1 Benefits and Problems of IT outsourcing: an investigation into IT companies in India A Study submitted in partial fulfilment of the requirements for the degree of Master of Science in Information Systems At THE UIVERSITY OF SHEFFIELD By ARVIDSAI VEKATESWARA SEPTEMBER 2008
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1
Benefits and Problems of IT outsourcing: an investigation
into IT companies in India
A Study submitted in partial fulfilment of the requirements
for the degree of Master of Science in Information Systems
At
THE U"IVERSITY OF SHEFFIELD
By
ARVI"DSAI VE"KATESWARA"
SEPTEMBER 2008
2
Abstract:
This research work investigates the benefits and problems in IT outsourcing in Indian IT
companies. The previous research works have explained on both positive and negative aspects of
IT outsourcing in India. India being the destination hub for outsourcing IT projects motivated me
to focus on IT outsourcing in India and also to analyse its benefits and problems. This research
illustrates the benefits and problems faced by both client and vendor in IT outsourcing. In this
research the major clients are the companies in the US and the vendors are the companies in
India.
The data for this research is gathered from primary data and secondary data. The primary
data is collected from online survey and telephone interview with managers in Indian IT
companies. An online survey was created and sent to all the participants through e-mail. All the
participants are the employees of Indian IT companies. Another method used to collect primary
data was from the telephone interview with the managers of Indian IT companies. The telephone
interview gave more insight details related to this research topic. The literature review helped me
to frame questionnaire for online survey and telephone interview. The secondary data is collected
from e-journals and websites. Data that is gathered using these methods were analysed and was
useful to draw conclusions.
The valid reasons to outsource IT functions to India are cost reduction, committed work
force, high worker skills at low cost, quality of work, availability of expertise and human
resources and better communication skills when compared to other non-native English language
speaking countries. The benefits faced by the clients are profit, vendor’s flexibility and
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productivity; client can focus on core activities of business and widen their market, and quality
work at low cost. The problems of IT outsourcing are loss of security and control, cultural
difference, hidden costs, inexperienced people working in project, project delay and loss of in-
house jobs. The problems like loss of control and security and projects delay are common even
when the project is not outsourced. The problem of cultural difference is managed by the vendor,
by intense training. But the valid problems in IT outsourcing are hidden costs and loss of in-
house jobs. Ultimately the process of IT outsourcing benefits the client and problems being very
less when compared to the benefits. IT outsourcing is worthy and the client is really benefitted.
IT outsourcing is a healthy and excellent strategy and this process of IT outsourcing will
continue as long as cheap wages and high worker skills are observed in India.
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Acknowledgement:
First regards goes to my parents and brother with whose help and support, I have been
raised up to this Master’s degree level. I would like to thank my dissertation supervisor Mr.
Barry Eaglestone for his guidance and encouragement. I deeply appreciate and thank the
participants of the online survey created for my dissertation and also the managers of Indian IT
companies who participated in my telephone interview in spite of their busy schedule.
Finally, I would thank the omnipresent God with whose blessing I was able to carry out
my dissertation successfully till the completion.
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Contents:
Abstract: .......................................................................................................................................... 2
Acknowledgement:.......................................................................................................................... 4
Contents:.......................................................................................................................................... 5
Introduction: .................................................................................................................................... 7
Background of study: .................................................................................................................. 7
Problem statement: ...................................................................................................................... 8
Research Objectives: ................................................................................................................... 9
Research Questions: .................................................................................................................... 9
Methodology: .............................................................................................................................. 9
Target population: ..................................................................................................................... 10
Limitations of the study: ............................................................................................................ 10
Literature Review: ......................................................................................................................... 10
IT Outsourcing: ............................................................................................................................. 10
IT Outsourcing Models: ............................................................................................................ 10
IT Outsourcing lifecycle: ........................................................................................................... 13
Reasons for IT outsourcing: ...................................................................................................... 14
Benefits of IT outsourcing: ........................................................................................................ 17
Problems and risks involved in IT outsourcing: ........................................................................ 19
India’s development due to IT outsourcing: .............................................................................. 24
Impact of IT outsourcing and current recession in the US: ....................................................... 27
Managing IT outsourcing: ......................................................................................................... 29
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Points to be considered before outsourcing IT project: ............................................................. 31
Solutions for IT outsourcing problems: ..................................................................................... 32
Important factors for successful IT outsourcing: ....................................................................... 35
Data Collection Methods and Result Analysis:............................................................................. 37
Overview and Conclusion: ............................................................................................................ 55
Future research: ............................................................................................................................. 58
Appendices: ................................................................................................................................... 59
Appendix 1 ................................................................................................................................ 59
Appendix 2: ............................................................................................................................... 61
References: .................................................................................................................................... 66
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Introduction:
Background of study:
This research investigates outsourcing of IT in large companies within India. The benefits
and problems involved in IT outsourcing are analysed. Contracting the IT functions of a
company to another external organisation is called IT outsourcing. Koh et al (2007) say that,
there are various reasons like guaranteed quality, improved productivity and reduced costs for a
company to outsource. Profit motivation also tends a company to outsource the IT functions.
(Shao et al, 2007). On the other side the problems in outsourcing are like loss of control over
core activities. (Ketler et al, 1999). When the vendor company works in an outsourcing project,
it tends to reduce HR costs and appoint freshers for programming. Matloff (2004) noted that the
big Indian IT company Tata Consultancy Service (TCS) reports that 50% of programmers in
their company are under age of 25 and 88% of them are under age 30. This insufficient
experience in the working field might affect the performance of the outsourced work. Another
problem identified is the cultural difference between the client and the vendor. The cultural
difference between the Western and Asian countries is also a possible problem in IT outsourcing.
(Ramingwong et al, 2007). These two contrasting aspects of IT outsourcing is investigated in this
research and more explanation to support these aspects are given. Analysing the issues, benefits
and problems of IT outsourcing in India using suitable research methods are the objectives of
this dissertation.
The dissertation will investigate IT outsourcing in Multinational Companies (MNC)
within India. IT outsourcing involves the activities between the client and vendor. The company
which outsources the project is called the client and the company which works for the outsourced
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project is called the vendor. The companies in the Western countries are mostly the clients and
projects are mostly outsourced to Asian countries. There are various factors for outsourcing IT
functions which are investigated in this dissertation. This research covers few topics in IT
outsourcing like reasons for IT outsourcing, process of IT outsourcing, benefits of IT
outsourcing, problems and risks in IT outsourcing and also the risk management techniques
followed in IT outsourcing. This study investigates both the positive and negative side of IT
outsourcing and concludes the value of IT outsourcing for the client.
Problem statement:
There many issues in IT outsourcing like cultural difference, loss of control and security,
chances of lack of co-operation, hidden costs, projects delay and loss of in house jobs. On the
other side the benefits of IT outsourcing for the client are profit, high worker skills at cheap
wages, vendor’s productivity, flexibility, client can concentrate on core activities and widen their
business. Considering both aspects of IT outsourcing, is IT outsourcing a worthy business
activity? How does the organisation manage with problems in IT outsourcing? Does IT
outsourcing really help to develop the client’s organisation? There is a little difference observed
in client’s actual benefit and anticipated benefits in IT outsourcing. Investigating on the benefits,
problems related to IT outsourcing and possible ways to solve the problems is the scope of this
research.
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Research Objectives:
The aim of this study is to analyse the actual benefits and problems of IT outsourcing in
India. The study also finds what are the functions outsourced to the client. The risk side of IT
outsourcing is analysed and the possible solutions to IT outsourcing problems are discussed. This
gives an idea about the worthiness of outsourcing.
Research Questions:
1. Why IT projects are outsourced to India?
2. What are the actual benefits of IT outsourcing and does it comply with anticipated
benefits?
3. What are the problems and risks involved in IT outsourcing projects and how is it
managed?
Methodology:
This research follows qualitative and deductive approach. This research uses both
primary and secondary data. The primary data was collected from online survey and telephone
interview. An online survey was created and the link is sent through e-mail to all participants
who are the employees of Indian IT companies. The responses of this online survey are used to
analyse the data. The mangers of Indian IT companies were interviewed which gave insight
details about the benefits and problems of IT outsourcing. Literature review was done which
helped me to understand the topics related to this research and also helped to frame questionnaire
for online survey and telephone interview. The findings in the literature and the findings from the
primary data had no significant difference.
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Target population:
The target population for this research are the programmers, managers and employees of
the Indian IT companies. These people are interviewed to know the facts from the real world.
These people are chosen as the target population as they work in outsourced projects and they
have better understanding about the client’s benefits and problems.
