OUTSOURCING AS A STRATEGIC TOOL
Kewal K. Verma, Ph.D.
BCA International, Austin, Texas, USA
Phone: 1-512-292-4314 E-Mail: bcaikkv@bga.com
ABSTRACT
Outsourcing is a strategic tool used by companies to
improve their ability to concentrate on the core
competencies, outsourcing non-core functions. Outsourcing
is not contacting or fixing business processes. It is about
creating value. It is about reengineering and being able to
provide customers a greater value faster, at a lower cost and
higher quality
Outsourcing industry has grown to about $150 Billion
worldwide and is estimated to grow to $240 Billion (Dunn
& Bradstreet) by the end of 1999 and about $630 Billion by
the year 2003 (Dataquest). Outsourcing has grown in scope
and complexity and it covers information technology,
administration, customer service, finance, HR, real state,
sales and marketing, distribution, transportation, health care
and more. Key issues in outsourcing are the selection of an
appropriate supplier partner and implementation of the
business relationship. A large number of global fortune 500
companies have been outsourcing software development in
India due to its strong infrastructure, investment friendly and
free market oriented business environment, and supportive
Government policies.
Key words: Outsourcing, strategic tool, competitive
advantage, software, supplier selection, benchmarking,
competitive analysis, core competencies, software industry
in India.
INTRODUCTION
Worldwide companies are using outsourcing as a strategic
tool to improve their ability to concentrate on the core
competencies. Outsourcing is not sub-contracting or fixing
business processes. It is a strategic decision about creating
value. It is about reengineering and being able to provide
customers a greater value faster, at a lower cost and higher
quality. By outsourcing non-core functions, companies are
able to concentrate on improving core competencies and
look at the broader business issues. It has helped companies
gain competitive advantage by allocating resources to
develop new tools, technologies, methodologies and
procedures. Outsourcing as an industry has moved beyond
the IT infrastructure in scope and complexity. It has grown
to about $150 Billion worldwide and is estimated to grow to
$240 Billion by the end of 1999 and $630 Billion by 2003.
In addition to the information technology, today outsourcing
covers administration, customer service, finance, HR, real
state, sales and marketing, distribution and transportation
[1,2]. Within information technology, outsourcing includes
maintenance and repair, training, R&D, applications
development,
consulting and reengineering, data
management, network management, etc. For a company,
proper preparation for outsourcing would use benchmarking
and competitive analysis tools and methodologies to
examine its strengths and weaknesses to develop
outsourcing goals. The three main steps in outsourcing
would be goal development, supplier selection and
implementation of the business relationship. Success of the
long term relationship depends upon taking care in defining
the goals, responsibilities, expectations and schedule, and
yet be able to have flexibility in the business relationship
agreement to accommodate an environment of rapidly
changing markets and technologies.
Several semiconductor manufacturing companies, such as
Motorola, IBM, Intel, TI and equipment supplier companies,
such as Applied Materials, KLA, Lam Research have either
outsourced or formed strategic alliances with software
development companies in India, Ireland, Hungary, etc. In
the back-end assembly and packaging manufacturing
industry, there are several areas, such as components and
materials distribution, inventory control, materials handling,
package design and test, manufacturing automation, factory
design, and package and factory modeling and cost analysis
that can benefit by the outsourcing services provided by
software companies. Ever increasing role of software
products would help these companies better manage the
factories, inventories, supplies, design and development,
rapid learning, manufacturing costs, and improve
productivity, yields, cost and customer satisfaction. Wellplanned outsourcing software development project could
offer the desired competitive advantage.
India has been recognized in a World Bank study as the
second most favored country for providing IT services.
Indian software companies have demonstrated their
capability to deliver large projects, on time and at lower
cost, utilizing state of the art technologies and global quality
standards. Software industry in India [3, 4] is $3.9 Billion
strong and has grown at the rate of 54%. The software
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export revenue for 1998-99 has been $2.65 Billion and has
grown at 57.4%. Over 203 Fortune 1000 companies
worldwide are outsourcing software development in India.
