OUTSOURCING: ALLIANCES FOR GROWTH · 2020-02-07 · NEARSHORE OUTSOURCING, OR NEARSHORING A...

O U T S O U R C I N G : A L L I A N C E S F O R G R O W T HC E O P E R S P E C T I V E S

L E A D I N G G R O W T H F I R M S E R I E SR E P O R T 1 3

O U T S O U R C I N G : A L L I A N C E S F O R G R O W T H

“It is this convergence of new players, on a new playingfield, developing new processes for horizontal collaborationthat I believe is the most important force shaping global economics and politics in the early 21st century”

THOMAS L. FRIEDMANAUTHORTHE WORLD IS FLAT: A BRIEF HISTORY OF THE TWENTY-FIRST CENTURY

I N T H I S R E P O R T

INTRODUCTION 4

GLOSSARY OF OUTSOURCING TERMS AND DEFINITIONS 6

GLOBAL STRATEGIC ALLIANCES (GSAs) 7

PROFILE: BUILDING ON TRUSTMICHAEL BRYANT, MANAGING DIRECTOR, MATREX COMPANY 8

THE FOUR PHASES OF GSA PROJECT MANAGEMENT 10

PROFILE: FORWARDING SOLUTIONSJEFF CULLEN, CEO NORTH AMERICA, BELLVILLE RODAIR INTERNATIONAL 12

NINE CRITICAL ISSUES IN AN ALLIANCE AGREEMENT 14

NEARSHORING: OUTSOURCING IN CANADA 15

PROFILE: NEARSHORING FOR THE U.S.SAYAN NAVARATNAM, CHAIRMAN AND CEO, AC TECHNICAL SYSTEMS LTD. 16

OFFSHORING TO CHINA 18

OFFSHORING TO INDIA 19

PROFILE: ENTERING CHINAJILL ANDERSON, PRESIDENT AND OWNER, AECOMETRIC CORPORATION 20

TIPS AND TACTICS 22

ACKNOWLEDGEMENTS 23

G L O B A L I Z AT I O N C R E AT E S W E A LT HOften overlooked in discussions about the merits of outsourcingis that it creates wealth. Businesses remain profitable, increaseproductivity, often expand into new offshore markets, and usesavings to invest in next-generation technologies and businessideas. Developing nations raise living standards, which in turnbuilds immense new consumer markets. Consumers enjoylower prices and new product innovations. Like other globaltrade movements, outsourcing actually creates wealth and jobsfor both outsourcing and provider nations.

The U.S. McKinsey Global Institute reports in a 2003 studythat for each dollar outsourced to a low-wage nation, thespending economy gains as much as $1.14 in return. Companiesthen reinvest savings, pay additional earnings to shareholders,or both. Additionally, outsourcing provider companies areoften owned in whole or part by parent customer companies,which repatriate profits. In this way, it’s estimated another fourcents of every dollar spent is returned to the national economy.

A S T E P P I N G S T O N EMany Ontario companies have considerable histories of outsourcing. Until now, most of this has been contracted within Canada. Nurhan Aycan, partner, Baker & McKenzieLLP, cites automotive component manufacturing in Ontario to illustrate how outsourcing works, with the Canadian manufacturer providing specific parts for an American automotive company. “Outsourcing is a form of strategicalliance, a form of joint venture.” The next step of movingcomponent manufacturing offshore may be initiated by a company primarily for cost-cutting purposes, but that may leadto a longer-term vision. It starts the relationship and providesa stepping stone to something more permanent. “This may bea way to get entrée into the provider’s country,” explains Aycan.

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I N T R O D U C T I O N


Globalization, and outsourcing in particular, is conventionally criticized as exploitive; a means for companies to reduce costs. This perception is simplistic and uninformed. Outsourcing is a form of trade, and like other international trade, it benefits Canada as a whole by increasing markets and further raising our standard of living.

G L O B A L I Z AT I O N A N D S M E sOutsourcing is not a fad or short-term decision. Outsourcing hasbecome the fastest-growing business strategy among largecompanies and multi-national corporations (MNCs) that formerlydid everything 'in-house'. This has created opportunities for smalland medium enterprises (SMEs) in the global marketplace.

For large companies and MNCs, cost reduction was originallythe key motivation for outsourcing. However, there is growingrecognition of greater benefits for firms of all sizes. For SMEs,cost management is critical to success, but constant innovationand improvement of their offerings are keys to sustainingcompetitive advantage and growth.

“Ontario's leading growth firms are well positioned to benefitfrom globalization as more and more are becoming internationalplayers,” says Aaron Glassman, Partner, Deloitte. “In additionto working with big business, we work extensively with SMEsthat have the vision to expand and whose success depends onan adequate network of support to meet those needs.” To takeadvantage of outsourcing opportunities, an SME must be ableto look at its business with a broad vision; identify the goal,purpose, and what it wants from outsourcing; plan strategically;and find the right partners. Globalization offers a panorama ofpossibilities to help drive a business forward.

AARON GLASSMANPARTNERDELOITTE

“Ontario's leading growth firms are wellpositioned to benefit from globalizationas more and more are becoming international players”

Some ways Ontario firms are expanding and competing globally:• Promoting their firm as a supplier in global markets.• Supplying to large companies and MNCs headquartered

outside of Ontario.• Examining cross border linkages and global investment

between SMEs.• Outsourcing in-house functions/increasing R&D training.

J O B C R E AT I O NOntario has for the most part benefited from globalizationwhile being spared the negatives associated with offshore outsourcing. Companies that outsource have tended to rely onCanadian delivery, with good reason. We are a technologicallyadvanced, developed nation with a well-educated, experiencedlabour force. We are also fortunate to share a continent, timezones, a common culture and language and a favourableexchange rate with the U.S., which exports almost 70 per centof the world’s outsourcing business. On balance, we have prospered from our global position.

Marie Lemay, CEO of the Canadian Council of ProfessionalEngineers (CCPE), which represents 160,000 members acrossthe country, was recently quoted as saying, “Since the mid-1980s, work from international sources has grown by 10.6 percent in Canada, outstripping overall employment growth inengineering.” A recent impact study also suggests: “By takingappropriate action Canada could see an increase of 165,000skilled IT jobs by 2010.”

G L O B A L S T R AT E G I C A L L I A N C E SAnother side of the coin is that historically one in five alliances endsin failure. According to TheodoreLing, partner, Baker & McKenzieLLP, “Critical to the success of a global strategic alliance is the understanding that in an ongoinglong-term relationship, both partieshave to win, or the agreement won’t

survive.” Ling says, “The number one issue arises when oneparty’s expectations do not match the other’s – in other words,when one party is not winning.” This report discusses globalstrategic alliances (GSAs), the preferred legal vehicle in outsourcing ventures. Contributed by Baker & McKenzie,these sections outline the four phases of GSA project management, critical issues in an alliance agreement, andpractices to help create a win-win situation and increase thechances for success when entering into a global partnership.

C O R P O R AT E S T R AT E G I E SSince the completion of the global undersea-undergroundfibre optic network in the mid-1990s, the world has entered anew age of globalization in which outsourcing, offshoring,insourcing and supply chaining are revolutionizing business. Thisedition of the Leading Growth Firm Series defines the differencesand distinctions between each strategy. Attention is given toChina as a favoured destination for contract manufacturingopportunities and supply chaining, and to India as an example of

offshoring IT and such business processes as HR administration,call centre, finance and accounting functions.

C E O P E R S P E C T I V E SThe report also profiles successful CEOs of Ontario’s leadinggrowth firms who have entered into global markets and sharetheir experiences and knowledge. Each profile highlights a different perspective:

• One demonstrates the transformative qualities and benefitsof outsourcing and globalization on the world and hisfirm’s profitability.

• One provides an insightful inside view of the “invisible”industry of international forwarding, explaining the valueand costs of offshore outsourcing and logistics that canmake or break a relationship.

• One demonstrates how his firm strategically used outsourcing and nearshoring to grow and create wealth.

• One explains how her company is taking its first stepsinto China’s burgeoning oil and gas industries.

The report concludes with a summary of tips and tactics toconsider when entering into global markets and alliances.

