IS5600 – 8

1. IS5600 – 8 Global IT & BP Outsourcing and Offshoring “There are no IT projects; there are just business improvement projects in which IT is a critical enabler” CEO – British Airways

2. Learning Objectives • Familiarisation with offshoring and outsourcing • Focus on IT services and system development • Plans for the offshore process • Cases and trends in organisations, globally

3. Outsourcing • This is an increasingly common practice • It means that (usually) non-core-competence activities are undertaken by a third party • Typical examples include • IT–related services [ITO] • New software development, inc. analytics, BI, big data • Cloud-based solutions • Mobile-enabled solutions • Business process services [BPO] • E.g. data entry, customer call centre

4. Outsourcing • The work may be undertaken in a variety of locations • Inshore – within the same country • Offshore – at a more distant location • Nearshore – at a nearby country or time zone • Backshore – return the work to the home country • Multisourcing and Microsourcing • Split your project into many (small) parts and assign each one to a different provider • Mobile or Nomadic software providers can be located anywhere, yet still provide services

5. Insourcing • Insourcing implies that the work is done by an affiliate of the organisation, but not done centrally. • Insourced work can be inshore (same country) or offshore (overseas), or nearshore (a nearby country) • E.g. HSBC gets BPO work done by a subsidiary in China (Nearshore insourcing)

6. Offshoring • Offshoring often implies the involvement of a cheaper and less developed country • E.g. a US firm outsources software development to India • E.g. an Indian firm outsources software development to Vietnam • But there are many hazards as well • Managerial, HR, Work Style, Political, currency and wage fluctuations, competition for employees, regulatory issues … • Offshoring should be a strategic choice, not an accidental mistake • Failing to plan for it – is planning to fail at it!

7. Offshoring - Transitions • On July 17th, Microsoft said it would lay off 18,000 employees, many of them ex-Nokia factory workers in China • Much of this work will move to Vietnam, some to Brazil and Mexico. • This is a form of right-shoring • Moving production to the right location

8. Right-Shoring • Move phone production to Hanoi • Some capacity retained in BJ and DG • Move other operations to Brazil and start to close Komaron (Hungary) • Samsung also plans to move production from China to Vietnam • Why? • Moving production closer to consumption. • Costs.

9. Costs • China is no longer a cheap destination for factory work • The middle class is growing and so wages are rising • Factory workers cost more • So, work will move to cheaper locations

10. Sample Factory Worker Monthly Salaries (US$/month) • AU, NZ, JP • HK, Seoul • BJ, SH, GZ • SZ, DL, SY, WH • KL, Jakarta, Manila, BKK • India • Hanoi, HCMC, Vientiane • Phnom Penh, Yangon • 2700-4600 • 1600-1700 • 400-466 • 280-330 • 240-340 • 180-400 • 130-150 • 50-75 Source: http://www.jetro.go.jp/en/reports/survey/pdf/2013_05_01_biz.pdf

11. The Big Four: Brazil, India, China and Russia • Large number of engineering graduates and well-qualified employees • Thousands of software exporting firms • But around 120 countries provide some offshoring services (RO, CR, PH, VN, PL, HU, MY, AR, FJ,…) • The Indian firms in particular are now global firms in their own right – with offshore operations to service clients ‘locally’. • Offshore sites in AU, CN, HU, JP, UK, US, UY • A significant threat to US- and Europe- based firms

12. The Provider (Vendor) Perspective • In over 120 countries, firms have been set up offering BPO/ITO services • www.nearshoreinfo.com • Industry & Technology parks • China graduates four times as many engineers as the US • China has tens of software/technology parks, each focusing on domestic and global markets • www.zpark.com.cn • www.xasoftwarepark.com

13. Diversification or Centralisation? • Diversification has long been a good practice in the financial investment industry – but in outsourcing, the same is not true. • Most providers are located in a single country, and even a single location, concentrating the risks. • Diversification can help to reduce the impact of risks.