The success of outsourcing projects by global corporations
in USA, Japan, Europe and Asia in India has been due to its
investment friendly and free market oriented business
environment in India, along with its supportive Government
policies. The supporting infrastructure [5, 6] of the Indian
software industry includes its second largest in world
supplier base of English speaking professionals, universities
and institutes producing 115 Thousand engineering
graduates and 55 Thousand software professionals every
year, companies with SEI established highest CMM quality
level, Government supported software technology parks of
India under the STP scheme, and high speed satellite data
links and services.
Global outsourcing
Outsourcing industry has grown to about $150 Billion
OUTSOURCING, A STRATEGIC DECISION
Decision about outsourcing and what to outsource requires
careful assessment and planning. In this regard, it is different
from subcontracting or fixing business processes. In
contrast, outsourcing would involve carefully restructuring
the company around its core competencies and the business
relationship with outsourcing partner.
worldwide and is estimated to grow to $240 Billion by the
end of 1999 and according to Dataquest, $ 630 Billion by
2003.
Figure – 1 The market for outsourcing continues to
explode at CAGR of 14%
Right reasons for outsourcing and its benefits should be
carefully analyzed and clearly understood. Although
strategically the non-core functions are outsourced, a
function that does not fit or is wrong or it cannot be done in
house should not be selected. However, the selected partner
would have access to superior technology, higher quality
standards, better manufacturing practices, be able to save
time. Consequently, it will translate to lower cost.
Internal benchmarking and competitive analysis tools may
be employed to evaluate internal processes and functions to
assess and evaluate your own company and also in the
selection of a supplier partner.
UNDERSTANDING OUTSOURCING
Using outsourcing as a strategic tool companies can gain
competitive edge by outsourcing non-core functions to an
outside organization and concentrating on internal
reengineering. The reengineering process is referred to the
fundamental rethinking and radical change in the business
outlook, focusing on broader business issues, employing
resources towards developing new tools, technologies and
skills. A dramatic improvement in performance may be
realized, providing value to the customer in terms of
productivity, quality, service and speed. Thus offering
customers a greater performance at lower cost.
70 – 70 – 70 (Wipro)
 70 % of all the software developed is owned by
U.S. companies
 70 % of all U.S. software is developed in the valley
 70 % of all software developed in the valley is
outsourced
Today outsourcing cover a lot more than just the IT
industry, it covers:
Information technology – maintenance and repair, training,
applications development, consulting and reengineering,
data management, network management, etc.
Administration – mailroom, reproduction, training, etc.
Customer service – tech support, field service, dispatch,
etc.
Finance – payroll, accounting, purchasing, records, etc.
HR – relocation, recruiting, training, insurance, etc.
Real estate - facility management, food services,
maintenance, security, etc.
Sales and marketing – mail, advertising, telemarketing,
field sales, etc.
Distribution – freight, leasing, warehousing, operations,
logistics, etc.
Transportation – fleet management, operations,
maintenance, etc.
Health care – insurance, patient records, health services,
etc.
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As indicated earlier outsourcing covers a lot more than just
the IT companies.
 Technology companies
 GE, Microsoft, Intel, IBM, HP, SUN, Lucent,
Alcatel, Nortel, CA, Cisco, NCR, Sequent, VLSI,
Analog Devices, TI, Cirrus Logic, Seagate,
Compaq, Oracle, EDS, Motorola, and more
 Retail companies
 Nike, J.C. Company, Dr. Pepper, Cadbury, Nestle,
and more
 Finance companies
 Citibank, Wells Fargo, AMEX, Putnam, and more
WHY OUTSOURCING
Based on the above discussion, in summary, organizations
would consider outsourcing to  Improve focus on core competencies
 Improve focus on broader business issues
 Gain competitive advantage through new tools,
technologies, methodologies and procedures
 Accelerate reengineering
 Shared/reduced risk associated with reengineering
changes
 Reduce operating cost
 Control and redirect valuable resources
OUTSOURCING PROCESS STEPS
Outsourcing essentially requires three steps:
1) Goal development
2) Supplier selection
3) Implementation of business relationship
1) Goal development
a) Need assessment
b) Expectations
Success of the outsourcing project may depend upon the
time and effort spent in a careful assessment of your own
capabilities, needs and expectations. Internal benchmarking
and competitive analysis tools may be used or outside
consultants help may be worth the expense. Important
consideration also being that a redistribution and relocation
of resources, people, equipment, and operations will be
required. A clear understanding of the expectations and the
relevant schedule is essential in the supplier selection and
implementation of the business relationship latter on.