“Outsourcing is a form of strategicalliance, a form of joint venture”

NURHAN AYCANPARTNER BAKER & MCKENZIE LLP

“Over the last century, those countriesthat tried to preserve their systems,jobs, culture or traditions by keepingthe rest of the world out all stagnated.Those that opened themselves up tothe world prospered”

FAREED ZAKARIAAUTHOR AND EDITORTHE FUTURE OF FREEDOM NEWSWEEK INTERNATIONAL

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B U S I N E S S P R O C E S S O U T S O U R C I N G ( B P O )

The transfer of management of a business process to a provider that conducts the activity based on a set of predetermined performance metrics. Typical BPO includes call centre, HR administration, finance and accounting functions.

I N F O R M AT I O N T E C H N O L O G Y O U T S O U R C I N G ( I T O )

The transfer of some or all of a company’s information systems,normally along with operational decision-making, to one ormore service providers. Common ITO functions include dataconversion; database administration; help desks; content,application and Web site development; systems administration;and mainframe and network management.

The key distinction between ITO and BPO is that while ITO is intended to lower costs and introduce efficiencies (aswell as more advanced technologies), IT providers do nottake on direct responsibility for accomplishing businessresults. In contrast, with a BPO the outsourcing firm notonly takes over administrative responsibility for a technicalfunction, but also assumes strategic responsibility for theentire execution of a business-critical function. Thisadditional step can introduce new efficiencies and costsavings and enable the outsourcer to deliver importantstrategic benefits to the client.

I N S O U R C I N G

An alliance with a provider that works inside a company tooperate and manage divisions. For example, Bellville Rodair(see page 12) serves as the internal shipping and/or logisticsdivision for a number of Canadian and global companies whosecore competencies are not focused on freight forwarding orproduct distribution.

I N T E L L E C T UA L P R O P E R T Y ( I P )

A technology, proprietary right or trademark owned by a company.

N E A R S H O R E O U T S O U R C I N G , O R N E A R S H O R I N G

A strategy in which some of a company’s functions are relocated to less costly yet geographically proximate locations. In the case of the U.S., the most obvious nearshorejurisdictions are Canada and Mexico.

O F F S H O R E O U T S O U R C I N G

An arrangement by which a provider in an overseas nationperforms business functions for a customer company.

O F F S H O R I N G

Functions performed by a foreign provider or a foreign divisionor subsidiary of a parent company.

O U T S O U R C I N G

Outsourcing is the transfer or delegation to an external serviceprovider the operation and day-to-day management of a busi-ness process. The customer receives a service that performs adistinct business function that fits into the customer's overallbusiness operations. Explained another way, outsourcing is astrategy by which a company contracts out, on a long-termbasis, major functions to specialized and efficient serviceproviders who become valued business partners.

P R O V I D E R

An outside company that performs activities traditionally handled by internal staff and resources.

S U P P LY C H A I N I N G

The operational process by which just-in-time (JIT) andimproved production cycles increase business productivity, byreducing inventory warehousing and other non-value activities.Wal-Mart is a leader in creating a global supply chain.

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G L O S S A R Y O F O U T S O U R C I N G T E R M S A N D D E F I N I T I O N S


THE THREE CHARACTERISTICS OF A GSAIT IS GLOBAL. Companies are often in different countries orcontinents.IT IS STRATEGIC. Companies typically adopt a long-term horizon;it is rarely envisioned as a one-time or short-term contract.IT IS AN ALLIANCE. As a full-scale partnership with mutualrights and obligations, it is more than a service contract inwhich one company directs the other, but less than a merger oracquisition that involves change of ownership or control.

W H Y O U T S O U R C E ?The most basic reasons to outsource are to cut expenses andraise revenues, but there are others. For example:

• A manufacturer may ally itself with an IT provider toavoid the expense of learning and upgrading skills peripheral to its core business.

• A company looking to expand into a foreign market mayally itself with another company more familiar with thesocial, cultural, legal and other conditions of that market.

• A company wishing to manufacture or assemble productscloser to its existing foreign market.

Whatever the objectives, a company considering outsourcingmust be confident that another company can do somethingmore effectively than it can on its own.

W H AT A R E T H E C O S T S ?Typically, a company pays a fee and contributes resources to thealliance. There are costs involved in sharing and transferringinformation. The average company will spend about three per cent of the value of a traditional domestic outsourcingcontract to choose the right provider and reach the agreement.

Less obvious are the inherent risks of GSAs:• The possibility of data loss and security breaches.

• The loss of public or investor goodwill if an ally is foundto have engaged in inappropriate corporate behaviour(worker exploitation, for example).

• The risk of defection.• The loss of intellectual property rights.

However, direct costs are generally offset by the efficiency gainsthe alliance brings, and inherent risks are generally mitigated bycareful attention to the design and management of the alliance.

I D E N T I F Y I N G P R O S P E C T SCompanies should carefully scrutinize prospective allies,including business plan, industry track record, financial performance and officer profiles.

Consider that no single alliance is likely to meet all of yourcompany’s needs, particularly on a global scale. As with yourpersonal investment portfolio, diversity is often the key toensuring alliances are managed effectively.

B U S I N E S S Q UA L I T I E S T O L O O K F O RThe dot.com craze demonstrated how developed companiesformed alliances with superficially attractive but underdevel-oped partners. Many fast alliances fizzled; companies wentbankrupt and saw no return on their investments. A companyshould seek certain business qualities in a potential GSA ally:

• Expertise.• Solvency in a viable or growing industry.• Commitment to traditional corporate values, such as

profitability, a business plan and actual revenues.• Selectivity in its current alliances, and not being part

of a competing alliance.• Compatible business culture. • Good chemistry between companies.• Tolerance for change, performance measurement and sharing.

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G L O B A L S T R AT E G I C A L L I A N C E S ( G S A s )

GSAs CAN CREATE A NEW COMPANY THAT SERVES THE INTERESTS OF THE PARENT COMPANY

Philips Electronics and United International Holdings created Ucentric, Europe’s largest cable service provider,recently sold to Motorola.

Sony and Ericsson created the equally owned Sony EricssonMobile Communications.

GSAs CAN FACILITATE OUTSOURCING OF AN ACTIVITY PREVIOUSLY HANDLED INTERNALLY

British Broadcasting Corporation outsourced its technologydivision to Siemens Business Services.

Procter & Gamble outsourced its internal e-mail system toHewlett-Packard.

For an organization considering outsourcing IT or component manufacturing to another company, a GSA is often the preferred legal vehicle. Think of it as a collaboration between companies to achieve a business objective. To succeed, it must be a win-win situation for both.

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MICHAEL BRYANT MANAGING DIRECTORMATREX COMPANY

The Matrex story demonstrates the transformative qualifies of outsourcing and globalization.Matrex has brought innovation, business skills and prosperity to people in Africa and aroundthe world.

Building on Trust

P R O F I L E


Michael Bryant is managing director of Matrex, a companythat fixes potholes. Bryant founded Matrex in 1996, and wasnamed the eighth fastest growing manufacturing company inCanada by PROFIT magazine, with 1,705 per cent growthbetween 1998 and 2003. The firm's incredible performancecontinues. The Matrex Permanent Cold Patch, the high-techstandard for repairing roads in inclement weather (from frigidto sizzling), is now used by such cities as Toronto, Ottawa,London and Niagara Falls, and on roads and highways in over35 countries on six continents.

Bryant sees his company as technology-driven, but it’s alsodriven by his personal vision. He is the ultimate “think globally,act locally” entrepreneur. For example, the first factory to generate product from the technology, developed and road-tested in Canada, wasn’t in Canada but in China. In countries Matrex partners with (South Africa, Romania,Thailand), it often adopts children, contributes to buildinghospitals and supports HIV/AIDS programs. Matrex also sup-ports UNICEF charities, and in Canada, donates to the RoyalCanadian Mounted Police Foundation, to help communitiesand youth.

“I know it sounds crazy, but if every company were todonate $100 a month to feed children in Africa, we’d savemillions of people – $100 a month! That’s like postage.”

The contribution exceeds charity, however. Bryant rigorouslybelieves in profit, but like songwriter Graham Nash he alsobelieves “We can change the world, rearrange the world. It’sdying to get better.” Matrex definitely promotes the “teach theman to fish” philosophy. Once it signs a licensing agreementwith a foreign client, the company teaches them the businessfrom start to finish: how to manufacture, organize, market andoperate the machinery. It also works with Canadian embassiesand consuls. “Once we’ve gone in and penetrated the market,we run seminars at the embassy with help from its staff.” With

the partner company, Matrex outsources “the raw materials,ships in our concentrate, buys the aggregate and bituminousmaterials in the local country and manufactures there.” It alsobuilds and maintains separate Web sites in dozens of languages.“How do you expect to sell to a billion people if you don’tspeak their language?” Bryant asks.

