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  1. 1. OUTSOURCING AS A STRATEGIC TOOL Kewal K. Verma, Ph.D. BCA International, Austin, Texas, USA Phone: 1-512-292-4314 E-Mail: ABSTRACT outsourcing covers administration, customer service, Outsourcing is a strategic tool used by companies to finance, HR, real state, sales and marketing, distribution improve their ability to concentrate on the core and transportation [1,2]. Within information technology, competencies, outsourcing non-core functions. Outsourcing outsourcing includes maintenance and repair, training, is not contacting or fixing business processes. It is about R&D, applications development, consulting and creating value. It is about reengineering and being able to reengineering, data management, network management, provide customers a greater value faster, at a lower cost etc. For a company, proper preparation for outsourcing and higher quality would use benchmarking and competitive analysis tools and methodologies to examine its strengths and Outsourcing industry has grown to about $150 Billion weaknesses to develop outsourcing goals. The three main worldwide and is estimated to grow to $240 Billion (Dunn steps in outsourcing would be goal development, supplier & Bradstreet) by the end of 1999 and about $630 Billion selection and implementation of the business relationship. by the year 2003 (Dataquest). Outsourcing has grown in Success of the long term relationship depends upon taking scope and complexity and it covers information care in defining the goals, responsibilities, expectations technology, administration, customer service, finance, HR, and schedule, and yet be able to have flexibility in the real state, sales and marketing, distribution, transportation, business relationship agreement to accommodate an health care and more. Key issues in outsourcing are the environment of rapidly changing markets and technologies. selection of an appropriate supplier partner and implementation of the business relationship. A large Several semiconductor manufacturing companies, such as number of global fortune 500 companies have been Motorola, IBM, Intel, TI and equipment supplier outsourcing software development in India due to its strong companies, such as Applied Materials, KLA, Lam infrastructure, investment friendly and free market oriented Research have either outsourced or formed strategic business environment, and supportive Government alliances with software development companies in India, policies. Ireland, Hungary, etc. In the back-end assembly and packaging manufacturing industry, there are several areas, Key words: Outsourcing, strategic tool, competitive such as components and materials distribution, inventory advantage, software, supplier selection, benchmarking, control, materials handling, package design and test, competitive analysis, core competencies, software industry manufacturing automation, factory design, and package in India. and factory modeling and cost analysis that can benefit by the outsourcing services provided by software companies. INTRODUCTION Ever increasing role of software products would help these Worldwide companies are using outsourcing as a strategic companies better manage the factories, inventories, tool to improve their ability to concentrate on the core supplies, design and development, rapid learning, competencies. Outsourcing is not sub-contracting or fixing manufacturing costs, and improve productivity, yields, cost business processes. It is a strategic decision about creating and customer satisfaction. Well-planned outsourcing value. It is about reengineering and being able to provide software development project could offer the desired customers a greater value faster, at a lower cost and higher competitive advantage. quality. By outsourcing non-core functions, companies are able to concentrate on improving core competencies and India has been recognized in a World Bank study as the look at the broader business issues. It has helped second most favored country for providing IT services. companies gain competitive advantage by allocating Indian software companies have demonstrated their resources to develop new tools, technologies, capability to deliver large projects, on time and at lower methodologies and procedures. Outsourcing as an industry cost, utilizing state of the art technologies and global has moved beyond the IT infrastructure in scope and quality standards. Software industry in India [3, 4] is $3.9 complexity. It has grown to about $150 Billion worldwide Billion strong and has grown at the rate of 54%. The and is estimated to grow to software export revenue for 1998-99 has been $2.65 $240 Billion by the end of 1999 and $630 Billion by 2003. Billion and has grown at 57.4%. Over 203 Fortune 1000 In addition to the information technology, today companies worldwide are outsourcing software PROCEEDINGS of the Technical Program, Fifth Annual Pan Pacific Microelectronics Symposium, Island of Maui, Hawaii, Jan. 25-27, 2000. 1 of 8
