Sunday, November 14, 2004

Offshore Outsourcing: The Big Five

Outsourcing of software development, support and maintenance is gradually emerging as a source for competitive advantages--and a source for headaches, too--for a number of companies

Recent study by Gartner attributed the first year-over-year revenue drop suffered by the IT services industry in 2002 to growth in offshore services, which is pushing down the prices. Forrester Research says that the offshore outsourcing is going to rise from 12 percent of corporate IT budgets in 2000 to more than 28 percent in 2003. Meta Group predicts that as much as 50 percent of U.S. IT workers will shift to contract labor by 2007.
A CEO of a young IT products company recently said on the panel of a popular Washington, D.C. event that by outsourcing its R&D center to Bangalore, India, his company was able to develop products very efficiently, effectively and with a minimal amount of cash. With only a $15,000 to $20,000 monthly cash burn rate, his company was able to compete against 4- or 5-year-old VC-backed companies that had raised multi-millions.

But is that all there is to outsourcing--reduced cost? What are the various things that one should consider while employing outsourcing? Industry experts say that there is a lot that stays hidden but has an enormous impact on the decision to outsource. Let's examine the experiences of these people to understand what it takes to successfully outsource a project.

Outsourcing Is More Than Labor ArbitrageLabor arbitrage--the ability to pay one labor pool less than the other--has definitely modified the fundamentals of outsourcing. Also, the availability of a greater number of equally qualified people--India produces 75,000 IT graduates every year as compared to 26,000 in the United States--has played a big part in the growth and efficacy of offshore outsourcing.

However, there is more to outsourcing then just lower HR expenses. There are many areas including vendor selection, communications, technical oversight, security/privacy and specialization, which all need to be considered while outsourcing work offshore. Studying best practices in these areas is a must if you want to be successful. Five things will help you achieve that.

Select the Right Vendor
As an industry, outsourcing has matured. There are many documented benefits and pitfalls of outsourcing. The general awareness has reached such a level that the case for outsourcing has been pretty much made. Now the prevalent question has changed from "Why outsource?" to "Outsource to whom?"

How you select your vendor will have a significant impact on your success. There are a host of questions that you need to get answers to. You need to establish selection criteria to evaluate vendors. You need to understand your core competencies, your business needs and how they relate to the core competencies of the vendor. You need to evaluate the industry knowledge of each vendor and their processes and methodologies, including CMM, ISO9000 or TQM certifications. You need to understand the cultural diversity and the impact that it may have on communications and development efforts.

One startup company that tied up with an outsourcing company in India had to constantly answer this question while seeking outside investment: "How are you going to assure that you have this effective development organization in India with all of the negative things going on around the world?" It was able to address this concern easily because it wasn't the only company using Indian development centers. Its vendor was also supporting a number of other U.S. companies that were much larger and prominent than the startup. The vendor had enough redundancy and resources for backup and recovery to ensure continuous operations in emergency situations.

Do Your Homework
An entrepreneur that is using outsourcing to build his startup venture said, "Outsourcing is not going to be an easy process, but it can be relatively simplified if you know what you're getting into." Outsourcing is quite different than contracting, more specifically time and material (T&M) contracting.

T&M contracting--the more prevalent form of IT contracting--usually entails getting people to join your team to complete the work. The client keeps the control and tells the contractors what is needed, when it is needed and how it will be done. The project management, resource planning, scheduling etc., are all done by the client.
On the other hand, in the case of outsourcing you ask the vendor to deliver you something and it is responsible for the complete development and the delivery of the final product. In this case the vendor is responsible for project management, resource planning, scheduling etc., hence it calls for a different type of preparation than T&M contracting.
In outsourcing, the completeness and thoroughness of business analysis is very critical. You need to ensure that your analysis specifies each and every aspect of the proposed job.

The lessons learnt mentioned by a panel of CEOs discussing outsourcing in a recently held Washington, D.C. event included requirement specifications and documentation. These companies spent a large amount of time writing the specs and completing the documentation that they then handed over to the vendor. They broke their specs in multiple modules, which could be much easily communicated to the development team as compared to the complete system. They developed elaborate matrices to measure the final product. They communicated this matrix to the vendor well in advance. Their suggestion? Don't even think about outsourcing if you are not willing to develop detailed specs and the measurement matrix.