At the centre of this dynamic growth is the pothole-fillingformula he developed. As an intellectual property, it is scrupulously protected; clients pay a small licensing fee. “The cost isn’t much,” he says, “but it establishes goodwill and shows we are all honest.”

According to Bryant, piracy is always prevalent. "Let's say Iintroduce a prospective client to a product that has beenpatented in Canada. By the time I get to the airport, he/she'salready downloading my patented formula. By the time Iarrive in Toronto and get my luggage, first production mayalready be underway." Bryant further compares the speed ofinfringement to the music or video industries. “So what we dois add masking agents that hide our technology. It’s almost likeputting a blank spot in a video.” The Matrex staff is legallysworn to secrecy. The foreign client receives 99 per cent of theknowledge, and “the critical one per cent is kept by us.”

Safeguarding its technology is the first step Matrex takestoward building trust with new clients. “I’m protecting interests against unlicensed competition, against their ownemployees stealing the formula. It’s trust. We look at this as avery important factor, to have security at our end and at our distributor’s end in another country.”

Trust, he explains, is a two-way street, and he demonstratesthis with the credit program he offers. “Most companies workon a letter of credit. We work completely differently. Webelieve our marketing people should be able to go out andbuild relationships that are lifelong, not just one order. UseAfrica as an example, where we’re working with a partner.

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We give them trust. We give them open credit, which is atremendously trusting situation. Imagine: You’re going toship maybe $400,000 in goods to Africa, and you might be worried about being paid. We’re trusting them with our technology because we believe they will pay us.” It’s not as risky as it might first seem. Matrex works with ExportDevelopment Canada, which insures the company’s receiv-ables, so it’s protected “for 90 per cent all the way through.”

Trust and credit have proven essential to the company’sgrowth and international success. “I think Canadian businessesalways make an error when they insist on letters of credit. Itlimits your growth and affects the client’s own cash flow.” Healso cites his American competition as a case in point: “Theysort of think inside the box, working the old-fashioned waywith letters of credit, rather than thinking about their clients’needs.” In his example, for a new partner to buy your $400,000in goods he would probably exhaust his line of credit. “Withus, it’s off-balance financing. We’re giving them financingsupported by the Canadian government, so their business cangrow and they can buy more and more products from us.Think about it. They’re making a lot of money. You’re makingmoney. You’re building a lifelong relationship with people.What’s wrong with that?”

Success has taken Bryant and his management group, whichhas grown from eight to 20 in under a year, around the world. He has learned a few lessons along the way: “I was in a placecalled Novosibirsk, Siberia, the dead centre of Russia. It wasminus 40. I was sitting in this hotel thinking, Oh my God,how am I going to go out and see these people? I don’t even

speak Russian or Siberian or whatever they speak here.” Atthe hotel bar, he asked a man what the principal industry is inthe city and was told “the university.” The penny dropped.Now when he travels, he first finds the largest university in thearea, contacts the English department by fax or e-mail, and asksthe professor in charge to recommend a student who speaks English and could handle technical interpretations and assistBryant on his business trip.

“So what happens now,” he says, “I get off the plane, I havea wonderfully talented person meet me at the airport, someonewho knows the city and knows where to take me. He’s sched-uled our appointments, we’ve talked on the phone, and I havehim working with me for four or five days. And anything I say,

I know I’m getting properly translated.”In addition to a potentially valuable contact with a university,

Bryant says he also “gains a young person’s view of how businessis conducted and what’s happening in the community. It’s veryimportant to hear what youth are saying, particularly in aplace where I haven’t been before.”

He believes Canadians have certain advantages internation-ally: “We work in China, and I don’t look at a communist anydifferently than I would an American. I work in Myanmar,and it’s a dictatorship, but they’re nice people, too. They justhave a different political system. Canadians are adaptable andoften bilingual, and we have a long history of tolerance andan appreciation of multiculturalism. I believe all that is toour advantage.”

“How do you expect to sell to a billion people if you don't speaktheir language?”

AT A GLANCE: MATREX COMPANY

2004SALES CDN$3.2 MILLIONEMPLOYEES 20

GROWTH (1999–2004)SALES 803%EMPLOYMENT 150%

P R E PA R AT I O NThe first step is drafting a term sheet (also referred to as a memorandum of understanding orletter of intent). In most major outsourcings, thecustomer company, not the provider, prepares theterm sheet, or bid document, and defines the

contract negotiation process. The term sheet is typicallydrafted following informal preliminary discussions between thecompanies. It outlines their business goals, discusses the termsof the alliance and recognizes relevant technical, organizational,legal, taxation and other issues.

N E G O T I AT I O NNext, the companies negotiate the actual terms of the alliance. Conventional wisdom that a winfor one side is a loss for the other does not applyhere. While companies must remain vigilant inprotecting their interests, a good alliance is a

win-win situation for all parties. Otherwise, alliances do notsurvive in the long term.

DUE DILIGENCE. Throughout the negotiation stage, each company scrutinizes the financial and legal fitness of itsprospective allies. This due diligence is essential to avoidingsurprises during negotiations or, worse, after the alliancebegins to operate.

Due diligence is typically a reciprocal process. Each companywill be called upon to disclose and grant access to all relevantdocuments requested by the other. However, companies do notneed to disclose all information. Claims of privilege will shieldcorrespondence with legal counsel and certain documents.Other documents may be withheld because they containsensitive data or are otherwise confidential. In addition,irrelevant documents should neither be requested nordisclosed. Legal counsel can assist in determining whichdocuments to disclose and which to withhold.

ALLIANCE AGREEMENT. Following negotiations and due diligence, companies develop an alliance agreement, a binding legal contract that stipulates each partner’s rights and

obligations. Improperly drafted provisions may cause signifi-cant long-term difficulties and challenges for the alliance, thecompanies involved and the specific people involved indesigning the agreement. They are often a major cause ofalliance failure.

Senior management and lawyers who negotiate and draft a transaction don’t generally have to live with it. Thatresponsibility belongs to middle management, which is oftennot effective at dealing with issues that may arise later.Nurhan Aycan, a partner with Baker & McKenzie LLP, advisescontract drafters to build in mediation, followed by arbitrationat the senior level. “You don’t want to have to depend on thecourt system in China,” he says.

I M P L E M E N TAT I O NThe orderly transfers between the companiesinvolved happen during implementation. Thismay include employees, technology, equipment,real estate, facilities, intellectual property licencesand other agreements. Often third parties are

involved, and this stage ensures they sign appropriate confi-dentiality, data protection, security and assignment-of-rightsagreements. In offshore transactions, implementation typicallyinvolves arranging for the execution of companion agreementsbetween ally affiliates, in order to affect local transfers andimplement local invoicing arrangements.

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A good alliance is a win-win situation for both parties. Once objectives are determinedand potential partners identified, there are four basic phases in project management ofa GSA. Legal advice is strongly recommended at every stage. It’s wise to note that histor-ically one in five alliances ends in failure. The following project management stepsincrease the chances for success.

PHASE

PHASE

PHASE

1

3

“Companies should devote as muchattention to the management of analliance as they do to its design”

THEODORE LING“GLOBAL STRATEGIC ALLIANCES”BAKER & MCKENZIE LLPMAY 2005

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T H E F O U R P H A S E S O F G S A P R O J E C T M A N A G E M E N T


O N G O I N G M A N A G E M E N TCompanies should devote as much attention to the management of an alliance as they do to its design.

RELATIONSHIP ISSUES. Relationship issues are critical, and different from financial, technical and legalconcerns. Nevertheless, they are vital in sustaining analliance. They include:

• Building trust.• Agreeing to resolve conflict jointly.• Maintaining a high level of open communication.

CULTURAL DIFFERENCES. Cultural differences between alliesmake this focus even more important. A study in 2004 byVantage Partners found that a majority of participants in contractual relationships believed that a good relationshipcould increase a contract’s value by up to 15 per cent, and,conversely, that a poor one could similarly decrease it.

