IS6600 – 7
Global IT Outsourcing and Risk
Management
“There are no IT projects; there are just business
improvement projects in which IT is a critical enabler”
CEO – British Airways
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Learning Objectives
Familiarisation with Offshoring and
associated Risk Management Issues
Focus on IT services and system
development
Plans for the offshore process (so as to
mitigate risks)
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Outsourcing
This is an increasingly common practice
It means that (usually) non-core-competence
activities are undertaken by a third party
Typical examples include
IT–related services [ITO]
• New software development, inc. analytics, BI, big data
• Cloud-based solutions
• Mobile-enabled solutions
Business process services [BPO]
• E.g. data entry, customer call centre
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When Not to Outsource? [SAP]
Is the function a core strategic
component or differentiator to your
business?
Do you need complete control of this
function to deliver your value add?
Do you perform this function better or
at a lower cost than anyone else?
If you answer ‘yes’ to all 3, then
outsourcing does not seem sensible.
http://news.sap.com/small-business-coach-outsourcing-hold-advantages-small-business/
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Key Goals to Achieve? (KPMG 2015)
Cost reduction – 87%
Greater scalability – 82%
Process standardization – 74%
Access to better technology – 62%
Improving analytical capabilities – 62%
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Costs or Something Else?
Outsourcing always used to be costfocused
Today, the trend is towards identifying
new value-adding opportunities
Outsource so as to locate talent and
innovation
Domain expertise and technology skills
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Outsourcing
The work may be undertaken in a variety of
locations
Inshore – within the same country
Offshore – at a more distant location
Nearshore – at a nearby country or time zone
Backshore – return the work to the home country
Multisourcing and Microsourcing
Split your project into many (small) parts and
assign each one to a different provider
Mobile or Nomadic software providers can be
located anywhere, yet still provide services
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Locations
While India is the most popular destination,
especially for low end work, South America and
Eastern Europe are growing fast
This is particularly the case for more complex work
where qualified Indian workers are more expensive than
those in EE.
EU membership means that EE countries now must
adhere to much higher standards of performance and
work ethics
Geographical proximity within Europe is one more
advantage
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Insourcing
Insourcing implies that the work is done
by an affiliate of the organisation, but
not done centrally.
Insourced work can be inshore (same
country) or offshore (overseas), or
nearshore (a nearby country)
E.g. HSBC gets BPO work done by a
subsidiary in China (Nearshore insourcing)
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Offshoring
Offshoring often implies the involvement of a cheaper
and less developed country
E.g. a US firm outsources software development to India
E.g. an Indian firm outsources software development to
Vietnam
But there are many hazards as well
Managerial, HR, Work Style, Political, currency and wage
fluctuations, competition for employees, regulatory issues …
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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Offshoring - Transitions
On July 17th 2014, Microsoft said it
would lay off 18,000 employees, many
of them ex-Nokia factory workers in
China
Much of this work will move to Vietnam,
some to Brazil and Mexico.
This is a form of right-shoring
Moving production to the right location
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Right Shoring
Move phone production to Hanoi
Some capacity retained in BJ and DG
Move other operations to Brazil and
start to close Komaron (Hungary)
Samsung also plans to move production
from China to Vietnam
Why?
Moving production closer to consumption.
Costs.
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Costs
China is no longer a cheap destination
for factory work
The middle class is growing and so
wages are rising
Factory workers cost more
So, work will move to cheaper locations
South East Asia, South Asia
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Consequences
When jobs move, people lose their jobs!
In early 2015, SCE laid off 400 IT workers
as it outsourced work to India
The same American IT workers had to
train the people who would replace them!
http://www.computerworld.com/article/2879083/southern-california-edison-it-workers-beyond-furious-over-h-1breplacements.html
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The Big Four: Brazil, India, China and Russia
Large number of engineering graduates and
well-qualified employees
Thousands of software exporting firms
But around 120 countries provide some
offshoring services (RO, CR, PH, VN, PL, HU, MY, AR, FJ,…)
The Indian firms in particular are now global
firms in their own right – with offshore
operations to service clients ‘locally’.