2) Supplier selection
Following supplier attributes and considerations would
prove to be very useful in the supplier section.
a) Common business and strategic objectives
b) Business and cultural compatibility
c) Technical expertise
d)
e)
f)
g)
h)
i)
j)
Quality focus
Supplier resources
Business reputation - stability and credibility
Contract terms – flexibility
Risk sharing
Cost
Consultants help
It may be risky to look for the business and strategic goals
so similar that you may be considering a competitor rather
than a partner. However, partners business and strategic
goals should compliment that of your own organization.
Cultural match and compatibility is very important in the
communications and working together of various teams.
Considerations include the language, values, agreements,
commitments, and written and verbal communications.
Although the relationship develops over a period of time and
it is impossible to think of every possible scenario and
situation, it may be worthwhile to agree upon some ground
rules as to how the agreements would be made and executed,
and what a certain agreement would mean.
Technical expertise and the focus on quality are of utmost
importance. After all, the outsourcing partner is being
selected based on the best practices in the industry in the
relevant areas. Cost is very important, but upfront cost may
lead to wrong decisions. The superior technology, skills,
focus on quality, availability of resources and qualified
people would provide the cost advantage in improved
product, quality and speed.
Since in most cases the partnership may last from six months
to several years, business reputation, stability and credibility
of the supplier are important. Supplier may not only be able
to supply adequate resources, but it should be able to expand
and grow with the industry and the client. Because of the
relatively long-term relationship, the supplier should be able
to accommodate ever-occurring changes in the market
conditions and the technologies, and be able to share the
associated risks.
Consulting help is available to identify potential partners
and best practices in the industry. International
organizations, such as SEMICON West and NEPCON West
have offered workshops on benchmarking. Consulting
companies and individuals are available to offer
benchmarking and competitive analysis help or offer
customized training that may help in the supplier selection.
3) Implementation of business relationship
It is difficult to say if one of the three steps is more
important than the other. However, each step in the sequence
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if executed with due care, analysis and planning, would
make the following steps easier.
Typically, following methodology and considerations would
result in a strong and successful business relationship.
a) Common strategies and goals
b) Well-defined project goals and schedules
c) Flexibility in agreement to accommodate change
d) Risk and rewards sharing
e) Employee support
f) Transition management
g) Relationship monitoring and management
Supplier with compatible business strategies and goals
would form a stronger and beneficial relationship. Perhaps it
is somewhat related to size of the outsourcing project, but
the relationship is not that of a contractor or a true partner. It
is a business relationship and needs to be treated as such.
Clearly defined expectations, deliverables and schedule must
be defined and agreed, early on.
Although a contract outlining deliverables and schedules is
necessary, the relationship should be flexible to
accommodate the rapidly changing tools, technologies and
the market conditions over a period of time. In order to
ensure commitment and dedication in a responsible business
relationship the risk and award must be shared. The supplier
cannot be expected or forced to accept the risk unless there
is a promise of an award.
It is very important to carefully select members from both
the outsourcing organization and the supplier to form
management teams to monitor and manage the business
relationship. As can be expected during the relationship
there are going to technical, schedule and people related
issues that would require resolutions and workable solutions
without terminating the relationship.
INDIA – A PROMISING CANDIDATE FOR
OUTSOURCING IT SERVICES
Global corporations in USA, Japan, Europe and Asia have
been looking at India for –
 Cost advantage
 Established quality standards
 State of the art technologies
 Dedicated development centers
 Experience with large projects
 On time deliveries
As shown in figure – 2., in 1992, a world bank study has
found India as a world leader in OEM professional services,
only second to Ireland.
FACTOR
Segment expertise
Labor cost
Labor supply
Ease of business
Ease of Visa
English speaking
Tech. competence
Edu. & training
Govt. incentives
Security
Telecom infra
Domestic market
Weighted average
Out sourcing requires some restructuring and reorganization
at the outsourcing company. In addition to the technology,
equipment and processes, it may involve moving a number
of employees. As a worst case, a group of employees
involved with the functions being outsourced may need to be
moved to a different function at a different location within
or outside the company. This transition period may be a
trying period for both the outsourcing company as well as
the supplier. An upfront open and honest communication
with the employees may be the best policy. Some companies
have combined open communication with some counseling
for the employees. Outside consultant may be useful in this
situation.