COMMUNICATION. A well-designed alliance agreement helpsmanage communication and relationship issues at the mid-management and operational levels.

PERFORMANCE MONITORING. Companies can adopt variousmethods of monitoring their alliances’ performance:

• Define precisely what you aim to achieve through the alliance, both quantitative benchmarks and qualitative gains.

• Commit to effective ways of determining whether thealliance is meeting these aims. Spelling out these meansin advance will help to avert the possibility that allies willlater resist them as intrusive or unnecessary.

• Identify the procedures to follow in case of underperform-ance. These may include a series of escalating levels of action.

FINANCIAL INCENTIVES. Incentives may encourage allies touphold their monitoring commitments. They can take theform of performance rewards or credits, which may build trustand commitment, particularly when an ally exceeds performancecriteria or provides deliverables ahead of schedule. Disincen-tives, such as fines or point deductions, discourage allies’defection from the agreement.

FLEXIBILITY. Because change is inevitable, flexibility is important in any relationship. Objectives will likely shift, andthere may occasionally be a need to deviate from the obligationsof an alliance. An alliance agreement should accommodate

new developments, including:• Fluctuations in market demand.• Actions of competitors.• Poor financial performance of one of the allies.• Changes in an ally’s core or secondary business.

DISPUTE RESOLUTION. Informal methods are generally preferable, because formal ones, particularly when lawyersbecome involved, can damage the trust in the relationshipbeyond repair. Alliance managers should:

• Analyze and identify root problems.• Brainstorm possible solutions and commit to them.

If there is no resolution, managers should report to an appropriate governing body, as defined in the agreement. The governing body resolves the conflict by applying a set ofpre-established criteria.

A second recommended informal method to avert disputesis a “problem identification and relationship audit system,”which includes the following features:

• A standard agenda for problem-identification meetings.• Survey instruments to measure cross-organizational trust,

respect and quality of collaboration over time.• Processes through which team members meet, ask

questions and raise concerns with executives of the allies.• Early-warning procedures designed to ensure that all allies

are aware of challenges that arise.Although such formal methods as litigation or arbitration provisions should be included in alliance agreements, theireffectiveness is limited, and they usually come too late. Invoking these methods is seen as adversarial. They should be reserved for situations that turn irretrievably bad, whereone ally ceases to be concerned about the quality of its relationship with its partner.

“Outsourcing Through Global Strategic Alliances” and “The Four Phases of GSA

Project Management” are based on “Global Strategic Alliances,” prepared for Baker &

McKenzie by Theodore Ling, Arlan Gates and Robin Rix, and “Outsourcing to India,”

prepared for Baker & McKenzie by Michael S. Mensik and Brian Hengesbaugh.

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PHASE

4

“Contract drafters should build in mediation, followed by arbitration atthe senior level”

NURHAN AYCANPARTNER BAKER & MCKENZIE LLP

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JEFF CULLEN CEO, NORTH AMERICABELLVILLE RODAIR INTERNATIONAL

With core competencies in freight forwarding, customs brokering and logistics planning,Bellville Rodair International exemplifies the “invisible science,” value and costs ofoffshore outsourcing and solutions that can impact and protect a business.

Forwarding Solutions

P R O F I L E


Jeff Cullen is CEO, North America, of the privately held company Bellville Rodair International and a shareholder andmember of its global board of directors. BRI, which started in1996 with three people, now employs 200 in 21 offices in ninecountries, and is active in 141 more through its agents andassociates. With a growth rate over 580 per cent in the pastfive years, revenues have increased from CDN$5 million toover CDN$82 million.

What the company does for the most part is unseen, Cullensays. “In a lot of ways, we are a very invisible industry, but theglobal economy doesn’t work without us. Computers, the branyou eat for breakfast, the shoes you wear don’t magically movefrom the factory to the store where you go and buy them.” Bellville Rodair’s business is moving products and componentsfrom country to country by air, sea, road or rail – through customs,to the factory floor, to the hanger on the Holt Renfrew rack.

“The high-end definition is: We are an international logistics company and a transportation intermediary,” Cullenexplains. “In layman’s terms, we are an international freightforwarding division, a customs brokerage division, a projectsdivision and a third-party logistics division.” The trouble is,“When you say you are a freight forwarding company, mostpeople think you’re in the trucking business, but 85 per centof what we do is intercontinental. It’s a little difficult to get toEurope or Asia by truck.” He also describes his company as anon-asset-based transportation provider, which means itdoesn’t own ships, trains or planes. Instead, he says, think ofBellville Rodair “as a travel agent for freight.” BRI alsodesigns, builds and manages custom-bonded warehouse facili-ties, which tend to be single-client storage and distributioncentres. Cullen says, “For a client whose core competency isn’twarehousing, they depend on us for complete solutions,including everything from just-in-time delivery to putting onthe price tags.

“In forwarding, direct is always preferable,” he advises.“Take that suit intended for Holt Renfrew as an example. It might be cheaper to move it from Milan to Paris toNew York to Toronto, but every time you touch an additionalpoint you put your goods in peril, and chances are the guyswho’ll steal your suits will steal the most popular sizes. ThenHolt Renfrew says, ‘You’ve got all the wrong sizes for me. I don’t want the order. Take the whole order back.’” Cullensays it might cost more to fly Milan to Toronto direct, butwhat is the cost of the damage to your customer relationship?

His advice about price and value is: “The least expensivebrokerage service isn’t necessarily the best. What a customsbroker essentially does is the paperwork. The broker acts as anagent for the importer, liaises between the importer and Canadacustoms, submits documentation declaring what the goods are,then remits duty and taxes to the government on behalf of theimporter. On the flip slide, we are actually a collection agencyfor the government. We collect the duty and charges from theimporter,” he says. “We have competitors in the marketplacethat will customs-clear your shipment for $7.50,” he says, makingthe point that $7.50 is not a price he is willing to meet. Mistakes and oversights are brutally punitive: Fines under theAuxiliary Monitoring Penalty System (AMPS) used by Canadacustoms range from $25,000 to $50,000 per incident. “That’sfairly substantial for not doing your due diligence. It’s theclient, not the brokerage agent, who pays.”

In Cullen’s experience, in certain countries, particularly in Eastern Europe, customs administrations and requirementsdiffer from one province to another. “In a lot of emergingnations, customs are more befuddled than on the NorthAmerican side. You simply don’t want to assume customs andtax on that end of things as part of your responsibility.” As inthe Far Eastern market, Cullen advises, “Buy on an FOB [freeon board] basis.” The position to take, he says, is “I don’t care

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where you manufacture in China. You provide it to my freightforwarder or logistics supplier in Hong Kong, for example, andthat’s where I will take over the transaction.”

Another role Bellville Rodair fills is that of in-house trafficprovider. Cullen cites a current tender the company hasanswered for a North American client that has contracts with30 separate trucking companies, which means 30 differentcontacts and invoices and the unlikely proposition that thecompany knows at any one time where all its goods are. “They are struggling to have best practices in place on thetransportation side,” he says. In this case, Bellville Rodair’slogistics division becomes the company’s traffic department.“A company has to staff the department and pay salaries anyway, so pay us those monies, and we’ll take over the transportation function. We’ll look at your payroll for the pre-vious year and drive that down without killing productivity orreducing services to your customers, then we’ll share a part ofthat savings with you.”

He describes Bellville Rodair’s projects division as a “travelagent for really big, ugly things.” These include componentsand machinery for power plants, pulp and paper mills and theoil and gas industries. “We moved the world’s largest machine,a walking drag line for open-pit mining. It’s like a giganticbackhoe. It weighed over 14,000 metric tons, the size of a cityblock, six storeys high. We moved it from Ohio to Australia,which took six and a half months. We were charged with dis-mantling the machine, cleaning it, leasing a 10-acre space forit in New Orleans, and chartering an entire ship for it.”

Recently, BRI helped an automobile component company

establish a factory site in Eastern Europe, a project thatdemonstrated how a logistics and forwarding company canassist a manufacturer in a new venture. The client was seekinga location for a new plant to serve European auto manufacturers.Bellville Rodair became part of its reconnaissance team, offeringadvice, setting up meetings with government officials andCanadian consuls, and providing due diligence on customs,duty and tax structures, and legal and processing issues.