It's the ProcessIn outsourcing projects, even though the project management, resource planning and scheduling is done by the vendor, the client still has to monitor the vendor. The lack of proximity to the vendor puts a greater importance on the process that is employed to communicate the work, to get the work done and to report back the progress.

That is why many companies are putting greater emphasis on the certification like CMM, ISO900, TQM, etc., as compared to the technical resources of the vendors. The vendor must deploy a consistent and high quality process for analysis, design, development, QA, reporting, project monitoring and management. The client and vendor must have a clear understanding about the process. Otherwise, the project will fail.

Other than SDLC processes and certification, another critical aspect is the outsourcing contract. The contract should be flexible enough to be able to address various late-stage concerns and modifications.

Protect Your IP
When the software is developed in a far-away place that you do not visit very often and where you do not have control, it can raise doubts about the protection of your intellectual property rights. How you go about protecting your IP will have a great impact upon the success of your company, not just the success of your outsourcing initiative.
One company split its system into multiple pieces and worked with multiple companies, finally integrating all pieces and coming out with the eventual product. This way none of the outsourcing vendors have a clear idea about the eventual product. They only knew about the modules that they worked on, not the whole picture.

Communicate Well
A common problem that the software people face is the miscommunication of requirements. A CEO of a company that outsourced work to India once mentioned that while developing software in the United States, he had same communication issues while developing software in India. However, when the development is in a different country, the problem can be exacerbated. How you address this will have critical bearing over the success of your project.

You need to develop thorough communications that address all foreseeable issues, including the time difference between different locations, the language and cultural differences, whether video conferencing capabilities exist, etc. Such a plan should specify how often you communicate, who will set up the agenda, who will initiate the discussion, etc.

IT outsourcing has been gaining momentum for some time. The industry has matured to a very good level. A number of big and small companies have consciously made an effort to pursue outsourcing on a strategic level and they have set up many good and bad examples. Getting your IT work done offshore has many advantages, but it also comes with a number of risks. If you do not address those risks and take care of all the areas mentioned above, then your outsourcing project may become a nightmare for you.


Tuesday, November 09, 2004

Five Ways To Offshore Proof Yourself

Offshore proofing yourself need not involve radical shifts in Careers away from IT. Those drastic steps may not be needed if you understand what works and what does not in IT Offshoring!Notwithstanding all the insanity with offshoring that is going right now, If you are in IT, I would not move away from it. You may just need to make sure you are in environments where offshoring does not work! Here are five simple ways to do it:

1. Positions Dependent Upon Constant Communication - Offshoring is not suitable for IT positions that are dependent upon constant communication - Business Intelligence and Reporting is one such area. Constant communication and changes are the norm rather than exceptions. This may not be because the business users are fickle. It's just the nature of Business Intelligence and Reporting.

2. Positions That Involve Lots of Internal and External Touchpoints - A good example might be IT careers in Consulting Companies that require interactions with customers here. More touchpoints mean bodies that are in the same time zones as yourself. They may try offshoring those positions but they will not work in the longer run.

3. Positions where Requirements are Changing Fast all the time - Fast growing businesses do these to you. Requirements cannot be frozen long enough for them to follow any process. That may also mean you need to be nimble on your feet, be familiar with Rapid Prototyping and faster release cycles if you are in software development. Good examples might be fast growing online companies.

4. Positions where Technology is the Core Set of Products - For Intellectual Property reasons as well as speed with which you need to do things (not very mature companies but younger ones) IT positions within such companies cannot be outsourced easily without pain. If you join a Retailer in their IT department, IT is a support process. It is subject more to outsourcing as it is not a core competency.