Transition management and the initial relationship building
require a great deal of effort and dedication. Often HR, legal
people work together with the technical people. Careful
consideration must be given in forming teams for the
transition as well as for implementation and maintenance of
the business relationship. Team building, management
classes, brainstorming sessions and social events, such as
department parties and company parties prove to be helpful.
Some companies are known to provide training classes in
their procedures and corporate culture to their supplier.
WEIGHT INDIA IRELAND
6
4
4
3
3
3
3
2
2
2
2
1
0
Ireland
India
Singapore
Israel
Philippines
China
Mexico
20
-
12
4
8
0
-3
3
3
0
0
0
-2
1
26
40
6
-8
0
6
3
3
3
2
4
2
4
2
27
27
26
WEIGHTED RANKING
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Hungary
Figure – 2 World Bank study shows India as a leader in
professional services.
Vendor Sophistication
(Number, Quantity)
More recently McKinsey & company analysis has shown
that India is best positioned for outsourcing IT services.
The
Philippines
India
Figure – 4 Software industry in India is expected to
grow from $3.9 Billion to $5.7 Billion by 2000.
As shown in Figure – 5, majority of the software exports,
about 61%, go to North America, Europe being the next
highest importer at 25%. In addition to the industry
emphasis on exports to the North America, it has major
initiatives with Europe and Japan. These are known as the
NASSCOM’s India Europe Software Alliance (NIESA) and
NASSCOM’s India Japan Software Alliance (NINJAS)
respectively.
CIS
China
Mexico
Low
Figure – 3
services
People sophistication
High
(Number, Cost, Language skill)
India is best positioned for outsourcing IT
SOFTWARE INDUSTRY INFRASTRUCTURE
Software industry in India has a strong and sustaining
infrastructure. Where as the domestic market growth rate has
been impressive 48.3%, India exports software to 86
countries and over 203 fortune 1000 companies have
outsourced software development in India.
As shown in Figure –4, Software industry in India is $3.9
Billion strong and has grown at the rate of 54%. The
software export revenue for 1998-99 has been $2.65 Billion
and has grown at 57.4%.
Figure – 5 61% of the exports go to North America.
Europe is the next largest importer.
NASSCOM is the National Association of Software and
Service Companies. In India it plays a role similar to the
EIA and SIA in the USA.
Table – 1 indicates that there are about 650 software
companies in India involved in various application
development segments.
Table – 1 Software revenue by application segment
Application Segment
Companies Involved
(%)
Banking
82
Insurance
55
Defense
38
Manufacturing
70
Hotels
56
Transport
65
Retail & distribution
73
Communications
78
Government
70 25-27, 2000.
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2.
The top ten are listed in Table – 2. Interesting thing is that
the export revenue of the top software company is almost the
combined revenue of the next five companies.
3.
Table – 2 Top ten Indian software companies
Rank
1
2
3
4
5
6
7
8
9
10
1998-99 Exports
Software Company
U.S. $ Millions
Tata Consultancy Services
168.6
Wipro
71.9
NIIT Limited
44.8
Pentafour
44.3
Infosys Technologies
35.2
Tata Infotech
29.4
Satyam Computer Services
24.8
International computers (India) 23.6
Patni Computer Systems
23.6
DSQ Software
22.3
Except for the top six (6) or seven (7), Indian software
companies have shied away from packaged software. Part of
the reason may be their inexperience in marketing and
another may be that as compared to their competition in the
USA and Japan these companies are significantly smaller.
However, because of the technical expertise and focus on
high quality, the Indian software companies make excellent
outsourcing partners.
From Table-3 on the types of services and software
activities, following observations can be made about the
industry infrastructure.
1. Dollar amount of the on-site services (59%) is
significantly more than the offshore services
(32.2%). However, same amount of dollars would
buy significantly more offshore services than onsite.
Table –3 Types of services and software activities
(1998)
Types of Services
On-Site Services
Off-Shore Services
Off-Shore Packages
Software Activity
Exports in products and packages ($136.79
Million) are significantly less than the domestic
consumption ($436.6 Million).