  2. 2. development in India. The success of outsourcing projects by global corporations in USA, Japan, Europe and Asia in India has been due to its investment friendly and free market oriented business environment in India, along with its supportive Government policies. The supporting infrastructure [5, 6] of the Indian software industry includes its second largest in world supplier base of English speaking professionals, universities and institutes producing 115 Thousand engineering graduates and 55 Thousand software professionals every year, companies with SEI established highest CMM quality level, Government supported software technology parks of India under the STP scheme, and high speed satellite data links and services. OUTSOURCING, A STRATEGIC DECISION Decision about outsourcing and what to outsource requires 70 – 70 – 70 (Wipro) careful assessment and planning. In this regard, it is • 70 % of all the software developed is owned by different from subcontracting or fixing business processes. U.S. companies In contrast, outsourcing would involve carefully • 70 % of all U.S. software is developed in the restructuring the company around its core competencies valley and the business relationship with outsourcing partner. • 70 % of all software developed in the valley is outsourced Right reasons for outsourcing and its benefits should be carefully analyzed and clearly understood. Although Today outsourcing cover a lot more than just the IT strategically the non-core functions are outsourced, a industry, it covers: function that does not fit or is wrong or it cannot be done in house should not be selected. However, the selected Information technology – maintenance and repair, partner would have access to superior technology, higher training, applications development, consulting and quality standards, better manufacturing practices, be able reengineering, data management, network management, to save time. Consequently, it will translate to lower cost. etc. Administration – mailroom, reproduction, training, etc. Internal benchmarking and competitive analysis tools may Customer service – tech support, field service, dispatch, be employed to evaluate internal processes and functions to etc. assess and evaluate your own company and also in the Finance – payroll, accounting, purchasing, records, etc. selection of a supplier partner. HR – relocation, recruiting, training, insurance, etc. Real estate - facility management, food services, UNDERSTANDING OUTSOURCING maintenance, security, etc. Using outsourcing as a strategic tool companies can gain Sales and marketing – mail, advertising, telemarketing, competitive edge by outsourcing non-core functions to an field sales, etc. outside organization and concentrating on internal Distribution – freight, leasing, warehousing, operations, reengineering. The reengineering process is referred to the logistics, etc. fundamental rethinking and radical change in the business Transportation – fleet management, operations, outlook, focusing on broader business issues, employing maintenance, etc. resources towards developing new tools, technologies and Health care – insurance, patient records, health services, skills. A dramatic improvement in performance may be etc. realized, providing value to the customer in terms of productivity, quality, service and speed. Thus offering As indicated earlier outsourcing covers a lot more than just customers a greater performance at lower cost. the IT companies.  Technology companies Global outsourcing  GE, Microsoft, Intel, IBM, HP, SUN, Lucent, Outsourcing industry has grown to about $150 Billion Alcatel, Nortel, CA, Cisco, NCR, Sequent, VLSI, worldwide and is estimated to grow to $240 Billion by the Analog Devices, TI, Cirrus Logic, Seagate, end of 1999 and according to Dataquest, $ 630 Billion by Compaq, Oracle, EDS, Motorola, and more 2003.  Retail companies Figure – 1 The market for outsourcing continues to explode at CAGR of 14% PROCEEDINGS of the Technical Program, Fifth Annual Pan Pacific Microelectronics Symposium, Island of Maui, Hawaii, Jan. 25-27, 2000. 2 of 8
  3. 3.  Nike, J.C. Company, Dr. Pepper, Cadbury, Nestle, than a partner. However, partners business and strategic and more goals should compliment that of your own organization.  