Offshore sites in AU, CN, HU, JP, UK, US, UY
A significant threat to US- and Europe- based firms
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The Provider (Vendor) Perspective
In over 120 countries, firms have been
set up offering BPO/ITO services
www.nearshoreinfo.com
Industry & Technology parks
• China graduates four times as many engineers
as the US
• China has tens of software/technology parks,
each focusing on domestic and global markets
• www.zpark.com.cn
• www.xasoftwarepark.com
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Diversification or Centralisation?
Diversification has long been a good practice
in the financial investment industry – but in
outsourcing, the same is not true.
Most providers are located in a single
country, and even a single location,
concentrating the risks.
Diversification can help to reduce the impact
of risks.
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Diversification - Example
A French company offshored 2,000 high-end IT jobs
Initially it planned to locate them all in Bangalore,
India.
Later decided to adopt a more diversified approach:
65% in India @ $20k/year/head
15% in Romania @ $25k/year/head
15% in Egypt @ $20k/year/head
5% in France @ $40k/year/head
Why these countries?
Romania - closer proximity to European markets.
Egypt - new talent availability.
Total cost slightly higher than an all-India approach,
but diversification reduced risks.
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Diversification Issues
In the more popular offshore locations, the providers
compete with each other for the best talent – this
produces a lot of turnover, as well as higher wage
costs.
Few locations are better than all others on all counts
– diversification brings in new skills, new languages,
new values.
India is obviously highly penetrated by offshore work,
yet there are many other providers in South America,
the Middle East and SE Asia.
Time zone issues, suitability of the local skill base,
proximity to key customers, government initiatives –
can all play an influencing role.
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Strategic Issues 1
Cost
“In India, we can get three security
engineers for the cost of one in the U.S.”
But, is cheaper really strategic?
Total Cost of Engagement?
• China is cheaper than India for programmers,
more expensive for Supervisory & Mgt staff.
• There can be many hidden costs…
• If you always worry about cost, you will get
poor quality solutions. Quality costs!
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Strategic Issues 2
Talent
Access resources unavailable at home
• But employee churn and provider reliability is a
major problem
• Resource quality (esp at smaller providers)
• Knowledge transfer and the risk of IP loss/theft
• Do you share values with the provider?
• Good governance? Ethics? Efficiency?
Flexibility?
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Strategic Issues 3
Agility
Respond to opportunities and get products
to market faster
• If you can overcome the differences of
language, communication style, culture
Anything strategic requires a
corresponding investment of resources
– and a long term vision.
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Strategic Issues 4
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
Few success stories
Small and simple tasks are more suitable
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Captive Centres 1
Captive Centres
Wholly owned subsidiaries that work (more cheaply)
for the parent company.
Captive Centres accounted for 25% of the
US$150B global services market in 2014.
64% of CCs employ more than 500
professionals, but smaller firms are adopting too
More than half of all CCs are in India
Scale and scope of work is attractive
New entrants in: PH, PL, CN, MY, CR, RO
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Captive Centres 2
Three Captive Centre Development strategies:
Hybrid, Shared and Divested.
Hybrid: The Captive Centre outsources (inshore)
work to a local service provider, so that some work
for the parent is done internally, some externally.
Shared: The Captive Centre also takes on work from
other clients, making it a profit centre – and
rendering it liable for acquisition by an investor.
Divested: The Captive Centre may be sold if the
parent is assured that it will not lose quality of
service under new management.
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Captive Centres 3
The management of a captive centre should
depend on a strategic position
Why was the Captive Centre set up?
What is its longer term objective?
A poorly managed captive centre can be a
drain on finances, as they have large fixed
costs
There are many examples of failed CCs:
Citigroup, Deutsche Bank, Unilever, Dell
And successes:
ANZ, WNS, Genpact
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For Example – ANZ Bank 1
Developed an integrated Captive Centre
offshore in Bangalore for ITO and BPO
operations.
The bank set out to create ANZ in Bangalore with
fully integrated ANZ culture.
