Offshore Outsourcing

AgendaGlobal Sourcing OptionsChoosing Projects Best Suited for Outsourcing?Why do Companies Want to Outsource Offshore?Rewards, Risks, and Risk Mitigation

Economic AspectsSocial ImpactsThe Role of EducationPolitics and PunditsRealNetworks Outsourcing Practices

Global Sourcing OptionsInternal sourcingOnshore outsourcing (domestic vendors)Nearshore outsourcing (e.g. Canadian vendors)Some of the benefits of offshoreLess of the riskInsourcing offshore (MNCs, JVs, WOFEs)Offshore outsourcing (e.g. Indian vendors)Big potential benefitsBig potential problems

What is Outsourced Offshore?ManufacturingBusiness and Professional ServicesInformation TechnologyInnovation

What is Outsourced Offshore?Manufacturing

What is Outsourced Offshore?Business Process Outsourcing (BPO)Office support servicesMortgage processingCustomer CareMarket researchHR, PayrollCustomer Tech SupportInsurance claims processing

If it can be digitized & commoditized, it can be outsourced

What is Outsourced Offshore?Information Technology Application DevelopmentSoftware TestingSystems IntegrationDesktop DeploymentNetwork MaintenanceTelephony MaintenanceLegacy system maintenance and supportInternal Technical Support / Help Desk

What is Outsourced Offshore?InnovationCompanies outsourcing R&D, engineering, & design. Outsource vendors are becoming ODMs Original Design Manufacturers

The pressure is on to get products to market faster and cheaper than ever (the Wal-Mart effect), but is this going too far?

What is Outsourced Offshore?Business Process Outsourcing (BPO)Professional ServicesAccountingAccounts payable/receivableQuarterly/annual reportingRegulatory compliance (Sarbanes-Oxley)LegalPatentsContractsParalegalMedicalX-ray & lab reportsPatient records

Why do Companies Outsource?Internal focus on core competenciesIn-house capability or capacity is lackingFree internal resourcesAbsorb business cyclesReduce capital outlays (OpEx vs. CapEx)Reduce FTE headcountShorten time to marketShare risks with vendors

These are benefits of both Onshore Outsourcingand Offshore Outsourcing

Why Offshore?Cost SavingsAccess to talent and/or capacityHigher degree of organizational maturity (CMM)Chasing the Sun 24/7 developmentFaster time to marketInroads into foreign marketsServicing global customers (time zone, language, culture)Tax deferment US taxes not due until repatriation of profits.

These are benefits of bothOffshore Outsourcingand Offshore Insourcing

Why Offshore?Cost Savings Real cost savings is achieved by offshoring labor-intensive tasks that are well defined, documented, and understood. A 2003 InterUnity Group survey concluded that while most CEOs and Corporate Buyers sought savings of 40-60%:The majority of respondents (33%) saw 20-40% savings.Only 12% saw savings of 40-50%. 19% of respondents saw less than 20% savings.

Source: The New Software Exporting Nations: Success Factors www.is.cityu.edu.hk/research/ejisdc/vol13/v13r4.pdfWhy Offshore?Wages for Software Professionals

USA $63,000Japan$44,000Russia$7,500Philippines$6,500$10,000India$5,000-$8,000China$5,000-$9,000Indonesia$5,000Ukraine$5,000Vietnam$1,400-$6,000

Source: The New Software Exporting Nations: Success Factors www.is.cityu.edu.hk/research/ejisdc/vol13/v13r4.pdf

Why Offshore?Cost SavingsMost cost savings is based on reduced labor costsTotal cost savings must also account for:Startup and knowledge transfer costsTelecom & Internet costsProductivity differences very rarely is it a 1:1 swapManagement, control, and performance auditingTravel costsRedundant sourcing costsCosts of reducing headcountHidden costs scary!

http://www.competeamerica.org/economy/experts/Why OffshoreAccess to TalentIndias universities produce 900,000 engineering and computer science graduates + another 2MM other graduates, most of whom speak very good English.*Together, China and India produce over 4MM graduates each year, twice as many as the U.S. and Europe combined.Approximately half of the graduate students currently enrolled in the physical sciences and engineering at U.S. universities come from other nations.

http://www.competeamerica.org/economy/experts/

http://www.competeamerica.org/economy/experts/Why OffshoreTime to Market

24/7 development Chasing the SunProgram Manager in the US (6pm local) hands off technical specs to a development team in India (6am local).Time to market can be cut by 50-66%

=

http://www.competeamerica.org/economy/experts/

Risks of OffshoringCheaper, better, fasterwhats the downside?

Financial risksOperational risksLegal and Regulatory risksGeopolitical & International Economic risksSocietal & Relational risks

Risks of OffshoringFinancial Risks

Unrealistic expectations of total cost. Counting on savings that dont materialize.Poor contracting fixed price vs. T & M. Can the contract accommodate changes in scope?Poorly defined Service Level Agreements (SLAs) can result in substandard quality or slow delivery. Is the staff that does the work who you paid for, or are they the B team? Is rework costing more than youre saving?

Risks of OffshoringFinancial Risks

Long term contracts vs. wage inflation. Good for saving, but could disincent the vendor unless allowances are made. Wage inflation in India is currently running >10%/year.If an outsourced program fails and is brought back in house, cost of reacquiring talent and IP can be very high.Did you pay too much or too little due to offshoring inexperience? Both can cost you.As vendor gains a hold on vital operations, they may have greater leverage in future contract negotiations, driving up costs.