Limitations of the study:
This research is performed in three months and outsourcing is a vast topic. Opinions on
IT outsourcing varies with each company, feedback varies a lot and it is not easy to generalise
this topic. Telephone interview is performed for this research and international calls to India are
also a consideration while performing this research.
Literature Review:
IT Outsourcing:
IT Outsourcing Models:
Outsourcing can be defined as contracting the services to third party which are done
internally within the company. Contracting some IT functions of a company to another company
is called as IT outsourcing. There are various models of IT outsourcing,
1. Full outsourcing
2. Selective outsourcing
3. Application Service Provider(ASP)
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4. Off shoring
5. Near shoring
6. On shore outsourcing (Online)
Full outsourcing: Outsourcing all the IT functions of a company to a third party is called full
outsourcing (Online)
Selective outsourcing: Some IT functions are retained in the in-house and some functions are
outsourced to a third party. The organisation decides as to which functions to outsource and as to
which functions to be retained (IT Business Edge, 2008, Online).
Application Service Provider (ASP): The organisation hires application from an ASP and
reduces the cost of buying software, running it and maintaining it. (Online)
Off shoring: When the management of the organisation decides to outsource IT services to a
vendor who is located in a different country, then it is called off shoring. (Shaberwal, 1999)
"ear shoring: Near shoring is contracting the services to a vendor in a foreign country which is
located near to the client’s country. In addition to this, the time zone is also relatively close.
(Wikipedia, 2008, Online)
On sourcing: Outsourcing the IT services to a vendor which has got an office at the client’s
country itself, it is called on sourcing. (Online)
Each model has got some of its own advantages and drawbacks. The problems with the
full outsourcing are chances of loss of in-house control and security, cultural difference,
language problems, loss of jobs in the client’s country, chances of client’s country economy
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getting affected, difference in time zone and geographical distance are some of the problems in
full outsourcing. The benefits of full outsourcing are reduced costs, companies can concentrate
on core activities, might find cheap and skilled workers in vendor’s company. These problems
and benefits are applicable to projects outsourced to a vendor who is located at a long distance.
The problems and benefits of off shoring is similar to full outsourcing.
The main benefit with selective outsourcing is reducing the cost with little risks. The
client can outsource few IT functions to a vendor who are expertise in those functions and which
can be done effectively by the vendor (IT Business Edge, 2008, Online).
The benefits of Application Service provider (ASP) are reduced IT costs and its
maintenance costs, reliable, guaranteed service, the software costs can be shared by a group of
clients. The drawbacks are high dependency on customised software provided by the vendor, and
the organisation might lose the control over the data. (Online)
Near shoring has got many benefits when compared to off shoring like geographically
close, similar culture, integrated approach and government policies. In near shoring the risks
involved in the business activity is reduced. For example American clients can outsource their
projects to Mexico or Canada. When compared to off shoring near shoring has got reduced risks.
But the reduction in cost is not high when compared with off shoring. (Wikipedia, 2008, Online)
On shore sourcing: Outsourcing projects to a vendor who has got an office at the on site
is called on shore outsourcing. On shore outsourcing reduces the loss of in-house jobs and the
client can still have control over the project. (Online)
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The first IT outsourcing agreement was informed by Kodak in 1989 and the project was
outsourced to IBM after which the trend of IT outsourcing has started. In 2006 IT outsourcing
was growing at the rate of 30% in a year and the major client to the world of IT outsourcing is
US and India has got a significant part as being their client. It was estimated that the IT
outsourcing services between India and US would increase from $10 billion in 2003 to $50
billion dollar in 2008. IT Outsourcing offers mutual benefit to both client and vendor. The client
obtains the required work for their organisation and the vendor is paid for that work. It has got
both mutual benefit and mutual obligation. If the vendor fails to meet the obligation, it creates a
stir in the trust of the client and will impact on the outcome of the project. (Koh et al, 1999).
IT Outsourcing lifecycle:
IT outsourcing follows a life cycle:
1. Following a strategy in order to decide on Outsourcing
2. Selecting a vendor and defining work to them
3. Sign an agreement with the vendor
4. Launching the project, Engage the vendor, Funds planning
5. Managing partnership, Evaluating the performance, Managing costs
6. Completion of contract (RoseIndia.net, 2008, Online)
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Reasons for IT outsourcing:
The possible reasons to outsource the IT functions are guaranteed quality, improved
flexibility, and reduced costs. (Koh et al, 2007). Theories on production and transaction cost
economies suggest explains that IT outsourcing improves the worthiness of the firm as it reduces
the production cost. (Ang, 1998). When IT functions of an organisation are outsourced to a
vendor, vendor can offer to do the project at competitive prices which is less than the cost that
would incur when produced by client itself. Koh et al used event study methodology to find out
the increase in stock returns and the result was favouring the IT outsourcing. It was observed that
the stock returns were positive in a short time. Companies invest a lot in famous outsourcing
destinations like India. Big IT companies like Oracle, HP and Microsoft has invested in India
and the wages in India is only one-fourth of the wages paid to US programmers. IT outsourcing
provides more jobs in the vendor’s country. In India the quality of education provided by premier
institutes like Indian Institute of Technology (IIT) is so high and the professionals graduating
from these institutes contributes excellent service for the client. The technical advancements and
cheap wages in the developing country attracts the Western countries to outsource (Marcus, A.
2004). Projects are outsourced to countries which have got high worker skills. Most of the
projects are outsourced to Asian countries like India, China, Malaysia, Singapore, Philippines
and Thailand. The programming cost in Asia is 5-12 times less than in Western countries and it
is expected to be 4 times less by 2012. (Ramingwong et al, 2007). The annual salary for a
programmer in US is $74,486 in 2003 but the annual salary in the same year for a programmer in
India is $6,350 and for a programmer at China is $5,852. This cost difference tends the
organisation to outsource their projects. (Ferguson, 2004). Outsourcing helps the company to
widen their market and decrease the input cost. (Chakraborty et al, 2005).
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One of the most motivating factors for a company to outsource their IT projects to a third
party is for profit margin. Outsourcing can be classified as onshore and offshore. The onshore
outsourcing seems to be safe as the domestic jobs are not transferred to overseas. It is very
difficult for outsourcer to bring back the jobs to their domestic place after sending the project
offshore and as long as the cost effectiveness is observed in IT outsourcing, this IT outsourcing
trend continues. When a project is sent offshore, the organisation gets the work done with good
quality and cheap cost. The company’s profit is increased by outsourcing and all these benefits
make the company’s strategy to outsource their project. (Shao et al, 2007). The organisation can
reduce IT costs and can focus on core activities of the organisation, and manage with
competency. The vendor offer high flexibility for executing the project. IT outsourcing gains an
important position in global outsourcing business. The significant advantages are flexibility,
reduced cost and productivity. The organisation can adapt to the emerging technology and
strengthen themselves among their competitors. IT Outsourcing has always been dilemmatic but
it all depends on the decision of the company as to whom to outsource and how to outsource.
The organisation needs to find a proper vendor for outsourcing who understands the needs of the
organisation and contributes towards organisational development. (Mikhailov, 2005). The trend
of outsourcing in IT tends the client to outsource few functions of IT like application
development and maintenance, end user computing, network infrastructure administration, and
technical support. (Das et al, 1999). Outsourcing offers mutual benefits to both client and vendor.
The client obtains the required work for their organisation and the vendor is paid for work and it
has got mutual benefit. If the vendor fails to meet the obligation, it creates a stir in the trust of the
client and will impact the outcome of the project. (Koh et al, 1999). Outsourcing also improves
international trade. (Chakraborty et al, 2005)
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IT projects are outsourced due to global competition and financial benefits. The decision
of outsourcing is taken by organisation and it is outsourced to a third party over a period of time.
The third party is paid for performing the outsourced work. Most of the organisations resist
facing the overhead in-house development. The strategies followed in Indian IT companies to
work in an IT outsourced project exist as a model for IT outsourcing. (Oza et al, 2004)
The technical advancements and cheap wages in the developing country attract the
Western countries to outsource. Many projects are outsourced to India and China and as a result
of this; the economy of the vendor’s country is improving. Analyst predicts that the economy of
India and China will exceed USA’s economy by 2050. (Marcus, 2004)
The four main factors for outsourcing are: economic factors, competition, technological
and regulatory factors. Due to outsourcing the US employers stop recruiting new employees as
the work could be done by overseas workers at cheaper wages. Outsourcing helps the company
to widen their market and decrease the input cost which improves the economy of the country
and the company as well. (Chakraborty et al, 2005).