Finance companies Cultural match and compatibility is very important in the  Citibank, Wells Fargo, AMEX, Putnam, and more communications and working together of various teams. Considerations include the language, values, agreements, WHY OUTSOURCING commitments, and written and verbal communications. Based on the above discussion, in summary, organizations Although the relationship develops over a period of time would consider outsourcing to - and it is impossible to think of every possible scenario and • Improve focus on core competencies situation, it may be worthwhile to agree upon some ground • Improve focus on broader business issues rules as to how the agreements would be made and • Gain competitive advantage through new tools, executed, and what a certain agreement would mean. technologies, methodologies and procedures Technical expertise and the focus on quality are of utmost • Accelerate reengineering importance. After all, the outsourcing partner is being • Shared/reduced risk associated with reengineering selected based on the best practices in the industry in the changes relevant areas. Cost is very important, but upfront cost may • Reduce operating cost lead to wrong decisions. The superior technology, skills, • Control and redirect valuable resources focus on quality, availability of resources and qualified people would provide the cost advantage in improved OUTSOURCING PROCESS STEPS product, quality and speed. Outsourcing essentially requires three steps: 1) Goal development Since in most cases the partnership may last from six 2) Supplier selection months to several years, business reputation, stability and 3) Implementation of business relationship credibility of the supplier are important. Supplier may not only be able to supply adequate resources, but it should be 1) Goal development able to expand and grow with the industry and the client. a) Need assessment Because of the relatively long-term relationship, the b) Expectations supplier should be able to accommodate ever-occurring changes in the market conditions and the technologies, and Success of the outsourcing project may depend upon the be able to share the associated risks. time and effort spent in a careful assessment of your own capabilities, needs and expectations. Internal Consulting help is available to identify potential partners benchmarking and competitive analysis tools may be used and best practices in the industry. International or outside consultants help may be worth the expense. organizations, such as SEMICON West and NEPCON Important consideration also being that a redistribution and West have offered workshops on benchmarking. relocation of resources, people, equipment, and operations Consulting companies and individuals are available to will be required. A clear understanding of the expectations offer benchmarking and competitive analysis help or offer and the relevant schedule is essential in the supplier customized training that may help in the supplier selection. selection and implementation of the business relationship latter on. 3) Implementation of business relationship It is difficult to say if one of the three steps is more 2) Supplier selection important than the other. However, each step in the Following supplier attributes and considerations would sequence if executed with due care, analysis and planning, prove to be very useful in the supplier section. would make the following steps easier. a) Common business and strategic objectives b) Business and cultural compatibility Typically, following methodology and considerations c) Technical expertise would result in a strong and successful business d) Quality focus relationship. e) Supplier resources a) Common strategies and goals f) Business reputation - stability and credibility b) Well-defined project goals and schedules g) Contract terms – flexibility c) Flexibility in agreement to accommodate change h) Risk sharing d) Risk and rewards sharing i) Cost e) Employee support j) Consultants help f) Transition management g) Relationship monitoring and management It may be risky to look for the business and strategic goals Supplier with compatible business strategies and goals so similar that you may be considering a competitor rather would form a stronger and beneficial relationship. Perhaps PROCEEDINGS of the Technical Program, Fifth Annual Pan Pacific Microelectronics Symposium, Island of Maui, Hawaii, Jan. 25-27, 2000. 3 of 8
  4. 4. it is somewhat related to size of the outsourcing project, • Experience with large projects but the relationship is not that of a contractor or a true • On time deliveries partner. It is a business relationship and needs to be treated as such. Clearly defined expectations, deliverables and As shown in figure – 2., in 1992, a world bank study has schedule must be defined and agreed, early on. found India as a world leader in OEM professional services, only second to Ireland. Although a contract outlining deliverables and schedules is necessary, the relationship should be flexible to FACTOR WEIGHT INDIA IRELAND accommodate the rapidly changing tools, technologies and the market conditions over a period of time. In order to Segment expertise 6 12 6 ensure commitment and dedication in a responsible Labor cost 4 4 -8 business relationship the risk and award must be shared. Labor supply 4 8 0 The supplier cannot be expected or forced to accept the Ease of business 3 0 6 risk unless there is a promise of an award. Ease of Visa 3 -3 3 English speaking 3 3 3 Out sourcing requires some restructuring and Tech. competence 3 3 3 reorganization at