The domestic size of projects ($239 Million) and
products and packages ($434.6 Million) is a strong
indication of the growing and strengthening
infrastructure.
ADVANTAGES OF OUTSOURCING IN INDIA
1) Low cost – high quality
a) Considering the currency conversion and the pay
scale, 30-40 percent lower development cost is
possible.
2) Virtual software factories => reduced time to market
a) The 11-hour time difference allows combined
professional teams in USA and India 20-24 hour
workdays.
3) Established high quality standards
a) Five (5) companies have SEI’s CMM level-5
quality rating
b) 12 companies have SEI’s CMM level-3 and level-4
quality rating
c) 20 companies have level-2 quality rating
d) over 115 companies re ISO 9000 certified
4) Globally competitive skills and state-of-the-art
technology, proven capability to handle large projects
5) High speed (Satellitea0 data links and services available
6) Access to large pool of qualified English speaking
professionals with mathematical and logical expertise
a) As of 1998, over 200K professionals are employed
by the software industry
b) 150 universities and 460 institutions produce over
115K engineering graduates per year
c) 55K professionals join software industry per year
7) Strong and stable industry infrastructure
a) $3.9 Billion software industry grown at the rate of
54%
b) IT companies with significant global operations
c) 1998-99 exports by the top five companies range
$35 Million to $169 Million.
d) Proven capability to handle large projects
e) Senior management often has U.S. experience,
education or training
f) As member of the WTO, Indian Government has
supportive policies, including –
i) Tax holiday, up to 5-years
ii) Equity, up to 100% possible
U.S. $, M
% of Total
917.3
59
500.65
32.2
136.8
8.8
Domestics
Exports
$, M
%
$, M
%
Projects
239
28.6
489.76 31.5
Professional Services
34.29 4.1
752.5 48.4
Products & Packages
434.6 52.0
136.79 8.8
Training
50.95 6.1
23.33 1.5
Support
&
Maintenance
26.74
3.2
46.67 3.0
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IT enabled
50.14 6.0
105.71 6.8
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g) Investment friendly and free market oriented
business environment
Top twenty or so IT companies in India have Global
operations. Their access to the state-of-the-art-technology
technologies is almost immediate, often before these become
available to the public in the U.S. Most of these companies
would typically have the following technologies and skills,
and work with several domains and platforms:
Technologies available: OOPS, Client/Networking,
GUI/Multimedia, CASE Tools, 4GLs
Hardware platforms include: IBM Mainframe, AS-400,
ES-9000, RISC-6000, DEC, HP, Unisys, DG, Tandem,
UNIX, PC, MAC, PS/2, Novell LAN, SUN, etc.
Development Platforms: PC (DOS, Windows, NT, Apple),
Mainframe, UNIX, Midrange, etc.
Two organizations that have contributed most in the
development of the software industry infrastructure are –
1.
National Association of Software and Service
Companies (NASSCOM)
NASSCOM, established in 1988, comprises of Member
companies with revenues over $28 Thousand and Associate
Member companies with revenues less than $28 Thousand.
In India it plays a role similar to the EIA and SIA in the
USA. In addition its activities include:
 Advisory, consultative and coordinating body for
the Indian software industry
 Provides information on Government policies,
domestic/export opportunities, seminars and
conferences abroad, visas, etc.
 Represents industry on various Government of
India committees and industry associations
 Maintains membership in international societies
and organizations, and lobbies with foreign
Governments
 Provides assistance in achieving ISO 9000
certification, organizes in India and abroad
seminars, conferences, workshops, trade fairs and
trade missions
 Does market research, maintains database and
publishes India software Directory
 Promotes public confidence, respect for software
industry and conducts anti-piracy campaign
Electronics (DOE), Government of India, under the STP
Scheme. Among the government schemes, STP is a shining
example. Under this scheme Indian and foreign software
companies become members on fee bases and the
participating companies are provided –
 Infrastructural facilities; floor space, amenities such
as EPABX, fax, internet, teleconferencing
equipment, backup power; computers, IBM AS400, ES-900, RISC-6000, Pentium machines; office
LAN and data communication services
 Duty free foreign equity
 Tax holiday, up to 5-years operations without
income tax
 Dedicated high-speed data communication links
 Single point custom clearance and export
certification
There are about twelve STPs located in different States
throughout India and its success has prompted several other
states to apply for the construction of STPs or similar
electronics parks.