One of the reasons for IT outsourcing might be the lack of skills in the client side. The
potential skills that are observed in the vendor side at cheap cost influences the client to
outsource their projects off shore. The vendor’s performance becomes effective when compared
with parameters like financial benefits, quality and guaranteed work, improved productivity, high
worker skills and reduced cost. (Williams C.R, 2007)
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Benefits of IT outsourcing:
The cost reduction is one of the important factors in IT outsourcing as the currency value
in the client and vendor side makes a big difference. The most common clients in the world are
the US and UK and the most common vendors in Asian countries are India and China. The
currency used in US and UK are dollars and pounds respectively, currency used in India and
China are Rupees and Yuan Renminbi. The currency rates of the US and UK with respect to
India and China is very high. So reduction of cost is considered as an important factor for IT
outsourcing. (Williams C.R, 2007)
The client has got flexibility with the vendor right from the selection of vendor till the
delivery of project. The client can examine the capability of the vendor by contracting small
projects to vendor. If the vendor has got high capabilities, it is better to have a long term contract
with that vendor. By outsourcing the projects to vendor, the client can expand their business
geographically and get the guaranteed quality work done at cheaper cost. (Online)
Companies can concentrate on core activities that will help them to compete with other
companies. Managing IT employees of the company and IT infrastructural management are dealt
by the vendor and the client need not handle all the IT activities in their company. The client
needs to search for a proper vendor and also probably train them for the project to be outsourced
in order to get an effective result for the project. Outsourcing helps in various companies’
activities like Customer Relationship Management (CRM), billing, data mining, data
warehousing. The essence of outsourcing is to obtain a quality result at lower cost. (Online)
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IT Outsourcing develops globalisation and US remains as the main outsourcer to many
countries to the world and the top ten countries who receives the projects are India, China,
Mexico, Brazil, Canada, Czech Republic, Philippines, Australia, Hungary and Ireland. The
broadband connectivity has helped to exchange data across countries in IT outsourcing. IT
Outsourcing helps to improve the economy of the developing countries. IT Outsourcing helps to
improve the communication between countries and the software development is performed at
different sites which may result in successful project. (Fraser et al, 2004). Outsourcing helps to
improve the value of the outsourcer (Koh et al, 2007)
The availability of quality vendors in other countries makes the client to outsource the
projects. The organisation can remain competitive when they outsource their work. The loss of
in-house experts are compensated in outsourcing and when an organisation works in a big project
that requires high experts, outsourcing is a better option as the client can find technical experts in
other countries and the organisation is to be benefitted. Exploring to knowledgeable experts is an
advantage for the organisation. The problems related to human resource and selecting the
technology can be shared with the vendor. The success of outsourcing depends on the selection
of vendor. There are some factors to be inspected by the client with the vendor: vendor’s
experience, planning, communication level, financial status and cultural cordiality .IT
Outsourcing can be classified as temporary and permanent contract. Permanent contract is
preferred for hardware and telecommunication department. Temporary contract is preferred for
software industry. It is up to the organisation to decide as to which contract will fit in well for
their organisation. The decision taken contributes towards the success of outsourcing. (Ketler et
el, 1999)
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Many companies outsource to China and India, as they get the work done in cheap
wages, make use of specialised skills, flexibility and the offshore team can work round the clock.
For example, in US when all the departments are closed in the night time, the offshore team can
work in the offshore site. The time difference is utilised in offshore site. (Ferguson, 2004)
Problems and risks involved in IT outsourcing:
The essential reason to avoid outsourcing could be the loss of control and security.
(Ketler et el, 1999). Outsourcing should not be encouraged by the organisation if it looses the
control over core operations and if there are issues related to data privacy and security. IT
Outsourcing really poses to be risky when it affects security and privacy. These risks should be
eliminated when a project is outsourced. (Patterson, 2006). The cultural difference between the
client’s country and the vendor’s country is also a disadvantage. The way US managers deal with
an issue might differ when compared to the way an issue is dealt by Asian managers.
Communication and management is very important in a project and this might get affected when
a project is outsourced offshore. (Narayanaswamy, 2005)
Some factors to be considered in IT outsourcing is that, the client should be sure that the
staff appointed by the vendor to work in outsourcing projects should have good IT skills and
must have proper education background and good communication skills. The possible risks that
are involved due to outsourcing are: strategic, operational, intrinsic risk of atrophy and location.
The strategic risks occurs when both the client and vendor attempts to be opportunistic.
Operational risk occurs due to the distance between the client and vendor and also the hindrances
in communication between them. Intrinsic risk of atrophy occurs when the organisation
outsources many projects and looses people who are familiar with the project. Intrinsic risk of
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location is due to location of the organisation and this includes political change and currency
exchange rate risk. (Aron et al, 2005). Trust between the client and vendor is very important in
IT outsourcing. Trust between them is built based on these factors: better understanding,
investments, credibility, communication, quality, timely delivery and performance. (Nguyen et al
2006). The staffs working in the offshore are expected to have proper communication skills,
team working skills, multicultural experience and exposure to international standards. The staffs
should be trained well with programming skills and computer applications. (Ferguson et al,
2005). Productivity of the vendor is very important while working in the outsourced project.
Building trust, transparency, honesty and reliability between the client and vendor are some of
the important factors in IT outsourcing. (Oza et al, 2004).
Cultural differences and change in the management at offshore team are considered as
problems in IT outsourcing. The clients can outsource their projects only if the vendor charges at
fewer rates as outsourcing becomes worthless if the outsourcing cost is high. (Ferguson, 2004)
The cultural difference between the outsourcer and the vendor is analysed. The two main
outsourcers are US and UK. The common vendors are the companies in Asian countries. Few
cultural differences between them are mentioned here. When an employee expresses his views in
the organisation that contradicts with a higher authority, this is considered as rude in Asian
countries, which is not the case in Western countries. The workers in the Asian countries are
more inclined for permanent employment till they retire. This long term orientation is observed
to be higher in Asian countries than in Western countries. (Ramingwong et al, 2007)
After signing the contract there are chances of lack of co- operation from the vendor side.
The vendor might fail to work and deliver the project as promised. Handling IT projects involves
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constraints like managing technical requirements, human resources, and financial requirements at
the vendor side. When the vendor fails to manage these requirements and does not co-operate
with the client, it really becomes a problem in IT outsourcing. (Williams C.R, 2007)
The critical aspect of software outsourcing is considered. In IT outsourcing complexities
might arise between client and vendor. The vendor might not know the seriousness of the client’s
organisational requirements. The main problems considered are the difference in culture, failure
of network connection between the client and the vendor during crucial time and time difference
between the two countries. The cultural impact and attitude of people and their approaches
towards work plays a key role when vendor works for the client. Language might be a barrier in
managing IT outsourcing relationship. (Oza et al, 2004)
The IT outsourcing has got some risks like political instability in the vendor’s country
and lack of Intellectual Property Rights (IPR) law in the vendor’s country. The political stability
and the climate over the vendor’s local government cannot be completely anticipated by the
client. If the vendor’s country faces a political instability that affects the outsourcing projects, the
client faces a tough situation at this time. The vendor’s local government Intellectual Property
Rights (IPR) law is also very important. If the IPR law of the local government does not comply
with the protection of the client data, then it is a problem to the client. (Ferguson, 2004) In
addition to the business risks, there are issues related to loss of information and intellectual
property. There are chances of using the same work done for another client. Switching from one
vendor to another vendor is costly. (Sharma, R et al, 2008)
Dell has withdrawn its offshore operation after lots of customer complained about the
technical support received from workers in the off shore countries. If the strategies are followed
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properly by the vendor in outsourcing, the client will be highly benefited by outsourcing.
(Ferguson, 2004)
There are always chances of a project getting delayed. In the case of IT outsourcing,
projects are outsourced to countries which are far from client’s location. So there might be
factors to be considered like time difference between the client’s and vendor’s country and their
working hours. For example, when the vendor wants clarification in the project and they are not
able to approach the client in the time they wanted, due to the time difference between these two
countries, it causes some delay to proceed with the project. Similar things may affect in the
delivery of the project. So there are chances of late delivery in IT outsourcing. Both the client
and vendor should take necessary steps such that time differences and differences in working
hours between the client and vendor do not affect the delivery in the project. (Williams C.R,
2007)
When a project is outsourced to a vendor, there are hidden costs like setting up and
maintenance cost between the client and the vendor. (Williams C.R, 2007). When the client is in
early stage of searching for vendor, they look forward for vendor who charges less. Spending
more in the searching stage and looking for trustworthy vendor will reduce the hidden cost.
