1 IS6600 – 4 Global IT & BP Outsourcing and Offshoring “There are no IT projects; there are just business improvement projects in which IT is a critical.

1

IS6600 – 4Global IT & BP Outsourcing and Offshoring

“There are no IT projects; there are just business improvement projects in which IT is a critical enabler”

CEO – British Airways

2

Learning Objectives

Familiarisation with offshoring and outsourcingFocus on IT services and system developmentPlans for the offshore processCases and trends in organisations, globally

3

Outsourcing

This is an increasingly common practiceIt means that (usually) non-core-competence activities are undertaken by a third partyTypical 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

4

OutsourcingThe work may be undertaken in a variety of locations

Inshore – within the same countryOffshore – at a more distant locationNearshore – at a nearby country or time zoneBackshore – return the work to the home country

Multisourcing and MicrosourcingSplit your project into many (small) parts and assign each one to a different providerMobile or Nomadic software providers can be located anywhere, yet still provide services

5

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)

6

OffshoringOffshoring often implies the involvement of a cheaper and less developed country

E.g. a US firm outsources software development to IndiaE.g. an Indian firm outsources software development to Vietnam

But there are many hazards as wellManagerial, 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!

7

Offshoring - Transitions

On July 17th, Microsoft said it would lay off 18,000 employees, many of them ex-Nokia factory workers in ChinaMuch 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

8

Right ShoringMove 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 VietnamWhy?

Moving production closer to consumption. Costs.

9

Costs

China is no longer a cheap destination for factory workThe middle class is growing and so wages are risingFactory workers cost moreSo, work will move to cheaper location

10

Sample Factory Worker Monthly Salaries (US$/month)

AU, NZ, JPHK, SeoulBJ, SH, GZSZ, DL, SY, WHKL, Jakarta, Manila, BKKIndiaHanoi, HCMC, VientianePhnom Penh, Yangon

2700-46001600-1700400-466280-330240-340180-400130-15050-75

10Source: http://www.jetro.go.jp/en/reports/survey/pdf/2013_05_01_biz.pdf

11

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, UYA significant threat to US- and Europe- based firms

12

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

13

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.

14

Diversification - ExampleA 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/head5% 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.

15

Diversification IssuesIn 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.

16

Strategic Issues 1Cost

“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!

17

Strategic Issues 2

TalentAccess 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?

18

Strategic Issues 3

AgilityRespond 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.

19

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 perfectFew success storiesSmall and simple tasks are more suitable

20

Captive Centres 1

Captive centres – wholly owned subsidiaries that work for the parent company. For the Fortune Global 250 companies, 153 had Captive Centres in 2008.A 60% failure rate for CCs

Created for the ‘wrong reason’ Need investment – cannot save money immediately

21

Captive Centres 2Three 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. The Captive Centre may be sold (divested) if the parent is assured that it will not lose quality of service under new management.

22

Captive Centres 3The 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 costsThere are many examples of failed CCs:

Citigroup, Deutsche Bank, Unilever, DellAnd successes:

ANZ, WNS, Genpact

23

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.

24

ANZ Bank 2IT graduates in Bangalore are paid at A$8k/annum, compared with A$45-50k/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.

25

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, help-desking, airline reservations, data entry, etc.

26

Offshoring IT Services

All these services are highly dependent on both IT and languageThe relevant data is mobile – it can be sent through the Internet easilyHSBC employs thousands of staff in China, India and Malaysia.English speaking countries (populations) have a distinct advantage

But can you understand Indian English?

27

Languages, Skills and Gov’t Support

Dubai and Singapore – IT security skillsPH, LK, IN, – English language call centresMorocco – French language call centresCentral/South American countries – Spanish call centres for Spain and Hispanic USA, e.g. help-desking, patient scheduling, data entry, helped by synchronous time zones.Active govt support in UY and CL. In sub-Saharan Africa, where English is spoken, e.g. KE & BW, there are similar opportunities.

28

Relative Costs of IT Professionals

US, CanadaSingapore, JapanEastern EuropeBrazilRussiaIndiaChinaSE Asia (VN, TH, PR, MY)S America, S Pacific

Higher

Mid

Lower

29

Its not just Salaries

Salaries are a major component, but also consider

HousingMedical insurance Local transportation13th/14th/15th month bonus, etc.And lots of hidden costs, such as…

30

Hidden Costs…?Transaction costsInfrastructure costsKnowledge transfer costsCurrency movements and fluctuationsDispute resolutionTravel costs – in the early stagesUnpredictable risks – wars, financial collapse, terrorism, regulatory changes (e.g. nationalisation, tax breaks), IP theft, corruption, proprietary knowledge, etc.

31

Is Offshoring Too Dangerous?

Offshoring can be exciting or scaryDepends 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?

32

Three steps (Common Sense?)

Laying the foundationsDo we have a plan, a strategy? Who is involved? Are we ready? [a year? 18 months?]