TELECOMMUNICATION INFRASTRUCTURE
Most of the top twenty or so software companies in India
have their own high speed data communication set up,
including satellite dishes, dedicated direct high speed links
with their customers in USA and Europe
However, there are about one thousand (1,000) High Speed
Datacom Links, 32-256 Kbps, mainly provided by STPIs
through SoftNET architecture, schematically shown in
Figure-6. Some of the characteristics of SoftNET
architecture are as follows:
 A unique network integrating Intlstat IBS stations and
radio TDMA technologies
 F3 IBS earth stations serve as International Gateways
 Provides software developers and exporters IP services
through TDMA radio, campus LAN and Dial-up-Lines;
typically –
 Signal from India is sent to a location in Europe,
such as Netherlands, via International satellite and
 From Europe to a location in U.S. via transatlantic
fiber lines provided by an international carrier,
such as AT&T, MCI, sprint or British Telecom
As mentioned earlier, two of its initiatives include
NASSCOM’s India Europe Software Alliance (NIESA) and
NASSCOM’s India Japan Software Alliance (NINJAS).
2. Software Technologies Parks of Indian (STPs)
Software Technology Parks of India (STPIs) is an
autonomous organization set up by Department of
FIBER
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




Figure – 6
Telecommunication Infrastructure,
International Carriers in Operation
Integrating SoftNet and ERNET systems, Figure – 7, Point
to Point communications can be extended worldwide,
including –
 Direct connections to countries with Earth Stations
operating on Intlsat 66 deg.
 Connections to other countries through transit
arrangements with other carriers
 Local loops through Microwave Radio
 Direct links, dedicated links and teleconferencing
are possible.
SoftNET – ERNET INTEGRATION
INTLSAT
IOR 66 DEG.
INSAT 2B
SoftNET
CONCLUSIONS
 Outsourcing is a fast growing industry.
 Outsourcing industry is expected to grow at CAGR
of 14%, from $240 Billion by the year-end 1999 to
$630 Billion by year 2003.
 IT continues to dominate outsourcing, but other
areas are following strongly
 India represents a strong software industry with
equally strong industry infrastructure and
supportive Government policies and schemes
 Indian software companies are among the world
leaders in IT services and potential candidates for
establishing outsourcing business relationships.
REFERENCES
[1] “Outsourcing: A Maturing Industry”, The Outsourcing
Institute – www.outsourcing.com
[2] InfoServer, The Journal for Strategic Outsourcing
Information, Jan 1999 – www.outsourcing-journal.com
[3] Record 68% Growth of Indian Software Exports in
1998-99: NASSCOM Report - www.nasscom.org
[4] Software Technology Parks of India – www.stpi.soft.net
[5] Personal visits and communications with Indian software
companies, May 1997 and January 1998.
[6] Benchmarking Indian Software Industry, part of a
project “Strategic Technology Tour of India ‘98” for MCC,
Austin, TX.
ERNET
STPI -
STPI
BANGALORE
INTERNATIONAL
Software Technology Parks of India (STPI)
Export Processing Zones (EPZ)
100% Export Oriented Units (EOU)
Electronic Hardware Technology Parks (EHTP)
Domestic Tariff Area (DTA)
NATIONAL
Figure – 7 SoftNET – ERNET integration
The success of the STP scheme has acted as a catalyst for
the Indian Government to introduce several other policies
and schemes to create investment friendly and open business
environment in India.
GOVERNEMNT SUPPORT - PLOICIES AND
SCHEMES
 Software identified as a Thrust Area for economic
development.
 India signed ITA agreement at WTO
 Automatic permission for 51% foreign equity and up to
100% foreign equity permitted
 Income tax holiday – up to 5-years
 Duty Free Imports subject to export obligations
 Software Import via high speed Datacom/internet links
 Indian Copyright Act, strict penalties to protect IPRs
 Special Schemes to facilitate the import/export of
technologies, hardware and software:
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