Seminar 10


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Seminar 10

  1. 1. 1 IS5600 Global IT Offshoring
  2. 2. 2 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
  3. 3. 3 Introduction Offshoring or Outsourcing? Outsourcing – getting someone else to do the work • Inside the host country (inshoring) or outside (offshoring) Offshoring usually implies the involvement of a developing country • Or one that is currently at a lower stage of development than the host country – E.g. a US firm outsources software development to India. – E.g. an Indian firm outsources software development to Vietnam
  4. 4. 4 Background 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.
  5. 5. 5 Software Commoditisation 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
  6. 6. 6 Strategic Advantages of Offshoring Cost reduction – but is this strategic? Enable cost efficiencies that promote better competition Is ‘offshore or die’ a strategic choice? Speed, agility and flexibility Respond to opportunities and get products to market faster Accessing talent unavailable elsewhere Both quality and quantity
  7. 7. 7 Follow the sun, round the clock Take advantage of time zone differences Send work from time zone to time zone US to S or SE Asia to Europe Non-stop work But coordination must be perfect And that is very hard in reality Few success stories Tasks with low complexity and small size are more suitable
  8. 8. 8 Why are so few firms offshoring? It is not as easy as it seems Breakdowns can occur in Communication – proximity Coordination – spontaneity and proximity Control – managers cannot manage by walking around so easily Cohesion barriers – socialisation that doesn’t take place Culture clash – sensitivity and adaptiveness
  9. 9. 9 Who is offshoring? - US IBM R&D in US, IL, CH + 16 sw devt centres MS most R&D in the US, but also IN, CN, IL & UK. Google 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
  10. 10. 10 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 read French or Danish manuals, or can build interfaces in FR/DK The UK is an exception, with much work outsourced to IN, PK, BD, LA Germany – 80% of the large firms have yet to offshore – language, culture, … 60% of German offshoring is to E Europe (nearshoring) Dutch – extensive offshoring to 35+ countries, but India preferred
  11. 11. 11 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 US to CA and MX – growing potential here
  12. 12. 12 The big three destinations China, India & Russia Large population, number of qualified employees 1000+ 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 TCS, the largest Indian firm, had 2003 revenues of US$1B. It has its own offshore sites in HU, CN, UY, AU, US, UK, JP • All are a great threat to US- and Europe- based firms
  13. 13. 13 Offshoring IT Services “If you want the loan application processed today, click ‘1’ and it will be done in Fiji. Otherwise press ‘2’, it will be done in the US, and will take a lot longer’ What % clicked ‘1’? There is increasing offshoring of IT services Application processing, telemarketing, help- desking, airline reservations, data entry, etc.
  14. 14. 14 Offshoring IT Services All these various services are highly dependent on both IT and language The relevant data is mobile – it can be sent through the Internet easily HSBC in 2003 had 1500 employees in China and 2000 in India for clerical work; +500 in MY for data processing. English speaking countries (populations) have a distinct advantage
  15. 15. 15 It all depends on language UK, US, CA, AU, NZ > IN, PK, LA FR > MU, MA, DZ, TN (Mauritius, Morocco, Algeria, Tunisia) NL > ZA, SR (Surinam) ES > ?? DE > ?? IT > ??
  16. 16. 16 What do IT Professionals cost? US Canada Japan Singapore Brazil Mexico India Russia China Vietnam 63,000 57,000 44,000 43,000 20.000 7,000 8,000-9,000 5,000-18,000 3,000-14,000 1,400-6,000 All salaries US$/year
  17. 17. 17 But, this is the basic What about housing, medical insurance, transportation, loans, 13th month bonus, etc. The full costs of an Indian programmer are 30-40k, compared to 120K in the US. Chinese programmers (3-4 yrs exp) cost US$12.50/hour – about 20% of the US rate.
  18. 18. 18 And what about…? Transaction costs Infrastructure costs Knowledge transfer costs Currency movements Dispute resolution 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.
  19. 19. 19 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 designed 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.
  20. 20. 20 I’ll Never Do It Again! 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?
  21. 21. 21 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]
  22. 22. 22 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.
  23. 23. 23 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)
  24. 24. 24 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? Operational issues • 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…
  25. 25. 25 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? Risks? IP protection? Security? Culture? Time? What is your strategic concern? Cost, quality, efficiency?
  26. 26. 26 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? Is makes no sense to select a country that no one wants to visit or live in.
  27. 27. 27 Provider Selection Criteria General Criteria Company size & stability HR policies Quality management Technical expertise Business domain knowledge Track record Methodologies used Costs Quality initiatives – ISO, CMM, 6 Sigma, etc. Extra care criteria Infrastructure SW production environment Interntional experience Language skills Employee turnover Org culture – flexibility, responsiveness, soft skills Global presence Disaster recovery & backup 24-hour support Weight the criteria; matrix the providers
  28. 28. 28 Send an RFI, using the criteria Who we are What we are looking for Questions about the provider History, customers, management, geo-locations, turnover, infrastructure, security Questions on services offered Domain expertise, platforms, skills, subcontractors Questions on strategy Vision, market share, alliances
  29. 29. 29 Send an RFP to the most promising firms What we expect in the proposal How are you going to undertake a specific project Need to provide sufficient project details Try to stimulate the provider’s creativity by asking more specific/difficult questions Ask for references of work they have done.
  30. 30. 30 Assessing & Selecting the Provider Evaluate the RFPs Identify false promises, too good to be true offers Learn what “yes” means. Check the references • Ask what worked, and what didn’t. • Technology always has problems. Look at soft issues – culture, values, trust, wavelength. Don’t only look at cost. Too good to be true is almost certainly too good to be true. Quality costs.
  31. 31. 31 The Offshore Visit Important for large/complex projects, long- term cooperation and situations where there is a high degree of dependence on the provider (i.e. it is hard to switch) Launch team members should be involved, but also other members of senior management and those who are not yet convinced about offshoring.
  32. 32. 32 Offshore Things to Do Don’t just visit the HQ, but also the work site, national software association, … Talk to other ‘foreigners’ who are already there Plan the site visit carefully – not on the plane Don’t visit too many and don’t only listen to sales pitches – they are all the same. Do speak to project managers and programmers Walk around - literally
  33. 33. 33 Recommendations & Contract Negotiations To offshore or not. Project objective, functionality scope, Comparison of providers Financial justifications to top mgt. Legal/contract issues: price, IP & confidentiality, penalties & incentives
  34. 34. 34 Concluding Lessons Don’t underestimate the importance of careful planning, or of allowing enough time to lay the foundations carefully. The project launch team should be small, agile, open-minded and pro-offshoring A low-risk pilot project will help a company find out if it is ready for offshoring Contracts are important, but developing a relationship with the provider is probably more critical. The two parties need to align their business interests for the duration of the project.