5. IT Careers that involve fast changing technologies - RFID, Wireless are all examples of fast changing technologies that cannot step outside the U.S simply for availability reasons. Wireless standards (Wide-area, telecom not local area) vary from country to country and is resistant to outsourcing simply for the reason that it cannot be done elsewhere. Fast changing technologies like RFID may require resources - people, knowledge, access to information, capital, etc that are very localized. They cannot be simply outsourced.

That said, already Computer Science enrollments are shrinking in schools. This may drastically alter the demand-supply equation in local IT workers favor soon. Hang in there, hide out for a while and the sun will come out. Hype machines work both ways, very optimistic and very pessimistic. Currently it is painting an unwarranted pessimistic picture. I don't believe it at all, if not for any reason other than simply what experience teaches you.


Wednesday, November 03, 2004

Business Process Outsourcing (BPO) Full Story

Author Of Article: Jagan

BPO is the new buzz in town, a relatively new concept with strong economical and business fundamentals which IT firms are now reeling towards, which provides an amazingly new plethora of opportunities for what Information Technology Companies can provide for the old-economy firms and how strongly they can get themselves entrenched in their value chain. This would not only make them felt very important in terms of their contribution but also as a tool for their clients, guaranteeing them competitive survival and growth in the current business market place.

BPO conceptually allows an enterprise to just focus on its core Competency and by outsourcing all the other support based facets that generally consumes a substantial amount of a firm's time and energy. Peripheral activity such as Payroll, Employee Health-Care, Employee benefits, System Support, internal IT division, Sales/Marketing, Inventory Management and the whole gamut of other things which hampers an organizations interest by not allowing it to focus on what it believes are its strategic area of expertise. A firm's energy should be highly focussed around its core competency which is what ensures it a place in the market, earns revenue for it and keeps it going.

After having decided to outsource all of its business process baring its core competing area, an enterprise also has to plan and strategize of how it would actually outsource, to whom and how it would integrate this whole process which is equally crucial for maintaining its competitive edge of its competition. Any corporate house having debated on the various business processes that it wishes to outsource now needs to pick the right outsourcing firms/agencies by doing the necessary due-diligence in terms of researching and analysing a particular firms capability and credentials and its track record for having accomplished outsourcing activity for reputed clients. Equally essential to brainstorm is how would one be bringing all these different outsourcing firms together while integrating the different business components and ensuring this does not entail into complicated issues consuming more time and energy.

Once this outsourcing model is championed by any firm, having adapted and Integrated it into their business strategy, it can achieve substantial business altitude it terms of its competition by focussing on what is does best and leveraging the outsourced model to its maxim. Also these outsourced Business components can be bench marked as per the organizations quality requirements thus ensuring the qualitative benefits as well.

For the outsourcing firms, BPO presents enormous opportunity to provide more of such peripheral services and support thus making it more important and also allowing it to play a much higher value added role for its clients.


Tuesday, November 02, 2004

The banking industry is ripe for business process outsourcing

For more than 30 years, the banking industry has used outsourcing as a means to reduce costs. Until recently, IT processes accounted for the majority of large-scale bank outsourcing.
In the past two or three years, however, more and more banks are dipping their toes into the fresher waters of business process outsourcing (BPO). A recent example is Bank of America’s deal with Exult to run its human resources department.

BPO entails outsourcing an entire business function—not just certain aspects of the function, such as IT systems. Good BPO candidates are key back-office processes, such as items processing, call centers, and even entire HR departments.

The impetus behind this more extensive kind of outsourcing is certainly cost savings. In addition, the flexibility with which banks must respond to industry challenges presented by straight-through processing (STP), electronic bill presentment and payment (EBPP), and truncation is increasingly important.
Outsourcing bank back-office processes also helps mitigate risk. And many banks choose BPO to gain access to intellectual capital and skill sets.

Issues to consider before making the move to BPOBanking is ripe for BPO. For example, of the top 20 banks in North America, more than half have outsourced their items processing, are actively searching for providers, or are reviewing the business case for such a move. So, what should banks consider before making the BPO decision?

Pricing needs to be at the top of the list. However, it's also one of the hardest things to get right. BPO is immature, and drawing up the right cost structures and identifying good deals is often something of a guessing game. So the financial side of any contract, let alone any other clauses, requires appropriate expertise to judge correctly.