(RoseIndia.net, 2008, Online)
The vendor deals with financial details, bank account details, and similar things related to
client where high confidentiality is required. If these details are misused by the vendor, there is a
breach of confidentiality. The vendor and client must take essential steps to take enough
measures on security. The employees working for the vendor should be monitored with respect
to confidentiality and security. (Online)
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As the vendor handles the outsourced project based on the price estimated as per the
agreement, all the required infrastructure, facilities and technology are arranged as per the time
of agreement. If there is sudden improvement in the technology, the vendor might hesitate to
update to new technology as it does not work out to be cost effective for the amount paid by the
client initially during the agreement.
As the projects are outsourced to Asian countries, there are many issues addressed in the
client’s country. The main problems are the client’s country’s economy gets affected, loss of in-
house jobs, lack of opportunity to train skills for in-house employees. These are the common
issues faced by the US and European clients as the IT projects are outsourced to Asian countries.
(Online)
The vendor has got a separate management which is different from the client
management team. When there are two management teams in a project there are chances of
clashes between the company rules and there might be mismatch in some company policies
between the client and vendor. There is loss of managerial control for the client as the whole
project involves two management teams. (Online)
There might be problems faced by the client due to political instability in the vendor’s
country and amended government rules that do not favour the client. There are chances where
the local political scenario might affect in dealing with the outsourcing project. (Online) For
example, if a project is being handled in India from US and if the local ruling government gets
unstable and if there is occurrence of election and if the ruling party changes, the new party who
gets elected might frame rules like paying heavy taxes for IT outsourcing companies and IT
professionals and this causes more expenses for the vendor to manage their company and also
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their employees. In such cases the vendor has to charge more from the client. Thus the change in
local government rules might affect the client.
There are always cultural differences between the Western and Asian countries. When it
comes to an organisation, working culture is very important. Only if the client and vendor are in
a position where they can balance their culture, the problem of cultural difference can be
avoided. The difference in languages between the Western and Asian countries is one of thing to
be noted. The formal language and the native language in US and UK is English but in Asian
countries, English is learnt as formal language but their native language is different. So problems
like lack of clarity in communication might occur due to this language difference.
India’s development due to IT outsourcing:
India is the main country where lots of IT projects are outsourced and India gains the
major share in global outsourcing industry. (Oza et al, 2004). Indians have performed very well
in their outsourced projects and they have taken over the outsourced technological jobs. This will
further help to improve the future software business of India. The major companies in India like
Tata Consultancy Services (TCS), Infosys, HCL and Patni technologies has experienced big
revenues due to IT outsourcing and Indian software industry has produced $10 million export
revenue.(Cusumanol, 2006). India plays a prevalent role in IT outsourcing. (Ferguson, 2004).
From the recent article in The Times of India, it is said that the 70% of the revenue for
companies like Tata Consultancy Services (TCS), Infosys and Wipro are from the US market
which proves that Indian IT companies get significant business from the US market. [The Times
of India, 2008] It is certainly developing the growth of Indian IT companies but too much
25
dependency on IT outsourcing projects from foreign countries is not healthy for Indian IT
companies.
According to Spring Board market research firm, India’s IT services market is expected
to grow to $8.1 billion by 2011 and it was $4.1 billion in 2007. This is the growth observed for
the past one year in IT services in India. (The Economic Times, 2008)
In the past decades outsourcing has helped to grow call centre and software industry in
India. Indian economy has seen a rise by 8% in 2004 and the trend follows such that big US
companies buy Indian companies. The development in Bangalore city in south India
demonstrates the growth of IT outsourcing. The Bangalore city in India is referred as California
of India. The population of the city has been doubled in two years due to development in the IT
field and previous period of doubling the population took 40 years. This shows the drastic
development in the country due to IT outsourcing. The IT outsourcing has helped the developing
countries to improve their advancement in technology, design and production and has increased
job opportunities. (Marcus, 2004)
It is very evident that the Indian IT companies are growing well but the one of the
drawback is its too much dependency on US market. This is considered as a drawback because
the economy of the US impacts on the Indian IT companies. As a result of this the Indian IT
companies has started looking out for clients from Europe and other countries and spread its
clients geographically. It is known from the recent news from the BBC that the big India IT
outsourcing company Infosys will purchase the British consultancy firm Axon for $753 million.
This is expected to happen in November 2008. The 60% of Infosys business relies on the US
market and the company wants to reduce it to 40%. Infosys has got big clients like Goldman
26
Sachs, Philips and ABN Amro. As a result of this venture, Infosys will have approach to more
European clients. After this announcement the share rates of both Infosys and Axon have risen.
[BBC News, 2008] Thus the Indian IT outsourcing companies are developing to such a level to
buy companies from a foreign country. This is one of the remarkable developments in Indian IT
outsourcing industry. This business deal is seen as an effect to reduce the dependencies on US
market and make the business activities globally and would also make a new business model as a
part of venture with European companies. (AFP, 2008)
From the latest news from The Economic times, Reserve Bank of India (RBI) has
informed that India is not secured against the global economy problems. The central bank has
informed that the consequence of global economy slowdown might affect the sectors of IT and
BPO in India as these markets are dependent on foreign investors. [The Economic Times, 2008]
From the latest news from The Statesman news paper of India, it is said that India’s growth rate
slows down to 7.9% in the first quarter of the financial year 2008 and in the year of 2008 the
inflation rate in India has risen up to double digit and necessary steps are being taken by the
Reserve Bank of India (RBI) to manage the inflation. [The Statesman, 2008] This is the current
economy status of India and it is evident that it is better for the Indian IT companies not to rely
too much on foreign clients.
27
Impact of IT outsourcing and current recession in the US:
Matloff (2004) said that bringing in the IT overseas workers to US and outsourcing the IT
projects has affected the US economy and also US firms. But importing people to onsite work is
observed to be productive and CEO’s in a company tends to retain overseas workers at onsite
rather than making them work offshore. Importing people at onsite is preferred as interaction
regarding requirements between the client and the programmer is discussed in person. By 2010,
it is expected that 25% of projects from US moves overseas. Matloff (2004) believes that IT
Outsourcing and importing overseas worker has affected the employment of the local people in
US and has also affected the US economy. But this point could be argued in a different way. As
the IT works are outsourced, the organisation focus on core activities and widen their market and
eventually the revenue of the organisation is increased which may result in more investment in
IT. But Matloff (2004) says that the remedy to resolve the problem of loss of in house jobs could
be solved by giving technical jobs only for local US citizens rather than overseas workers.
IT Outsourcing has become the trend for the past twenty years. US has created 43 million
white collar jobs but the issue is, most of the white collard IT tech jobs are outsourced to
countries like India and China where the work can be done in a fraction of cost. Due to reduction
in telecommunication cost and broadband services data are easily transferred in IT outsourcing.
Another main outsourcing function is call centre. It is estimated that US company gains $1.14 for
every dollar spent for outsourcing and India gets 33 cents from it. The loss of jobs in the client’s
country due to off shoring services is observed but the client should follow necessary policies in
order to prevent the impact on US economy. A poll was conducted among US citizens regarding
the issues of outsourcing. It is observed that 69% reported that outsourcing affects US economy
28
and 19% reported that it would improve the economy (survey conducted in 2004). (Chakraborty
et al, 2005)
According to Business Line newspaper, fear of job loss due to IT outsourcing has made
the students of the US to refrain from taking computer science courses. (Business Line
newspaper, Online) So the loss of in house jobs and lack of interest shown by students of the US
towards computer science courses are seen as problems faced by the US and it is also said that
these problems affects US economy and US IT firms. [Business Line newspaper, Online] But
according to Rediff India, the National Association of Software and Service companies has
informed that outsourcing IT services to India will not affect the companies in US as it makes the
company to be more competitive and also the nation to face its economy slowdown. However
US has become regulated towards grating H1B visa for foreign workers to work in their country.
(Rediff, India. Online)
According to The Times of India (2008), big Indian IT companies like HCL, Tata,
Mahindra and Wipro has created more than 30,000 jobs for US citizens. This is an evidence to
say that business relations with foreign vendor would also create job opportunities in the client’s
country. (The Times of India, 2008)
According to the Information Technology Association of America (ITAA) research, a
report states that Off Shoring IT services would create more jobs in US and also makes the US
economy better. It is believed that IT outsourcing has created more IT jobs in US and has
generated 90,000 new jobs in 2003. Despite of ITAA report, there are many claims saying that
off shoring IT services has caused many jobs losses in the US. The president Bush administration
29
has reported that IT outsourcing services has made good contribution towards the US economy.
(CIO News, Online)
The IT outsourcing services from US to India or other foreign countries is seen as a main
issue in the US but the fact seems to be like, IT outsourcing helps the US IT companies to stay
competitive and productive and also helps the country to face the current economy recession.
