IT Offshore Outsourcing
Todd Budin
Akin Ola
Ryan Moore
7 Nov 2003
IT Offshore Outsourcing

The sharing or transferring of responsibility for
some or all IT services to a third-party vendor
that operates in a foreign country. 16
IT Offshore Outsourcing

The practice of moving IT work,
or spending IT dollars outside
North America12.
Offshore Outsourcing

Nearshore outsourcing is
outsourcing to Canada and
Mexico12.
Companies Using Offshore Providers
InformationWeek study of
industry sector revealed
over 50% of IT companies
are offshore
outsourcing13.
Jobs




360,000 jobs outsourced offshore.20
Demand to exceed 1 million by 2005. 20
60% of Fortune 500 firms are outsourcing.21
As of 2002 GE had 7,000 software professionals
offshore.21
Offshore IT Spending
Offshore Spending
15
Dollars (Billions)
16
14
12
10
8
10
7
6
4
2
0
2003
2005
2007
Year
17
Reasons for Outsourcing
 Cost
 Quality
 Skills
 Speed
Development
 Globalization
Cost



Cost of Labor in vendor countries is lower than
that in the US. 22
93% of financial services executives interested,
to reduces cost.22
Wages can be as much as 80% lower. 23
Quality




Offshore developer have standards equal to or
higher than that of the US.24
64% of financial services executives cited
improved productivity.25
42% cited enhancing service quality. 25
India has twice as many technical graduates as
the US. 24
Skills



High demand for IT
skills
Y2K and e-Business
revolution
Forecasted shortage
24
Speed Development

Allow companies to focus on core competencies

Increase productivity

Reach market sooner
Globalization



Companies are competing in a global economy
Internet and Telecommunications
International Standards and Metrics
Capability Maturity Model
 ISO9000

Capability Maturity Model



CMM or SEI-CMM
Developed by Software
Engineering Institute,
Carnegie Mellon
University
Five levels of
competency
27
ISO 9000







International Organization of Standardization
Standard for assuring, managing and improving quality
Companies can be certified in ISO 9001 or ISO 9002,
ISO 9003 or ISO 9004
ISO 9001 for design, development, production,
installation and/or servicing.
ISO 9002 for development, production, installation
and/or servicing.
ISO 9003 – final inspection and testing.
ISO 9004 – similar ISO 9001 but also includes
guidelines for continual improvement.
www.iso.ch Accessed: Oct. 29, 2003
ISO 9001 – Certification Steps
Define policy
objectives and
measures
ISO 9001
Certification
Build quality
management
system
On-Site
Audit
Review
and
improve
www.cionline.net Accessed: Oct. 29, 2003
Develop
quality
manual
Implement
quality
system
Identify and
document
required
measurement
s
On-Site
Audit
Vendors

Countries
India
 Russia
 Malaysia
 China



Companies
Government
Countries – 95% of Outsourcing
Russia
Canada
EU
Israel
China
Mexico
Japan
Philippines
India
Singapore
Brazil
Australia
15
Countries – Significant
Hungary
Czech Republic
Estonia
Ukraine
Latvia
Slovenia
Lithuania
Poland
Belarus
Bulgaria
Romania
Korea
Pakistan
Cost Rica
Taiwan
Malaysia
15
Countries – Little Outsourcing
Yugoslavia
Croatia
El Salvador
Cuba
Caribbean
Jordan
Bangladesh
Egypt
Vietnam
Sri Lanka
Chile
South Africa
Argentina
15
Country - Comparison
24
India
Best vendor country
Low labor cost
Vast resource of highly skilled professionals
Cooperative effort between government and businesses
Indian based multi-national companies



Wipro
TCS – Tata Consultancy Services
Infosys
Cost of labor is rising.
Russia
Russia's Appeal