Two additional factors compound the problem. First, BPO typically incorporates a desire to improve best practices or deliver operational transformation. It can be difficult to discern where the danger points lie in the relationships governing these crucial but intangible qualities.
Second, the very nature of BPO requires companies to negotiate functions that they have little knowledge about, which is one of the reasons they want to outsource in the first place. But this can pose a serious risk. Unscrupulous outsourcing partners may use this lack of expertise to pull the wool over a company’s eyes. Therefore, banks should begin by outsourcing what they thoroughly understand before moving to more innovative projects.

How soon will BPO benefits be quantifiable?How soon a bank will realize the benefits of BPO depends on the situation, according to "BPO in Banking: Outsourcing the Back Office," a Giga Information Group report by analyst Julie Giera. If the scale of outsourcing is one small area of back-office operations, then banks will potentially realize benefits sooner because conversion to the outsourcer’s area of responsibility will occur sooner.
However, if a multibillion-dollar bank decides to outsource its entire items processing facility and consolidates, say, 15 different capture facilities into five, while converting to image and truncation at the same time, it could be at least a year before the bank will realize any substantial benefits.

In addition, banks are often ill-equipped to assess the benefits that BPO can bring, let alone when it might bring them. The focus of most traditional outsourcing relationships is solely on reducing the cost of current services, which has resulted in an important missed opportunity for increasing the business impact of outsourced IT as well as BPO.

Successful outsourcing contracts involve relationships between parties, not transactions. As such, the value an outsourcing partner can and should deliver goes well beyond cost savings. But most CIOs and IT managers have little experience in measuring that type of value, and they're often unprepared to apply such concepts to BPO.
BPO should be an offer that many banks simply cannot refuse. Whether it's an offer they can understand is another question entirely.


Monday, November 01, 2004

Will Offshore Outsourcing Kill U.S. IT Services Jobs?

The threat may not be as serious as many U.S. tech workers fear.
To save money, some U.S. firms are looking beyond the United States for IT services. However, this shift doesn't necessarily translate into a doomed outlook for U.S. IT services jobs or U.S.-based services firms, according to a research report from IDC.

IDC says U.S. services firms will continue to use offshore workers to lower costs. However, most U.S. workers at risk will transform their current knowledge into new skills that will remain in demand, according to IDC. "Several facts have been lost in the debate about offshore sourcing," says Ned May, program manager of IDC's Worldwide Services research. "One is that much of the spending to date has focused on only a few activities, which limits the impact of offshore on the broader market. Another is that much of the offshore spending will be captured by locally-based vendors, who are currently building up their own offshore delivery resources. But the most important fact being overlooked is that, while there will be a migration of some jobs overseas, it will be coupled with steady growth in a number of service activities on U.S. soil."

To get an idea of the impact that offshore sourcing may have, IDC applied a supply-side survey to the U.S. IT services market. This survey took two perspectives: "macro markets," which demonstrate how IT services contracts are bought and sold, and "activity groups," based on the underlying tasks workers are performing.
According to IDC, offshore sourcing will affect the three macro markets -- project-oriented services, outsourcing, and support/training -- about equally, although additional market factors will cause a net decline for project-oriented services.

When looking at activity groups, the researchers found the impact of offshore outsourcing will focus on maintenance and support, implementation, and operations, while planning and IT education and training will remain relatively unaffected.

According to May, the work that will move offshore is mostly activities that require low skill, as process and repeatability are strong underpinnings of the work. Companies will still look with in the United States for innovation and detailed business expertise.


Sunday, October 31, 2004

Offshore Outsourcing Grows Up

Offshore outsourcing is evolving into a more sophisticated model, according to Forrester Research, Inc. What used to be a simple hop from the US to India, for example, now includes work being done across a global network of multiple offshore locations that deliver services at even lower cost. As a result, suppliers are shifting their focus from serving the needs of local clients, or supporting remote operations of multinational firms, to expanding their talent pools in developing areas like China and Southeast Asia.