This issue has been continuing till recent times and as an example of this, the US
presidential candidate Barack Obama has said that if he is elected as President, he would not give
tax breaks to companies that outsource their projects to another foreign country. This statement
has been made as a measure to prevent job losses in the US. (The Economic Times, 2008,
Online)
Managing IT outsourcing:
The success of an outsourced project depends on the initial decision taken to outsource
and the way outsourced project is managed. Planning and managing the project with the vendor
is a very important factor for a successful project. Reducing the cost is the most important factor
to outsource that the client cannot refuse to admit. So the client should plan the budget and has to
analyse the pricing with the vendor before commencing the project. If the hidden cost incurs
heavy expenses for the client then the scope of reduced cost cannot be achieved by the client.
Once the agreement is signed between the client and vendor there should be a proper and regular
communication between them as it helps to run the project in a smooth way. Both the client and
vendor should convey clearly about their needs and there should a help desk system for both of
them in order to clarify doubts regarding the project. Regular review of the project performance
should be done by the client in order to know the project development. Some of the other factors
30
where the client needs to check with the vendor are disaster recovery, risk management and crisis
management. The client should see to that the vendor is equipped with all these factors before
signing the contract. The complete information about the project should be known clearly to
vendor and also should secure all the information regarding the project and the vendor should
make sure that the employees working in the project does not leak any information about the
project to some another company. These are responsibilities of the vendor that the client should
check. Managing relationship with the vendor is very vital as it creates mutual understanding,
transparency, proper communication, and flexibility. Proper partnership is very important for a
successful project. In addition to managing the vendor, both the client and vendor must manage
the internal activities of the company during the outsourcing as the in-house management should
be strong for a successful completion (RoseIndia.net, 2008, Online).
There are few considerations to be made before outsourcing to a vendor. The client
should document their requirements. The infrastructure and the technology to be used for
handling the project should be defined by the client. The vendor should be chosen by the client
based on expertise and experience. The client has to perform search for a suitable vendor that
conforms their requirements. After short listing companies that closely suit their requirements,
companies should be contacted. The company’s policies, procedures, pricing and its strategies
should be know before the contract is signed. The project information should not be revealed too
much before the contract is signed. The local government law has to be verified and project
statement should be prepared for the vendor and proper consultation should be made with them.
It is recommended to visit the vendor company before the contract is signed. (RoseIndia.net,
2008, Online)
31
Points to be considered before outsourcing IT project:
Outsourcing an IT project to a vendor is an important decision for the client and the client
must consider few points before outsourcing to a vendor. The following points have to be
considered before the client decides to outsource a project.
1. The client has to know how well the vendor has been established in the business. The
quality of work delivered by the employees working in the vendor’s company and the
management capability of the vendor’s company should be known to client. The financial
background of the vendor company is also important.
2. The vendor’s capability can be known from existing or previous clients of the vendor.
The vendor who has obtained certification from ISO, CMM or from other private
agencies shows the quality of service provided by them. So these kinds of vendor who
has got good reputation from their previous client and who has obtained certifications are
better one’s to choose for client to outsource their project.
3. The hidden costs that are involved during IT outsourcing should be anticipated. Best
efforts should be made from the client for a cost effective project from a quality vendor.
4. The agreement and deadline for delivery of the project should be finalised before signing
the contract.
5. The data security measures followed by the vendor when working on the project is very
important. Data Encryption method, data access and firewall are some of the important
32
security parameters. Security measures should be ensured by the vendor when providing
outsourcing services for the client.
6. The vendor should have the ability to recoup from the disaster and risk management
procedures should be followed in order to reduce the risk occurrences. The vendor should
plan the project in such a way that the risks are minimised.
7. The amount of training provided to the employees working in the vendor side is very
important as it results in the quality of the project. The vendor should follow proper
infrastructure and maintenance standards. The transparency between the client and
vendor is also very important.
8. The vendor must comply with government rules and regulations. Legal practices in the
profession are important as it reduces the issues related to law.
9. Then the cultural difference between client and vendor should not be observed as the
compatibility in culture between them helps to work together in a comfortable way.
(RoseIndia.net, 2008, Online)
Solutions for IT outsourcing problems:
The main requirement to overcome the disadvantages of IT outsourcing is to recruit
skilled and knowledgeable graduates in the vendor side. (Ferguson et al, 2005). The staffs
working in offshore are expected to have proper communication skills, team working skills,
multicultural experience and exposure to international standards. The staff should be trained with
programming skills and fundamental of computer applications. The quality of education in every
33
institution should be improved. Future graduates are expected to think logically with problem
solving skills. The adaptability to change with customer needs and technology is very important.
(Ferguson et al, 2005)
US companies can ideally outsource to their nearby places like Canada and Mexico rather
than outsourcing to far places like India, China, and Philippines. (Ferguson, 2004)
Patterson (2005) says that “There is nothing to whine about out-sourcing. Whining about
outsourcing will only spread rumours rather than developing IT skills”. Many of the big IT
companies setup their operations throughout the world and it is hard to stop MNC to outsource or
hiring overseas workers. The IT opportunity has been growing up significantly in recent years.
Due to whining about IT outsourcing and rumours about depreciating IT opportunities, students
are reluctant to choose studies related to computer science.
The interesting factor about US education system is discussed. Many projects are
outsourced by US to foreign countries. On the other side, US have got excellent education
system and 582,996 foreign students pursued higher studies in US in the year 2001-2002.
(Ferguson, 2004)
Trust between the client and vendor is very important in outsourcing. Trust between them
is built based on these factors: understanding, investments, credibility, communication, quality,
timely delivery and performance. (Nguyen et al, 2006)
Before outsourcing the client has to consider whether the vendor is reliable and trustable.
The vendor should work in client point of view. The active responses to the client from vendor,
makes the client to allocate more projects to the same vendor. (Das et al, 1999)
34
The necessary steps should be taken by the vendor in developed and developing countries
such that performance of the employees does not affect the client. The computer science students
are the future programmers of a company and the training is required right from the school level.
This can be achieved by training the students in their country in a creative and innovative
method. Students should be trained well in school level with communication skills, team work
skills and programming skills (Patterson, 2006)
The client should estimate the cost of outsourcing such that it works out to be economical
and reduces the hidden costs. If cost effectiveness is not observed, then the client looses the
scope of the IT outsourcing. The client should also take hidden costs in to consideration, as
hidden cost appears to be one of the main drawbacks in IT outsourcing. In fact some organisation
decides not to outsource because of hidden cost that occurs in IT outsourcing. (Ketler et el, 1999)
The outsourcer should find an appropriate vendor in order to get their project done well.
It is observed that 80% of the world CMM level-5 companies are based in India. Big software
companies like Oracle try to setup their own offshore facility to benefit the low wage talent.
India is preferred as destination for outsourcing because it has got ample availability of worker
skills at cheap wages and they are good in communication skills as well. Other countries try to
duplicate what India has done in IT outsourcing. Russia is trying to gear up among vendors.
Russia’s education system is advanced and they are geographically near to Europe and US. In
spite of this fact, more projects are outsourced to India. It is better to outsource to a destination
where the vendor has been well established for many years and who has been performing well in
IT outsourcing for recent years (Cusumano, 2006)
35
It is possible to reduce the risks involved in IT outsourcing. Some of the methods
followed to lessen the risks are: Monitoring, chunkification, coaching. Monitoring is to observe
closely as what vendor is doing during the time of contract. This method may be expensive but it
fetches good results. Chunkification is to compare the performance among the vendors and to
drop the contract with the vendor whose performance is not up to standards Outsourcing among
competitive vendors reduces the risk that could occur due to dependency on single vendor. (Aron
et al, 2005)
Important factors for successful IT outsourcing:
The client expects the final delivery of the project to be a substantial contribution. The
main expectation of the client from vendor is to achieve the project task in a precise and a tacit
way. The vendor should charge at a fair price. The staffs used by vendors should be experienced
and freshers should be trained well. The vendor is expected to perform the job with minimum
interference of client. The vendor must be responsive to client, provide regular feedback about
the ongoing project and very importantly should maintain cordial rapport with the client. The
main expectation of the vendor from client is to provide proper project specification, pay fair
price for work, make payment on time, to provide proper support and leadership, respond to their
requests, and attend the meeting organised by them and mainly to have a cordial rapport with
them. (Koh et al, 1999).
Two important factors in outsourcing are reliance and alliance. Reliance factor is based
upon the support provided and alliance is based on alignment. If these factor works out well in
outsourcing, then it is beneficial for both client and vendor. (Kishore et al, 2003) The client
36
expects the vendor to possess responsiveness, tangibility, reliability, assurance and empathy.