Work includes back-office processing for
•
•
•
•
•
credit cards,
mortgages,
wealth management products,
a/c payable
HR.
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ANZ Bank 2
IT graduates in Bangalore were paid at
A$8k/annum, compared with A$4550k/annum in Australia.
Although India is getting more expensive,
labour costs are still sufficiently low to mean
that India is an attractive destination for
offshored work.
By focusing on culture, ANZ Bangalore is also
producing individuals who can move out into
other parts of India and further instill the
culture there.
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Offshoring IT Services
“If you want the loan application processed
today, click ‘1’ and it will be done in Fiji
today. Otherwise press ‘2’, it will be done in
this country by next month’.
What % clicked ‘1’?
There is increasing offshoring of IT services
Application processing, telemarketing, helpdesking, airline reservations, data entry, etc.
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Offshoring IT Services
All these services are highly dependent on
both IT and language
The relevant data is mobile – it can be sent
through the Internet easily
HSBC employs thousands of staff in China,
India and Malaysia.
English speaking countries (populations) have
a distinct advantage
But can you understand Indian English?
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Languages, Skills and Gov’t Support
Dubai and Singapore – IT security skills
PH, LK, IN, – English language call centres
PL – Banking & Financial Services
MY – Asian Language Support
MA – French language call centres
UY, CL, VE, CO - Spanish language call
centres for Spain and Hispanic USA, e.g.
help-desking, patient scheduling, data entry,
helped by synchronous time zones.
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Its not just Salaries
Salaries are a major cost, but also
consider:
Housing
Medical insurance
Local transportation
13th/14th/15th month bonus, etc.
And lots of hidden costs, such as…
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Hidden Costs…?
Transaction costs
Infrastructure costs
Knowledge transfer costs
Currency movements and fluctuations
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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Is Offshoring Too Dangerous?
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 to Offshoring
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
Precisely why are we doing this?
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
Globally, there are tens of countries that do
offshore work
Which one do you want?
General skills or specific? Language?
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?
• So many expats don’t like their assignment…
• Spousal/family issues.
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
Need to do a good requirements analysis
Try to stimulate the provider’s 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 that “yes” means ‘yes’, ‘no’ and ‘maybe’.
• Often all simultaneously
Check the references
• Ask what worked, and what didn’t.
• Technology always has problems.
Soft issues – culture, values, trust, wavelength.
Don’t only look at cost.
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The Offshore Visit
Important for large/complex projects, longterm 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
Don’t just visit the HQ, but also the work site,
national software association, …
Talk to other ‘foreigners’ who are there
Plan the site visit carefully – not on the plane
Don’t visit too many and don’t only listen to
sales pitches – they are all the same.
Do speak to project managers and
programmers – how good are their soft skills?
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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Contract Specificity
It would seem sensible to have specific contracts
More quality and satisfaction??
Consultants report that a less than complete contract
means more room for creativity and flexibility
The vendor can then work within a framework and be
creative – which is more satisfying for vendor staff
They are not just being told what to do
An onsite supervisor can help
It requires the client and vendor to have similar
cultural values – tolerance for uncertainty
A client-vendor matching process is needed
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Insourcing and Outsourcing
You need to do the requirements analysis
Don’t trust others to know your business better
than you do
Outsource the software development
Software testing must be done by the users,
not the developers
Developers tend not to do such a good job here
And if the software is not carefully tested, the
chance of rejection is higher.
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Summary
Don’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-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.
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Future Directions/Trends
Best-shoring and Near-shoring
The most appropriate location to maintain control &
proximity to market
Integration of domestic players even as
smaller players emerge in smaller markets
Diversification of risks across multiple suppliers
Multisourcing
Never-ending search for new sources of skills
It is not just India. EE and SA will grow
Outsource storage and apps to the cloud
Out with the RFP (too slow and expensive), in
with the enterprise marketplace
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Concluding Remarks
India is far ahead and – Brazil, Russia
and China have a long way to catch up
Integration of smaller players is essential
Smaller players/countries will continue to
provide value
Planning is essential, as there are both
experts and cowboys out there!
Fail to plan = plan to fail
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