Other
11%
Health Care
6%
Software
Development
41%
Energy
8%
Financial Services
8%
IT or Telecom
Equipment
10%
Consulting
16%
28
Two-thirds of
suppliers are IT
related
Russia
Strong technical, research, innovative and
problem solving culture
Attractive labor cost, $18 per hour
Expected annual growth of 50%
Poor government support and infrastructure
English language barrier
China
Good with legacy type systems.
Attractive labor cost
Large Labor pool
No regard for intellectual property, proprietary
and confidential data
29
Malaysia
Strong government support
Infrastructure
 Education

Shortage of highly skilled and experienced
developers
Philippines
Labor cost, annual salary $10,000 - $15,000 26
Good job market with 40,000 computer
technology graduates each year
Familiar with state of the art technology
IT Offshore
Outsourcing
Considerations
If there was Justice in the world…..
Sorry, the Board is Outsourcing your
job to guy in India who’ll be CEO for
a 10th of your salary.
Everybody’s Doing It!


More than 300 of the top fortune 500
companies tap IT services in India to run data
centers1.
CEO’s see the IT department as a huge expense.
Everybody’s doing it!




In the year 2000 there were 27,000 jobs moved
overseas.
By 2015 Forrest Research estimates that number
to grow to 472,000 American jobs.
Other sources say 3.3 million jobs by 2015.
The average computer programmer in the U.S.
costs a company $100.00 per hour. In India the
same hour costs $20.002
A large cost savings?



80% cost savings per
hour.
CEO’s see this a way
to cut expenses
dramatically and
improve the company’s
numbers to the
shareholders
Executives must look
deeper into offshore
outsourcing before
signing the contract
with the supplier.


Offshore IT outsourcing started to soar during the
economic downturn. With shareholders screaming
bloody murder, many CEO’s mandated some IT work
be sent overseas.30
“But when you parse it all out, the total cost of
offshore outsourcing a given IT job is generally
comparable to getting the work done domestically, it is
just that few companies are aware of the real costs,
most just look at wages”31
Considerations





Unions
The U.S. Government
Loss of future talent and intellectual assets
Security
Expenses involved in all phases
Unions




There are two main Unions: Alliance IBM and
Washtech
Washtech newsletter circulates to 14,000
members3
Both are associated with the powerful CWA
union, the Communication Workers of America.
Once resistant to joining a Union because of
the IT worker’s white collar status, many are
joining this “e-movement”.
Unions
Considerations




Executives may have to deal with Union
employees when deciding to outsource.
The company could face protests and public
scrutiny by Union officials and members.
Union members could boycott the company’s
products.
The entire IT department could strike.
The United States Government


U.S. Companies BEWARE!!!
Laid-off IT workers are asking state and federal
governments for help.
U.S. Government



U.S. Senator Jeff Drozda (R-Indiana) introduced
a bill on October 9, 2003 that would restrict
state agencies from offshore outsourcing4.
The bill goes a step further and restricts state
agencies from using any vendor that uses the
services of offshore IT supplier.
….and tax breaks for companies who do not
utilize offshore suppliers for their IT function.
U.S. Government
Considerations

If a large portion of your revenue comes from a
state or federal agency beware. If this legislation
is voted into law, a company that uses offshore
outsourcing will see its government contract
dissolve.
U.S.Government and Visas



On October 1, 2003, the number of visas that
the U.S. makes available to foreign professionals
fell by 66%5.
This program is called the H-1B visa program.
The program was established by Congress in
1990 to supply U.S. businesses with specialized
knowledge that was unavailable domestically.
U.S.Government and Visas



Original number in 1990 was set to 65,000
From 2001-2003 congress tripled the ceiling to
195,0005
As of October 1, 2003, the number is back to
65,000.
U.S.Government and Visas
Considerations


Workers from the offshore suppliers come to
the U.S. to make the transition go more
smoothly.
Executives may have less workers from the
supplier available for the sometimes lengthy
transition period.
Loss of future talent