(Das et al, 1999)
Productivity of the vendor is very important while allocating a project. Building trust
between the client and vendor is an important factor. Transparency and honesty are also
considered as important factors between them. Vendor works vigilantly for their outsourced
work as they fear that they might lose the contract with the client. The way of carrying out the
outsourced work is important as it is more involved with service rather than manufacturing.
Quality in delivery and service are important things to be offered by the vendor to the client. The
success of outsourcing is determined by customer satisfaction. The organisation expects the
vendor to be responsible and agile. Information whether good or bad, irrespective to it,
information should be proposed to the client. (Oza et al, 2004). Effective technical
communication is also very important for a successful outsourcing project. (Sharma, R et al,
2008)
IT costs seem to be a burden in many companies. In order to reduce the IT costs and to
focus on the core activities of the company, companies decide to outsource their project. The
client and vendor relationship plays a major role in IT outsourcing and stands as one of the key
factor for success. Even though it is hard to measure all the performance, continuous monitoring
of vendor’s performance is required for successful projects. The important factors towards
achievement of success in IT outsourcing are trust, communication, and cooperation. Trust is
achieved between the vendor and client by fulfilling the expectations of each other in business
activities. Client vendor relationship exists as one of the successful factor of IT outsourcing.
(Sargent, A, 2006)
37
Building trust between the client and vendor is very important and important factors that
are required are cultural compatibility, proper communication, personal visits to vendor side and
timely delivery. (Nguyen, P. et al, 2006)
Data Collection Methods and Result Analysis:
This research collects data from primary and secondary source. This research follows
qualitative method and deductive approach. The secondary data collected are taken from e-
journals, and website that discusses about IT outsourcing in India. Most of the e-journals are
taken from the ACM portal website. Many journals that discuss about IT outsourcing are found
in it and necessary data are gathered from those journals. In addition to e-journals, many
websites were referred that helped to get more data about this research topic.
In addition to secondary data, this research involves in primary data collection. Primary
data are collected from Indian IT companies who exist as vendor in IT outsourcing projects. The
major clients of these IT companies are from US. The IT professions who are currently working
in IT outsourcing projects are requested to participate in the online survey. The IT professions
who participated in the survey work for big MNC in India and the name of those companies is
not mentioned due to ethical issues. The people who participated in the survey works in
outsourced projects and they are the employees of the vendor side. From the time of
commencing the project till the project delivery, the vendor side employees have got some
experience in handling the outsourcing projects. So the positive and the negative aspects are
known from them. This survey is participated by profession who have worked in outsourcing
projects at least for a year. This survey would give a better idea about the worthiness of IT
outsourcing. The programmers who are working in outsourcing project are asked to participate in
38
the survey and the managers are interviewed over the telephone. The link that takes to the online
survey is sent to all the participants through e-mail. A questionnaire based survey was conducted,
which was participated by the IT professions in Indian IT companies. All the questions are based
on analysing both positive and negative aspects of IT outsourcing. Project and Delivery
managers are interviewed to get insight details happening throughout the project and they are
interviewed by telephone. Managers are interviewed for getting qualitative opinions. Responses
from participants and from the manager were very informative. The responses from online
survey helped to find the types of projects outsourced, the benefits, and problems of IT
outsourcing. Responses from manager helped to find what are the problems and benefits faced
from the management aspect. So the responses from the programmers and mangers helped to
analyse data from both employee and managerial aspect.
The research involved both online survey and telephone interview with IT professionals
and managers in Indian IT companies. The literature that I read regarding the reasons, benefits
and risks on IT outsourcing helped me to frame the questions for the online survey and telephone
interview. The number of IT professionals who were requested to participate in the survey was
20 and I got 19 responses. The response rate was 95%. There was a tremendous response in
terms of percentage of respondents. So the number of participants in the survey was 19 and the
number of managers who were telephone interviewed was 5. There totally 25 participants all
together for this research which helped me to get rich data.
39
The number of participants and the response rate is shown below:
Number of IT professions mailed to participate in the survey ------------- 20
Number of IT profession participated in the survey-------------------------- 19
Response rate for online survey-------------------------------------------------- 95%
Number of managers telephone interviewed ---------------------------------- 5
IT outsourcing is one of the important happening for the last decade in the IT companies
in India. India has become one of the popular destinations to outsource projects from Western
countries and the literature about the IT outsourcing inspired me to frame questions for this
research to know about the worthiness of the IT outsourcing, types of projects outsourced to
India. The reasons, benefits and problems of IT outsourcing is also known from the response of
online survey and interview. Indian IT companies are specifically chosen as the vendors in this
research. The responses gave more interesting facts about IT outsourcing which did not deviate
much from the literature. The benefits and the problems in IT outsourcing is explored in this
research. The online survey contained 19 questions and is divided into four sections. The first
section is to find the participants role in the company, questions in the second section are based
on the analysis of the reasons and benefits of IT outsourcing, third section address the problems
in the IT outsourcing and the fourth section is to know about the participants opinion about IT
outsourcing. Thus the questionnaire was divided into four sections to find out opinions based on
the aims of this research.
40
The first section of the questionnaire was to find the participants role in the company.
The designations of the online survey participants were Business Associate, Software engineer,
Programmer analyst, Technical architect, Team Leader, Project Engineer, IT consultant, and
technical staff. The average work experience of these participants was from 1-5 years. The main
activities done by the participants in the company are design, development, project review, IT
infrastructure planning and maintenance, coding, unit testing, defect fixes, network testing, data
warehousing and IT support. The participants company handles these kinds of outsourced IT
projects: Sales, Insurance, Health care, Core banking solutions, Application maintenance,
Telecommunication, Software application, and financial projects. These data were collected in
the first section of the survey.
41
The second section of the survey was designed in a way to find the reasons and benefits of IT
outsourcing from the online participants and it is explained as follows:
When the participants were asked what might be the important reason to outsource IT
functions to India, most of them felt it could be the financial benefits for the client and cheap
wages in India. This opinion has got the highest percentage (52%) of all. Literature also says this
is the prime reason for the Western companies to outsource. I would agree with this opinion but
it can’t be said that cheap wages is the sheer reason to outsource to India. In addition to cheap
wages there are high worker skills in India and Indians are good in communicating in English
when compared to other non-English speaking nation. Better performance and quality of work is
observed in Indian IT companies. Cheap wages can be found in other Asian countries as well,
but quality of work and performance is also important at the same time. As all these things are
observed together in India, projects are outsourced to Indian IT companies. It is not always right
to say that cost reduction is the only reason to outsource. In addition to reduced costs, better
productivity and quality is also important.
42
This opinion substantiates my previous statement, which says in addition to reduced
costs, productivity and quality is also important in IT outsourcing. When there are options of
profit and productivity, flexibility, participants preferred to choose the productivity, flexibility
and quality as the main benefit for the client. This option has gained the major percentage
(42.1%) when compared to other options. In addition to these benefits, the client can concentrate
on the core activities of the company, is also considered as one of the important benefit for the
client. So profit benefit for the client works out well if the good quality of work is delivered by
the vendor. I would like to completely agree with this opinion given by the online survey
participants.
43
This question is to know from the participants whether there is a difference in what the
client perceived about the result of the project and the actual work delivered to the client. Most
of the participants opted for the result favouring as per client’s expectations. The literature say
that there a bit of difference in the work delivered to the client which deviates from their
expectations. I would say the reason for the delivered project to get deviated as per client’s
expectations is not because of project being outsourced. There are always possibilities of the
project result getting deviated a bit than what is expected in the company. This possibility occurs
even if the project is developed in the client’s country itself. So IT outsourcing might not be the
only reason for the project benefits being different from what is expected.
44
This question is to know, from which country projects are outsourced to India. Most of
the participants opted as the US as the major client. In the Indian IT companies, most of the
projects are from the US. The percentage of the participants (89.5%) selected US as the major
client. Even when the managers of IT companies were interviewed, they said that the major
clients are from the US. US stand out as the hub for IT industry and most of the projects running
in the Indian IT companies are based on projects from US companies.
45
The third section is based on addressing the problems in IT outsourcing. The set of
questions in this section is to trace the problems related to inexperienced people working in the
project and also in finding out the problems faced by the client. It also tells about the way the
client’s country is affected due to IT outsourcing.
