IT Outsourcing

Kyle Wilson Andy Vu Ian McCulley BA471

1/13/06

Topics Covered

Definitions and types of outsourcing. Pros & Cons. Which countries are the major players? How big is this outsourcing and why? Is it growing? Which jobs are being outsourced? Companies & process involved and why? Trends and future outlook.

Definitions

Outsourcing: an arrangement in which one company provides services for another company that could also be or usually have been provided in-house.

Onshore: (also called domestic outsourcing) is the obtaining of services from outside a company but within the same country

Nearshore: is the practice of getting work done or services performed in neighboring countries.

Offshore: the exporting of IT-related work from the home country to other countries. Offshore simply means "any country other than your own.

BPO: Business Process Outsourcing, the long-term contracting out of non-core business processes to an outside provider to help achieve increased shareholder value.

(http://searchcio.techtarget.com/)

Onshore OutsourcingPros

Travel and communications are easy and less expensive

Same country and culture Speak the same

language Small differences in time

zones Less risk of security

issues

Cons

Not as large of talent pool

Not as many options Price may be much

higher because of same currency and standard of living

Nearshore OutsourcingPros

Travel and communications are easier and not very expensive

Likely to be at least some commonalities between the cultures

More likely to speak the same language

Similar time zones

Cons

Possibility of higher prices

Security risks Loss of domestic jobs

(for the country outsourcing)

Offshore OutsourcingPros

Lower labor costs or tax savings

Companies able to be more price competitive

A wide variety of outsourcing companies to choose from

Cons

Home-grown IT talent might dry up

Language barriers/cultural differences

Security problems Different time zones Loss of domestic jobs

(for the country outsourcing)

Minimizing Risk

ISO 9000

The International Organization for Standards (ISO 9000 series). International set of documents on quality assurance. Written by members of a

worldwide delegation.

SEI-CMM Model

SEI (Software Engineering Institute) established in 1984. The CMM (Capability Maturity Model) of SEI is a framework that describes the

key elements of an effective software development process. CMM - composed of 5 maturity levels. Each level facilitates a layer in the foundation for continuous process

improvement. Achieving each level of the model institutionalizes a different component in

the software process, resulting in an overall increase in the process capability of the organization.

Three out of every four SEI-CMM companies that have reached level5 worldwide are located in India. (http://www.offshorexperts.com/index.cfm/fa/articles.ISO9000-and-SEI-CMM-processes-and-standards-for-outsourcing)

Major Players: IndiaLabor Pool: India has many prestigious technical universities, but the Indian Institute of Technology stands apart as one of the world's best. India produces 75,000 IT graduates and 2 million English-speaking graduates annually.

Costs: Labor costs have crept upward over the years but have been offset by falling telecom rates. Typical salaries range from $5,000 to $12,000 for technical staff, while back-office salaries range from $3,500 to $7,500.

Government: Outsourcing is so ingrained in the fabric here that the Indian government has a national minister specifically for IT. The government favors IT foreign ownership and imposes no export taxes.

Infrastructure: With redundant telecom and utility infrastructure, there is very good reliability within India's special IT parks. Reliability can be spotty outside the parks or in more remote areas.

Expertise: Application development, maintenance, call centers, financial processing. Experts see India becoming a hotbed for more critical analytical jobs.

Major U.S. Customers: Citigroup, GE Capital and American Express have a very large presence and have set up their own centers here.

Major Players: Philippines Labor Pool: The Philippines turns out 380,000 graduates annually, but only

15,000 of them are focused on technology. The country has cultural affinities with the U.S., is well-versed in U.S. accounting and customer service standards and has low employee turnover.

Costs: Lower labor costs than India; technical salaries range from $5,000 to $10,000 annually and back office from $3,000 to $8,000.

Government: Government exempts companies from export taxes, fees, dues and licenses if they open in one of the country's IT parks. Government's task force charged with development of IT and business process outsourcing (BPO) services.

Infrastructure: IT parks that have sprung up over the past 13 years fuel the export industry. Abandoned U.S. military bases left behind dependable telecom infrastructure.

Expertise: Accounting, finance, call centers, animation, human resources.

Major U.S. Customers: Procter & Gamble, American International Group, Citigroup.

Major Players: Russia Labor Pool: The good news: Russia can claim the third largest population of

engineers and scientists per capita. The bad news: Not many of them speak English.