College students are noticing that the IT field is
not as attractive as it was 5 years ago.
Top students are choosing careers other than IT.
Having our best and brightest go into other
fields gives foreign companies an advantage.
Loss of future talent



Any new project or product that a company
wants to introduce to the marketplace requires
an innovative IT department.
Top IT developers help a company get a product
out better and faster than the competition.
The best and brightest to help in this process
will be in other professions in the future.
Loss of future talent
considerations

“Executives should consider (not offshore
outsourcing) because they cannot afford to have
domestic talent ‘dry up’”6

When the economy finally rebounds, U.S.
companies may be at a global disadvantage.
Security

Security is a concern domestically. Security risks
do increase when you take an IT function
offshore.

Risks can be divided into two categories:
Physical and Technological.
Security: Physical



Terrorism and war in the foreign country where
your IT department resides.
Post 9-11 companies must realize the global
terrorism threat.
Delta Airlines cancelled an IT outsourcing deal
to the Philippines on October 10th of this year
due to “Muslims separatist groups including Al
Queda being active in the area”7.
Security: Physical

Nuclear threat between India and Pakistan

Nuclear threat between N. and S. Korea

Consider the threats in the Middle East
Security: Technological



According to analyst Stephanie Moore at Giga
Information Group, it is “prudent for
companies to wait until offshore companies
mature their services.”8
Moore points to the concern in the lack of
infrastructure in India due to the nationalization
of the IT industry by the government in the late
1970’s which drove companies like IBM out of
India in 19788.
India is still trying to catch up with the US.
Security
considerations

Executives must take into account the offshore
suppliers security for their intellectual assets.

Consider the risks involved with both the
political environment and IT infrastructure of
the country.
How Much Will This Cost?




1. Cost of selecting a vendor
2. Cost of the transition
3. Cost of laying off domestic IT workers
4. Managing the offshore contract
Selecting a vendor



Ranges from .2%-2% of the entire deal9
Costs include documentation requirements,
attorney’s fees, in-house project management
team.
Opportunity cost: Selection could take up to one
year: the in-house team could be working on
other projects to increase company revenue.
Selecting a vendor



Hidden danger in taking the lowest bid
Vendors try to outbid one another to win the
contract. They end up outbidding themselves11.
This could lead to a vendor not fulfilling
contractual obligations leading to : renegotiation
($$$), buying more services from the vendor
($$$), or ending the agreement.
Transition costs




The most expensive stage of an outsourcing
endeavor9.
U.S. companies keep all their IT staff to train
the supplier.
Cultural barrier for custom applications
Transition period can take several months.
During this period, a companies IT budget will
at least double10.
Transition costs


Near the end of the transition, the company
wants to realize their cost-savings so they lay-off
IT employees.
Severance pay and retention bonuses are paid to
keep domestic workers through the transition
phase.
Transition costs




Executives must also consider cultural barriers.
American IT workers are often more efficient
because they know the American consumer. In
addition they helped build their company’s IT
function. A foreign worker must be trained to a
companies custom applications
Once the suppliers’ workers are trained, they
often quit. Attrition rates in India average 35%
per year9.
This can lead to decreased efficiencies!
Managing the offshore contract


Invoicing and auditing to ensure cost centers are
charged correctly.
Many domestic employees are retained whose
sole job it is to ensure that the foreign supplier is
living up to the contract
Total Cost

Can be up to 15.2% of the cost of the contract9.