New research from Forrester further defines this new low-cost global delivery model (GDM) and finds that none of the IT services vendors is leading in its adoption.

To assess the large investments that IT services vendors are making in a low-cost GDM, Forrester compared the capabilities of the three major onshore suppliers (Accenture, EDS, and IBM), and three offshore suppliers (Infosys, TCS, and Wipro). Using its Forrester Wave? methodology, Forrester evaluated the suppliers against 60 criteria, reflecting a fully developed low-cost global delivery model, and found that while the six suppliers are making a broad range of GDM investments, no one is a clear leader yet.

"The grouped ranking of the vendors is an indication that the move to a low-cost GDM is at the beginning of an evolution that will take place during the next three to five years," said John C. McCarthy, vice president, at Forrester Research, Inc. "As providers expand into new locations, develop new capabilities, and increase GDM services, they will face unique challenges."
Forrester sees the adoption of this distributed approach as a complex evolution with specific hurdles around account management, process, skill sets, and culture.

Challenges For Indian Suppliers (Infosys, TCS, And Wipro)
Improving account management.
Moving away from technology-centric messages that often alienate business buyers. Investing in vertical-specific skills.
Building out their middle management.
Becoming more multicultural organizations.

Hurdles For Onshore Suppliers (Accenture, EDS, And IBM)
Motivating local sales people to sell their GDM capabilities.
Further investing in consistent global processes.

Expanding their offshore technical and quality skill sets. The research, "Low-Cost Global Delivery Model Showdown," also presents a more in-depth look at the unique strengths of each supplier, including a second weighting toward a simple, basic delivery model.


Friday, October 29, 2004

The challenge of managing offshore outsourcing

Monday 12th January 2004
In discussions about outsourcing, most of the attention has been paid to the performance of the offshore supplier rather than on managing the outsourcing relationship once the contract is signed. Management of outsourced activities is difficult because they are not under one roof and under single management control. It is an even bigger problem when the other party is many thousands of miles and several time zones away and has a different culture.

When the dust has settled after the conclusion of the large outsourcing contract organisations cannot relax, as there is much work to be done to establish effective cooperation with their outsourcer. Cooperation needs to be based on well-defined management principles with clear accountabilities and have unambiguous processes to deliver the promised benefits.

Principles are crucial for setting the tone of the relationship. They describe the rights and responsibilities of each party to share information and the limits of each party's decision-making authority. Despite the vast improvement in global communications, contact with offshore suppliers is often constrained by time differences. Well-designed principles are doubly important in these circumstances, as they ensure decisions are made that are informed by and align with the principles of the agreement.

An outsourcing project needs a joint management structure to manage operational, tactical and strategic liaison. The management structure will define the roles and responsibilities of each party and the management committees that direct and control the outsourced activity.
New processes will be required to manage the contract and the outsourcer's performance. Existing IT management processes will need to be modified to handle the new arms-length relationship. Additional communications and liaison processes will be needed to resolve issues that will inevitably arise between the partners.

These processes need to be developed and agreed in partnership with the outsourcer - a significant challenge when the outsourcer is on another continent. Even minor differences between business cultures can lead to many more misunderstandings in agreeing business practices and assumptions. A shared information workspace is crucial to ensure that all crucial information is in fact shared so that the playing field stays level.

Outsourcing customers will find it challenging to select the right people to manage these contracts. Managers who have a hands-on approach to solving problems may be perfectly effective when an activity is in-house. They will need a different management style when managing an outsourcing contract where much has to be accomplished with phone calls and written instructions. When offshore contracts encompass geographical and cultural differences, the task becomes very challenging indeed.

Organisations will need staff who can rapidly learn new management skills - people who can develop clear and comprehensive plans and communicate them well while being sensitive to cultural differences. Organisations are unlikely to staff these positions from the remnants of the IT department but one source of good candidates could be IT workers with expatriate experience.

Customers of offshore outsourcers need to provide a realistic level of resources to handle this challenging task. Only customers who invest wisely and well in the management of the offshore outsourcing relationship will obtain the promised benefits.