Outsourcing IT: Global Opportunities and Challenges

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Outsourcing ITGlobal Opportunities and
Challenges

• Venu Nair, PMP

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Outsourcing Defined..

• Outsourcing
• Farming out of services to a third party.
• With regards to IT, outsourcing can include
  anything from outsourcing all management of IT to
  an IBM or EDS or outsourcing a very small and
  easily defined service, such as disaster recovery
  or data storage, and everything in between.
• Often used interchangeablyand incorrectlywith
  offshoring its a subset
• Classic Make vs. Buy Decision
• Globalization - The World Is Flat best seller
  by Thomas Freedman

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Offshore Outsourcing

• Offshore outsourcing of software development has
  become a common practice in recent years.
• Most of the Fortune 500 companies have or started
  to outsource software development, maintenance or
  support to software companies in India.
• India has the majority in organizations worldwide
  that have achieved Level 5, the highest in SW-CMM
  ratings

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What is a make or buy decision?

• Sometimes it makes more sense to buy services
  rather than perform the task in-house
• The argument for outsourcing
• Proficiency
• Complexity
• The argument against outsourcing
• Control
• Flexibility
• The verdict
• Either can make operational and financial sense
• Arguments for, can become arguments against

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Deciding whether to make or buy

• What do you want to accomplish?
• How is it done now?
• What can you do?
• Make
• Buy

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Set objectives

• What?
• Improve quality
• Reduce time
• Cut costs
• Why?
• Rationale
• Importance
• When?
• Timeframe

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Needs assessment

• Identify your needs
• The more crucial the task, the more details need
  to be specified
• Workflow and outputs
• Policies
• Steps
• Time increments
• Staff and system capabilities
• Classify your needs
• Long-term, medium-term, immediate
• Low, medium, and high priority

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Review options

• In-house
• Core competencies
• Competing priorities
• Career path
• Skills to task
• Supervision
• Corporate culture

• Outsourcing
• Availability of options
• Competitor offerings
• Appropriateness
• (esp, offshoring)
• Gains from technology
• Interface issues

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Outsourcing Advantages

• Financial
• Avoid heavy capital investment, thus releasing
  funds for other uses.
• Improve cash flow and cost accountability.
• Technical
• Be freer to choose software due to a wider range
  of hardware.
• Achieve technological improvements more easily.
• Management
• Concentrate on developing and running core
  business activity.
• Delegate IT development (design, production, and
  acquisition) and operational responsibility to
  supplier.

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Outsourcing Advantages (cont.)

• Human Resources
• Draw on specialist skills, available from a pool
  of expertise.
• Enrich career development and opportunities for
  staff.
• Quality
• Clearly define service levels.
• Improve performance accountability.
• Flexibility
• Respond quickly to business demands.
• Handle IT peaks and valleys more effectively.

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Outsourcing Strategies (Clemons, 2000)

• Understand the project. Clients must have a high
  degree of understanding of the project, including
  its requirements, the method of its
  implementation, and the source of expected
  economic benefits.
• Divide and conquer. Dividing a large project into
  smaller and more manageable pieces will greatly
  reduce programmatic risk and provides clients
  with an exit strategy if any part of the project
  fails.
• Align incentives. Designing contractual
  incentives based on activities that can be
  measured accurately can result in achieving
  desired performance.

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Outsourcing Risks(Clemons, 2000)

• Shirking occurs when a vendor deliberately
  underperforms while claiming full payment.
• e.g., billing for more hours than worked,
  providing excellent staff first and later
  replacing them with less qualified ones.
• Poaching occurs when a vendor develops a strategy
  and strategic application for a client and then
  uses them for other clients.
• e.g., vendor redevelops similar systems for
  other clients at much lower cost, or vendor goes
  into clients business.
• Opportunistic repricing or holdup occurs when a
  client enters into a long-term contract with a
  vendor and vendor changes financial terms at some
  point or overcharges for unanticipated
  enhancements and contract extensions.