In the end, BRI established an office at the location, andstaffed and managed the manufacturer’s logistics functions inEurope. “That’s how we got our toe into Hungary,” Cullenexplains, as Bellville Rodair adds another country to the global service it provides in its “invisible science.”

“In forwarding, direct is always preferable. Every single time you touchan additional point, you put yourgoods in peril”

AT A GLANCE: BELLVILLE RODAIR INTERNATIONAL



O B J E C T I V E SCommon objectives include increasing revenue,decreasing expenses, building a customer base,

developing brand loyalty and value and/or improving market exposure.

G O V E R N A N C EAlliance governance issues include strategic and oper-ational decisions, approval procedures, licences for

new technology, creation of alliance relationships with thirdparties, and appointments of alliance managers.

EQUITY STRUCTURES include equity joint ventures, minorityequity investments and equity swaps. Their distinguishing feature is that they establish a board of directors to oversee analliance’s operations. Questions relating to the composition ofthe board often arise during negotiations, and they can be par-ticularly challenging.

NON-EQUITY STRUCTURES include payment for services,barter, commission sales, sharing revenue or profits, and royalties. They are generally simpler to establish than equitystructures, although they may suffer from a lack of the discipline a board of directors provides.

F I N A N C I A L C O M M I T M E N T STo be meaningful, an alliance requires its members to contribute financial, human, technological and

intellectual resources.

I N T E L L E C T UA L P R O P E R T YFor alliances to function effectively, allies will likelyneed access to each other’s intellectual property, such as

patents, copyrights, domain names, trademarks, trade names,software and other technologies. The alliance itself may beresponsible for creating new intellectual property.

I N F O R M AT I O N S E C U R I T Y A N D P R I VA C YAlliances often involve transactions with consumers

and, by extension, require the collection of data about them.In addition, personal information relating to employees of therespective parties involved will be exchanged. Increasingly,privacy laws around the world impose specific obligations onany entity that collects, uses or discloses such data. Companiesinvolved in GSA arrangements must uphold all laws regulat-ing the transfer of personal data.

E M P L O Y E E SAlliances typically necessitate the pooling and/orsharing of employees. An alliance agreement should

therefore set out each company’s responsibilities.

C O M P E T I T I O N A N D A N T I T R U S TGSAs occupy a unique status under competition andantitrust laws. They do not culminate in a full-scale

merger and are therefore exempt from regulatory merger reviewprocesses in most countries. However, they give rise to at leasttwo other major issues: laws regarding arrangements betweencompetitors in a particular market, and those pertaining tojoint ventures.

In general, global competition and antitrust laws strictlyregulate the types of arrangements competitors can makeamong themselves. If an alliance significantly prevents or reduces competition in a market segment, regulators mayscrutinize the details of the agreement. Penalties for violating competition and antitrust laws can be severe.

T E R MAn alliance agreement typically has an initial term and the option for extended terms.

E X I T C L A U S E SDespite the parties’ best efforts, some alliances willfail. Possible causes are poor performance, the inability

of an ally to supply the appropriate level of resources, andexternal changes. Negotiations should include how to dissolvean alliance.

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As the outsourcing market matures in the future,nearshoring is expected to grow, with Canada amongthe top 10 destinations. It is anticipated that foreignand domestic outsourcing firms in Canada will focus onservicing more complex and critical business processfunctions. These organizations will leverage Canada’snatural advantages in the areas of human resources,culture, infrastructure, technical skill and proximityto the U.S., as discussed further on page 15.

When the quality of BPO people skills and availability of educated and trained workers are factored in, Canada rankssecond behind India. Measured by the quality of our businessenvironment, we also come in second, behind Singapore.

According to the McKinsey Global Institute, in 2002 Canada generated US$3.7 billion in offshore revenue, behindonly Ireland (US$8.3 billion) and India (US$7.7 billion).

A F F I N I T YCanada and the U.S. have developed an affinity overcenturies. In addition to a common language and the samecontinent and time zones, we share similar values,democratic beliefs, culture, and even accounting andbusiness principles. The U.S. accounts for 70 per cent of theworld’s outsourcing business.

Given our favourable currency exchange rate, experiencedlabour force, high educational standards, political stability,security of intellectual property, and infrastructure, it’s notsurprising that Canada is perceived by U.S. corporations as anattractive location for information technology outsourcing(ITO) and business process outsourcing (BPO) and,importantly, as a choice that reduces risk.

R I S K M A N A G E M E N TA recent study, “Global Sourcing Trends NecessitateConsiderations of Nearshore Sourcing in Canada” (March2004), sponsored by Compuware, compared nearshoring toCanada with offshoring. The survey sample involved evenlydistributed respondents from smaller businesses to the Fortune500. The survey confirmed that Canada’s geographic proximity,political stability and similar business culture appeal toAmericans, but it also indicated that a deciding factor inchoosing nearshoring was managing risk. As projects becomeincreasingly interrelated and complex, communicationbecomes critical.

Outsourcers also recognized that indirect expenses, such astravel and communications, associated with managing out-sourcing relationships must be considered when calculatingprojected costs.

For Ontario companies, and particularly employees – whomay fear the cliché that globalization means a “race to thebottom” – it’s important to note that cost is no longer the primary reason for selecting an offshore supplier, according to the survey of 127 respondents who plan to use eithernearshore or offshore providers. When asked to rank the

10 factors they used in selecting a provider, cost was third,and fewer than half of respondents cited it among the topthree drivers. Experience and specific expertise topped the list.English competency and shared business culture followedclose behind.

A September 2004 report by Baker & McKenzie LLP concurs.The importance placed on direct cost savings diminishes,while such other factors as security, quality, service and the“existence of solid trusted networks” rises. In fact, expertsobserve that U.S. companies are more likely to opt for near-shoring to Canada when the cost benefit is at or above 65 percent of the cost of a U.S. project.

B U S I N E S S P R O C E S S O U T S O U R C I N GIn terms of BPO, and call centre outsourcing in particular,Canada rates extremely well. In the August 2003 report“Profiting From Canadian Call Centre Outsourcing: LoweringRisk and Maximizing Savings,” Datamonitor projected thatoutsourced call centre agent positions in Canada will rise52 per cent by 2007.

The report suggests Canada offers higher quality thanAmerican-based call centres because it has lower turnoverrates and lower costs. (Some U.S. centres report over 70 percent turnover.) It confirms that compared with offshoreproviders, Canada has a cultural affinity with U.S. customersand a political stability many competitor nations lack.

In one recent example, U.S. Mobil opted to outsource call centre activities to Canada, where, a company spokes-person said, Canadian teachers do a better job of teachingU.S. geography than American teachers do.

C U LT U R A L A D VA N TA G E SWith the U.S.’s increased public concerns over offshoring, offshore companies have responded by entering the Canadianmarket with subsidiaries and joint venture projects. In the pastyear, Indian-based outsourcers have opened or expandeddevelopment facilities in Canada to facilitate nearshore services for U.S. clients. These Indian companies include TataConsultancy Services (TCS), Satyam Computer Services, and Infosys, India’s second-largest outsourcing provider.

Toronto is seen as having particular advantages in thisregard, because of its ethnic mix and established culturallinkages. According to the most recent census statistics, about25 per cent of Toronto residents indicate East Indian, Chinese,Russian or Filipino as their ethnic origin.

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N E A R S H O R I N G : O U T S O U R C I N G I N C A N A D A

Canada is ranked the eighth most attractive offshore destination in the world, accordingto the 2004 Offshore Location Attractiveness Index, prepared by A.T. Kearney.

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SAYAN NAVARATNAM CHAIRMAN AND CEOAC TECHNICAL SYSTEMS LTD.

AC Technical Systems is a technology company that uses outsourcing strategically to grow and create wealth. Through its commitment to strong management, research anddevelopment, the company has successfully penetrated the demanding North Americansecurity and surveillance industry as a nearshore provider.

Nearshoring for the U.S.

P R O F I L E


Sayan Navaratnam is chairman and CEO of AC TechnicalSystems, a wholly owned subsidiary of Creative Vistas Inc.(of which he is also chairman and CEO).A leading provider ofintegrated electronic security and surveillance systems, thecompany designs and integrates systems for various high-profileclients: governments, school boards, retail outlets, banks andhospitals. AC Technical Systems was a private company for14 years, evolving from servicing security and surveillance systems to becoming a developer and supplier of large-projectcustom-designed and integrated systems. Clients includeOntario government ministries, Loblaws and the Air CanadaCentre. In the past five years, the company has experiencedtremendous growth, reaching US$8.5 million in revenues.

