IS5600

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IS5600

• Global IT Offshoring

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What is Offshoring?

• Contracting software development or the provision
  of IT services to an overseas firm
• It 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

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Introduction

• Offshoring or Outsourcing?
• Outsourcing getting someone else to do the work
• Inside the host country (inshoring) or outside
  (offshoring)
• Offshoring usually implies the involvement of a
  developing country
• Or one that is currently at a lower stage of
  development than the host country
• E.g. a US firm outsources software development to
  India.
• E.g. an Indian firm outsources software
  development to Vietnam

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Background

• Providing IT services is big business
• India, 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.

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Software Commoditisation

• Standard practices and tools
• Established industry benchmarked procedures
• Some software tasks have been commoditised
• They can be offshored to the lowest cost, most
  productive bidder
• Like shopping in an online supermarket

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Strategic Advantages of Offshoring

• Cost reduction but is this strategic?
• Enable cost efficiencies that promote better
  competition
• Is offshore or die a strategic choice?
• Speed, agility and flexibility
• Respond to opportunities and get products to
  market faster
• Accessing talent unavailable elsewhere
• Both quality and quantity

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Follow the sun, round the clock

• 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 perfect
• And that is very hard in reality
• Few success stories
• Tasks with low complexity and small size are more
  suitable

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Why are so few firms offshoring?

• It is not as easy as it seems
• Breakdowns can occur in
• Communication proximity
• Coordination spontaneity and proximity
• Control managers cannot manage by walking
  around so easily
• Cohesion barriers socialisation that doesnt
  take place
• Culture clash sensitivity and adaptiveness

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Who is offshoring? - US

• IBM
• RD in US, IL, CH 16 sw devt centres
• MS
• most RD in the US, but also IN, CN, IL UK.
• Google
• RD 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

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Who is Offshoring? - Europe

• Fewer than in the US, due to more conservative
  business culture, as well as stricter labour laws
  (redundancies)
• Language is an issue few Indian programmers
  read French or Danish manuals, or can build
  interfaces in FR/DK
• The UK is an exception, with much work outsourced
  to IN, PK, BD, LA
• Germany 80 of the large firms have yet to
  offshore language, culture,
• 60 of German offshoring is to E Europe
  (nearshoring)
• Dutch extensive offshoring to 35 countries,
  but India preferred

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And what about Nearshoring?

• Germany to E Europe
• Japan to China, Vietnam, S Korea
• NEC started offshoring to China in 1982, with 40
  firms and 3000 employees now involved
• Several JP firms are spending US10-30M/year in
  China
• US to CA and MX growing potential here

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The big three destinations

• China, India Russia
• Large population, number of qualified employees
• 1000 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
• TCS, the largest Indian firm, had 2003 revenues
  of US1B. It has its own offshore sites in HU,
  CN, UY, AU, US, UK, JP
• All are a great threat to US- and Europe- based
  firms

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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.

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Offshoring IT Services

• All these various services are highly dependent
  on both IT and language
• The relevant data is mobile it can be sent
  through the Internet easily
• HSBC in 2003 had 1500 employees in China and 2000
  in India for clerical work 500 in MY for data
  processing.
• English speaking countries (populations) have a
  distinct advantage

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It all depends on language

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

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What do IT Professionals cost?

• US
• Canada
• Japan
• Singapore
• Brazil
• Mexico
• India
• Russia
• China
• Vietnam

• 63,000
• 57,000
• 44,000
• 43,000
• 20.000
• 7,000
• 8,000-9,000
• 5,000-18,000
• 3,000-14,000
• 1,400-6,000

All salaries US/year
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But, this is the basic

• What about housing, medical insurance,
  transportation, loans, 13th month bonus, etc.
• The full costs of an Indian programmer are
  30-40k, compared to 120K in the US.
• Chinese programmers (3-4 yrs exp) cost
  US12.50/hour about 20 of the US rate.

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And what about?

• Transaction costs
• Infrastructure costs
• Knowledge transfer costs
• Currency movements
• Dispute resolution
• Travel costs in the early stages
• Unpredictable risks wars, financial collapse,
  terrorism, regulatory changes (e.g.
  nationalisation, tax breaks), IP theft,
  corruption, proprietary knowledge, etc.

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The IT Offshoring Journey

• SunnySystems (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 designed 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.

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Ill Never Do It Again!

• 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?

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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 providers
• Which country? Which providers? Selection
  criteria? RFI and RFP. 6 months
• Assessing Selecting the Provider
• Visit the offshore location. Meet the people.
  Observe their work. Sign the contract. at least
  a month

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Laying the Foundations 1

• Assessing if we are ready
• How 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.

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Laying the Foundations 2

• The launch team
• Offshoring is complex it needs a powerful team
• Build a strategic vision, commitment and push for
  implementation
• Agile and able to make quick decisions
• Expertise in offshoring
• Learn from others experiences (including
  consultants)

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Laying the Foundations 3

• Strategy 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

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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?
• Risks? IP protection? Security? Culture? Time?
• What is your strategic concern? Cost, quality,
  efficiency?

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Selecting a Country

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

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Provider Selection Criteria

• General Criteria
• Company size stability
• HR policies
• Quality management
• Technical expertise
• Business domain knowledge
• Track record
• Methodologies used
• Costs
• Quality initiatives ISO, CMM, 6 Sigma, etc.

• Extra care criteria
• Infrastructure
• SW production environment
• Interntional experience
• Language skills
• Employee turnover
• Org culture flexibility, responsiveness, soft
  skills
• Global presence
• Disaster recovery backup
• 24-hour support

Weight the criteria matrix the providers
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Send an RFI, using the criteria

• Who we are
• What we are looking for
• Questions about the provider
• History, customers, management, geo-locations,
  turnover, infrastructure, security
• Questions on services offered
• Domain expertise, platforms, skills,
  subcontractors
• Questions on strategy
• Vision, market share, alliances

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Send an RFP to the most promising firms

• What we expect in the proposal
• How are you going to undertake a specific project
• Need to provide sufficient project details
• Try to stimulate the providers creativity by
  asking more specific/difficult questions
• Ask for references of work they have done.

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Assessing Selecting the Provider

• Evaluate the RFPs
• Identify false promises, too good to be true
  offers
• Learn what yes means.
• Check the references
• Ask what worked, and what didnt.
• Technology always has problems.
• Look at soft issues culture, values, trust,
  wavelength.
• Dont only look at cost. Too good to be true is
  almost certainly too good to be true. Quality
  costs.

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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.

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Offshore Things to Do

• Dont just visit the HQ, but also the work site,
  national software association,
• Talk to other foreigners who are already there
• Plan the site visit carefully not on the plane
• Dont visit too many and dont only listen to
  sales pitches they are all the same.
• Do speak to project managers and programmers
• Walk around - literally

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Recommendations Contract Negotiations

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

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Concluding Lessons

• Dont 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-offshoring
• A low-risk pilot project will help a company find
  out if it is ready for offshoring
• Contracts 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.