hours duringthe day, then putting in additional hours at night tomeet with Eastern European personnel. Travel was aproblem, both in terms of time and expenses, sincethere was typically a U.S. manager on-site. The trip

required multiple plane changes and executives lost afull business day to travel. This particular company washappy with software quality, but multiple companieshave reported quality problems that had to be fixeddown the line.

A Scientific ApproachVital Roy and Benoit Aubert wrote an excellent analysisof the pros and cons of outsourcing in their papertitled, A Resource-Based Analysis of IT Sourcing. In thepaper, they cited some of the less tangible outsourcingcosts that, nevertheless, impact a company's short- andlong-term revenues.

One is loss of competitive advantage. Especially intoday's very competitivebusiness climate, IT isincreasingly a business dif-ferentiator. Far fromNicholas Carr's "IT isdead" philosophy, thereare multiple companies inwhich IT is breathing lifeback into the business. Weare especially seeing thisin companies that haveleveraged service-oriented

architecture (SOA) to enable a level of flexibility previ-ously unknown in the business world.

SOA has helped banks respond more flexibly to everchanging regulatory and customer demands. It hashelped telecommunications companies to dramaticallycut the effort required to bring new customers online.And it has enabled healthcare companies to developnew products, such as medical portals that connectpharmacies, medical records, and doctor's offices.The competitive advantage SOA brings with it is somarked that the world of business is increasingly beingdivided into technology "haves" and "have nots." The"haves" are well-positioned as industry leaders with asolid foundation for future growth. The "have nots"find themselves left behind and facing a gap that growswider with time.

Loss of the ability to innovate, loss of confidence byhigh quality employees who have their choice of jobselsewhere, and loss of brand equity can all be falloutfrom outsourcing critical business services. CIOs consid-



In addition to underestimatingthe management requirementsof outsourcing, there are other

"gotchas" as well.

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ering outsourcing would benefit from reading Roy andAubert's paper, as it is well thought out and features amatrix that is useful for determining appropriate sourc-ing strategies for specific IT services.

ConclusionLike any development in the IT industry, outsourcinghas evolved to the point where, in many cases, it canprovide significant business value. Like in any relation-ship, it appears the early excitement is giving way andIT is developing a more realistic perspective. They areseeing outsourcing as what it is: one of a variety of

offerings that can be leveraged to provide high qualityIT services to the business.

Developing a strategic mix of internally and externallysupported business services is as much an art as a sci-ence. In the end, there is no substitute for good man-agement, business-focused technology expertise, andkeeping high-quality personnel and strategic assets in-house. �



There is a common belief that businesses are better offif they turn over all of their non-core competency workto third parties. This idea has driven the growth of the

multi-billion dollar IT outsourcing business. An alarmingnumber of failed attempts at a "one-size-fits-all" approach,however, have shaken corporate faith in the traditional out-sourcing model.

The initial concept of outsourc-ing proved no panacea. As itturned out, well-negotiateddeals didn't generate theexpected 25 to 30 percent costsavings. Unexpected situationsdrove additional cost; many ofthem coming from geography,time zone, and cultural issues.

The next wave of outsourcingrose in the Far East, driven bythe race to comply with Y2Kadjustments. This then drove the emergence of soft-ware development and application maintenance com-panies. These new companies, based primarily in India,also promised large cost savings and resulted in thecreation of a new industry segment.

Once again, these companies provided nothing new as

they essentially made the same promises as earlierdomestic outsourcers, but delivered services from thou-sands of miles away.

Sourcing — With a TwistThe new trend has returned control of core processes

to IT leadership. This has result-ed in the abolishment of themonolithic, one-vendor-fits-alloutsourcing model of the1990s and has contributed tothe emergence of a multi-sourcing strategy where theenterprise contracts with multi-ple outsourcing vendors fortheir respective expertise in agiven space.

The industry has now realized itis unrealistic to think one can

hand over all of one’s challenges to a third party andexpect that automatically all of the problems will goaway.

