IT Offshore Outsourcing

1. IT Offshore Outsourcing Todd Budin Akin Ola Ryan Moore 7 Nov 2003

2. IT Offshore Outsourcing • The sharing or transferring of responsibility for some or all IT services to a third-party vendor that operates in a foreign country.16

3. IT Offshore Outsourcing $ • The practice of moving IT work, or spending IT dollars outside North America12.

4. Offshore Outsourcing • Nearshore outsourcing is outsourcing to Canada and Mexico12.

5. Companies Using Offshore Providers InformationWeek study of industry sector revealed over 50% of IT companies are offshore outsourcing13.

6. Jobs • 360,000 jobs outsourced offshore.20 • Demand to exceed 1 million by 2005. 20 • 60% of Fortune 500 firms are outsourcing.21 • As of 2002 GE had 7,000 software professionals offshore.21

7. Offshore IT Spending 17

8. Reasons for Outsourcing • Cost • Quality • Skills • Speed Development • Globalization

9. Cost • Cost of Labor in vendor countries is lower than that in the US. 22 • 93% of financial services executives interested, to reduces cost.22 • Wages can be as much as 80% lower. 23

10. Quality • Offshore developer have standards equal to or higher than that of the US.24 • 64% of financial services executives cited improved productivity.25 • 42% cited enhancing service quality. 25 • India has twice as many technical graduates as the US. 24

11. Skills • High demand for IT skills • Y2K and e-Business revolution • Forecasted shortage 24

12. Speed Development • Allow companies to focus on core competencies • Increase productivity • Reach market sooner

13. Globalization • Companies are competing in a global economy • Internet and Telecommunications • International Standards and Metrics • Capability Maturity Model • ISO9000

14. Capability Maturity Model • CMM or SEI-CMM • Developed by Software Engineering Institute, Carnegie Mellon University • Five levels of competency 27

15. ISO 9000 • International Organization of Standardization • Standard for assuring, managing and improving quality • Companies can be certified in ISO 9001 or ISO 9002, ISO 9003 or ISO 9004 • ISO 9001 for design, development, production, installation and/or servicing. • ISO 9002 for development, production, installation and/or servicing. • ISO 9003 – final inspection and testing. • ISO 9004 – similar ISO 9001 but also includes guidelines for continual improvement. www.iso.ch Accessed: Oct. 29, 2003

16. ISO 9001 – Certification Steps Define policy objectives and measures Build quality management system Develop quality manual Identify and document required measurements Review and improve On-Site Audit Implement quality system On-Site Audit ISO 9001 Certification www.cionline.net Accessed: Oct. 29, 2003

17. Vendors • Countries • India • Russia • Malaysia • China • Companies • Government

18. Countries – 95% of Outsourcing Russia Canada EU Israel China Japan Mexico Philippines India Singapore Brazil Australia 15

19. Countries – Significant Hungary Estonia Czech Republic Ukraine Latvia Slovenia Lithuania Poland Belarus Bulgaria Romania Korea Taiwan Pakistan Cost Rica Malaysia 15

20. Countries – Little Outsourcing Yugoslavia Croatia Jordan Cuba Bangladesh Egypt Caribbean El Salvador Vietnam Sri Lanka Chile South Africa Argentina 15

21. Country - Comparison 24

22. India • Best vendor country • Low labor cost • Vast resource of highly skilled professionals • Cooperative effort between government and businesses • Indian based multi-national companies • Wipro • TCS – Tata Consultancy Services • Infosys • Cost of labor is rising.

23. Russia • Two-thirds of suppliers are IT related 28

24. Russia • Strong technical, research, innovative and problem solving culture • Attractive labor cost, $18 per hour • Expected annual growth of 50% • Poor government support and infrastructure • English language barrier

25. China • Good with legacy type systems. • Attractive labor cost • Large Labor pool • No regard for intellectual property, proprietary and confidential data 29

26. Malaysia • Strong government support • Infrastructure • Education • Shortage of highly skilled and experienced developers

27. Philippines • Labor cost, annual salary $10,000 - $15,000 26 • Good job market with 40,000 computer technology graduates each year • Familiar with state of the art technology

28. IT Offshore Outsourcing Considerations

29. If there was Justice in the world….. Sorry, the Board is Outsourcing your job to guy in India who’ll be CEO for a 10th of your salary.

30. Everybody’s Doing It! • More than 300 of the top fortune 500 companies tap IT services in India to run data centers1. • CEO’s see the IT department as a huge expense.

