seminar 10

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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 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

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IntroductionOffshoring 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 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.

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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

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Strategic Advantages of OffshoringCost reduction – but is this strategic?Enable cost efficiencies that promote better competition

Is ‘offshore or die’ a strategic choice?

Speed, agility and flexibilityRespond 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 differencesSend work from time zone to time zone

US to S or SE Asia to EuropeNon-stop work

But coordination must be perfectAnd that is very hard in realityFew success storiesTasks 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 seemsBreakdowns can occur in

Communication – proximityCoordination – spontaneity and proximityControl – managers cannot manage by walking around so easilyCohesion barriers – socialisation that doesn’t take placeCulture clash – sensitivity and adaptiveness

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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

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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 read French or Danish manuals, or can build interfaces in FR/DKThe UK is an exception, with much work outsourced to IN, PK, BD, LAGermany – 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 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

US to CA and MX – growing potential here

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The big three destinationsChina, India & Russia

Large population, number of qualified employees1000+ 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 rightTCS, the largest Indian firm, had 2003 revenues of US$1B. 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 languageThe relevant data is mobile – it can be sent through the Internet easilyHSBC 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 > IN, PK, LAFR > MU, MA, DZ, TN (Mauritius, Morocco, Algeria, Tunisia)NL > ZA, SR (Surinam)ES > ??DE > ??IT > ??

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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

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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 US$12.50/hour – about 20% of the US rate.

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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.

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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 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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I’ll 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 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]

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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.

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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)

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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…

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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 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

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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

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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.

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Assessing & Selecting the Provider

Evaluate the RFPsIdentify false promises, too good to be true offersLearn what “yes” means.Check the references

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

Look at 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.

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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 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

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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

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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.