1

IS5600 – 9

Global IT Offshoring

2

What is Offshoring?

Contracting software development or the provision of IT services to an overseas firmIt is often seen as being cheaper, faster.But there are many hazards as well

Managerial, HR, Work Style, Political, …

Offshoring should be a strategic choice, not an accidental mistake

Failing to plan for it – is planning to fail at it

3

Offshoring is a Huge Activity

Global total: US$80 Billion annuallyIndia had $58 Billion

By 2020, look for $0.5 trillionThough the potential total market would be approx $1.75 trillion

So, it is no wonder that offshoring is seen as a great opportunity, and not only by India.

4

IntroductionOffshoring or Outsourcing?

Outsourcing – getting someone else to do the work

• Inside the host country (inshoring) or outside (offshoring)

Offshoring often implies the involvement of a less developed country (compared to the client)

• E.g. a US firm outsources software development to India.

• E.g. an Indian firm outsources software development to Vietnam

5

Inshore or Offshore?Insource or Outsource?

OutsourceAsk someone else to do it (outside the organisation)

InsourceDo it yourself

Backsourcing

InshoreDo it in your own country

Near shoreDo it in a nearby country

OffshoreDo it somewhere else, usually a less developed country

BackshoreBring the work back home again!

6

Background

Providing IT services is big businessIndia, China, Philippines, Russia, Brazil

• 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.

7

Software Commoditisation

Standard practices and toolsEstablished industry benchmarked proceduresSome software tasks have been commoditised

They can be offshored to the lowest cost, most productive bidderLike shopping in an online supermarket

8

Strategic Issues 1Cost

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!

9

Strategic Issues 2

TalentAccess 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?

10

Strategic Issues 3

AgilityRespond to opportunities and get products to market faster• If you can overcome the differences of

language, communication style, culture

Anything strategic requires corresponding investment of resources – and a long term vision.

11

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 perfectFew success storiesSmall and simple tasks are more suitable

12

Who is offshoring? - USIBM

R&D in US, IL, CH + 16 sw devt centres

MS most R&D in the US, but also IN, CN, IL & UK.

Google R&D 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

13

Who is Offshoring? - EuropeFewer 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 DanishUK - much work outsourced to IN, PK, BD, LAGermany

80% of the large firms have yet to offshore60% of German offshoring is to E Europe (nearshoring)

Dutch – extensively to 35+ countries, India preferred

14

And what about ‘Nearshoring’?

Germany to E EuropeJapan to China, Vietnam, S Korea

NEC started offshoring to China in 1982, with 40+ firms and 3000+ employees now involvedSeveral JP firms are spending US$10-30M/year in China

• Dalian is emerging as a hub for JP-focused work

US to CA and MX – growing potential here

15

The Big Three: China, India and Russia

Large number of engineering graduates and well-qualified employees

Thousands of software exporting firms

But around 100 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, UYA significant threat to US- and Europe- based firms

16

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.

17

Indian Restructuring 2Initially 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 ChinaTheir Chinese employees are setting up parallel and competing operations with the stolen IP.

18

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.

19

Offshoring IT ServicesAll these various services are highly dependent on both IT and languageThe relevant data is mobile – it can be sent through the Internet easilyHSBC 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?

20

It all depends on language

UK, US, CA, AU, NZ > IN, PK, LAFR > MU, MA, DZ, TN (Mauritius, Morocco, Algeria, Tunisia)NL > ZA, SR (Surinam)ES > ??DE > ??IT > ??

21

What do IT Professionals cost?USCanadaJapanSingaporeBrazilMexicoIndiaRussiaChinaVietnam

63,00057,00044,00043,00020.0007,0008,000-9,0005,000-18,0003,000-14,0001,400-6,000

All salaries US$/year and rising

22

What are the Costs?

SalaryHigh: US, Canada, Japan, SingaporeMedium: Brazil, Russia, MexicoLower: India, China Low: Philippines, Vietnam

But what about housing, medical insurance, transportation, loans, 13th month bonus, etc.

23

And what about…?Transaction costsInfrastructure costsKnowledge transfer costsCurrency movementsDispute resolutionTravel costs – in the early stagesUnpredictable risks – wars, financial collapse, terrorism, regulatory changes (e.g. nationalisation, tax breaks), IP theft, corruption, proprietary knowledge, etc.

24

The IT Offshoring JourneySunnySystems (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.

25

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?

26

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 providersWhich country? Which providers? Selection criteria? RFI and RFP. [6 months]

Assessing & Selecting the ProviderVisit the offshore location. Meet the people. Observe their work. Sign the contract. [at least a month]

27

Laying the Foundations 1

Assessing if we are readyHow 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.

28

Laying the Foundations 2

The launch teamOffshoring is complex – it needs a powerful teamBuild a strategic vision, commitment and push for implementationAgile and able to make quick decisionsExpertise in offshoringLearn from others’ experiences (including consultants)

29

Laying the Foundations 3Strategy & 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…

30

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?

31

Selecting a CountryWhile 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 don’t like their assignment…• Spousal/family issues.

Is makes no sense to select a country that no one wants to visit or live in.

32

Provider Selection CriteriaGeneral Criteria

Company size & stabilityHR policiesQuality managementTechnical expertiseBusiness domain knowledgeTrack recordMethodologies usedCostsQuality initiatives – ISO, CMM, 6 Sigma, etc.

Extra care criteriaInfrastructureSW production environmentInterntional experienceLanguage skillsEmployee turnoverOrg culture – flexibility, responsiveness, soft skillsGlobal presenceDisaster recovery & backup24-hour support

Weight the criteria; matrix the providers

33

Send an RFI, using the criteria

Who we areWhat we are looking forQuestions about the provider

History, customers, management, geo-locations, turnover, infrastructure, security

Questions on services offeredDomain expertise, platforms, skills, subcontractors

Questions on strategyVision, market share, alliances

34

Send an RFP to the most promising firms

What we expect in the proposalHow are you going to undertake a specific project

Need to provide sufficient project details

Try to stimulate the provider’s creativity by asking more specific/difficult questionsAsk for references of work they have done.

35

Assessing & Selecting the Provider

Evaluate the RFPsIdentify false promises, too good to be true offersLearn that “yes” means ‘yes’, ‘no’ and ‘maybe’.

• Often all simultaneously

Check the references• Ask what worked, and what didn’t.• Technology always has problems.

Soft issues – culture, values, trust, wavelength.Don’t only look at cost. Too good to be true is almost certainly too good to be true. Quality costs.

36

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.

37

Offshore Things to DoDon’t just visit the HQ, but also the work site, national software association, …Talk to other ‘foreigners’ who are already therePlan the site visit carefully – not on the planeDon’t visit too many and don’t only listen to sales pitches – they are all the same.Do speak to project managers and programmersWalk around - literally

38

Recommendations & Contract Negotiations

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

39

Contract SpecificityIt 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 staffThey are not just being told what to doAn onsite supervisor can help

It requires the client and vendor to have similar cultural values – tolerance for uncertaintyA client-vendor matching process is needed

40

Concluding LessonsDon’t 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-offshoringA low-risk pilot project will help a company find out if it is ready for offshoringContracts 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.