Jeff Reid November 13, 2003

1
Jeff ReidNovember 13, 2003

• CIO Roundtable Presentation
• Offshore Applications Development and Support

2
Outsourcing History

• Outsourcing has arguably created three historic
  revolutions
• The growing of things (Home to Farm)
  Agricultural Revolution
• The making of things (e.g. Cotton and China)
  Industrial Age
• The doing of things (Services) Creating IT
  industries in the Information Age
• In the 1990s, focus on core business activity
  resulted in outsourcing of necessary but indirect
  activities
• Outsourcing began with peripheral services
  cleaning, catering, printing
• Eastman Kodak has been credited with bringing
  about the sea of change in outsourcing IT
  services.
• Handed over most of its IT operations to
  outsource partners in 1989

Source Karin B. Sinniger
3
Outsourcing Offshore

• Cost pressures have led from outsourcing to local
  vendors to lower-wage countries
• Following the path of manufacturing outsourcing
• Believed to be a structural, rather than cyclical
  change, in the labor market
• The Promise Extended, flexible workforce that
  can increase or decrease as needed
• Less Expensive
• Why does this make sense? Use India as an example
• They are home to a large, English speaking labor
  market
• Nearly 40 of Indian university graduates are
  engineers
• Compared to 6 in the US in 2000
• 65 of the worlds Capability Maturity Model
  (CMM) level 5 certified companies are Indian
• Culture is customer friendly
• Call Center jobs are considered first steps in a
  technology career
• Lower labor costs than western countries
• Government is sensitive to intellectual property

4
India Some of the Worries

• Geopolitical risk
• Demand outstripping supply
• Next move looks to be to China
• Global competition
• Infrastructure has improved but not always
  reliable
• Time Delay 12 hour lag but Follow the Sun

5
Some General Outsourcing Categories

• Onshore In the US (i.e. EDS, IBMGS)
• Offshore Usually across an ocean (i.e., India,
  China)
• Near Shore Usually Mexico or Canada
• Offshore Insource Create your own Offshore
  Development Center

6
Practical Approach to Outsourcing

• Know why you are doing it what do you expect to
  achieve?
• Save money/reduce costs
• Move assets off books improve earnings
• Accommodate a variable workload
• Solve a labor shortage
• Shed non-core operations
• Focus remaining IT attention on the business
• Initial project should be discrete and not
  require extensive user input during the
  development cycle

7
Dont Outsource

• Strategically important or mission-critical
  functions
• Functions with clear benefits to keeping IT
  in-house
• When quality of services is extremely critical

8
Outsource Other Factors to Consider

• Obtain buy-in from senior management
• Carefully choose types of applications no
  mission-critical applications
• Decide countries and cities to which you would
  outsource
• Quality of transportation, power, telecom
• Social and political stability
• Be clear about how much money you want to save
• Consider start up costs
• Give your in-house team a chance to bid on
  projects
• Decide whether to outsource directly with a
  vendor or through an intermediary or set up your
  own
• Decide to outsource to one or multiple vendors
• Due diligence the service provider(s)
• Get familiar with regulations that are specific
  to your industry
• Anti-trust or regulatory requirements
• Data protection regulations

9
Outsource Factors to Bear in Mind

• Successful offshore outsourcing takes time
• CIO Magazine says at least 2-3 years
• Internal staff can be trained on less
  transferable skills
• Requirements analysis, architecture planning,
  business process design, contract management and
  business relationship management

10
Offshoring Maturity Phases
Mature
Pilot
Ramp
Stabilize
0
6 MTHS
1 YR
2 YRS

• All projects and most production support
• 18 Offshore Onshore Ratio
• 75 of offshorable resources
• All processes optimized
• Review process / metrics in full progress
• Cost benefits clearly apparent and contributing
  to bottom line

• Several projects with some production support
• 14 Offshore Onshore Ratio
• 10 - 75 of offshorable resources
• All processes defined, with some optimization
• Offshore onshore routine established
• Review process / metrics started
• Cost benefits starting to kick in

• 1 2 Projects
• 11 Offshore Onshore Ratio
• 10 of offshorable resources
• Communication processes defined
• Connectivity established
• Minimal cost benefits

11
Outsourcing Costs to Consider

• Vendor Selection
• Documenting requirements, RFP activities,
  negotiation, legal fees, time
• Transition the Work
• Overlap may double up on costs short-term
• Onshore expense to learn applications
• Offshore vs. Onshore
• Layoffs and Retention
• Severance
• Morale and attrition
• Lost Productivity/Cultural Issues
• Interpretation
• Communication more face time required
• Improving Development Processes
• Internal IT processes may need to improve
• Specs
• Better documentation
• Managing the Contract
• Invoices, audits, managing
• Dedicated resource

Dean Davison, Meta Group says for most
companies, the average overall cost savings is
15 to 20
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Start Up Costs May Include

• Communication Links
• XOIP
• Data Circuits
• Collaboration Tools
• Travel
• Hardware
• Servers
• Printers
• Tape Library
• Import and Duty for any equipment shipped
• Software Licensing

13
Who are the players?

• Big Five
• Tata Consultancy, Infosys, WIPRO, Satyam, HCL
• Up Coming
• USTRI, Syntel
• Affiliates
• Accenture, HP, IBM Global Services

14
Offshore Applications Conexant Experience

• Began 5 years ago with programming
• Whittled, didnt whack, at first
• Found many things on previous pages to be fact
• Have had all programming done in India since 2000
• Lived through slow start up issues
• Communication issues
• Time zones
• Internal resistance
• Improved processes
• Manage the contract
• In our case, also the pool of talent
• Looking at additional possible benefits

15
Offshore Applications Conexant Experience

• Ongoing Development
• Improved Network performance
• Most Support offshore, Project onshore
• Established development and support processes
• Benefits Clearly Understood
• Flexibility
• Quality
• Project labor transition to Support
• Total Cost of Ownership

16
Offshore Applications Conexant Experience

• What we have learned
• Visa limitations can impact project execution
• One resource offshore lt one onshore
• Resources are getting harder to find - turnover
  is increasing slightly
• Costs are not increasing significantly (India)
• ODC resources are individuals dont ignore
  Management overhead
• Small teams are harder to manage
• A mixture of Offshore, Near Shore and Onshore may
  be optimal for Project and Support work

17
So

• Know why you are doing it
• Be aware of costs
• Be aware of business considerations
• Build some confidence and experience with
  discrete projects
• Measure your results
• Good Luck!