Offshore Outsourcing
•
•
•
•
Pei-Fen Chan
Soojin Kang
Aaron Schiltz
Bill Bernskoetter
1
What is Offshore Outsourcing?
• “The exporting of IT-related work from the
United States and other developed countries to
areas of the world where there is both political
stability and lower labor costs or tax savings.”
Source: Whatis.com
2
What do you think of Offshore
Outsourcing?
• Is it good or bad for the US economy?
• Who benefits the most?
• Who gets hurt?
3
Offshore Outsourcing in the News
4
Offshore Outsourcing in the News
(cont.)
• Outsourcing Debate Turns Spicy for Powell
Cynthia L. Webb, Washington Post 3/17/04
• Outsourcing comment stirs a firestorm even if
it's good economics
David Nicklaus, Post-Dispatch 2/17/04
http://www.umsl.edu/services/ur/media/umslair/040324.mov
5
Offshore Outsourcing in Politics
• US politician Kerry calls outsourcing firms
traitors economictimes.indiatimes.com
• Kerry was quoted by Contra Costa Times on
as denouncing the Bush Administration for
"rewarding Benedict Arnold CEOs who move
"profits and jobs overseas.“ economictimes.indiatimes.com
• Missouri has joined over 30 other states in
drafting anti-sourcing legislation with the
objective of protecting domestic jobs.
www.infotech.indiatimes.com
• javascript:oMvsLink('00','bd29daba-8f3f-4b4d876f-648c03aa1848')
6
Size of Offshore Outsourcing
Industry
• In 2002, $32-$35 billion outsourced
• 1% of the $3 trillion that could be outsourced.
• Projected to grow 30%-40% over the next 5
years
• Make it an industry with well over $100 billion in
annual revenue by 2008.
•
Www.forbes.com/home/2003/12/04/1204mckinsey.html
7
Promised Benefits of Outsourcing
•
•
•
•
Lower inflation
Increased productivity
Lower interest rates
By 2008, GDP expected to be $124.2 billion
higher
• 90,000 net new jobs as of 2003, 317,00 net
new jobs by 2008.
Source: Global Insight, Inc. 2004
8
Promised Benefits of Outsourcing
(continued)
• Increase in real wages for US workers
• Increase in demand for US exports
Source: Global Insight, Inc. 2004
9
Net Jobs created by Outsourcing
Global Insight, Inc. 2004
Number of Jobs
Jobs Created With Outsourcing vs Jobs
Lost due to Outsourcing
700,000
600,000
500,000
400,000
300,000
200,000
100,000
2003
2004
2005
2006
2007
2008
Years
Jobs Created
Jobs Lost
10
Exports
Source: Global Insight, Inc. 2004
Cum. Improvement,
Billions $
Real Exports Rise due to Offshore
Outsourcing
$10.0
$8.0
$6.0
$4.0
$2.0
$0.0
2003
2004
2005
2006
2007
2008
Years
Real Exports
11
Top Countries for Offshore
Outsourcing
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•
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•
•
India
China
Malaysia
Czech Republic
Singapore
Philippines
Brazil
Canada
Source: A.T. Kearney from Forbes.com
12
India
• Population: 1 billion
• Interesting Finding: IT software and services
export market expected to grow from $10 billion
in 2002 to $60 billion by 2008.*
• Reasons Attractive: Low wages, favorable tax
rates, quality of IT training and education,
English language skills.
• Negatives: Political and economic instability,
bad infrastructure.
• U.S. Cos.: Hewlett-Packard, Amazon, Sprint
Source: NASSCOM, the National Association of Software and Services Companies of India
Source: Forbes.com
*
13
China
• Population: 1.3 billion
• Interesting Fact: Population under age 18 in China is larger
than the combined total populations of the U.S. and the U.K.
• Reasons Attractive: Low wages, good educational system.
• Negatives: Piracy, red tape, English skills
• U.S. Cos.: IBM, Accenture.