the outsourcing company. In addition to Edu. & training 2 0 2 the technology, equipment and processes, it may involve Govt. incentives 2 0 4 moving a number of employees. As a worst case, a group Security 2 0 2 of employees involved with the functions being outsourced Telecom infra 2 -2 4 may need to be moved to a different function at a different Domestic market 1 1 2 location within or outside the company. This transition Weighted average - 26 27 period may be a trying period for both the outsourcing 0 20 40 company as well as the supplier. An upfront open and honest communication with the employees may be the best policy. Some companies have combined open communication with some counseling for the employees. Outside consultant may be useful in this situation. Transition management and the initial relationship building require a great deal of effort and dedication. Often HR, Ireland 27 legal people work together with the technical people. India 26 Careful consideration must be given in forming teams for Singapore the transition as well as for implementation and Israel maintenance of the business relationship. Team building, Philippines management classes, brainstorming sessions and social China events, such as department parties and company parties Mexico WEIGHTED RANKING prove to be helpful. Some companies are known to provide Hungary training classes in their procedures and corporate culture to their supplier. It is very important to carefully select members from both Figure – 2 World Bank study shows India as a leader the outsourcing organization and the supplier to form in professional services. management teams to monitor and manage the business relationship. As can be expected during the relationship More recently McKinsey & company analysis has shown there are going to technical, schedule and people related that India is best positioned for outsourcing IT services. issues that would require resolutions and workable solutions without terminating the relationship. Vendor Sophistication INDIA – A PROMISING CANDIDATE FOR The India (Number, Quantity) OUTSOURCING IT SERVICES Philippines Global corporations in USA, Japan, Europe and Asia have been looking at India for – CIS • Cost advantage China • Established quality standards Mexico • State of the art technologies • Dedicated development centers Low People sophistication High (Number, Cost, Language skill) PROCEEDINGS of the Technical Program, Fifth Annual Pan Pacific Microelectronics Symposium, Island of Maui, Hawaii, Jan. 25-27, 2000. 4 of 8
  5. 5. Figure – 3 India is best positioned for outsourcing IT services SOFTWARE INDUSTRY INFRASTRUCTURE Software industry in India has a strong and sustaining infrastructure. Where as the domestic market growth rate has been impressive 48.3%, India exports software to 86 countries and over 203 fortune 1000 companies have Figure – 5 61% of the exports go to North America. outsourced software development in India. Europe is the next largest importer. As shown in Figure –4, Software industry in India is $3.9 NASSCOM is the National Association of Software and Billion strong and has grown at the rate of 54%. The Service Companies. In India it plays a role similar to the software export revenue for 1998-99 has been $2.65 EIA and SIA in the USA. Billion and has grown at 57.4%. Table – 1 indicates that there are about 650 software companies in India involved in various application development segments. Table – 1 Software revenue by application segment Application Segment Companies Involved (%) Banking 82 Insurance 55 Defense 38 Manufacturing 70 Hotels 56 Transport 65 Retail & distribution 73 Communications 78 Government 70 Others 55 Figure – 4 Software industry in India is expected to grow from $3.9 Billion to $5.7 Billion by 2000. The top ten are listed in Table – 2. Interesting thing is that the export revenue of the top software company is almost As shown in Figure – 5, majority of the software exports, the combined revenue of the next five companies. about 61%, go to North America, Europe being the next highest importer at 25%. In addition to the industry Table – 2 Top ten Indian software companies emphasis on exports to the North America, it has major initiatives with Europe and Japan. These are known as the 1998-99 Exports NASSCOM’s India Europe Software Alliance (NIESA) Rank Software Company U.S. $ Millions and 1 Tata Consultancy Services 168.6 NASSCOM’s India Japan Software Alliance (NINJAS) 2 Wipro 71.9 respectively. 3 NIIT Limited 44.8 4 Pentafour 44.3 5 Infosys Technologies 35.2 6 Tata Infotech 29.4 7 Satyam Computer Services 24.8 8 International computers (India) 23.6 9 Patni Computer Systems 23.6 10 DSQ Software 22.3 PROCEEDINGS of the Technical Program, Fifth Annual Pan Pacific Microelectronics Symposium, Island of Maui, Hawaii, Jan. 25-27, 2000. 5 of 8
