IS5600 – 9 Global IT OffshoringPresentation Transcript
IS5600 – 9 Global IT Offshoring
What is Offshoring?
Contracting software development or the provision of IT services to an overseas firm
It is often seen as being cheaper, faster.
But there are many hazards as well
Managerial, HR, Work Style, Political, …
Offshoring should be a strategic choice, not an accidental mistake
Failing to plan for it – is planning to fail at it
Offshoring is a Huge Activity
Global total: US$80 Billion annually
India had $58 Billion
By 2020, look for $0.5 trillion
Though the potential total market would be approx $1.75 trillion
So, it is no wonder that offshoring is seen as a great opportunity, and not only by India.
Offshoring or Outsourcing?
Outsourcing – getting someone else to do the work
Inside the host country (inshoring) or outside (offshoring)
Offshoring often implies the involvement of a less developed country (compared to the client)
E.g. a US firm outsources software development to India.
E.g. an Indian firm outsources software development to Vietnam
Inshore or Offshore? Insource or Outsource?
Ask someone else to do it (outside the organisation)
Do it yourself
Do it in your own country
Do it in a nearby country
Do it somewhere else, usually a less developed country
Bring the work back home again!
Providing IT services is big business
India, China, Philippines, Russia, Brazil
Technology parks, IT parks, lots of engineering graduates
China graduates 4 times as many engineers as the US – annually
The cost of calling IDD has dropped 80-90%, if you still call, with VOIP at 100% below.
Bandwidth has increased similarly, with developing countries now connected by gigabit lines. Only 10 years ago, it was close to 0.
Standard practices and tools
Established industry benchmarked procedures
Some software tasks have been commoditised
They can be offshored to the lowest cost, most productive bidder
Like shopping in an online supermarket
Strategic Issues 1
It should be cheaper – but is this strategic?
If you are in an ‘offshore or die’ situation, then is it really sensible to offshore?
Total Cost of Engagement?
China is cheaper than India for programmers, more expensive for Supervisory & Mgt staff.
There can be many hidden costs…
If you always worry about cost, you will get poor quality solutions. Quality costs!
Strategic Issues 2
Access resources unavailable at home
But employee churn and provider reliability is a major problem
Resource quality (esp at smaller providers)
Knowledge transfer and the risk of IP loss/theft
Do you share values with the provider?
Good governance? Ethics? Efficiency? Flexibility?
Strategic Issues 3
Respond to opportunities and get products to market faster
If you can overcome the differences of language, communication style, culture
Anything strategic requires corresponding investment of resources – and a long term vision.
Strategic Issues 4
Take advantage of time zone differences
Send work from time zone to time zone
US to S or SE Asia to Europe
But coordination must be perfect
Few success stories
Small and simple tasks are more suitable
Who is offshoring? - US
R&D in US, IL, CH + 16 sw devt centres
most R&D in the US, but also IN, CN, IL & UK.
R&D in IN.
All the top 20 US tech firms do offshoring, but only about 10% of the Fortune 1000 devote more than 10% of their budget to offshored activities
Who is Offshoring? - Europe
Fewer than in the US, due to more conservative business culture, as well as stricter labour laws (redundancies)
Language is an issue – few Indian programmers can read or build in French or Danish
UK - much work outsourced to IN, PK, BD, LA
80% of the large firms have yet to offshore
60% of German offshoring is to E Europe (nearshoring)
Dutch – extensively to 35+ countries, India preferred
And what about ‘Nearshoring’?
Germany to E Europe
Japan to China, Vietnam, S Korea
NEC started offshoring to China in 1982, with 40+ firms and 3000+ employees now involved
Several JP firms are spending US$10-30M/year in China
Dalian is emerging as a hub for JP-focused work
US to CA and MX – growing potential here
The Big Three: China, India and Russia
Large number of engineering graduates and well-qualified employees
Thousands of software exporting firms
But around 100 countries provide some offshoring services (RO, BR, PH, VN, PO, HU, MY, AR, FJ,…)
The Indian firms in particular are now global firms in their own right – with offshore operations to service clients ‘locally’.
Offshore sites in AU, CN , HU, JP, UK, US, UY
A significant threat to US- and Europe- based firms
Indian Restructuring 1
A decade ago, Indian firms like TCS set up offshore operations in places like Shanghai.