–
Source: Forbes.com
14
Malaysia
• Population: 23 million
• Interesting Finding: Less bureaucratic red
tape than Canada.*
• Strengths: Low costs, high level of global
integration, strong government support.
• Negatives: Piracy, small population.
• U.S. Cos.: Motorola, IBM
*Source: World Economic Forum's Global Competitiveness Report
Source: Forbes.com
15
Czech Republic
• Population: 10 million
• Interesting Finding: Offshore services
market growing greater than 10% annually.
• Strengths: competitive infrastructure costs,
good education system, stable business
environment.
• Negatives: Higher labor costs, small
population
• U.S. Cos.: IBM, Sun Microsystems, Dell
Source: Forbes.com
16
Singapore
• Population: 5 million
• Interesting Finding: The second-highest income
per capita in the world but, still attracts U.S.
companies as a place for regional headquarters
because of its strengths.
• Strengths: education system, infrastructure,
intellectual property protection, stable political
environment.
• Negatives: High labor costs, low population.
• U.S. Cos.: HP, Eli Lilly
Source: Forbes.com
17
Hidden Costs of Offshore
Outsourcing
•
•
•
•
•
•
Selecting a Vendor
Transition
Layoffs
Cultural
Ramping Up
Managing the Contract
Source: CIO Magazine, 9101/03, Stephanie Overby
18
Outsourcing – One Way Street?
• Foreign companies employ 6.4 million Americans
– Commerce Dept.
– 114,000 in Missouri
– 321,000 in Illinois
• Foreign companies in the St. Louis area
– Reuters – Britain
– bioMerieux - France
– Toyota - Japan
David Nicklaus, St. Louis Post Dispatch, April 16, 2004
19
WIPRO TECHNOLOGIES
1.
2.
3.
4.
5.
6.
Offshore Market in India
Wipro Overview
History of Wipro
CEO of Wipro
Wipro’s Quality Standards
Case Studies
- Delta Airlines
- Otis elevator company
20
PROSPEROUS INDIAN
OFFSHORE MARKET: Why India?
• Lower Cost for highly skilled
manpower.
• Indian Government Initiatives
• Favorable Tax incentives
• The export segment in Indian
IT market accounts for 60% of
total revenue of its IT industry
• India claims 80% share of
global off-shored service
• Obstacles offshore vendors
face
Year Global IT
spend($ in
Billion)
Indian IT
Exports($
in Billion)
1997
359
1.8
1998
392
2.6
1999
459
4
2000
519
6.2
2001
542
7.8
2002
557
9.5
Businessweek, NASSCOM.org, www4.gartner.com
21
WIPRO OVERVIEW
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•
Size : $1.4 Billion in revenue, 27,000 employees from
18 nationalities, 30 global offices in India, Australia,
Japan, and the U.S.
Customers: Boeing, Nationwide, Ericsson, Toshiba,
Cisco, Putnam Investment, etc
Products: IT Consulting and services, Application
Development and Maintenances, Product Design
Services, Business Processing Outsourcing
Main competitors in India : Tata Consulting Services,
Infosys Technologies, Satyam Computer Service,
HCL Technologies Ltd
Headquarter : Bangalore, India
Wipro.com
22
WIPRO’S REVENUE PIE
Computer
Application
Development &
maintenance
37%
R & D service
32%
IT enabled service
11%
Package
Implementation
11%
System Integration
& IT Consulting
3%
Infrastructure
Outsourcing
6%
Wipro.com
23
HISTORY OF WIPRO
• Started as a cooking oil and soap
manufacturing company 57 years ago, Wipro
has transformed itself into a hardware
manufacturer( light bulb, printers, scanner and
PCs) and into a software consulting company
to become today’s Wipro Technologies.