This question is to find out the problems arising due to inexperienced people working in
the project. It is told in the literature that many inexperienced people working in the project is
one of the problems in IT outsourcing and the result in this survey has matched what is told in
the literature. The age group of 20-30 is the majority of people working in the project and the
participants opinion on the age group of 20-30 is high (94.7%). I would say, this might be one of
the problems in IT outsourcing, but this cannot be blamed as one of the major reason. It also
depends on the way the freshers are trained by the. If adequate training is provided by the vendor
company to the freshers, this might not affect the client. Anyways the project is being reviewed
by the senior people, who can rectify the mistakes caused by the freshers. There are thousands of
46
youngsters graduating every year in every country, if the company feels that inexperienced
people working in the project might affect the company, the company can have only senior
people working the company. It is not a wrong idea to recruit freshers but they must be put in
fundamental level of the project so that they can learn stuffs and make significant contribution to
the company. It is a fact that all the senior experienced people working in the company would
have started their career as a fresher. The problem of inexperienced people working in the project
will not affect the company as long as freshers are trained properly and put into apt designation
in the project. Similar argument was discussed in the literature where the vendor company has
got 50% of their programmers under the age 25. In spite of all such reports the vendor company
seems to excel in their projects. If the quality of project delivered by the vendor is not up to
satisfactory level of client, then the clients from US would have not continued to outsource their
projects to India.
The online survey says that the employees working in the outsourcing projects are
appointed based on the skills. The skills option was chosen by the participants in very high
percentage (73.7%) as the basis for the staffs to be appointed in outsourcing project. Experience
47
scores as the secondary basis for the staffs to be appointed in the outsourcing projects as per the
online survey. I would say that skills should be the primary basis to work in outsourcing project
but the senior position in the project should be offered to a person based on both experience and
skills. In most cases, obviously skills come along with the experience. It is very clear from the
survey that skilled people are appointed in the project. When skilled people are appointed in the
project, if the project is reviewed and quality checked by senior person in the project, the chances
of project failure is reduced. The client is not affected by the vendor employee’s performance.
The most common opinion of the participants for the question related to problem faced
by the client is, inexperienced people working in the project. Sufficient explanation regarding
this problem was made in previous discussion. The secondary problems opted by the participants
48
are loss of control& security and late of project& project failure. I would say failure of project
and project delay are common problems observed in many companies even if it is not an
outsourced project. But loss of control and security is a big concern as the data are given to a
third party who is located in some other country. Both the client and vendor should take
necessary steps such that, client does not face problems due to loss of control and security. When
I interviewed one of the managers in Indian IT Company, he said “In order to solve the problem
of loss of control and security for the client, most of the vendor companies in India take
necessary step such that there is no threat due to security. The employees working in the vendor
company are very much informed about the security issues and this is a part of their training
process before they commence their job” Training on data security issues is given to employees
in the vendor company. So the vendor companies seems to take essential steps towards security
and one of the example of such measure is: In some Indian IT companies use of camera mobile
phone is restricted to avoid the problems related to security and control.
This question is to analyse whether the vendor company follows standard guidelines for
the project and the response from the participants saying there are guidelines for the outsourced
project has got major percentage (68.4%). Framing standard guidelines for outsourcing projects
is very important as the work is dealt for a third party. I would say having standard guidelines for
49
outsourcing projects is better for vendor Company as it improves the quality of work in the
project and it does not affect the client as well. If the vendor company does not have standard
guidelines it poses as a risk for the client. The client must ensure that the vendor follows standard
guidelines for their projects. The client must not consider outsourcing their project to a third
party who does not have such standard guidelines for outsourcing projects.
The client’s country is affected due to IT outsourcing, this is what told in literature and
this fact motivated me to put up this question. There were only two options given for this
question and both of them had equivalent fact. It is said that there is loss of in house jobs and
client’s country’s economy is affected due to IT outsourcing to India. I would say, whatever
things that has happened recently in the client’s country (US) would be a temporary impact but
the when things are foreseen on long run, IT outsourcing would only help the client’s country
and I will substantiate this statement. When the IT works are outsourced to a third party, it does
not mean even the in-house jobs are moved to third party’s country. In fact more jobs are
created in the client’s country as the client concentrates on the core activities of the company,
this would create more opportunities in the client’s country. Another point to be discussed here is
about the client’s country’s economy. It is said that the US economy is affected due to
outsourcing projects to foreign countries. In spite of such facts, the process of IT outsourcing
50
continues. If the outsourcing process really impacts the US economy, do you think the US
companies would have continued to outsource? As I mentioned before, it might be a temporal
impact for the client or for the client’s country, ultimately benefit is for the client. It is very
obvious, if the IT outsourcing to India had great impact in the US economy things would have
not continued as before. The economy of the US is the world’s largest economy [Wikipedia,
2008, Online] and for such a potential nation, managing such issues is not a big challenge. In
spite of strong opposition from the British trade union to prohibit outsourcing jobs to foreign
nations, the British e-commerce Minister Mr. Timms (2004) said that their country had no plans
to prevent British firms outsourcing to India or any other country. (Source: BBC News). These
facts prove that globalisation is a part of a country’s activity.
This question is very much related to the current trend of IT market in India which has
been affected due to the US economy. Even from the telephone interview, I could see that the
several activities of the company have been affected due to the recession in the US. The
managers say that US has been their major client and obviously the current recession in US has
affected Indian IT companies. As an example, the employees working in Indian IT companies
51
were not allocated to a project since the number of projects expected from the client has not been
outsourced. So the employees has been in a scenario where they could not work for a project in
their company as their companies itself were in short of getting outsourced projects. As an
evidence for this, the employees who were the participants of the survey answered the major
percentage supporting the impact on Indian IT companies due to current recession in the US.
Due to the current recession in the US, one of the Indian IT company asked 500 employees of
their company to quit the job. This termination of job was based on the poor performance
appraisal (Wikipedia, 2008, Online). From the telephone interview with a manager, I came to
know that the appreciation in the salary increment for the employees has not been too good in the
recent times due to depreciation of US dollar value with respect to Indian money. As the
payment is received by the vendor as per the current US dollar value, the vendor is restricted to
give incentives to employees based only on the business activities with US and also based on the
economy of the client’s country. Companies which are majorly based on IT outsourcing project
from third party in foreign country, there are always chances of risk based on the dependency
factor of the client and its country. The employees working in such companies are really affected
by this factor. So it is better for the vendor company to make arrangements like having more
clients within their country. Having more clients within the vendor’s country reduces the
dependency risks and will also improve the business activities in the vendor’s country.
But I got opinions from managers of the other Indian IT companies, like their companies
were core based upon activities within clients in India and their project activities are being done
for other firms in India. The impact of IT recession in the US or the US dollar value depreciation
does not affect their company as they are based only on clients within India. One of the managers
I interviewed is working for an Indian IT company whose projects are fully based on clients in
52
India and does not deal with any third party in foreign country, so the manager said that their
company is not at all affected by any of the factors happening in the Western countries. I feel
that the vendor must have a balance between in-house clients and foreign clients according to the
situation such that the company does not face any impact due to external factors like foreign
currency value depreciation or client country’s economy.
The fourth section is to find the participants opinion on IT outsourcing and its success.
When the participants were asked to define success of a project, the couple of things which was
very much insisted are the timely and quality delivery of the project. The next question in this
section is to find whether the current trend in IT outsourcing is the same as it was before and will
the IT outsourcing trend will continue. The common reply given by most of the participants is,
“there is an impact in the IT field in India due to IT recession in the US but the trend of IT
outsourcing will continue as long as cheap wages is observed in India and India will continue to
be the destination hub to outsource IT projects “. The next question is about the participant’s
opinion in IT outsourcing. The various opinions given by the participants are, IT outsourcing
creates lots of job opportunities in the vendor’s country, exposure to multi cultural environment,
IT Outsourcing is an excellent strategy that elevates both the client and vendor to international
standards, business activities in the vendor side is developed, IT outsourcing to India helps the
client to utilise the workforce in India, IT outsourcing is an excellent strategy with proper vendor
management. These are the various opinions given by the participants about IT outsourcing in
India.
53
The managers of Multinational Company (MNC) in India were interviewed by telephone.