Costs: IT salaries range from $6,000 to $10,000. The country hasn't yet developed back-office competence. Telecom infrastructure costs are higher than average.

Government: Government is erratic and, for now, sticking by old tax laws and structures that don't benefit business. But a treaty with the U.S. could change things down the road.

Infrastructure: Infrastructure quality and quantity decrease when outside of Russia's few IT parks.

Expertise: Web design, complex software development, aerospace engineering.

Major U.S. Customer: Boeing.

Major Players: China

Labor Pool: China's technical schools turn out 50,000 graduates annually, many of whom migrate west. Those who stay generally don't speak English.

Costs: IT salaries range from $3,000 to $8,000 annually. No real BPO competency.

Government: China's government has hampered growth due to trade policies and overregulation; intellectual property concerns linger. The hope is that these issues will evaporate as China blends into the World Trade Organization.

Infrastructure: Infrastructure can be spotty outside major cities, but China is building networks, particularly telecommunications, almost as fast as the U.S.

Expertise: Transaction processing, low-end software development and maintenance.

Major U.S. Customers: HSBC, Microsoft.

Major Players: Canada

Labor Pool: <del>U.S. neighbor to the north</del> Has solid educational system, with a qualified labor force of more than 16 million.

Costs: Being a nearshore alternative to the U.S. means IT salaries are much higher than most offshore countries, ranging from $25,000 to $50,000.

Government: Low or no political risk. Government gives tax breaks on IT exports. NAFTA provides free trade market for IT services.

Infrastructure: Solid telecomm infrastructure.

Expertise: Software development and maintenance, call center, tech support.

Major U.S. Customers: Allmerica, Agilent.

Major Players: Mexico

Labor Pool: Mexico provides U.S. companies with millions of Spanish-speaking people to staff call centers.

Costs: Low labor costs; companies can save up to 50% by outsourcing call centers to Mexico. Costs could be offset by unreliable infrastructure.

Government: NAFTA has opened up free trade markets, but Mexican government does not offer high level of incentives.

Infrastructure: Solid inside the technology parks.

Expertise: Spanish-language call centers, software development, data center outsourcing.

Major U.S. Customers: AOL Time Warner, General Motors, IBM.

Major Players: Ireland

Labor Pool: Relatively small; 34,000 graduates annually, 5,000 of them technical.

Costs: Tech salaries range from $25,000 to $35,000, making Ireland unattractive if primary objective is cost savings.

Government: Favorable tax laws and $330 million technology-education fund provide incentives. Low or no political risk.

Infrastructure: Solid.

Expertise: European shared-services centers, software development, call centers.

Major U.S. Customers: Intel, Dell, Microsoft.

Leader of the Pack

India is the leading recipient of IT outsourcing functions• Software development/maintenance• Business process outsourcing

The latter includes back office functions• Accounting, human resources, call centers, and data analysis

Similar to manufacturing, outsourcing will fall into a tiered structured and base-level work will go to rock-bottom-wage countries such as Vietnam and Uruguay

• Payroll & data entry

Leaving countries such as India to advance and take on more complex development services

• Software• Product

Growing Popularity of Outsourcing

Pioneered by Citigroup and GE in the late 80’s. In 2004 there are roughly 130 million employed people in the

United States >>> In India there are roughly 650,000 – 700,000 jobs consisting of software and business process jobs

By 2015 an estimated $151 billion in wages will be outsourced and 3,000,000+ white collar jobs will be overseas.

Engineers in India working on several innovative products• Microprocessor chips for high-speed wireless technology• Aircraft engines• Transport Systems• Plastics• Medicine

Continued…

Very large amount of intellectual property is being created for US companies all over India.

Texas Instruments, GE, Intel & Cisco Systems > 1000 patent applications with US patent office by 2004

Bangalore, India is quickly becoming the Silicone Valley of the US.

Samples:• Molded toothbrush with flexible bristles• Safety device for motorized two-wheel vehicles with shock

absorption • HIV fighting medicine

Continued…

India is becoming so successful, Fortune 500 companies are seeking consultation and advice regarding patents, technology and innovation.

One firm in India who specializes in the outsourcing of large corporations and companies is armed with over 1400 working engineers and over 200 R&D labs.

India is the busiest hub for innovation and intellectual property in 2004 – “Year of the Idea”.

Why So Big?

