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 or Outsourcing?
Outsourcing – getting someone else to do the
• Inside the host country (inshoring) or outside (offshoring)
Offshoring usually implies the involvement of a
• 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
Providing IT services is big business
India, China, Philippines, Russia, Brazil
• Technology parks, IT parks, lots of engineering
• China graduates 4 times as many engineers as the US –
• 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
Some software tasks have been
They can be offshored to the lowest cost,
most productive bidder
Like shopping in an online supermarket
Strategic Advantages of Offshoring
Cost reduction – but is this strategic?
Enable cost efficiencies that promote
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
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
But coordination must be perfect
And that is very hard in reality
Few success stories
Tasks with low complexity and small size are more
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
Culture clash – sensitivity and adaptiveness
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
Who is Offshoring? - Europe
Fewer than in the US, due to more conservative
business culture, as well as stricter labour laws
Language is an issue – few Indian programmers read
French or Danish manuals, or can build interfaces in
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
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
US to CA and MX – growing potential here
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,
The Indian firms in particular are now global firms
in their own right
TCS, the largest Indian firm, had 2003 revenues of
US$1B. It has its own offshore sites in HU, CN,
UY, AU, US, UK, JP
• All are a great threat to US- and Europe- based firms
Offshoring IT Services
“If you want the loan application processed
today, click ‘1’ and it will be done in Fiji.
Otherwise press ‘2’, it will be done in the US,
and will take a lot longer’
What % clicked ‘1’?
There is increasing offshoring of IT services
Application processing, telemarketing, help-
desking, airline reservations, data entry, etc.
Offshoring IT Services
All these various services are highly
dependent on both IT and language
The relevant data is mobile – it can be sent
through the Internet easily
HSBC in 2003 had 1500 employees in China
and 2000 in India for clerical work; +500 in
MY for data processing.
English speaking countries (populations)
have a distinct advantage
It all depends on language
UK, US, CA, AU, NZ > IN, PK, LA
FR > MU, MA, DZ, TN (Mauritius,
Morocco, Algeria, Tunisia)
NL > ZA, SR (Surinam)
ES > ??
DE > ??
IT > ??
What do IT Professionals cost?
All salaries US$/year
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.
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 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.
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
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
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
Laying the Foundations 2
The launch team
Offshoring is complex – it needs a powerful
Build a strategic vision, commitment and
push for implementation
Agile and able to make quick decisions
Expertise in offshoring
Learn from others’ experiences (including
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
Which one do you want?
General skills or specific?
Risks? IP protection? Security? Culture? Time?
What is your strategic concern? Cost, quality,
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
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.
Provider Selection Criteria
Company size & stability
Quality initiatives – ISO,
CMM, 6 Sigma, etc.
Extra care criteria
Org culture – flexibility,
Disaster recovery &
Weight the criteria; matrix the providers
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
Send an RFP to the most
What we expect in the proposal
How are you going to undertake a specific
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.
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,
Don’t only look at cost. Too good to be true is
almost certainly too good to be true. Quality costs.
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.
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
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
Walk around - literally
Recommendations & Contract
To offshore or not.
Project objective, functionality scope,
Comparison of providers
Financial justifications to top mgt.
Legal/contract issues: price, IP &
confidentiality, penalties & incentives
Don’t underestimate the importance of careful
planning, or of allowing enough time to lay the
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
The two parties need to align their business
interests for the duration of the project.