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If You Decide to Outsource

• Make sure the supplier you choose
• Understands your market and your industry
• Is a leader in the field
• Has a proven track record
• Take your time and make sure you create a very
  thorough RFP
• Be realistic about how things will go during for
  the first 6-12 months

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Lessons Learned

• Manage the relationship and be hands-on for at
  least the first year
• Clarify with expected outcomes, results,
  timetables and budgets
• Schedule regular progress reviews
• Evaluate regularly
• Be open and candid
• Allow mistakes and learn from them

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Lessons Learned

• Consider them an extension of your staff, your
  partner
• Treat them with respect
• Dont assume that your way is the best or only
  way
• Be proactive at resolving disputes quickly
• Measure regularly in face-to-face meeting
  (monthly is preferred)
• Communicate both the positives and the challenges
  to your provider and to your internal executive
  staff

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IT Failures

• The following definitions indicate the range of
  possibilities for the various types of IT
  failures

• Outright failure. The system is never completed,
  and little or nothing is salvaged from the
  project.
• Abandoned. The system is completed, including
  some or all of the originally specified features,
  but either it is never used or usage stops after
  a short period.

• Scaled down. The system is completed and used,
  but lacks much of the functionality of the
  original specifications.
• Runaway. The project requires much more money
  and time than planned, regardless of whether it
  is ever completed or used.

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Cultural Aspects

• India

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Protocol and Communication

• The Indian manner is polite and respectful,
  especially when dealing with senior managers or
  government officials. Respect for the hierarchy
  and those senior in age or status is ingrained in
  the culture and affects business interactions.
  For example, in meetings, junior managers may not
  speak or disagree publicly
• Punctuality may vary. It's best to reconfirm
  appointments. The pace of business varies,
  depending on the region/city and type of
  business. In private industries, it's more
  competitive, especially in newer high-tech
  industries and financial services. It may be a
  good idea to build more time into schedules and
  deadlines.

• One of the lasting contributions of the British
  Raj is the wide use of English in business and
  government. However, accents, style, usage of
  words differ in different regions.
• Indians mix English with their local language.
  Some Indians' style may be more indirect than
  direct, in which case you will need to listen
  carefully. If someone is very direct or
  assertive, he or she will be known for this
  style.

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Supervising and Socializing

• Priorities may differ. Sometimes family matters
  take precedence over business. Some Indians may
  not sense the same kind of urgency, or they may
  respond, "no problem," which should not be taken
  literally. A person may be conveying what he or
  she hopes to do, rather than disappoint the other
  by saying no.
• There is a middle-class of highly trained
  technocrats who have been to the best schools,
  are up on the latest management techniques and
  business jargon, and are fully conversant with
  Western ways of doing business. Treat them as
  colleagues rather than uninformed "developing
  country" managers.

• If there is an opportunity to meet your
  colleagues socially, it's a good idea to attend.
  Relationships are important in India, and will
  facilitate your interactions.
• When socializing, just be aware of some personal
  preferences surrounding food and alcohol. Hindus
  avoid beef and many are vegetarian. Muslims do
  not eat pork. Many conservative Indians of all
  religious backgrounds avoid alcohol.

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Cultural Tips

• Indians often respond positively to a question by
  shaking their head in a way that Westerners
  interpret as 'no
• The word no has harsh implications in India,
  non-committal answers are considered more polite.
  For example, if you have to decline an
  invitation, it's more acceptable to give a vague
  and noncommittal answer such as I'll try or
  We'll see rather than No, I can't.
• The hierarchical nature of Indian society demands
  that the boss is recognized as the highest
  individual in authority.
• In some offices, employees may rise each time the
  boss enters the room to acknowledge respect.
• Employees do as they're told even if they know
  the boss is wrong, they won't argue
• Talking about your friends and family is an
  important part of establishing a relationship
  with those involved in the negotiating process.

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Cultural Tips - Continued

• Eating meals with hands is very common India and
  that is one of the reasons that finger bowls are
  provided in many elite restaurants
• Indian culture is what Samuel Huntington of
  Harvard describes as a strong culture, meaning,
  in part, that Indian culture is able to withstand
  an influx of outside cultural ideas and products
  without losing its own internal identities.
• Whereas Western management techniques and
  business practices were quickly integrated into
  traditional lifestyles in the growing Indian
  software industry, most Indians continue to eat
  indigenous foods, watch local movies and TV, and
  to wear traditional clothing. Western companies
  in the vast Indian consumer market, therefore,
  have successfully Inidanized their products to
  appeal to the large middle class.

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Summary

• Its not painless, but its worth it, if you
  execute it well.
• Good Luck and Thank You!

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Reference

• www.cio.com Various articles on Outsourcing
• Outsourcing Lessons Learned SAE Corporation
• Economist London Summer 2001
• Outsourcing and Offshoring Kaufmann-Willis Group