Risks of OffshoringOperational Risks

Are you offshoring the right projects for the right reasons? Lack of strategic focus and planning may make offshoring inefficient or ineffective.Poor vendor selection good company, but not for our purposes, or vendors operations are sub-standard.Lack of experience or ability to skillfully manage an offshore project.

Risks of OffshoringOperational Risks

Management challenges due to time zone, language, and cultural differencesLoss of internal capabilities may make your outsourcing decision irreversible.Allowing vendors access to company systems and data poses a potential security risk.Giving access to strategic company information could turn your vendor into a competitor.

Risks of OffshoringLegal & Regulatory Risks

Difficulty in contract enforcement and remedy for breach. However, most major offshore service providers maintain a U.S. office.Lack of data privacy regulations in some countries (e.g. China & India)Lack of Intellectual Property (IP) protection.Lack of understanding or difficulty complying with U.S. laws and regulations (e.g. SOX).

Risks of OffshoringGeopolitical & Intl Economic Risks

Political, social, or economic instability (e.g. India-Pakistan conflict)Potential for U.S./WTO trade sanctions Macro-economic effects, such as inflation, currency exchange rates, taxes, labor rates, etc.State control & monitoring of telecom/InternetActs of terrorism, war, disease outbreaks, natural disasters. How would a bird flu outbreak affect your business?

Risks of OffshoringSocietal & Relational Risks

Poor labor & community relations due to layoffsRisk of employee backlash, including flight of key employees & undermining of offshore relationships.Poor perceptions by customers, the public, and even shareholders.Outsourcing customer support & service can result in negative customer response (e.g. Dell)Challenges in the transition process train your replacement concept.Loss of local purchasing power in some cases. Who are your customers? (Alaska Airlines vs. Boeing)

Mitigating the Risks of Offshoring#1 Do your homework!Understand what youre outsourcing and why.Only outsource appropriate projectsSet realistic expectation for performance and financial return.Research your choice of vendors and perform due diligence.Visit your vendor, and have them visit you expensive, but necessary.

Mitigating the Risks of Offshoring#1 Do your homework! (contd)Perform a meaningful pilot project (10-15 FTEs)Contract a Win-Win for you and the vendor. Align their objectives with yours.Communicate constantly and verify performance.Understand but dont deny cultural differences.Maintain redundancies and have an exit plan.

R. Mohan confidential*Project Organization BUSINEES HEADAccountManagerQualityAssuranceAccountCo-ordinatorCustomerManagementMIS /End UserOn Site

R. Mohan confidential

R. Mohan confidential*BUSINESS HEAD

AccountManagerQualityAssuranceSkill set : Experience in Customer Liaison Management of Large teams Domain Knowledge

Responsibilities : Customer Relationship Management Communications Management Onsite and Offshore Team Management

Project Organization

R. Mohan confidential

R. Mohan confidential*BUSINESS HEADAccountManagerQualityAssuranceProject Organization

R. Mohan confidential

R. Mohan confidential*BUSINESSHEADAccountManagerQualityAssuranceSkill set : Experience in required platform Analytical / Programming skillsResponsibilities : Construction and Testing as per Schedules Quality control ( Peer reviews, testing ) Change control ( Maintaining Configuration Management Registers )Project Organization

R. Mohan confidential

Social ImpactsForrester Research predicts 3.3MM service jobs, including 473,000 computer services jobs, will be sent offshore by 2015.

In 2004, Gartner estimated that 1 in 10 jobs at IT companies will go offshore by the end of that year.

The Role of Education "Some have a gnawing sense that the roots of the problem may extend back through our education system.

--Alan Greenspan chairman, Federal Reserve Board

The Role of Education "The K-12 system does a good job of weeding out any students interested in math and science. We prepare them to be lawyers and consultants, instead."

--Craig Barrett CEO, Intel

The Politics of Offshoring

"We value an America that exports products, not jobs - and we believe American workers should never have to subsidize the loss of their own job." "All across America, companies have shut their doors, putting hardworking people out of a job, leaving entire communities without help or hope,"

The Politics of Offshoring Bush has been quiet on the specific topic of shipping work abroad, but his advisers have defended so-called 'offshoring' as healthy for the economy.

Kerry writes: "[Bush] let companies outsource jobs to Asia and given them tax breaks for doing so -- and he's the first president to lose jobs in 70 years."

CNET News.comThe Politics of Offshoring Congress and more than 30 states have proposed measures to keep government work from flowing offshore.

But just a handful of bills have become law, and that legislation doesn't always expressly oppose overseas outsourcing.

CNET News.com

Where have all the jobs gone?Some have gone offshore

Where have all the jobs gone?Technology and Automation

The Offshoring DebateOffshore Outsourcing is a fact of business, and is likely to increase in the near term.Economists largely agree that offshore outsourcing is good for business, good for the economy, and good for Americans as a whole, in the long run.

The Offshoring DebatePoliticians, labor organizations, and media point out that offshore outsourcing hurts many people in the near term, and may be bad for American employment and standard of living in the long term.Both sides of the debate generally agree that social programs are needed to help those who lose their jobs due to offshoring.

*Motorola example. Turbines in China*****