• With the arrival of Vivek Paul, (Vice Chairman
and CEO) in 1999, now this company enjoys $
1.4 billion in revenue as the 3rd largest IT
service company in India
Fast company, Wipro.com, Economist
24
CEO OF WIPRO:
VIVEK PAUL
• Graduated from BITS in India, engineering
major, MBA from University of Massachusetts
• Made his career in America, built his career
through Bain & Co in Boston, PepsiCo,
Purchase in NY and ran GE’s joint venture
medical scanner business with Wipro in India
• In 1999, he was hired by Wipro, since then
he has turned $150 million software company
into over $1 billion profit company
• Rated as one of the best managers in 2003
by Business week
Wipro.com, Businessweek
25
WIPRO’S QUALITY
STANDARDS
• SEI CMM (Software Engineering Institute Capability Maturity Model):
Highest Maturity Model level 5
• CMMI (Capabilty Maturity Model Integration): First company in
India to be certified at level 5
• PCMM (People Capability Maturity Model) :World’s first company
to be level 5
• ISO 9001 (International Standard Organization 9000 series):
Compliant by 1995
Wipro.com, NASSCOM.ORG, sei.cmu.edu
26
Case study 1: Delta Airlines
• Delta Airlines was operating
20 call centers all over the
world with 6500 center
representatives employed
• To focus on improving the
customers’ travel expenses
and reducing costs on the call
centers
Wipro.com
27
Divisions Outsourced
• General Sales calls
• Frequent Flyer Service support and
report
• Reject & queue call handling
• Baggage service center
28
Solution
• Transition Toolkit ™ Model that created by
Wipro to deliver customer service process
designed for offshore model
-Analysis: Subject Matter Experts (SMEs)
team to Spectramind team in Mumbai, India
- Transition: “Adapted Process Quality
parameter” set by Delta and achieved by
Spectramind
- Sustained Operation : Operation teams took
over responsibility related to quality metrics,
resource planning and operational issue
29
ENHANCEMENT
• Customer Satisfaction: Decreased the
average call handling time
• Improved Process: Outperformed “the
quality of call handling” set by Delta’s SMEs
• Cost Savings: Initial cost saving of $12-15
million annually projected by Delta over 2
years
30
Quality of call handling operation at Spectamind
200
180
160
140
120
100
80
60
40
20
0
87
92
92
92
93
95
93
75
75
75
75
80
81
82
31
Reduction in Call Handling Time
(In seconds)
700
639
639
639
630
580
600
599
537
579
572
514
501
500
430
458
435
Target
Achived
400
300
200
100
0
Jan W 3
Jan W4
Feb W1
Feb W2
Feb W3
Feb W4
Mar W1
32
Case Study 2 :
Otis Elevator Company
Outsourcing Decision
• Otis is the largest manufacturer of elevators,
escalators in the world. It was becoming very
complex to handle after-sales support services
requested by thousands of customers from over
50 countries.
• It was time for Otis to search for an integrated
system to handle these after-sale service and
revenue functions
Wipro.com, Otis.com
33
Solution
• Analysis: Wipro team needed to understand its client’s
business
• E*Service :
- An integrated application that was created by Wipro
- System that can be presented to individual
customer in country-specific format through a
single window.
• This service portal was implemented to Otis.com
(Otis’ global website) and to Otis’ internal system
34
Enhancement:
With e*service, customer has…
• 24 x 365 x 7 access
• Fast and easy service and tracking of the
service progress
• Access to individual company’s financial
transaction
35
Enhancement:
With e*service Otis realized…
• Cost Savings: Application Development cost
40% -50% savings
• Efficiency: Otis sales representatives save 20
minutes with customer contact and save
around 2 hours for email report to customers
• International recognition: e*service was
awarded for “Grand Prix de I' Innovation” at the
French condominium exhibition
36
• “We appreciate the hard work and nice
features WIPRO has built into the
application. It is great to get Positive feed
back from customers and see the pull for
the application.”
- Sarma Pullela, Otis E*service program manger
37
BEST PRACTICES FOR SELECTING
POTENTIAL OUTSOURCING VENDOR
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•
•
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Reputation of the vendor and it’s employees
Financial strength of the vendor
Experience of the vendor
Client base of the vendor in outsourcing
38
Case Study: PRT Group, Inc.