As such, over the last 18 to 24 months we have seen anew and refreshing trend in the marketplace where ITleadership is taking ownership of the delivery process;



The Case for Nearshore Outsourcing

By Claudio Muruzabal

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The initial concept of outsourcing proved no panacea. As it turned out, well-negotiateddeals didn't generate the expected 25 to 30 percent cost savings.

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contracting out only those pieces that lend themselvesbetter to third-party services while retaining control ofthe strategy and overall execution plan.

As the industry moves towards a multi-sourcing model,the bid process has opened up to specialized out-sourcers with a focus on infrastructure, telecommunica-tions, business process, call center, and software devel-opment and maintenance.

IT execs also started to look for development and sup-port capabilities close to their business centers, creat-ing a network of suppliers in different geographies andwith different technical expertise. This approach, nowwidely known as the global delivery model, opened thedoor to competition with the established Indian andtraditional onshore providers.

Providers in Latin America and Eastern Europe areproving to be as well trained and cost effective as theIndian, Filipino, and Chinese providers but offer a clos-er-to-home delivery mechanism.

The Case for NearshoreIT services provided from locations in Latin Americaand Eastern Europe are generally known as"nearshoring" services. A number of providers buildsoftware development, maintenance and support capa-bilities from these locations.

Although it is difficult to argue against the massiveavailability of talent and low labor costs in India andother locations in the Far East, there are a number ofreasons that make nearshoring a more attractive alter-native for many large organizations:

Time Zone: Nearshoring offers the alternative of havingthe developer, support organization, and user commu-nity working in similar time zones. This is a critical ele-ment in most engagements and could be a definingcomponent in those cases where online interaction is amust.

Geographic Proximity: For most outsourcing deals tofunction properly, you need some measure of face-to-face interaction. This is as true at the project managerlevel as it is at the power-user level. Being close to yourvendor gives your teams a chance to build chemistry,too.

Immigration Advantages: Of course, travel works bothways. A CIO who oversees a project that requires a mixof onshore-nearshore combination and rotationalassignments will play host to visiting workers and needto understand the rules governing visas and any tradeagreements.

The good news is, under NAFTA (North American FreeTrade Agreement), flexible visa arrangements allownearshore professionals to travel to the U.S. from Canadaor Mexico to work for extended periods of time.

Intellectual Property Protection: NAFTA also providesfor increased protection of intellectual property rights.This is a critical component when sensitive proprietaryinformation needs to cross borders as a result of thenearshore engagement.

Cultural Affinity: There is more to affinity in a workingrelationship than language. When a country shares anextensive border with another and has a common his-tory spanning more than 300 years, like the U.S. andMexico, there are culture affinities that are strong.When it comes to building the necessary empathy tocollaborate in a complex project, this affinity plays acritical role.

Cost Advantage: All of the previous advantages men-tioned lead to an ultimate cost advantage for nearshoreservices. Proximity leads to more interaction at a lowercost allowing for project management to be more pres-ent in the project, and cultural affinity reduces the needto spend many cycles to reach a conclusion.

Time zone proximity eliminates the need to work extrahours. As a result of all this, the apparent hourly ratedifferential between nearshore service and traditionalFar East-based service is eliminated and true cost con-verges.

It is cost advantages that are the ultimate proof-pointfor any outsourcing program. Nearshore services pro-vide similar cost advantages to those in more far-flungareas of the globe. However, only those organizationsthat have experienced traditional Far East-based out-sourcing know the impact of some of the issues out-lined above. In fact, it is actual veterans of these warsthat coined the concept of nearshoring being "Indiawithout the pain." �



If you go by Gartner, many U.S. companies need to seri-ously rethink their outsourcing strategies. Outsourcing hasbecome so faddish there is a danger that companies may

do so compulsively, with little planning or consideration ofwhat it takes to successfully manage contracts, processesand goals.