  6. 6. Except for the top six (6) or seven (7), Indian software c) 20 companies have level-2 quality rating companies have shied away from packaged software. Part d) over 115 companies re ISO 9000 certified of the reason may be their inexperience in marketing and 4) Globally competitive skills and state-of-the-art another may be that as compared to their competition in technology, proven capability to handle large projects the USA and Japan these companies are significantly 5) High speed (Satellitea0 data links and services smaller. However, because of the technical expertise and available focus on high quality, the Indian software companies make 6) Access to large pool of qualified English speaking excellent outsourcing partners. professionals with mathematical and logical expertise a) As of 1998, over 200K professionals are employed From Table-3 on the types of services and software by the software industry activities, following observations can be made about the b) 150 universities and 460 institutions produce over industry infrastructure. 115K engineering graduates per year 1. Dollar amount of the on-site services (59%) is c) 55K professionals join software industry per year significantly more than the offshore services (32.2%). However, same amount of dollars would 7) Strong and stable industry infrastructure buy significantly more offshore services than on- a) $3.9 Billion software industry grown at the rate of site. 54% b) IT companies with significant global operations Table –3 Types of services and software activities c) 1998-99 exports by the top five companies range (1998) $35 Million to $169 Million. Types of Services U.S. $, M % of Total d) Proven capability to handle large projects On-Site Services 917.3 59 e) Senior management often has U.S. experience, Off-Shore Services 500.65 32.2 education or training Off-Shore Packages 136.8 8.8 f) As member of the WTO, Indian Government has Software Activity Domestics Exports supportive policies, including – $, M % $, M % i) Tax holiday, up to 5-years Projects 239 28.6 489.76 31.5 ii) Equity, up to 100% possible Professional Services 34.29 4.1 752.5 48.4 g) Investment friendly and free market oriented Products & Packages 434.6 52.0 136.79 8.8 business environment Training 50.95 6.1 23.33 1.5 Support & Maintenance 26.74 3.2 46.67 3.0 Top twenty or so IT companies in India have Global IT enabled 50.14 6.0 105.71 6.8 operations. Their access to the state-of-the-art-technology technologies is almost immediate, often before these become available to the public in the U.S. Most of these 2. Exports in products and packages ($136.79 companies would typically have the following technologies Million) are significantly less than the domestic and skills, and work with several domains and platforms: consumption ($436.6 Million). Technologies available: OOPS, Client/Networking, GUI/ 3. The domestic size of projects ($239 Million) and Multimedia, CASE Tools, 4GLs products and packages ($434.6 Million) is a strong Hardware platforms include: IBM Mainframe, AS-400, indication of the growing and strengthening ES-9000, RISC-6000, DEC, HP, Unisys, DG, Tandem, infrastructure. UNIX, PC, MAC, PS/2, Novell LAN, SUN, etc. Development Platforms: PC (DOS, Windows, NT, ADVANTAGES OF OUTSOURCING IN INDIA Apple), Mainframe, UNIX, Midrange, etc. 1) Low cost – high quality a) Considering the currency conversion and the pay Two organizations that have contributed most in the scale, 30-40 percent lower development cost is development of the software industry infrastructure are – possible. 2) Virtual software factories => reduced time to market 1. National Association of Software and Service a) The 11-hour time difference allows combined Companies (NASSCOM) professional teams in USA and India 20-24 hour NASSCOM, established in 1988, comprises of Member workdays. companies with revenues over $28 Thousand and Associate 3) Established high quality standards Member companies with revenues less than $28 Thousand. a) Five (5) companies have SEI’s CMM level-5 In India it plays a role similar to the EIA and SIA in the quality rating USA. In addition its activities include: b) 12 companies have SEI’s CMM level-3 and • Advisory, consultative and coordinating body for level-4 quality rating the Indian software industry PROCEEDINGS of the Technical Program, Fifth Annual Pan Pacific Microelectronics Symposium, Island of Maui, Hawaii, Jan. 25-27, 2000. 6 of 8