However, this “bright idea” seems to be undergoing a re-evaluation. TCS has now moved its Asia-Pacific HQ to Singapore, hired new management with direct experience in Asia-Pacific and China, and moved the other employees back to India.
Indeed, firms like TCS are cutting back on all their China operations.
Indian Restructuring 2
Initially they thought that existing MNC clients operating in China, who were also their world-wide clients, would like to have their local (in China) work done in China. But it seems that the MNCs would still prefer to have the work done from other centres.
However, two factors have made them change their minds:
They have lost their IP in China
Their Chinese employees are setting up parallel and competing operations with the stolen IP.
Offshoring IT Services
“ If you want the loan application processed today, click ‘1’ and it will be done in Fiji. Otherwise press ‘2’, it will be done in the US, and will take a lot longer’
What % clicked ‘1’?
There is increasing offshoring of IT services
Application processing, telemarketing, help-desking, airline reservations, data entry, etc.
Offshoring IT Services
All these various services are highly dependent on both IT and language
The relevant data is mobile – it can be sent through the Internet easily
HSBC employs thousands of staff in China, India and malaysia.
English speaking countries (populations) have a distinct advantage
In this respect, China has a lot of catching up to do.
But what about housing, medical insurance, transportation, loans, 13 th month bonus, etc.
And what about…?
Knowledge transfer costs
Travel costs – in the early stages
Unpredictable risks – wars, financial collapse, terrorism, regulatory changes (e.g. nationalisation, tax breaks), IP theft, corruption, proprietary knowledge, etc.
The IT Offshoring Journey
SunnySystems (SS) is a small sized HK software house. It needs to reduce costs, so it decided that the next version of its software would be developed in India. The project manager met a rep. of a large India provider at a US IT fair and decided to sign a contract. Problems started almost immediately: SS used a development platform called Progress, but this is little used in India. SS overlooked the fact that the Indian programmers had no experience with the latest version of Progress. Knowledge transfer from SS to India was fraught with problems. One year later, the project was written off as a failure and abandoned. Clients now started to lose confidence in a company that could not deliver. The project manager had already lost his job.
Is It Too Dangerous?
Offshoring can be exciting or scary
Depends on your appetite for adventure, for the exotic, for risks
Many lessons have already been learned, and can be read, so companies considering offshoring have no excuse not to know in advance what they are getting into.
But are the risks over stated? Is it really that dangerous?
What should be done?
Three steps (not that special)
Laying the foundations
Do we have a plan, a strategy? Who is involved? Are we ready? [a year? 18 months?]
Identifying the providers
Which country? Which providers? Selection criteria? RFI and RFP. [6 months]
Assessing & Selecting the Provider
Visit the offshore location. Meet the people. Observe their work. Sign the contract. [at least a month]
Laying the Foundations 1
Assessing if we are ready
How good is our project management?
Can we manage an offshore project?
Can our people work with them?
Are changes in work norms acceptable?
What is our appetite for risk?
The hardest step is re-engineering internal processes – so as to ensure that they are ready.
Laying the Foundations 2
The launch team
Offshoring is complex – it needs a powerful team
Build a strategic vision, commitment and push for implementation
Agile and able to make quick decisions
Expertise in offshoring
Learn from others’ experiences (including consultants)
Laying the Foundations 3
Strategy & Plan
Why are we doing this? (specifically why?)
How are we going to achieve this goal?
What are the risks?
HR costs, skill sets, current & future operations, exactly what are we offshoring,
Develop a business case for offshoring
With performance indicators to measure later success
Costs, satisfaction rates, productivity rates, delivery times, benchmarking against competitors,
Planning for resistance to change
How to keep key people, retrain some, let others go…
Identifying the Providers
In India, there are thousands of providers!
Many have offshore agents – in your country!
Globally, there are tens of countries that do offshore work
Which one do you want?
General skills or specific? Language?
Risks? IP protection? Security? Culture? Time?
What is your strategic concern? Cost, quality, efficiency?
Selecting a Country
While selection of the provider is often done carefully, selection of the country is the subject of much less care.
It may relate to personal factors or connections.
Who is going to have to go and work there, to supervise and control? Can they cope?
So many expats don’t like their assignment…
Is makes no sense to select a country that no one wants to visit or live in.