While the initial driver for out-sourcing is cost savings, there'sa lot more success criteria thatcompanies should be lookingat. With outsourcing expectedto continue growing, effectivelymanaging these relationshipshas never been more important.Generally speaking, the pitfallsassociated with outsourcing fallinto three categories: geo-graphical, infrastructural, andoperational.

In terms of the geographic location of the outsourcingfirm, companies can run into language problems,accent problems, political instability, changes in lawsand regulations, labor laws, and cultural issues.Geography is also a root cause of infrastructural prob-lems that can occur in the form of poor communicationinfrastructure, disaster recovery capacity, power genera-tion capacity, and non-renewable resources availability.

While these setbacks can be overcome by choosingone geographic target over another, it is fundamentallythe operational problems that make or break the suc-cess of an outsourcing engagement.

Mismanagement on the opera-tions front can make even themost carefully thought-out out-sourcing plans go awry.Whether you are re-evaluatingyour outsourcing strategy,expanding it or considering itfor the first time, here are fivethings every CIO should knowabout outsourcing.

Evaluate the vendor'sprocesses. Operational prob-lems start with processes.Consequently, you need to aska lot of questions about the

vendor's processes, best practices, and the levels ofquality control in place.

Being SEI or ISO rated is often used as a selection cri-terion. However, these measures of quality are evolv-ing. The SEI capability maturity models (CMM), forexample, have been upgraded in the last few years.While these ratings are important, it's more critical that



Five Things Every CIO Should KnowAbout Outsourcing

By Sashi Reddi

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Generally speaking, the pitfalls associated with outsourcing fall intothree categories: geographical, infrastructural, and operational.

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you ask when and how the company was assessed andby whom.

Interview the relationship manager. Too often, com-panies enter an engagement without fully understand-ing the processes that will drive the relationship.

It is critically important that you find out in detail howyour organizations will engage with each other, whatworkflow entails, the points of contact and communica-tion and reporting processes. Interviewing key projectpersonnel eliminates unwanted expectations and sur-prises. Moreover, it clarifies the overall business goals.

Insist on a risk mitigation plan. Any outsourced servic-es firm that takes its reputation and client satisfactionseriously will not balk at putting a risk mitigation plan inplace. In fact, this should be a standard practice but it'ssimply not quite the reality today.

Such a plan should address issues from risk identifica-tion, risk analysis, risk management, risk resolution, andmonitoring. The plan should assign tasks and responsi-bilities to the people involved in the project.

You should also be aware of the techniques that will beused to identify risk factors at the beginning of theproject and on an ongoing basis. Techniques mayinvolve risk assessment workshops, brainstorming ses-sions, and interviews at the beginning of each lifecyclephase.

Factor in the costs of internal management. There isa tremendous amount of project overhead that isrequired to manage just one outsourcing relationship.You have to travel, deal with conference calls outside ofthe usual business hours, and doublecheck the workthree or four times over.

Every deliverable needs to be reviewed and cross-checked to make sure the vendor is telling the truth.Because vendors want to get their payments, theyoften try to deliver as fast as they can and invariably,quality will sometimes suffer.

The time difference can significantly change the rhythmof your business, or at the very least, the team ordepartment responsible for an outsourcing project. Thisbecomes an overhead because people get burned out.Companies need to understand this cost and sufficient-


The Pros and Cons of Outsourcing[ ]Overseas IT OutsourcingRates Remain LowBy CIO Update Staff

Despite the attention focused on the out-sourcing of technology jobs overseas, a sur-vey by Robert Half Technology shows that

the majority of U.S. companies are not engaged inthe practice.

Ninety-four percent of chief information officers(CIOs) surveyed said their company does not out-source information technology (IT) jobs outsidethe United States. Among companies that oncesent IT jobs overseas but discontinued the prac-tice, nearly six-in-10 (59 percent) respondentscited management challenges as the top reason.These percentages appear unlikely to change sig-nificantly in the near future, as most surveyrespondents expected a continuation of the statusquo.