  7. 7. • Provides information on Government policies, through SoftNET architecture, schematically shown in domestic/export opportunities, seminars and Figure-6. Some of the characteristics of SoftNET conferences abroad, visas, etc. architecture are as follows: • Represents industry on various Government of  A unique network integrating Intlstat IBS stations and India committees and industry associations radio TDMA technologies • Maintains membership in international societies  F3 IBS earth stations serve as International Gateways and organizations, and lobbies with foreign  Provides software developers and exporters IP services Governments through TDMA radio, campus LAN and Dial-up- • Provides assistance in achieving ISO 9000 Lines; typically – certification, organizes in India and abroad  Signal from India is sent to a location in Europe, seminars, conferences, workshops, trade fairs and such as Netherlands, via International satellite and trade missions  From Europe to a location in U.S. via transatlantic • Does market research, maintains database and fiber lines provided by an international carrier, publishes India software Directory such as AT&T, MCI, sprint or British Telecom • Promotes public confidence, respect for software industry and conducts anti-piracy campaign As mentioned earlier, two of its initiatives include NASSCOM’s India Europe Software Alliance (NIESA) and NASSCOM’s India Japan Software Alliance (NINJAS). 2. Software Technologies Parks of Indian (STPs) FIBER Software Technology Parks of India (STPIs) is an autonomous organization set up by Department of Electronics (DOE), Government of India, under the STP Scheme. Among the government schemes, STP is a shining Figure – 6 Telecommunication Infrastructure, example. Under this scheme Indian and foreign software International Carriers in Operation companies become members on fee bases and the participating companies are provided – Integrating SoftNet and ERNET systems, Figure – 7, Point • Infrastructural facilities; floor space, amenities to Point communications can be extended worldwide, such as EPABX, fax, internet, teleconferencing including – equipment, backup power; computers, IBM • Direct connections to countries with Earth AS-400, ES-900, RISC-6000, Pentium machines; Stations operating on Intlsat 66 deg. office LAN and data communication services • Connections to other countries through transit • Duty free foreign equity arrangements with other carriers • Tax holiday, up to 5-years operations without • Local loops through Microwave Radio income tax • Direct links, dedicated links and teleconferencing • Dedicated high-speed data communication links are possible. • Single point custom clearance and export certification SoftNET – ERNET INTEGRATION INTLSAT There are about twelve STPs located in different States IOR 66 DEG. INSAT 2B throughout India and its success has prompted several other states to apply for the construction of STPs or similar electronics parks. SoftNET ERNET TELECOMMUNICATION INFRASTRUCTURE Most of the top twenty or so software companies in India STPI - have their own high speed data communication set up, including satellite dishes, dedicated direct high speed links STPI with their customers in USA and Europe BANGALORE However, there are about one thousand (1,000) High Speed INTERNATIONAL NATIONAL Datacom Links, 32-256 Kbps, mainly provided by STPIs PROCEEDINGS of the Technical Program, Fifth Annual Pan Pacific Microelectronics Symposium, Island of Maui, Hawaii, Jan. 25-27, 2000. 7 of 8
  8. 8. Figure – 7 SoftNET – ERNET integration The success of the STP scheme has acted as a catalyst for the Indian Government to introduce several other policies and schemes to create investment friendly and open business environment in India. GOVERNEMNT SUPPORT - PLOICIES AND SCHEMES  Software identified as a Thrust Area for economic development.  India signed ITA agreement at WTO  Automatic permission for 51% foreign equity and up to 100% foreign equity permitted  Income tax holiday – up to 5-years  Duty Free Imports subject to export obligations  Software Import via high speed Datacom/internet links  Indian Copyright Act, strict penalties to protect IPRs  Special Schemes to facilitate the import/export of technologies, hardware and software:  Software Technology Parks of India (STPI)  Export Processing Zones (EPZ)  100% Export Oriented Units (EOU)  Electronic Hardware Technology Parks (EHTP)  Domestic Tariff Area (DTA) CONCLUSIONS • Outsourcing is a fast growing industry. • Outsourcing industry is expected to grow at CAGR of 14%, from $240 Billion by the year-end 1999 to $630 Billion by year 2003. • IT continues to dominate outsourcing, but other areas are following strongly • India represents a strong software industry with equally strong industry infrastructure and supportive Government policies and schemes • Indian software companies are among the world leaders in IT services and potential candidates for establishing outsourcing business relationships. REFERENCES [1] “Outsourcing: A Maturing Industry”, The Outsourcing Institute – [2] InfoServer, The Journal for Strategic Outsourcing Information, Jan 1999 – [3] Record 68% Growth of Indian Software Exports in 1998-99: NASSCOM Report - [4] Software Technology Parks of India – [5] Personal visits and communications with Indian software companies, May 1997 and January 1998. [6] Benchmarking Indian Software Industry, part of a project “Strategic Technology Tour of India ‘98” for MCC, Austin, TX. PROCEEDINGS of the Technical Program, Fifth Annual Pan Pacific Microelectronics Symposium, Island of Maui, Hawaii, Jan. 25-27, 2000. 8 of 8