IFCLA Conference 2010


Managing Risks when Offshoring Services: Including
          a Practical Indian Experience


     ...
Offshoring

Offshoring describes the relocation by a company of a
business process from one country to another—typically a...
Offshoring from Europe
Offshoring as a Business Model

The continuous globalization of the economy has lead several
enterprises to adopt Offshori...
Motivation factors for Offshoring
Positive Impacts of Offshoring
Destination for Offshoring
Offshoring
                                     Strategy

[change title in View/Header and Footer]   8
Key Observations

 Majority of outsourcing companies have corporate-wide
   offshoring strategy
 Offshoring of highly sk...
New Strategy - Offshoring of highly
       skilled innovation activities

 Engineering, research & development, product d...
Service Providers adapting Offerings

 Smaller service providers are specializing in product
  design, engineering, and R...
SME’s Increasingly Offshoring

 Offshoring is no longer the domain of Fortune 1000; it has
   been embraced by SMEs
 SME...
Offshoring Growth continued despite Slowdown


  Those who have already offshored; aggressively planning to
   expand off...
Offshoring to
                               India

[change title in View/Header and Footer]   14
Benefits of Offshoring to India

 India offers many advantages that make it the favorite of 82%
  of US software export m...
Weathering the Economic Storm

 US Offshoring needs recently reduced by:
   - Decrease in corporate growth initiatives

 ...
Weathering the Economic Storm

 Offshoring continued to grow in the areas of R&D, product
  development, media, health ca...
Green Outsourcing

 Environmental concerns are creating a green revolution
  worldwide
 Green IT: reducing the harmful e...
Risk Management

[change title in View/Header and Footer]   19
Barriers met on Offshoring Activities
Risks and Barriers faced when Offshoring


Some of the major barriers faced when offshoring may be
categorized as:
    Op...
Managing Operational Risk


Operational Risks can be minimized by the following means:
    Create joint knowledge reposit...
Managing Strategic Risk

Strategic Risks can be minimized by the following means:
    Build Transition Service clauses in...
Managing Composite Risk


Observe the Extended Organizational Form (EOF):
  The EOF bridges the strengths of both organiz...
Risk of Miscommunication


The following risks associated to miscommunication may be
minimized;


    Language barriers a...
Other Risks

 Public resistance - Pressure from labour unions, anti-globalists
   and some political figures may attempt ...
Enterprise Risk Management

 Enterprise risk management is a process, effected by an
  entity’s board of directors, manag...
Suppliers             The Extended Enterprise




                Contract
              Manufacturer




                ...
Enterprise Imperatives
Key Offshoring Compliance Risks

   Antitrust/Competition Law           Industry Guidance/Regulations
   Codes of Condu...
Reducing Risk …

    High




                 Controls, Communication
Impact           and Monitoring
    Low




       ...
Requires Good Governance
Disaggregating Compliance Responsibilities
Other Risks to Assess in India

 Geopolitical Factors
   - Infrastructure Issues
   - Regulations for vendors
   - Legal ...
Mitigating Risk in India

 Conduct Due Diligence
 Complete a Risk/Benefit Analysis
 Negotiate a thorough Contract – fle...
THANKS FOR YOUR ATTENTION…


Sajai Singh
Partner and Head of Technology Practice
J. Sagar Associates
2 Frontline Grandeur,...
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Managing risks when offshoring services including a practical indian experience - sajai singh

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Managing risks when offshoring services including a practical indian experience - sajai singh