In September 2004, Navaratnam decided the time was rightto advance to the next level, to gain access to more capitaland pursue growth into the U.S. market, and through a reversemerger went public, trading on the NASDAQ-OTCBB. As aresult of this strategy, AC Technical Systems, originally basedand operating in Ontario, became a subsidiary of a U.S. company. To become a major player in the American securityindustry, where issues regarding the U.S. Patriot Act andHomeland Security remain sensitive, being American ownedwas a quality he deemed essential.

In some regards, AC Technical Systems is a model of nearshoring. A recent example is its integration of security andsurveillance for a water treatment facility in the northeastern U.S.,where perimeter and motion detection are critical to security.Faced with the complexities of the Patriot Act and Canada’sown Personal Information Protection and Electronic DocumentsAct (PIPEDA), Navaratnam says, “This is where having goodcounsel becomes crucial. Both American and Canadian counselreview important documents. It’s expensive, but we are certain

we are doing the correct thing.”He says, “There has been a huge influx of Asian products into

the American market, and fluent and efficient communication isa big issue for U.S. companies, so Canada has a great advantage.We don’t just share the same language. Our accounting andlegal procedures are similar. Not only are we an hour away inthe same time zone with very similar culture, but the samerestaurant chains are in both places. Canadians are alsowelcomed as friends,” says Navaratnam. “We tend to understandthe U.S. market much better.”

To foster growth, AC Technical Systems focused on recruitingand organizing its management team. A key decision was toadvance robust research and development. The strategy is tooutsource component technologies to companies already specializing in specific security and surveillance equipment,while AC Technical Systems develops the necessary technologyand integrates security systems for large projects, from designto installation.

For example, video was determined to be a criticalcomponent, and the company invested in the substantialtransition from analog to digital. Unlike videotape, digitalimages don’t deteriorate. “We’ve all seen one of those tapes of aconvenience store being robbed, and you can barely make outthe perpetrator’s face,” Navaratnam says. “The ability to seewhat is going on at any given moment is a key factor in securityand surveillance – plus everything gets networked now.”

Like DVD, digital transmission passing through a networkof 500 offices remains clear, and digitization allows for extra-ordinary image recognition. The company’s new IviewDVMS motion-detection sensor actually recognizes andisolates non-moving items (such as abandoned baggage at anairport) and immediately signals their image and location to

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a central station, or to a wireless hand-held device carried bya security agent.

Most low-end IT such as data entry and cable preparation is outsourced, however, in core technologies, we try first tooutsource to Canadian-based companies. We want to maintainthe high-level technological base that already exists here.” Hecites the support AC Technical Systems has received from theNational Research Council and government programs thatassist with R&D and leave intellectual property in corporatecontrol. “You have it. You own the IP. There is much less riskof it getting into other hands.”

Hardware is normally purchased and, when necessary,designed and made to order by providers in Canada, the U.S.and, recently, Asia. For Asia, Navaratnam relied on hisnetworking skills and personal experience directing a previouscompany. But he says finding an Asian provider isn’t necessarilydifficult. “Sometimes it’s as easy as taking apart a competitor’ssystem, looking on the back of the board and finding thestamp of the manufacturer’s name.” However, communicationremains a difficulty. “We’re doing some software work based onthe client’s hardware for a project, and we are working closelywith them to integrate our software with their hardware, but wehad a lot of communication issues. Our next hire was an Asian-Canadian who spoke the language.”

The company also outsources certain networking componentsystems, such as people-counting modules that keep track ofhow many have walked through the door. “Other companieshave that expertise,” Navaratnam explains. “Because of ourgrowth, we don’t want to keep hiring and training different

trades. We like to specialize in what we do internally. We outsource jobs that are not as highly advanced.”

He cites the security system integration of a large courthousein Canada, where AC Technical Systems was responsible forsecuring everything from courtrooms and galleries to prisoncellblocks. The installation was complex, driven by the needsof the presiding judiciary, court reporting and transcriptions,and internal prisoner security. The opening and closing ofcells, for example, required time sequencing, a componentAC Technical Systems could essentially purchase off the shelffrom American manufacturers. Instead of investing in

recreating the technology, it outsourced to a company thatspecializes in prison security systems.

A further piece of the strategy is to grow AC Technical Systems, not only by building the company, but also throughacquiring complementary technologies. Navaratnam explainsthe four basic steps in security and surveillance: capturing animage, intelligently analyzing the data, transmitting it, anddisplaying images and analysis. AC Technical Systems hasdeveloped technologies for the first two stages. To build thethird, it recently signed a letter of intent to acquire the Dallascompany dataBahn, one of the premier providers of wirelessmobile satellite transmission. It is a growth and wealth-creationstrategy that only outsourcing can make possible. Focusing oncore technologies and training is key. AC Technical Systemsstaff regularly visit U.S. technology and training institutes. “You want to train the staff in technologies that keep themmotivated,” Navaratnam says. “Our future is in designingtechnologies and integrating them into large-scale applications.”

AT A GLANCE: AC TECHNICAL SYSTEMS LTD.

2004SALES USD$8.45 MILLIONEMPLOYEES 60


“In core technologies, we try first to outsource to Canadian-based companies. We want to maintain thehigh-level technological base thatalready exists here”

China’s entry into the World Trade Organization in December2001 has accelerated investment. Western companies haveestablished more than 130 R&D facilities in China, and thegovernment has created five special economic zones and 15national software industrial parks to facilitate more investment.

The 2008 Olympic Summer Games in Beijing will focus theworld’s attention on China and provide useful experience withthe English language – which remains China’s greatest obstacleto ITO and BPO expansion and its interface with theEnglish-speaking world. At present, ITO and BPO in Chinaare mainly focused on back-office support for neighbouringAsian countries and regions, such as Hong Kong, Taiwan,Korea and Japan.

This is expected to change. The Chinese government is serious about developing a first-class high-tech labour force.Universities and training institutes are emphasizing training insoftware development. English-language proficiency is addressedin schools, and some Shanghai elementary students receivemath and science instruction in English.

INTELLECTUAL PROPERTY PROTECT IONAnother serious obstacle to offshoring in China is inadequateprotection of intellectual property rights. In their report forBaker & McKenzie LLP, “Outsourcing Opportunities inChina,” authors Jia Zhoa and Zack Dong report that “despiteChina’s WTO commitments, China remains a leading countrywhere intellectual property rights are frequently infringed.” Theauthors add that while China has revised and enacted numerouslaws and launched periodic, widely publicized raids against localinfringers, “it is thus possible to find a contract manufacturer inChina that concurrently produces legitimate goods for theforeign company that has ordered the goods and counterfeitsgoods for itself using the foreign company’s design, technologyor trademark.”

Blockbuster closed its retail outlets in Hong Kong in 2004,in part because it could not compete with pirated VCDmovies. Time magazine reported that copies of the Tom Cruisemovie The Last Samurai were available on the streets andalleys of Hong Kong even before it premiered in the U.S.

The Baker & McKenzie LLP report advises that companiesgoing to China to outsource their products should “takepreventive steps.” In the accompanying profiles, Jill Andersonof Aecometric Corporation and Michael Bryant of Matrex discuss the strategies they have developed to protect IP.

I N V E S T M E N T C AT E G O R I E SDespite China’s WTO membership, the government encouragesdirect foreign investment in some industries but restricts orprohibits it in others. The first step for foreign investors is toassess whether a project is permitted. Usually, encouraged orpermitted projects have one of these attributes:

• New agricultural technology, and construction of energy,communications and important raw materials industries.

• New and advanced high technology.• Products that open new markets.• Energy and material conservation, utilization of recycled

resources and environmental protection.• HR and resource advantages, specifically in China’s

central and western regions.Generally, investments determined to be technologically back-ward, exploitive and/or not conducive to conserving resourcesor improving the ecological environment are restricted ordiscouraged.