An unsuccessful offshore outsourcing
agreement
39
Best Practices
Practices
Description
1.
Did the company effectively manage their team at great
distance?
2.
Did managers visit the site while evaluating bids?
3.
Were the contracts signed shorter than 4 years?
4.
Were the contracts detailed ?
5.
Was there joint evaluation of the proposals by both
senior management and IT managers?
6.
Were managers directly responsible for the success of
the venture ?
7.
Were objectives clearly articulated to all stakeholders?
8.
Did both companies adequately prepare for the venture?
Source: Anthony J.Delmonte, Richard V.McCarthy, "Offshore Software Development: Is the benefit
worth the risk?"
40
4 Categories of Offshore
Software Development
1.
2.
3.
4.
The first category: involves the sponsoring of foreign
individuals on employment visa.
The second: involves the engagement of a domestic or
offshore consulting firm that could provide the needed
skills and manage them overseas for the sponsoring
company
The third: for the offshore company to recruit the
workers and send them to the company’s domestic
location
The fourth: involves the establishment of a physical
presence of the business overseas, by the sponsor
company.
Source: Anthony J.Delmonte, Richard V.McCarthy, " Offshore Software Development: Is the benefit
worth the risk?"
41
Platform Reengineering Technologies
(PRT) GROUP Inc.
42
General Information of PRT
• CEO/Chairman: Doug Mellinger
• People called: The next Bill Gates
• Year Founded: 1989
• Capital: $12,000
• Headquarter: New York, NY
source: http://www.forbes.com/specialsections/barbados/006.htm
43
General Information of PRT
• Industry: Software Development
• Sector: Global IT Consulting Firm
Source: Jack Soat, " IT Confidential", www.informationweek.com
44
Major Service of PRT
• Strategic Technology Consulting
• On-site, Off-site, Offshore Projects
• Year 2000 solutions
• Tactical/Functional Outsourcing
and Staff Augmentation.
Source: www.careerbuzz.com/success/register/ employers.asp
45
General Characteristics of PRT’s
Customers
• Fortune 500 companies
Ex: J.P. Morgan, Prudential,Travelers
Insurance…
• Large government agencies
source: http://www.forbes.com/specialsections/barbados/006.htm
46
Transformation of PRT
• 1989~1991: Business growth limited by lack of
skilled IT workforce
• 1991~1994: Tried to outsource to India
• 1995~1997: Settled on Barbados as a location to
outsource
• 1997~1998: Initial Public Offering at $13,
$21 at the highest
• 1998~2000: Stock price under water and company
was closed in 2000
Source: Micheal S.Hopkins, "Paradise Lost", Inc, Nov 1999, www.inc.com
47
Size of PRT
1990
Revenues
$462,000
# of
Employees
No Data
1995
1997
1998
$3~4
$60
$85
Million Million Million
700
900+
700+
(Lay off
17%)
Source: Micheal S. Hopkins, The Antihero's Guide to the New Economy, www.inc.com
1999
No
Data
80
48
Why PRT went offshore?
• Critical problem: The desperate
shortage of software engineers
• Legal restriction for foreign programmers
• Skyrocketing salaries
• Unmanageable turnover among
engineers
Source: Micheal S.Hopkins, "Paradise Lost", Inc, Nov 1999, www.inc.com
49
Locations PRT Considered
The 1st choice: India
Why not?
(1) Bureaucracy
(2) The country’s remoteness
Results: Kept clients away
Source: Micheal S.Hopkins, "Paradise Lost", Inc, Nov 1999, www.inc.com
50
Facilitating Developments
• Decision: the island of Barbados (PRT/Barbados)
• Why?
I. Excellent Managers:
Srinivasan Viswanathan, President of PRT
Barbados, came from Citicorp in India, where he
built one of the best offshore development
centers in the world.
Richard Koppel, year-2000-bug strategist, was
formerly the CIO of McKinsey & Co.