Identifying the providersWhich country? Which providers? Selection criteria? RFI and RFP. [6 months]

Assessing & Selecting the ProviderVisit the offshore location. Meet the people. Observe their work. Sign the contract. [at least a month]

33

Laying the Foundations 1

Assessing if we are readyHow good is our project management? Can we manage an offshore project? Can our people work with them? Are changes in work norms acceptable? What is our appetite for risk?

The hardest step is re-engineering internal processes – so as to ensure that they are ready.

34

Laying the Foundations 2

The launch teamOffshoring is complex – it needs a powerful teamBuild a strategic vision, commitment and push for implementationAgile and able to make quick decisionsExpertise in offshoringLearn from others’ experiences (including consultants)

35

Laying the Foundations 3Strategy & 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…

36

Identifying the Providers

In India, there are thousands of providers!Many have offshore agentsGlobally, 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?

37

Selecting a CountryWhile 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.

38

Provider Selection CriteriaGeneral Criteria

Company size & stabilityHR policiesQuality managementTechnical expertiseBusiness domain knowledgeTrack recordMethodologies usedCostsQuality initiatives – ISO, CMM, 6 Sigma, etc.

Extra care criteriaInfrastructureSW production environmentInterntional experienceLanguage skillsEmployee turnoverOrg culture – flexibility, responsiveness, soft skillsGlobal presenceDisaster recovery & backup24-hour supportWeight the criteria; matrix the providers

39

Send an RFI, using the criteria

Who we areWhat we are looking forQuestions about the provider

History, customers, management, geo-locations, turnover, infrastructure, security

Questions on services offeredDomain expertise, platforms, skills, subcontractors

Questions on strategyVision, market share, alliances

40

Send an RFP to the most promising firms

What we expect in the proposalHow are you going to undertake a specific project

Need to provide sufficient project detailsNeed to do a good requirements analysis

Try to stimulate the provider’s creativity by asking more specific/difficult questionsAsk for references of work they have done.

41

Assessing & Selecting the Provider

Evaluate the RFPsIdentify false promises, too good to be true offersLearn 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.

42

The Offshore Visit

Important for large/complex projects, long-term cooperation and situations where there is a high degree of dependence on the provider (i.e. it is hard to switch)Launch team members should be involved, but also other members of senior management and those who are not yet convinced about offshoring.

43

Offshore Things to Do

Don’t just visit the HQ, but also the work site, national software association, …Talk to other ‘foreigners’ who are therePlan the site visit carefully – not on the planeDon’t visit too many and don’t only listen to sales pitches – they are all the same.Do speak to project managers and programmers – how good are their soft skills?Walk around – literally

44

Recommendations & Contract Negotiations

To offshore or not.Project objective, functionality scope, Comparison of providersFinancial justifications to top mgt.Legal/contract issues: price, IP & confidentiality, penalties & incentives

45

Contract SpecificityIt 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 staffThey are not just being told what to doAn onsite supervisor can help

It requires the client and vendor to have similar cultural values – tolerance for uncertaintyA client-vendor matching process is needed

46

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 hereAnd if the software is not carefully tested, the chance of rejection is higher.

47

SummaryDon’t underestimate the importance of careful planning, or of allowing enough time to lay the foundations carefully.The project launch team should be small, agile, open-minded and pro-offshoringA low-risk pilot project will help a company find out if it is ready for offshoringContracts are important, but developing a relationship with the provider is probably more critical.

The two parties need to align their business interests for the duration of the project.

48

China’s ProgressCurrently only 10% of Chinese software is exported, compared to 78% of India’s, though the value of the Chinese software market is double India’s. China has 18,000 software companies, strongly supported by govt policy and economic growth. China plans to have

1000 new software firms with global sourcing expertise, 100 global software firms to set up business in China10 cities within China identified as locations for world class software development

49

China’s ProgressThe top ten Chinese software firms engaged in offshore work have, together, about the same revenue and headcount as the 5th largest Indian firm.Together, these top ten firms account for less than 30% of the total Chinese market.This indicates a considerable degree of fragmentation in the market (too many micro providers). Market consolidation is likely.

50

Key Chinese Providers

CVIC SE (1991)iSoftStone (2001)Neusoft (1991)

Subsidiaries in: JP, US, DE, RO, FI, CH, AE, PE

23000 employees9000 large customers

Beyond Soft (1995)

51

Future Directions/TrendsBest-shoring, to the most appropriate locationNearshoring, to maintain control & proximity to marketIntegration of domestic players (M&A)Large players offering services across many sectors and locationsSmall players emerging in many smaller marketsDiversification of risks across multiple suppliersFurther development of offshore services globallyContinued downward pressure on costsNever-ending search for new sources of skillsKnowledge processes & cloud solutions added to the mixSocial and mobile applications rising fast

52

Concluding Remarks

India is far ahead – Brazil, Russia and China have a long way to catch up

Integration of smaller players is essentialSmaller 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