D I R E C T I N V E S T M E N TThree basic vehicles are available to foreign investors in China:

• The joint venture (JV) offers the foreign investor a Chinesepartner who may be able to assist with China’s numerousregulatory hurdles, and may provide an existing site, staff,a low-cost production base, the means to penetrate theChinese market, as well as a source of investment. Thiswas the path chosen by Matrex Company, which licensesits technology and forms franchise-like partnerships.

• Wholly foreign-owned enterprises (WFOEs) have otheradvantages. A company may be formed more quickly and enjoy more operational freedom without a Chinese partner. The foreign investor can make quicker decisionsand remains in control of proprietary technology, and thecompany’s success solely benefits the foreign investor.

• The third option is acquiring an existing Chinese companyand converting it to a JV or WFOE.

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O F F S H O R I N G T O C H I N A


OFFSHORE INVESTMENTS OF CANADIAN COMPANIES

39% LESS THAN $100,00031% $100,000 TO $1 MILLION

Of Canadian companies responding to a Conference Boardof Canada survey in April 2005, 58 per cent said “they werenot offshoring any businesses or functions.”

Second only to India as an offshore provider, China has increasingly become a favouredoutsourcing destination for many American and Canadian manufacturing companies.

With the global undersea-underground fibre optic network,laid in the mid-1990s – making the cost of transmitting voice,data and other information competitive with domesticnetworks – India ranks first for offshoring IT and businessprocesses. The principal factor contributing to India’s successis its labour force. Unlike with its Asian neighbours, in IndiaEnglish is a primary language. Wages are lower, and thepopulation and workforce are second in size only to China’s.

India’s workers are very well educated, with two millionEnglish-speaking students graduating from secondary schoolevery year. The engineering schools, and particularly theIndian Institute of Technology, are renowned. A decade’sexperience has allowed Indian provider companies to evolvefrom basic data entry and software coding to high-level analytics and business process management. The NationalAssociation of Software and Services Companies of India(NASSCOM) predicts the IT software and services exportmarket will reach US$60 billion by 2008.

C O S T S AV I N G SOntario companies attracted to cost savings in India have discovered that several new factors must be considered:

• The average company will spend about three per cent ofthe value of a traditional domestic outsourcing contractto choose the right provider, conduct the appropriate duediligence and reach an agreement.

• Moving an in-house division offshore takes anywherefrom three months to one year.

• The ramp-up costs and project management of an offshoreprovider, including travel, also affect cost savings.

Despite these considerations, offshoring to India predictablyreduces costs. Oracle Canada, which has employed 4,000Indian workers in two plants for the past four years, reportsthat project management infrastructure added 10 to 15 percent to overheads. But Yves Leclerc, senior practice designer,says that “Oracle’s clients still routinely save between 25 and50 per cent by going offshore.”

I T O V E R S U S B P OThe fundamental differences between information technologyoutsourcing and business process outsourcing will determinehow a company locates and contracts an offshore provider,whether in India or elsewhere.

The Baker & McKenzie LLP report “Outsourcing to India,”

by Michael Mensik and Brian Hengesbaugh, makes thisdistinction about the goals of ITO and BPO customers: ITOcustomers primarily pursue cost savings, via off-the-shelfsolutions and economies of scale; while BPO customers seekcost savings but also target value-added objectives and moretailor-made solutions.

The commonly used reverse auction process identifies “theprovider who will perform a particular function at the lowestcost,” which is effective for the ITO customer. Typically, ITOinvolves activities that are not highly regulated.

The reverse auction “generally proves to be inappropriate”for BPO, which has broader and deeper objectives and, usually,more significant compliance issues. The client bears the risksof liability and adverse publicity. “Accordingly, a customershould clearly understand the nature and extent of applicableregulatory requirements, and structure its outsourcingarrangement so as to best ensure compliance,” states the report.

I N T E L L E C T UA L P R O P E R T YCustomer companies are advised to address intellectual propertyissues in India, particularly copyright. This is particularly relevant in the creation or modification of computer programsor other works of authorship. Customers must understand thatrights for intellectual properties created or exercised in Indiaare governed by Indian law.

The Indian Copyright Act specifically protects computerprograms and provides that the copyright for an original orderivative work will be owned by the individual who createdit. This includes economic and moral rights.

D I S P U T E R E S O L U T I O NThe Indian judicial system is slow and has been subject tomanipulation. Theodore Ling of Baker & McKenzie LLP notesfrom experience “that the parties that negotiate the transactionare not the ones who have to live with it. The fact is, middlemanagement runs with the project.” An effective GSA buildsin dispute management and mediation at the senior level. Headvises, “You don’t want to rely on the court system.” Whilethere are concerns about India’s economic stability and businessenvironment, the A.T. Kearney report “Making OffshoreDecisions” ranks India as the number one global providernation. The report says, “Government efforts to improveinfrastructure and maintain economic and political stabilityseem likely to reinforce India’s emergence as a global player.”

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O F F S H O R I N G T O I N D I A

India has become the world’s leading service provider and the first-choice destination foroffshoring information technology and business process services.

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JILL ANDERSON PRESIDENT AND OWNERAECOMETRIC CORPORATION

Aecometric Corporation, which designs and builds industrial combustion equipment, is entering China with a strategy to manufacture and market a product for that country’sburgeoning oil and gas industries.

Entering China

P R O F I L E


Jill Anderson is owner and president of Aecometric Corporation,a privately owned company that produces process equipment forlarge-scale industrial applications for “base” industries,including oil and gas refineries. Although these are extremelylarge pieces of equipment – an average vessel is as big as a schoolbus – Aecometric units are only one small component of oftenhuge international projects.

The 33-year-old Richmond Hill company regarded the U.S.as part of its domestic market. “By dealing through largeinternational engineering companies, we had the benefit ofworldwide installations and recognition without the risk ofinternational uncertainties,” says Anderson.

Then the company hit the wall: 9/11, when, Andersonexplains, “everything in the States went on hold. It was a crisis, both personally and professionally. “It takes a long timein this industry to train people, and some employees had beenwith me a long time.” She remortgaged the property to fundthe payroll, and the company cut back, downsizing from 25 to14 staff. “Together with key staff members,” she continues,“we set out a plan to capitalize on our international reputationand sell direct.

“While waiting for the U.S. market to recover, we developedopportunities in China and the Middle East. We had a designerwho had been with us a number of years who was born inBeijing. He was very interested in developing sales in China,and we gave him that opportunity.” And so the expansioninto China began, one step at a time.

Aecometric chose to introduce itself into China through itsglobally recognized expertise in the design and manufacture ofsulfur recovery units. One problem quickly became evident:“Despite having five agents in China, our sales engineer wasspending fantastic amounts of time in China to cover theopportunities presented.” Aecometric opened a small office inBeijing last year, with a limited staff to answer the phone and

provide service. It was a success and will be expanded thisyear. “The office established presence,” says Anderson. “Webelieve the Chinese market is about building credibilitythrough relationships. That is our mission.”

Sales to China began, then increased to the point thatAecometric decided it made economic sense to reduceshipping and production costs of the larger components and manufacture the vessels in China. Anderson recognizesthat most companies follow the opposite track: First theybuild a manufacturing plant in China, then they sell into that market.

While China is still new to Aecometric, the concept ofoutsourcing is not. The company has accumulated considerableexperience in three decades. Although it has its own shop –one of the few combustion equipment companies worldwidewith that resource – it frequently outsources vesselconstruction to American Society of Mechanical Engineers(ASME) authorized shops, principally in southern Ontario.In addition to sulfur recovery units in refineries, thecompany has a leading reputation in numerous other baseindustries, such as cement, pulp and paper, gypsum andmineral processing. “These industries are also developingquickly in China,” Anderson says. “We set our platform onsulfur recovery. Now we’ll take steps into the other industriesas well.”

The irony is that as Aecometric is about to expand intoChina, the U.S. market has come back as never before, especially in developing solutions for the ethanol industry,where Aecometric is becoming a world leader. Ethanol hasgrown to comprise half of its business. The company recentlyassigned a 10-unit order to an ASME plant in Oshawa – acontract of significant magnitude in an industry where burnerequipment is normally one-off and custom-designed, andwhere companies seldom carry inventory.

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To protect intellectual property, the burner technology willcontinue to be manufactured in Ontario. The company willthen transfer the straightforward vessel fabrication to Chinaand complete the final assembly of the unit there. Potentialfor error is always present, even with proven ASME shops,so an experienced Aecometric engineer oversees productionin China.