Source: Micheal S. Hopkins, The Antihero's Guide to the New Economy, www.inc.com and Source:
Micheal S. Hopkins, "Paradise Lost", Inc., Nov 1999, www.inc.com
51
Facilitating Developments
II. Customers became investors:
J.P. Morgan, Chase and others paid for future
work, invested equity, and contributed millions of
dollars’ worth of donated design help,
construction-management expertise, and
purchasing clout. The value of contributions
totaled some $12 million in all.
III. The support form local official government
Source: Micheal S. Hopkins, The Antihero's Guide to the New Economy, www.inc.com and Source:
Micheal S. Hopkins, "Paradise Lost", Inc., Nov 1999, www.inc.com
52
Facilitating Developments
IV. Profit:
The vision of creating an enterprise which
was measured to earn far more than the
profits PRT could generate and the market
share it could seize.
Source: Micheal S. Hopkins, The Antihero's Guide to the New Economy, www.inc.com and Source:
Micheal S. Hopkins, "Paradise Lost", Inc., Nov 1999, www.inc.com
53
What PRT moved offshore
• Software Development Programmers for
package of Y2K solutions…
• Infrastructures
• Capital
• Customers
Source: Pamela Abbott and Matthew Jones, " The importance of being nearest: nearshore software
outsourcing and globalizarion discourse
54
Dramatic difference in stock price
Name: PRT Group Inc.
Ticker: PRTG
Market: Nasdaq
25
Price
20
15
10
5
20
00
7/
21
19
98
12
/3
1
19
98
8/
31
19
98
2/
26
11
/2
0
19
97
0
Date
Source: Micheal S. Hopkins, The Antihero's Guide to the New Economy, www.inc.com and Source:
Micheal S. Hopkins, "Paradise Lost", Inc., Nov 1999, www.inc.com
55
Paradise Lost: What went wrong with
PRT
1. The IPO was inflated by unrealistic expectations
2. A sales force that was unprepared for the task
3. Management overfocused on building the
production side of the business at the
expense of the marketing operation
4. Over reliant on the CEO's gift for bringing in
business
Source: Source: Micheal S.Hopkins, "Paradise Lost", Inc, Nov 1999, www.inc.com and Anthony
J.Delmonte, Richard V.McCarthy, "Offshore Software Development: Is the benefit worth the risk?"
56
Did PRT match the 8 best practices?
Practices
Description
Consequence
1.
Did the company effectively manage their team at great
distance?
Yes
2.
Did managers visit the site while evaluating bids?
Yes
3.
Were the contracts signed shorter than 4 years?
Not applicable
4.
Were the contracts detailed ?
Not applicable
5.
Was there joint evaluation of the proposals by both senior
management and IT managers?
Yes
6.
Were managers directly responsible for the success of the
venture ?
Yes
7.
Were objectives clearly articulated to all stakeholders?
No
8.
Did both companies adequately prepare for the venture?
No
Source: Anthony J.Delmonte, Richard V.McCarthy, "Offshore Software Development: Is the benefit
worth the risk?"
57
Duty-Free Shop
Group
58
Duty-Free Shop Group
• Founded in Hong Kong in 1961 by Robert
Miller and Charles Feeney
Mr. Miller
• Now based in San Francisco
• LVMH acquires 61% of company in 1997
Source: Ginsberg, Steve “Flashy store less than heavy-duty success for DFS.” San
Francisco Business Times 22 Dec. 2000 – retrieved from the WWW 4/15/04
59
Duty-Free Shop Group
• Operate 150+ on and off-airport stores
in tour and travel destinations
• Locations worldwide and U.S.
• 5,000+ employees
• Annual sales of $1.8 billion
Source: DFS Galleria. April 2004 DFS Galleria. April 15, 2004
<http://dfsgalleria.com/>
60
Duty-Free Shop Group
• Retailer of fine liquors, tobacco products,
fragrances and luxury items.