"Challenges such as language, culture, and time-zone barriers can sometimes outweigh the poten-tial benefits of outsourcing," said KatherineSpencer Lee, executive director of Robert HalfTechnology, in a statement. "Smaller companies,in particular, may lack the resources to commit toan effective long-term offshoring strategy."

The survey shows that large companies (thosewith 500 or more employees) are much more likelyto engage in overseas technology outsourcingthan small ones (those with fewer than 500employees). In companies with more than 500employees, 11 percent of CIOs reported that theycurrently engage in outsourcing, compared tofive-percent overall.

"Researching viable vendors, and teaching themabout the company and its products, managementstyle, and quality control require a substantialinvestment," continued Lee. "Large companiesmay be better positioned to absorb the costs ofboth initial setup and ongoing oversight, and tobenefit from economies of scale."

In the near future, growth in offshore outsourcingis likely to come primarily from companies alreadyoutsourcing, not from those that are new to thepractice. Forty-three percent of respondents fromcompanies that currently engage in offshore out

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ly communicate this internally.

Remember, this is a partnership, not a customer-suppli-er relationship. The most successful outsourcing rela-tionships are those built on a partnership.

Talk to the firm's other clients to find out how aggres-sively they have to renegotiate contracts. Companiesshould look for a partner that meets their needs with-out looking for excuses to re-price services at everyopportunity. Since partnerships foster a sense ofrespect, trust and responsibility, it is important for youto select companies that have satisfied a similar-sizedorganization.

Whether outsourcing is done offshore or domestically,it is all about efficiency. That is, creating leaner compa-nies that can focus on their core competency or, asJack Welch explains it, "Move up the food chain," andthereby be more competitive in the market.Taking these five basic things into consideration willhelp companies get off on the right track with their out-sourcing strategy and maintain successful, long-termrelationships. �


The Pros and Cons of Outsourcing[ ]sourcing said they plan to increase their level ofoffshore outsourcing in the next two years, ver-sus 13 percent who said they expect levels todecrease.

According to the survey, management challengesare a common obstacle to successful offshoring.More than half (59 percent) of CIOs whose compa-nies had stopped offshore outsourcing cited man-agement and oversight requirements among thereasons they had done so. Unrealized cost savingsand quality control also were factors, cited by 30percent and 23 percent of respondents, respec-tively.

For firms contemplating offshore outsourcing,Lee pointed out some strategies to consider:

• Look for stability. Choose a vendor that has atrack record of measuring staff turnover andretaining employees. Seek a company that has asuccession plan in place, as well as defined careerpaths for their IT professionals.

• Setup time and costs. New jobs or even depart-ments may need to be created to handle vendorselection, manage contracts, train workers, andoversee remote work teams.

• Management challenges. Dispersed IT workteams may require a different level and type ofoversight from management. Consider offeringtraining for managers who will lead overseasteams and will likely be managing individualswho may be very different from them, in terms ofculture, background and experience. Some com-panies may find that they need a full-time projectmanager to oversee the offshore vendor.

• Security and privacy concerns. Intellectualproperty risks such as the enforcement of patents,copyrights and trade secrets may require addition-al oversight and resources. Benchmark best prac-tices in the areas of security and proprietary tech-nology, for example, from similar companies thathave done it successfully. �

Forget for a moment the tainted pet food, contaminatedseafood, poison paint on kids' toys, irate customersfrustrated by unintelligible customer service reps, and

other problems associated with outsourcing functions acrossborders. The reality is that most companies – especially smallandmedium sized organizations – are becoming increasinglyreliant on collaboration with third parties around the world.This rise of globalization demands that IT managers andprofessionals rethink how they aregoing to service their users.

An e-mail survey and in-depthtelephone interviews of more than350 CEOs, CFOs, CIOs, COOs,and other senior executives ofNorth American companies founda striking change in the extent ofcollaboration with third parties inBrazil, China, India, Russia, Taiwan,Vietnam, and elsewhere. While thepercentage of operations out-sourced by companies with lessthan 1,000 employees is relatively low right now, it isslated to roughly triple by 2011 (see figure 1 next page:blue bar is today; yellow bar is 2011).