  1. 1. IFCLA Conference 2010 Managing Risks when Offshoring Services: Including a Practical Indian Experience Helsinki, June 10, 2010 Sajai Singh Partner and Head of Technology Practice J. Sagar Associates advocates & solicitors Delhi | Gurgaon | Mumbai | Bangalore | Hyderabad
  2. 2. Offshoring Offshoring describes the relocation by a company of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting Types/Kinds of Offshoring  Production Offshoring  IT Services Offshoring  Innovation Offshoring
  3. 3. Offshoring from Europe
  4. 4. Offshoring as a Business Model The continuous globalization of the economy has lead several enterprises to adopt Offshoring as a business model because of the following benefit factors :  Access to cost-effective services  Can concentrate more on core business  Increase in profits, productivity, level of quality, business value, business performance  Can gain access to specialized, expert and skilled services  Faster deliveries to customers and improved customer satisfaction  Benefit from time zone advantages  Helps organizations gain a competitive edge in the market
  5. 5. Motivation factors for Offshoring
  6. 6. Positive Impacts of Offshoring
  7. 7. Destination for Offshoring
  8. 8. Offshoring Strategy [change title in View/Header and Footer] 8
  9. 9. Key Observations  Majority of outsourcing companies have corporate-wide offshoring strategy  Offshoring of highly skilled innovation activities is new strategic imperative  Service providers are adapting offerings to meet new demands  Small and medium businesses are increasingly offshoring  Offshoring continued to grow despite downturn
  10. 10. New Strategy - Offshoring of highly skilled innovation activities  Engineering, research & development, product design, software development  Key drivers: growth strategy; speed to market; domestic shortages of qualified personnel  Main magnets: labor costs; talent availability; high levels of expertise  Most common concerns: service quality; employee turnover; operational efficiency; loss of managerial control; data security  Flows to India: Scandanavia (65%); US and UK (50%)
  11. 11. Service Providers adapting Offerings  Smaller service providers are specializing in product design, engineering, and R&D  India faces challenges due to wage inflation and worker attrition  Russia and the Middle East (e.g., Egypt and Jordan) are emerging new knowledge center clusters  Canada, Mexico and Central America are increasingly popular destinations for product development  Companies prefer captive delivery model in China and other countries where IP protection is weak
  12. 12. SME’s Increasingly Offshoring  Offshoring is no longer the domain of Fortune 1000; it has been embraced by SMEs  SMEs find it difficult to compete for highly qualified domestic talent  Time to market is important driver for SMEs  SMEs are more adept at identifying and accessing new geographic talent clusters (e.g., Brazil, Egypt, Sri Lanka)  SMEs are sophisticated users of web-based collaboration tools and prefer specialized service providers
  13. 13. Offshoring Growth continued despite Slowdown  Those who have already offshored; aggressively planning to expand offshored activities  Many have aggressive plans to initiate new offshoring initiatives  Companies with existing offshored activities seek improvements by revamping internal processes, provider selection, performance monitoring, best practice sharing and renegotiating provider terms  Some plan to spin off captives to monetize assets in exchange for long-term service contracts
  14. 14. Offshoring to India [change title in View/Header and Footer] 14
  15. 15. Benefits of Offshoring to India  India offers many advantages that make it the favorite of 82% of US software export market (Nasscom)  Large pool of computer literate and English speaking professionals  Well recognized Information Technology skills  Wide gap between personnel costs in India and developed countries  Work practices largely comply with ISO and SEI CMM standards. Three out of every four SEI-CMM 5 companies worldwide are located in India  Quality standards meet the approval of the world. India exports software to more than 95 countries  India has a stable political environment and pro-IT government  Reliable satellite and submarine communication links facilitate good broadband connectivity with the rest of the world
  16. 16. Weathering the Economic Storm  US Offshoring needs recently reduced by: - Decrease in corporate growth initiatives - Reduction in domestic labor costs due to unemployment  Concerns for Indian Vendors: - Focus solely on back-office operations - Lack of client diversification • Major Indian technology companies get at least 50% of revenue from the U.S. and 20-30% from Europe • Majority of revenues are from banking & financial services sector
  17. 17. Weathering the Economic Storm  Offshoring continued to grow in the areas of R&D, product development, media, health care, utilities, engineering (ESO) and legal (LPO) outsourcing  Opportunities for Indian offshoring firms during the slow down: - Acquisition opportunities in the US and Europe at low cost - Acquiring laid-off technology talent from financial services sector - Acquisition of niche outsourcing companies / vendor landscape consolidation - Time to focus on integration work and standardization - Flexibility in contract ‘term’ & other terms