Let’s do the math…
Conclusion


It is not simple math when making decision to
offshore outsource a company’s IT function.
Considering all the risks associated with going
offshore is just as necessary as considering the
rewards.
IT Offshore Outsourcing
Best Practices

Many aspects of Offshore IT outsourcing
use similar best practices as traditional
outsourcing.
 Establish
a clear offshore strategy.
 Research, understand and know the supplier
market.
 Plan for everything, including an exit strategy.
Outsource Projects Wisely
Consider how
much effort and
interaction is
required before
outsourcing
24
Finding the Right Supplier




Which countries are the closest fit?
Talk to other U.S. companies.
Use a consultant familiar with the country.
Go and visit the offshore companies and
countries you’re most interested in.
Finding the Right Supplier Cont.
14
Researching the Market

Think about Cost, Quality, Control and Risk20
 What is the total cost to offshore outsource?
 Is the quality level sufficient?
 Who is really in charge of the offshore site?
 What risk factors are involved in hosting the
operation abroad?
Investigating Potential Suppliers






Find out about the company?
Current financial status and future growth.
A measure of the products and services
available
Infrastructure (internal and external)
Company culture
HR (recruitment, training, compensation,
retention)32
Various Offshore Business Models
Captive
Firm’s own
offshore “shared
service center.
Examples include
GE, American
Express and
HSBC.
Highest
investment
 High management
commitment
 Potentially high
risk if no local
knowledge
 Greatest
opportunity to
realize value
 Potential to
insource

Build-OperateTransfer (BOT)
Facilities
Management
Outsourced
An offshore center
built and operated
by a third party for
a finite time period
after which the
ownership transfers
to the client firm.
An offshore center
fully owned by the
firm; facilities
management (real
estate, security,
transportation,
cafeteria, etc.)
provided by a third
party .
Popular choice for
low-end business
processes or
contact centers.
Could have ttwo or
more vendors and
multiple countries
Joint Venture
An offshore
center with joint
ownership of the
firm and a third
party
More complex to
set up
 Moderate
investment
 Opportunity to
share reward
 Local knowledge
of the JV partner
helpful




Helpful when a
firm wants to
retain control but
lacks local
knowledge
Also appropriate
when vendors
lack domain
experience
Opportunity to
realize value as a
“captive” facility



Helpful when a
firm wants to
retain control but
lacks local
knowledge
Also appropriate
when vendors
lack domain
experience
Opportunity to
realize full value
as a “captive”
facility
“Extended Organization”



Requires robust
vendor
management
Heavy
management
focus in the multivendor model
Opportunity to
employ Best of
breed providers
18
Fail to Plan, Plan to Fail



Plan for managing the transition
Plan for managing the offshore relationship
Contingency planning
Planning the Big Move


Communicate the coming changes with
shareholders, employees, customers and the press
Develop a detailed plan for the transfer of
knowledge.
 Transferring cultural, industry, and legacy
systems knowledge
 Knowledge transfer should be completed
without business disruption
Plan on how to Manage the
Relationship



The supplier isn’t going to maintain the
relationship
Set expectations and performance benchmarks
from the beginning
Put a team in place to monitor the supplier’s
performance, financial health, personnel status
and contractual conformance.
Contingency Planning



“You need two ‘hot sites’,
not merely a theoretical
failover site.”19
Transition methodology
for moving functions
between sites, including
the U.S.
Offshore exit plan
Questions?
References






1Alore
Gilbert, Protestors Decry outsourcing to India, NewsTech, September 9,
2003
2Peter Engardino, The New Global Job Shift, Business Week, February 3, 2003,
pgs. 46-53
3 David Beckman, IBM Plans to Accelerate Offshore Outsourcing, WashTech
news, July 22, 2003
4Paul McDougal, Indiana Senator Pushes for Anti-Outsourcing Measure,
Information Week, October 9, 2003
5Manjeet Kripalani and Bruce Einhorn, Global Designs for India’s King, Business
Week, October 13, 2003, pgs. 56-58
6[1] Diane Morello, U.S. Offshore Outsourcing Leads to Structural Changes and
Big Impact, Gartner, July 20, 2003
References continued