US companies sending work abroad yielded higher productivity that actually boosted employment by 90,000 across the economy

Foreign Workers > Lower Costs > Higher Productivity > Increased Income > Expand in the US and Abroad

Source of table: Global Insight and North American Industry Classification System

  2003 2008

Natural Resources & Mining 1,046 1,182

Construction 19,815 75,757

Manufacturing 3,078 25,010

Wholesale Trade 20,456 43,359

Retail Trade 12,552 30,931

Transportation & Utilities 18,895 63,513

Publishing, Software & Communication

–24,860 –50,043

Financial Services 5,604 32,066

Professional & Business Services 14,667 31,623

Education & Health Services 18,015 47,260

Leisure, Hospitality & Other Services 4,389 12,506

Government –3,393 4,203

Total Employment 90,264 317,367

Which Jobs Can Be Outsourced?

Wide variety of jobs – anywhere from low skilled to high.

• Computer programming, insurance claims, processing, radiology, and legal work.

Any task that can be sent down a wire can be outsourced even some jobs where the finished product can be shipped.

How large is this going to be? Imagine the jobs today that actually require face-to-face interaction with the customer and you will begin to understand the impact this will have.

CEOs are not safe either!!!

Why Companies Outsource:

Focus in-house resources on core functions Personnel cost savings Improved quality of information systems services Increased flexibility Increased access to new technology Provide alternatives to in-house costs Stabilize information systems costs Technology cost savings Re-engineer process Reduce technological obsolescence risk.

http://www.itmweb.com/essay528.htm

Which Sectors are Being Outsourced?

Information Technology Programming Logistics Human Resources Purchasing

http://www.itmweb.com/essay528.htm

Trends in Outsourcing

Companies are now outsourcing more functions than just IT.

Even the government is starting to outsource “white collar” jobs.

Most major companies are turning to outsourcing to stay competitive in the global economy.

Companies rely on their “core competencies” while trying provide better customer service and lowering costs.

Companies now outsourcing for long-term, strategic reasons yield better results than doing so for short-term, tactical reasons.

http://www.itmweb.com/essay528.htm

Process For Outsourcing

1. Clearly define the scope and schedule of your project. Make a clear statement of what you wish to accomplish.2. Evaluate a service provider like you'd hire a full-time employee. Be subjective and ask questions and for references.3. Look for specific experience fit.Ideally, your provider will have experience with your type of project,

which is crucial for projects like software development.4. Don't choose a vendor based solely on price.Look for a good balance of value and quality.5. Review portfolios and samples.Make sure their previous work meets your expectations for quality and

style.

Process Cont.

6. Start small.First time with a service provider? Make it a small project, not

a crucial one. 7. Tie payment to clearly defined project milestones.Follow the progress and compensate along the way based on

completion.8. Negotiate ownership of work up front.Be clear about who owns the result of the work.9. Don't forget about support after the project is complete.Specify a warranty or support clause to ensure continuing

support. 10. Get it in writing.Clearly communicate schedules and payments in writing.

http://solovatsoft.com/offshore-outsourcing-knowledge.html

What is the Future?

By 2008, IT services and back-office work in India will swell fivefold, to a $57 billion annual export industry employing 4 million people and accounting for 7% of India's gross domestic product.

http://www.mapsofindia.com/outsourcing-to-india/future-for-outsourcing.html

In the next 15 years, more than 3 million US white-collar jobs, representing $136 billion in wages, will depart to places like India, with the IT industry leading the migration.

Sources

http://searchcio.techtarget.com/ http://itoutsourcingindia.com/india/ http://www.windowsitpro.com/Article/ArticleID/44623/44623.html http://www.offshorexperts.com/index.cfm/fa/articles.ISO9000-and-

SEI-CMM-processes-and-standards-for-outsourcing http://www.itmweb.com/essay528.htm http://solovatsoft.com/offshore-outsourcing-knowledge.html http://www.mapsofindia.com/outsourcing-to-india/future-for-

outsourcing.html “India: The Big Outsourcing Hub of Patent Ideas” By Nona Walia,

Times New Network, January 04, 2004 http://www.jobjournal.com/thisweek.asp?artiid=1441 “Size of Outsorucing Doesn’t Justify Uproar”, PTI, June 13, 2004 “Best Countries for outsourcing”, By Lisa DiCarlo, August 27, 2003