This method of collection was very interesting as the interaction with the managers took me
closer to the clear view of IT outsourcing. When compared to online survey, this interview
method gave more detailed opinion about IT outsourcing and the managers were able to tell very
well about the benefits and problems in the IT outsourcing. On the whole five managers from
different companies were interviewed and very incidentally the opinions given by each manager
from different companies did not differ a lot. The main points told by them when asked about the
benefits of IT outsourcing, “It is definitely cost reduction that stands as major benefits of IT
outsourcing but it cannot be said that cost reduction is the only purpose to outsource IT
functions”. The managers feel “in addition to the cost reduction there are additional benefits and
reasons to outsource like extended support, 24*7 services, committed workforce from the vendor
side employees, excellent availability of human resource and functional expertise available at
vendor side” One of the example given by a manager to utilise the human resource in the vendor
side is, “the amount that the client spends for a project in the vendor side can employ more
people in a project as cheap wages are observed in the vendor side” Another manager from one
of the top IT companies told that “client can concentrate on the core activities of the organisation
and need not face the burden of developing and maintaining the IT functions and as a result of
concentrating on core activities of the company, the client can widen the market and venture into
new business activities” A delivery manager from one of the Indian IT companies mentioned
that “management costs would be high if same outsourced IT functions are managed at the client
side, not only the IT costs gets reduced due to outsourcing even the management costs that
would incur due to IT functions can be reduced by the client due to IT outsourcing and the
vendor can take care of back office works as well. The possible problems and risks that were
54
told by the managers are loss of control and security, chances of inexperienced people working
in the project and a bit of cultural difference. The managers say these are the possible problems
but the vendor companies’ takes necessary steps such that it does not affect the client. The
managers say that the vendor is equipped to tackle the problems of IT outsourcing and
arrangements are made by the vendor to reduce the problems and risks. It seems essential steps
are taken by the vendor to control the problems arising due to loss of security. Security measures
like restriction to use camera mobile phone inside the office are strictly enforced in some IT
companies in India, in order to alleviate the problems due to security. Inexperienced people are
trained by experts and intense training is given to freshers so that, they are fit enough to handle
the real world projects. As intense training is provided by experts to fresher, inexperienced
people working in the project are trained in such a way it does not affect the project. But the
managers said that inexperienced people are not straight away put in a senior position in the
project. The inexperienced people are basically put in coding and testing which are finally
reviewed by experienced managers. So the performance of the fresher is being quality checked
by senior people in order to rectify the mistakes. Thus the problem of lack of inexperienced
people working in the project is eliminated. Inexperienced people are trained well in order to
overcome the problem of lack of expertise. Managers say that “However cultural difference
cannot be a big problem as the staffs in the vendor side are trained as how to interact with the
people in the client side, such that there is no scope for cultural difference”. When I interviewed
a manager from one of the Indian IT Company he told “Special training is given on cultural
aspect to all the employees of our company such that the client does not feel any cultural
differences” Cultural differences is not found much in IT outsourcing when compared with
Business Process Outsourcing (BPO). The managers are sure about the benefits of IT
55
outsourcing and they say there are not many problems in IT outsourcing when compared to the
excellent benefits. Managers seem to give a good opinion about IT outsourcing.
Overview and Conclusion:
This investigating research on IT outsourcing within Indian IT companies has led to
important conclusion. This research gave me a broad understanding on IT outsourcing in India.
The positive and negative aspects of IT outsourcing is known from the literature, online survey
and telephone interview. The literature helped to understand and to know the topics of this
research. The responses obtained in the online survey and telephone interview were close to
literature. The possible reasons, benefits and problems in IT outsourcing is clearly discussed
earlier. In order to conclude this research topic, I have narrowed down few important conclusions
about the IT outsourcing and its worthiness.
Why should a company outsource their IT functions to another foreign country? Most of
the clients are from Western countries, does the Western countries lack in infrastructure and
technology? It is very obvious that the infrastructure and technology is well developed in
Western countries and it is a very simple answer that the prime reason to outsource IT functions
to a third party is for cost benefit. It can’t be said that cost reduction is the only reason; but cost
reduction is the one of the prime reason. In addition to cost reduction there are additional vital
reasons like extended support from the vendor, 24*7 services from vendor, committed workforce
and high worker skills in India, cheap wages, many people can be employed in the vendor side
with little money spent by the client when compared to employing in their own country, better
performance and quality, availability of human resource and expertise at the vendor side. All
these things are benefitted at low cost for the client. This is what really makes the client to
56
outsource their project. The main benefits of IT outsourcing are vendor’s flexibility, client can
concentrate on core activities, client widen their business activities and spread their business,
client gets the quality work done from high skilled workers at low cost, good programming and
communication skills in India. The main problems identified are loss of control and security,
cultural differences, chances of lack of co-operation between client and vendor, hidden costs,
vendor resistance to adapt to new technology, inexperienced people working in the project,
chances of project delay, loss of in house jobs and impact in client’s country’s economy,
projects might get affected due to vendor’s local government political scenario and government
rule amendments. These are the possible reasons, benefits and problems in IT outsourcing. I
would like to give justified conclusion on the IT outsourcing strategy. The reasons and benefits
of IT outsourcing is clear as mentioned and very importantly cost being an important reason to
outsource to India. I would like to address the problems in IT outsourcing and make a suitable
explanation for those problems. One of the problems mentioned is the lack of security and
control; there is always a threat for control and security irrespective of the country in which the
project is being done. As the project is outsourced to another country, this issue is looked up to
be critical. There is a threat to data security and control even when the project is done within the
same country. If necessary steps are taken to monitor these problems, these issues will not at all
be a problem in IT outsourcing. The next problem is cultural differences, which is very true and
happens in IT outsourcing. From the telephone interview with one of the managers in big Indian
IT companies, I came to know that intense cultural training is being given to employees such that
the client do not see any cultural differences with the vendor. If the vendor is successful in
training their employees on the cultural aspects, the problem of cultural differences can be
avoided. If the client is wise in choosing a vendor, who has got reliable profile in the market then
57
problems like lack of co-operation and project delay can be avoided. Even then project delay is
quite common in software projects. It is not only in outsourcing projects that project delay might
occur; there are also chances of project delay even when the project is done in-house. IT
outsourcing may not be the only reason for the project delay. The next problem is hidden costs in
outsourcing projects; it is one of the valid problems in IT outsourcing. The problem of
inexperienced people working in the vendor side is inevitable. In every country there are
thousands of students graduated as freshers, it is not a problem appointing a fresher in the
company but it is very important, in which part of the project the fresher is being appointed and
the way how they are trained. The work experience is required for designations like managers
and team leaders; but a fresher can learn things as a programmer. In this way the problem of
inexperienced people working in the project can be managed. From the telephone interview, I
came to know from the managers of Indian IT companies that the senior position in the project is
given to only highly experienced people. The problems that incur due to vendor’s local
government instability and sudden change in government rules are really a disadvantage to the
client when dealing with outsourcing projects. This factor can be seen as a real disadvantage but
this political instability might happen occasionally. Another two problems in IT outsourcing are
the loss of in-house jobs and impact in the client’s country’s economy. The loss of in-house jobs
is true to some extent but IT outsourcing would also create job opportunities as the client
concentrate on their core activities. The problem with economy cannot be blamed only due to IT
outsourcing because the current economy slowdown in US is due to various other factors and IT
outsourcing may be one of the reasons. Even five years ago, projects were outsourced to India
from US but the economy of the US was good at that time. Recession is said to occur
periodically after a certain stage of business growth is occurred. On that basis, the US is facing in
58
the current year (2008) and it has lost 63,000 jobs as a result of recession (Wikipedia, 2008,
Online). In fact IT outsourcing helps the company to concentrate more on core activities and
develop their business. If the IT outsourcing is really going to affect the economy of the client’s
country, the clients would have not continued their outsourcing business.
I would conclude saying that IT outsourcing is an excellent strategy if the client chooses
a well established and a reliable vendor. The client should choose a vendor who has been
certified as CMM – 5. Some of the CMM-5 IT companies in India are Infosys, Larsen & Turbo
InfoTech Limited, Patni, Sathyam, Tata Consultancy Services (TCS) and Wipro (Kamat.com,
2008, Online). These companies have proved to be an excellent vendor by providing quality
services to their client for the past many years. India has been the IT outsourcing hub for many
years. In spite of English being a non-native language in India, India has got the second highest
English speakers in the world next to the US (Wikipedia, 2008, Online). English is the lingua
franca in India. These reasons combined with high worker skills, quality work and cheap wages
makes India as the IT outsourcing hub.
Future research:
This research has investigated IT outsourcing in Indian IT companies and major clients
being from the US. Indian IT companies being the top leader in off shoring services, there are
many competitive vendors in other countries like China, Russia and Brazil. The future research
will be based on the IT outsourcing in China.
59
Appendices:
Appendix 1:
E-mail sent to participate in the online survey
My name is Arvindsai and I am currently studying Msc- Information Systems at
University of Sheffield. As a part of the course, I am undertaking a dissertation on IT
outsourcing in India. I would request you to take part in my online survey. Please click the
following link for the online survey. This online survey is helpful for data collection in my
dissertation. All the data that is collected will be used anonymously. I have attached a letter from
my supervisor to bona fide my research. Thank you in advance for participating in this online
survey.
http://www.surveymonkey.com/s.aspx?sm=hrj1ID59_2fuu4PBMe3OMkjA_3d_3d
Thank you
Arvindsai
60
61
Appendix 2:
Online survey
62
63
64
65
66
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