Assessing the cost of Assessing the cost of Offshore Outsourcing: Offshore Outsourcing: Efficiency, Effectiveness, Efficiency, Effectiveness, and Risk and Risk Todd Little
Jan 12, 2016
Assessing the cost of Assessing the cost of Offshore Outsourcing: Offshore Outsourcing: Efficiency, Effectiveness, and Efficiency, Effectiveness, and RiskRisk
Todd Little
Efficiency, Effectiveness, and Efficiency, Effectiveness, and RiskRisk
Efficiency– The speed at which things are done
Effectiveness– The net value generated from activities
Risk– Major things that might happen to impact
Effectiveness or Efficiency
About LandmarkAbout Landmark
Commercial Supplier of Oil and Gas Exploration and Production Software
Users are Geophysicists, Geologists, Engineers
Subsidiary of Halliburton Energy Services
Integrated suite of ~60 Products
~50 Million lines of code
Some products 20 years old
Landmark Product SuiteLandmark Product Suite
Common Model Representation
Well data
Production data
Seismic data
Velocity data
Reservoir /Fluid data
Structural /Stratigraphic data
Common Model Representation
Offshoring the CEOOffshoring the CEO
March 11, 2007, 8:35PM
Halliburton to move headquarters to DubaiCEO Dave Lesar says the oil giant will maintain a Houston corporate office
By BRETT CLANTON
Copyright 2007 Houston Chronicle
Halliburton Co. surprised the energy world, members of Congress and the city of Houston today by announcing it will open a new corporate headquarters in the United Arab Emirates and relocate its chief executive officer there.
Financial DriversFinancial Drivers
Offshore outsourcing can Save 75% (multiple sources)
Offshore outsourcing can average 75% of cost. (Forrester)
Financial DriversFinancial Drivers
Country Cost Ratio relative to USUS 1.00Canada 0.85India 0.40Pakistan 0.25
Cost SavingsCost Savings
InhouseCost
SavingsCost % Savings
Cost Savings = Expected Cost Inhouse – Cost Offshore – Cost of Overhead
Expected Cost Inhouse = nn * cn
Cost Offshore = nf * cf
Cost of Overhead = nm * cm
Cost SavingsCost Savings
e
mcSavings
1%
nn
mmffnn
nc
ncncncSavings
%
e
mccc
Savings nm
1%
c = Cost ratio = cf/cn
e = Efficiency = nn/nf
m = Management Overhead factor = nm/nf
Our ExperienceOur Experience
e ranges from 0.10 to as high as 1.0– But is subjective and uncertain
m tends to run about 0.10 to 0.25
c from cost tables, 0.25 to 1.0
Sample Data for Pakistan Sample Data for Pakistan OutsourcerOutsourcer
e m c Savings Comments
Development 0.40 0.11 0.16 33%
Testing 0.27 0.04 0.18 16%
Testing 0.60 0.06 0.19 59%
Testing 0.60 0.05 0.19 60%
Development 0.60 0.17 0.23 34%
Development 0.64 0.17 0.23 38%
Testing 0.80 0.06 0.17 72% High performance, low overhead
Development 0.56 0.13 0.30 23% Cost factor compared to Canada
Testing 0.40 0.10 0.20 26%
Testing 0.60 0.06 0.21 55%
Testing 0.20 0.05 0.27 -56%
Bad project. Cost factor compared to Canada and team lacked proper skills.
33%
RM Projects with TCS for 2007RM Projects with TCS for 2007
e m c Savings Comments
Development 0.14 0.05 0.31 -152% SDS - needed domain help
Test 0.20 0.06 0.42 -141%General testing. Only smoke tests
w/o domain help
Development 0.20 0.10 0.37 -135%
Java development did not require domain, just understanding of systems
-143%
Risk adjusted SavingsRisk adjusted Savings
Risks– Cost– Value
Types– Technical Risk– Project/Business Risk– Political Risk– Outsourcer Risk– Security/IP– Financial Risks
Value Risks (Effectiveness)Value Risks (Effectiveness)
Lost Value due to Delays
Lost Value due to Quality
Lost Value due to Security
Lost Value due to Missed Opportunities
Technical RiskTechnical Risk
Does the outsourcing company have all the technical skills necessary to do the work?
Does the outsourcer understand the business domain?
Can the project requirements and specifications be defined to meet the capabilities of the outsourcer?
Quality of work
Project/Business RiskProject/Business Risk
Rapidly changing requirements amplify remote communication challenges
Lost opportunity from dialogue between business and technical people
Political RiskPolitical Risk
Is the supplier in a stable political regime?
Are there difficulties getting work or training visas in either direction?
Outsourcer RiskOutsourcer Risk
Is the outsourcing company stable and predictable?
Does high employee turnover put the project at risk
Security / Intellectual PropertySecurity / Intellectual Property
Theft of Intellectual Property
Risk of IP pollution
Export Compliance
Portfolio Management and Dealing Portfolio Management and Dealing with Darwin (G. Moore)with Darwin (G. Moore)
Mar
ket
Dif
fere
nti
atin
g
High
Low
Mission CriticalLow High
Invent Deploy
ManageOffload
Create Change
Embrace Change
Eliminate Change
Control Change
Ad Hoc Agile
Outsource Structured
Project SelectionProject SelectionP
rob
abil
ity of
Su
cces
s
High
Low
Risked Cost of FailureLow High
Outsource Consider
Consider Avoid
Landmark’s Portfolio ConclusionLandmark’s Portfolio Conclusion
Location Project TypeUS internal development
Core business, mission critical, innovation
Canada Projects well suited to the skills of our Canadian teams, potentially including core business.
India Maintenance and enhancement projects of non-core business
Pakistan Maintenance and enhancement projects that can tolerate project risk, Testing projects where skills exist