In previous outsourcing arrangements, Anderson says the company has always protected its proprietary rights to the burner technology by retaining the design and scalingknowledge and production of critical components within itsown engineering facility and manufacturing shop, thus successfully maintaining its leading edge on products. “Ourpart of it, the combustion end, is very sophisticated. There arefewer than 100 people globally who really understand thecombustion process.”

To Aecometric’s proprietary advantage, mass-productiondesigns don’t work for large-scale industrial combustion. Eachapplication differs by plant. The technical barriers for potentialcompetitors are considerable. “Copiers will no doubt try, but sofar they have not succeeded. Improper installations often lead tolong-term downtime and maintenance issues for the plant, andthat tends to make the end user cautious about unprovenvendors,” Anderson explains. “The burner system is a very smallportion of the overall plant cost, but if improperly installed itcan completely incapacitate the plant’s operations. It’s notworth the risk for offshore companies to copy our designs. As faras intellectual property goes, that really is our safety factor: It’sbetter to pay for the expertise and get it done properly.”

The legal and investment vehicle Aecometric has chosenfor China is a wholly owned Canadian company, essentially acorporate subsidiary, described elsewhere in this report as awholly foreign-owned enterprise (WFOE), a limited-liabilitycompany with its equity interests entirely owned by a foreigninvestor. Anderson says, “While the joint venture keeps yourliability in China, to be perfectly frank we’d rather go thewholly owned route. Our company is about quality. If anythinggoes wrong, we service it. We prefer having the responsibility.”

To establish the company, Aecometric guarantees an accessof $150,000 in a Chinese bank. The company must maintainjust 15 per cent of that in a bank account at all times.Anderson is now working with outside consultants to addressissues regarding auditing, Chinese tax systems (which resemble

Canada’s PST and GST) and repatriating dollars. There is also the question of customs: “I don’t know how

that’s going to shake out yet,” Anderson says. “Previously,once our equipment reached the Port of Vancouver, someoneelse owned it and I didn’t have to worry about duties. Thetraining process is about to begin. But if people want whatyou’re selling, there’s always a way.”

Anderson not only survived the 9/11 crisis, but significantlyincreased Aecometric's sales and employment in just a fewyears. By opening her mind and doors to opportunities overseas,the company now has 50 employees (2005) and sales continueto rise. With proven successes in China, the Middle East,Canada, and the recovering U.S. market, Anderson is ready toexplore new opportunities in the global marketplace. After all,Aecometric has become a recognized and successful Ontarioplayer on the international field.

“We believe the Chinese market is about building credibility throughrelationships”

AT A GLANCE: AECOMETRIC CORPORATION



22

Ontario firms considering nearshoring or offshoring as a growth strategy need to bearmany issues in mind. The following points can help you plan your strategy, manage theprocess and increase your chances of success.

T I P S A N D TA C T I C S


NEARSHORING

c Take advantage of geography. The U.S. accounts for70 per cent of the total global outsourcing market, andCanada is uniquely situated to service and broker out-sourcing arrangements.

c Focus on servicing high-end, more complex criticalfunctions, where cost savings is not necessarily the primary objective.

c Use ethnicity and multicultural linkages. Indian-basedITO and BPO providers are establishing subsidiaries and GSAs in Canada for an increasingly receptive U.S. market. With one of the most ethnically diverse populations in North America, Toronto constitutes aprime location for outsourcing opportunities.

c Build on the similarities of the accounting and legal systems between Canada and the U.S., but be preparedfor some distinctly different applications of legal andtax issues.

c Emphasize data privacy and intellectual property concerns.Unlike many foreign jurisdictions where copyrightinfringements are endemic, Canada offers U.S. companiesthe comfort of shared values. Conflicts are usually restrictedto the minutiae of privacy laws (PIPEDA versus the U.S.Patriot Act) rather than violations of proprietary rights.

c Capitalize on Canadian education and knowledge of the U.S. Where interaction with Americans is critical,Canada has few peers. (For example, difficult accents andan inability to adapt culturally are criticisms of Indian-based BPOs.) As a result, the Canadian call centre industry is projected to grow 51 per cent by 2007.

OFFSHORING

c Adopt a win-win attitude. Consider outsourcing as a collaboration between two companies. For it to succeed, both parties must win.

c Understand that any cross-border outsourcing transactionraises potential legal issues and requires specialized counsel.When forming a global strategic alliance (GSA), legaladvice is recommended at every stage.

c Remember that contract negotiations only mark the beginning of a collaboration. The ongoing managementof a project requires dispute resolution mechanisms and executive-level intervention.

c Separate the ITO and BPO bidding processes. A reverseauction is an effective method for an ITO. A BPO tendsto target broader and deeper business objectives and besubject to greater regulatory compliance, and thereforeusually requires tailor-made solutions.

c Conduct thorough due diligence. Data privacy, compromiseof public and investor goodwill and IP loss are significantrisks. Research prospective allies carefully, including business plan, track record, financial performance andcompany officers.

c Build in performance incentives that allow your outsourcingally to profit from streamlining services and reducing costs.

c Avoid litigation in dispute resolution. Invoking legal methods is perceived as adversarial, and jurisdictions inforeign countries are unlikely to resolve disputes to thecustomer’s advantage. Negotiations should include how to dissolve an alliance.

A C K N O W L E D G E M E N T S

The Ministry of Economic Development and Trade extends its appreciation to:

CEOs OF LEADING GROWTH FIRMS WHO HAVE ENTERED INTO GLOBAL MARKETS AND SHARED THEIR EXPERIENCESAND KNOWLEDGE IN THE REPORT:

Michael BryantManaging DirectorMatrex Companywww.matrexstar.com

Jeff CullenCEO, North America Bellville Rodair International Ltd.www.bellvillegroup.com

Sayan NavaratnamChairman and CEOAC Technical Systems Ltd.www.actechnical.com

Jill AndersonPresident and OwnerAecometric Corporationwww.aecometric.com

Members of the Leading Growth Firm Series Reference Group,for contributing their time, guidance and expertise to developingcontent for the series.

Special thanks to Baker & McKenzie LLP, for preparing and contributing content for this report.

CORPORATE SPONSORS, FOR RECOGNIZING THE IMPORTANCEOF ONTARIO’S LEADING GROWTH FIRMS AND SUPPORTINGWISDOM EXCHANGE 2005:

Baker & McKenziewww.bakernet.com

Business Development Bank of Canadawww.bdc.ca

Chartered Accountants of Ontariowww.icao.on.ca

Congress Financial of Canadawww.wachovia.com/abl

Deloittewww.deloitte.ca

Export Development Canadawww.edc.ca

Ernst & Young Orenda Corporate Finance Inc.www.eyorenda.com

Roynat Capitalwww.roynat.com

RBC Financial Groupwww.rbc.com

Media Sponsor: PROFITwww.profitguide.com

The Leading Growth Firm Series researches and promotes the effective managementpractices of CEOs of Ontario’s fast-growing firms.

For copies of reports, visit www.ontario-canada.com

To comment on this report or others in the series, e-mail [email protected]

Ministry of Economic Development and TradeSmall and Medium Enterprise DivisionBusiness Advisory Services Branch56 Wellesley St. West, 5th FloorToronto, ON M7A 2E4

Queen’s Printer for Ontario© 2005ISBN 0-7794-8645-5

13OUTSOURCING: ALLIANCES FOR GROWTH

12WHY LEADING GROWTH FIRMS MATTER

11PLANNING FOR SUCCESSION

10PARTNERING FOR GROWTH

9HIGH PERFORMING ADVISORY BOARDS

8WINNING MANAGEMENT TEAMS

7LEVERAGING CUSTOMER RELATIONSHIPS TO DRIVE GROWTH

6DYNAMICS OF GROWTH: IS HIGH GROWTH SUSTAINABLE?

5THE WISDOM EXCHANGE 2000 REPORT

4THE E-BUSINESS READINESS ASSESSMENT REPORT

3THE SIX STAGES OF GROWTH

2THE GROWTH BUILDERS REPORT

1THE INNOVATION REPORT

L E A D I N G G R O W T H F I R M S E R I E S

OUTSOURCING: ALLIANCES FOR GROWTH · 2020-02-07 · NEARSHORE OUTSOURCING, OR NEARSHORING A...

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