Source: DFS Galleria. April 2004 DFS Galleria. April 15, 2004
<http://dfsgalleria.com/>
61
Duty-Free Group
• Primary concern is managing supply from
production to point of sale.
• By 1999, legacy system in use 15 years.
• Japan market doldrums paired with weak
European currencies cause slump in
profits.
• 9/11 air traffic slowdown further
emphasized need for cost-saving.
Source: Ginsberg; DFS Galleria website
62
Duty-Free Group
• Due diligence started Eastern Europe
– Problems with political instability
– Immature providers
• Ireland and Western Europe
– Long-term cost savings absent
Source: Goolsby, Kathleen. Outsourcing Center. Offshore is not Offhand –
Recommendations for Effective Offshore Outsourcing. 2002
63
Duty-Free Group
• Settled on India because of mature
providers and presence of competition.
• Cognizant chosen primarily because of:
– R&D capabilities
– Flexibility
– U.S. presence
64
• Founded in 1994 in Teaneck, NJ.
• Specialize in Outsourcing and e-Business
with 24/7 project support.
• Large R&D segment for assessing and
administering change for clients.
65
• Named ‘Public Company of the Year’ by
New Jersey Technology Council.
• ‘Top Solution Provider’ in Business Week’s
list of Hot Growth Companies.
• ‘Best Small Company in America’ by
Forbes.
Source: Cognizant Technology Solutions. 14 April, 2004
<http:cognizant.com/>
66
• Sales offices throughout U.S.
• Development offices in Chennai, Kolkata,
Pune, Hyderabad and Bangalore, India.
• Based in U.S., 70% of staff located in
India.
Source: “Offshore Outsourcing Can Achieve More Than Cost Savings,”
Gartner.com. 16 April 2004
<http://www.gartnerconnects.com/reprints/cognizant/CS-16-3520.htm
67
Chennai Offices
68
Duty-Free Group
• Initial agreement signed in May, 2000.
• Cognizant employees provide on-site
support for legacy systems.
• DFS minimizes exposure and Cognizant
allowed to prove value.
Source: “Offshore Outsourcing Can Achieve More Than Cost
Savings,” Gartner.com. 16 April 2004
<http://www.gartnerconnects.com/reprints/cognizant/CS-163520.htm
69
Duty-Free Group
Stage Two:
• Late 2000 – DFS extends scope to hybrid
on/off-shore model.
• “Follow the Sun”
- 2, 12 hour shifts, one onshore one
offshore
- Cognizant takes production support calls
from data centers and business users
70
• September 11, 2001
- Travel & Sales plummet
• Reorganized from 7 IT regions to 1.
• Identified need to reduce costs of merchandising,
supply chain and store systems.
•October, 2001 - DFS signs three-year global
outsourcing deal (costs not released).
71
• Systems consolidated and grouped by
business process.
• Cognizant responsible for all application
support and new development.
• Entire process completed, within budget –
in less than six months.
72
• Why stop there?
• Mid 2002, Cognizant takes over support of
Peoplesoft HR, SAP and Lotus Notes.
• Cognizant replaces internal and external
websites.
73
• Major piece of $100 million cost cutting
and reorganization strategy.
• Significant reductions in application and
support costs.
• Savings used to reinvigorate core
competencies.
74
• Cost reductions attributed to:
• Salary differences
• Smaller staff requirements due to system
consolidation.
• Ongoing IT productivity improvements.
75
76
Did DFS meet the 8 best practices?
Practices
Description
Consequence
1.
Did the company effectively manage their team at great
distance?
Yes
2.
Did managers visit the site while evaluating bids?
3.
Were the contracts signed shorter than 4 years?
Yes
4.
Were the contracts detailed?
Yes
5.
Was there joint evaluation of the proposals by both senior
management and IT managers?
Yes
6.
Were managers directly responsible for the success of the
venture?
Yes
7.
Were objectives clearly articulated to all stakeholders?
Yes
8.
Did both companies adequately prepare for the venture?
Yes
?
77