7Paul
McDougall, Delta Cancels Deal, Information Week, October 10, 2003
8Mark Willoughby, Offshore Security: Considering the Risks, Computer
World,
September 15, 2003
9Johanna Amrosio, Experts Reveal Hidden Costs of IT Outsourcing, CIO Magazine,
April 23, 2003
10Stephanie Overby, The Hidden Costs of Offshore Outsourcing, CIO Magazine,
September 1, 2003, pgs. 28-42
11Thomas Kern, Leslie Wilcocks, Eric Van Heck, The Winner’s Curse in IT
Outsourcing, California Management Review, Volume 44, Number2, Winter 2002, pg
49.
12Mary Lacity, Offshore Outsourcing Presentation
13Information Week, The Offshore Decision, InformationWeek; 12/10/2001 Issue
867, p116, 1/3p, 1 graph
References continued

14Mapping

15Erran
•
16Narender
Offshore Markets, NeoIT.com, Issue 7, April 2003, Pg.21
Carmel and Ritu Agarwal, The Maturation of Offshore Sourcing of
Information Technology Work, MIS Quartery Executive, Vol. 1, 2 pg 75
Ramarapu and Monica Parzinger, Issues in foreign outsourcing,
Information Systems Management; Sept 97, Vol. 14 Issue 2, p27, 5p
•
17Jaikumar
•
18Suresh

19Laton

20Onshore
Vijayan, Companies expected to boost offshore
outsourcing, Computerworld. Framingham: Feb 17, 2003. Vol. 37, Iss. 7; pg. 13, 1 pgs
Gupta, Global Perspectives in Outsourcing, Presented 23 Oct. 2003 Baruch
College, New York, NY
Mccartney, a shore thing?, CFO, Spring 2003, Vol. 19 Issue 4, pg. 60
Versus Offshore Outsourcing: Significant differences require unique
approaches, NeoIT.com, Issue 13, October 2003 pg. 8
References continued






20.
Larry Greenemeier, Offshore outsourcing grows to global proportions, Insurance
& Technology. New York: Apr 2002. Vol. 27, Iss. 5; p. A12
21. Erran Carmel and Ritu Agarwal, The Maturation of Offshore Sourcing of
Information Technology Work, MIS Quartery Executive, Vol. 1, 2 pg 75
22. Greg MacSweeney, Special report: IT gameplan-outsourcing: Offshoring can
improve quality, Insurance & Technology. New York: Jul 2003. Vol. 28, Iss. 7; pg. 39
23. Shailen Gupta, Offshore call center outsourcing: International site selection
strategies, Customer Inter@ction Solutions. Norwalk: Jul 2003. Vol. 22, Iss. 1; pg. 48
24.Inigo Amoribieta, Kaushik Bhaumik, Kishore Kanakamedala, and Ajay D. Parkhe,
Programmers Abroad: A Primer in software development, McKinsley Quarterly,
2001,Number 3
25.Greg MacSweeney, Special report: IT gameplan-outsourcing: Offshoring can
improve quality, Insurance & Technology. New York: Jul 2003. Vol. 28, Iss. 7; pg. 39

26Mary

27Mark
Hayes, Paul McDougall, John Soat. Gaining
ground, InformationWeek. Manhasset: Mar 31, 2003. , Iss. 933; pg. 34, 6 pgs
Paulk, Bill Curtis, Mary Chrissis, and Charles Weber, Capability Maturity
Model, Version 1.1, IEEE Software, Vol. 10, No. 4, July 1993, pp. 18-27,
References continued

28Mary

29Winter
Hayes, Greg Macsweeney, From Russia with
love. InformationWeek. Manhasset: Jul 28, 2003. , Iss. 949; pg. 59
Wright, New Kid, Far Eastern Economic Review. Hong Kong: Jul 11,
2002. Vol. 165, Iss. 27; pg. 38, 1 pgs
30The

Hidden Costs of IT Outsourcing, Business Week Online, Olga Karhif, October
27, 2003
31Quote from Tom Weakland, a partner in management consultancy DiamondCluster.

32Visiting

Offshore Suppliers, NeoIT.com, Issue 1, June 2003