31. Everybody’s doing it! • In the year 2000 there were 27,000 jobs moved overseas. • By 2015 Forrest Research estimates that number to grow to 472,000 American jobs. • Other sources say 3.3 million jobs by 2015. • The average computer programmer in the U.S. costs a company $100.00 per hour. In India the same hour costs $20.002

32. A large cost savings? • 80% cost savings per hour. • CEO’s see this a way to cut expenses dramatically and improve the company’s numbers to the shareholders • Executives must look deeper into offshore outsourcing before signing the contract with the supplier.

33. Offshore IT outsourcing started to soar during the economic downturn. With shareholders screaming bloody murder, many CEO’s mandated some IT work be sent overseas.30 • “But when you parse it all out, the total cost of offshore outsourcing a given IT job is generally comparable to getting the work done domestically, it is just that few companies are aware of the real costs, most just look at wages”31

34. Considerations • Unions • The U.S. Government • Loss of future talent and intellectual assets • Security • Expenses involved in all phases

35. Unions • There are two main Unions: Alliance IBM and Washtech • Washtech newsletter circulates to 14,000 members3 • Both are associated with the powerful CWA union, the Communication Workers of America. • Once resistant to joining a Union because of the IT worker’s white collar status, many are joining this “e-movement”.

36. UnionsConsiderations • Executives may have to deal with Union employees when deciding to outsource. • The company could face protests and public scrutiny by Union officials and members. • Union members could boycott the company’s products. • The entire IT department could strike.

37. The United States Government • U.S. Companies BEWARE!!! • Laid-off IT workers are asking state and federal governments for help.

38. U.S. Government • U.S. Senator Jeff Drozda (R-Indiana) introduced a bill on October 9, 2003 that would restrict state agencies from offshore outsourcing4. • The bill goes a step further and restricts state agencies from using any vendor that uses the services of offshore IT supplier. • ….and tax breaks for companies who do not utilize offshore suppliers for their IT function.

39. U.S. GovernmentConsiderations • If a large portion of your revenue comes from a state or federal agency beware. If this legislation is voted into law, a company that uses offshore outsourcing will see its government contract dissolve.

40. U.S.Government and Visas • On October 1, 2003, the number of visas that the U.S. makes available to foreign professionals fell by 66%5. • This program is called the H-1B visa program. • The program was established by Congress in 1990 to supply U.S. businesses with specialized knowledge that was unavailable domestically.

41. U.S.Government and Visas • Original number in 1990 was set to 65,000 • From 2001-2003 congress tripled the ceiling to 195,0005 • As of October 1, 2003, the number is back to 65,000.

42. U.S.Government and VisasConsiderations • Workers from the offshore suppliers come to the U.S. to make the transition go more smoothly. • Executives may have less workers from the supplier available for the sometimes lengthy transition period.

43. Loss of future talent • College students are noticing that the IT field is not as attractive as it was 5 years ago. • Top students are choosing careers other than IT. • Having our best and brightest go into other fields gives foreign companies an advantage.

44. Loss of future talent • Any new project or product that a company wants to introduce to the marketplace requires an innovative IT department. • Top IT developers help a company get a product out better and faster than the competition. • The best and brightest to help in this process will be in other professions in the future.

45. Loss of future talentconsiderations • “Executives should consider (not offshore outsourcing) because they cannot afford to have domestic talent ‘dry up’”6 • When the economy finally rebounds, U.S. companies may be at a global disadvantage.

46. Security • Security is a concern domestically. Security risks do increase when you take an IT function offshore. • Risks can be divided into two categories: Physical and Technological.

47. Security: Physical • Terrorism and war in the foreign country where your IT department resides. • Post 9-11 companies must realize the global terrorism threat. • Delta Airlines cancelled an IT outsourcing deal to the Philippines on October 10th of this year due to “Muslims separatist groups including Al Queda being active in the area”7.

48. Security: Physical • Nuclear threat between India and Pakistan • Nuclear threat between N. and S. Korea • Consider the threats in the Middle East

49. Security: Technological • According to analyst Stephanie Moore at Giga Information Group, it is “prudent for companies to wait until offshore companies mature their services.”8 • Moore points to the concern in the lack of infrastructure in India due to the nationalization of the IT industry by the government in the late 1970’s which drove companies like IBM out of India in 19788. • India is still trying to catch up with the US.

50. Security considerations • Executives must take into account the offshore suppliers security for their intellectual assets. • Consider the risks involved with both the political environment and IT infrastructure of the country.