The January 2008 survey, sponsored by business soft-ware vendor SAP, found a variety of reasons for theincreased reliance on overseas collaboration. The moti-

vation goes beyond the labor cost arbitrage. Access toadditional skill sets and ideas is a prime motivator, andaccess to new markets is increasingly seen as a key rea-son to seek out overseas partners.

Interestingly, many C-level officials say overseas suppli-ers enable them to provide higher quality products andservices to their customers, though they rated quality as

the highest risk of collaboration.

Another key aspect of the rise ofcollaboration is the broad-basednature of the efforts in the future.Organizations are not just lookingfor low cost manufacturing help.As the table below shows, smalland medium-sized companies aregoing to increasingly rely on off-shore collaboration for R&D, mar-keting, sales, customer service,and human resources support aswell (figure 2).

Outsourcing More Than Just ITOrganizations with less than 2,500 employees arealready collaborating with external partners for most cor-porate functions to a modest extent, but more will berelying on others for a substantial extent in the future.



Outsourcing: SMBs are Doing It, Too

By Larry Marion

Jupiterimages

The reality is that most companies – especially small and medium sized organizations –are becoming increasingly reliant on collaboration with third parties around the world.

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While the C-level execs are intent on increasing thenumber and extent of their collaborations with othercompanies, they're not exactly sanguine about the levelof support they’re getting from IT. Indeed, the surveyindicates that only half of the respondents are satisfiedthat their IT infrastructure can support the extent of col-laboration incorporated into their strategic goals for thenext three years.

IT Doesn’t Satisfy MostCollaboration NeedsMore than one-third of C-level managers say they'redissatisfied with the level of collaboration support fromtheir IT infrastructure expected in three years:• Very satisfied: 13 percent• Moderately satisfied: 39 percent• Neither satisfied or dissatisfied: 18 percent• Moderately dissatisfied: 21 percent• Very dissatisfied: 8 percent• Don't know: 1 percent

How to Get Ahead of theCollaboration DemandIT managers should view the growing need to supportcollaboration as a multifaceted opportunity. The C-levelinterest in improving the ability of IT to enable collabo-ration gives you a chance to clean up some long stand-ing architecture issues. In addition, collaboration is theexcuse you’ve been looking for to get involved in thenew generation of Web 2.0 technologies.

Understand that one of the biggest barriers to successfulcollaboration is complexity. Having too many systems

and too many processes is the bane of any collaborationeffort, especially if they’re not based on industry stan-dards and best practices. Time to clean the IT house.

If your organization has too many databases, too manyERP platforms, an applications portfolio census thatgoes beyond 100 and other examples of excessivetechnology overlaps, now you have another argumentto begin the consolidation.

And while you're thinking about simplifying your ITarchitecture, collaboration is a great door-opener for aservices oriented architecture discussion with yourCFO. Depending on the size of your organization, SOAprovides an ideal platform for providing secure accessto information, systems and processes that should beshared with external organizations.

Simultaneously, you need to provide a pallet of Web-based collaboration tools and choices. Relying on a vir-tual private network (VPN) as a gateway for externalindividuals to gain the appropriate access to key sys-tems takes too long and costs too much. You need tomove quickly and inexpensively.

Think corporate use of wikis, social networking tools,blogs, and other Web 2.0 tools as key building blocksof a collaboration tool set. The criteria include easy touse, easy to manage, easy to deploy and low cost,since there are a wide variety of individuals nowinvolved in collaboration with third parties. �

This content was adapted from Internet.com'sDatamation and CIO Update Web sites. Contributors:Lionel Carrasco, Sashi Reddi, Claudio Muruzabal, JulieCraig, and Larry Marion.


The Pros and Cons of Outsourcing[ ]Figure 1 Figure 2

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