  18. 18. Green Outsourcing  Environmental concerns are creating a green revolution worldwide  Green IT: reducing the harmful environmental impacts of computing - Inside vendor organization - increases savings in energy costs - Outside IT as an enabler - Opens market for energy efficient products  NASSCOM Initiative: - Making IT Green – from obligation to opportunity - Making ‘Green’ happen through IT – cloud computing, video- conferencing, etc. - Making Green Warriors - employees adopt green lifestyle  Dell Policy – “Go Green” - Delivering energy efficient projects - Assisting companies in becoming green
  19. 19. Risk Management [change title in View/Header and Footer] 19
  20. 20. Barriers met on Offshoring Activities
  21. 21. Risks and Barriers faced when Offshoring Some of the major barriers faced when offshoring may be categorized as:  Operational Risks  Strategic Risks  Composite Risks  Miscommunication  Public Resistance  Security and Data Integrity  Wage Inflation
  22. 22. Managing Operational Risk Operational Risks can be minimized by the following means:  Create joint knowledge repositories and deploy collaboration mechanisms  Have a well defined Risk Matrix  Proper Transition Management  Good monitoring and controlling
  23. 23. Managing Strategic Risk Strategic Risks can be minimized by the following means:  Build Transition Service clauses into the contract  Use multiple suppliers  Retain residuary capacity  Monitor and Control the Offshoring activities, on a stricter basis
  24. 24. Managing Composite Risk Observe the Extended Organizational Form (EOF):  The EOF bridges the strengths of both organizations by letting the providers employees report to the buyer’s management  It allows companies to exert operational and strategic control over their offshore operations without having to carry the expenses on their balance sheets  In difficult times it provides a compelling rationale for offshore services
  25. 25. Risk of Miscommunication The following risks associated to miscommunication may be minimized;  Language barriers and cultural differences can increase the risk of miscommunication  Same words and expressions holding multiple meanings in different cultures
  26. 26. Other Risks  Public resistance - Pressure from labour unions, anti-globalists and some political figures may attempt to block the offshoring process  Security and data integrity- At times the management by staff in another country may be perceived or inherently less safe than that is managed on a domestic basis  Wage inflation – The increasing demand for offshore services may dive the wages up thereby nullifying the benefits of offshoring
  27. 27. Enterprise Risk Management  Enterprise risk management is a process, effected by an entity’s board of directors, management and other personnel, applied in a strategy setting and across the [extended] enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.
  28. 28. Suppliers The Extended Enterprise Contract Manufacturer Intermediaries Customers Customers Extended Enterprise ITO Contractor s BPO
  29. 29. Enterprise Imperatives
  30. 30. Key Offshoring Compliance Risks  Antitrust/Competition Law  Industry Guidance/Regulations  Codes of Conduct  Money Laundering  Codes of Social Responsibility  Permanent Establishment  Customs/Import  Product Safety/Recall  Data Protection/Privacy  Professional Codes  Employment  Records Management  Environmental/Climate Change  SOX/Listing Requirements  Export Controls  Security Breach  FCPA/Bribery  Trade Sanctions  Foreign Investment Controls  Transfer Pricing  Foreign Exchange Controls  VAT/GST
  31. 31. Reducing Risk … High Controls, Communication Impact and Monitoring Low Low High Likelihood
  32. 32. Requires Good Governance
  33. 33. Disaggregating Compliance Responsibilities
  34. 34. Other Risks to Assess in India  Geopolitical Factors - Infrastructure Issues - Regulations for vendors - Legal environment - Political stability  Manpower Quality  Business Value - Training and travel costs - Time concerns  Intellectual Property Protection - Theft by employees, hackers, errors, negligence or espionage
  35. 35. Mitigating Risk in India  Conduct Due Diligence  Complete a Risk/Benefit Analysis  Negotiate a thorough Contract – flexibility is key  Create an Emergency Response Plan  Perform Routine Audits  Learn who is performing the work and where the work is being done  Remember cultural barriers (i.e. Indian vs. American communication of “yes” and “no”)  If possible, travel to India to observe facilities and meet face to face Future for Indian Vendors  Increase in work related to customer strategy  Become experts in transforming businesses, not simply being a passing sourcing entity
  36. 36. THANKS FOR YOUR ATTENTION… Sajai Singh Partner and Head of Technology Practice J. Sagar Associates 2 Frontline Grandeur, 14 Walton Road, Bangalore 560 001, Karnataka, India Telephone # (+91-80) 435 03627 Facsimile # (+91-80) 435 03617 Mobile # (+91) 98450 78666 Email : sajai@jsalaw.com

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