14. Diversification - Example • A French company offshored 2,000 high-end IT jobs • Initially it planned to locate them all in Bangalore, India. • Later decided to adopt a more diversified approach: • 65% in India @ $20k/year/head, • 15% in Romania @ $25k/year/head, • 15% in Egypt @ $20k/year/head • 5% in France @ $40k/year/head. • Why these countries? • Romania - closer proximity to European markets. • Egypt - new talent availability. • Total cost slightly higher than an all-India approach, but diversification reduced risks.

15. Diversification Issues • In the more popular offshore locations, the providers compete with each other for the best talent – this produces a lot of turnover, as well as higher wage costs. • Few locations are better than all others on all counts – diversification brings in new skills, new languages, new values. • India is obviously highly penetrated by offshore work, yet there are many other providers in South America, the Middle East and SE Asia. • Time zone issues, suitability of the local skill base, proximity to key customers, government initiatives – can all play an influencing role.

16. Strategic Issues 1 • Cost • “In India, we can get three security engineers for the cost of one in the U.S.” • But, is cheaper really strategic? • Total Cost of Engagement? • China is cheaper than India for programmers, more expensive for Supervisory & Mgt staff. • There can be many hidden costs… • If you always worry about cost, you will get poor quality solutions. Quality costs!

17. Strategic Issues 2 • Talent • Access resources unavailable at home • But employee churn and provider reliability is a major problem • Resource quality (esp at smaller providers) • Knowledge transfer and the risk of IP loss/theft • Do you share values with the provider? • Good governance? Ethics? Efficiency? Flexibility?

18. Strategic Issues 3 • Agility • Respond to opportunities and get products to market faster • If you can overcome the differences of language, communication style, culture • Anything strategic requires a corresponding investment of resources – and a long term vision.

19. Strategic Issues 4 • 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 • Few success stories • Small and simple tasks are more suitable

20. Captive Centres 1 • Captive centres – wholly owned subsidiaries that work for the parent company. • For the Fortune Global 250 companies, 153 had Captive Centres in 2008. • And yet, a 60% failure rate for CCs • Created for the ‘wrong reason’ • Need investment – cannot save money immediately

21. Captive Centres 2 • Three Captive Centre Development strategies: Hybrid, Shared and Divested. • Hybrid: The Captive Centre outsources (inshore) work to a local service provider, so that some work for the parent is done internally, some externally. • Shared: The Captive Centre also takes on work from other clients, making it a profit centre – and rendering it liable for acquisition by an investor. • Divested: The Captive Centre may be sold if the parent is assured that it will not lose quality of service under new management.

22. Captive Centres 3 • The management of a captive centre should depend on a strategic position • Why was the Captive Centre set up? • What is its longer term objective? • A poorly managed captive centre can be a drain on finances, as they have large fixed costs • There are many examples of failed CCs: • Citigroup, Deutsche Bank, Unilever, Dell • And successes: • ANZ, WNS, Genpact

23. For Example – ANZ Bank 1 • Developed an integrated Captive Centre offshore in Bangalore for ITO and BPO operations. • The bank set out to create ANZ in Bangalore with fully integrated ANZ culture. • Work includes back-office processing for • credit cards, • mortgages, • wealth management products, • a/c payable • HR.

24. ANZ Bank 2 • IT graduates in Bangalore are paid at A$8k/annum, compared with A$45-50k/annum in Australia. • Although India is getting more expensive, labour costs are still sufficiently low to mean that India is an attractive destination for offshored work. • By focusing on culture, ANZ Bangalore is also producing individuals who can move out into other parts of India and further instill the culture there.

25. Offshoring IT Services • “If you want the loan application processed today, click ‘1’ and it will be done in Fiji today. Otherwise press ‘2’, it will be done in this country by next month’. • What % clicked ‘1’? • There is increasing offshoring of IT services • Application processing, telemarketing, help-desking, airline reservations, data entry, etc.

26. Offshoring IT Services • All these services are highly dependent on both IT and language • The relevant data is mobile – it can be sent through the Internet easily • HSBC employs thousands of staff in China, India and Malaysia. • English speaking countries (populations) have a distinct advantage • But can you understand Indian English?

27. Languages, Skills and Gov’t Support • Dubai and Singapore – IT security skills • PH, LK, IN, – English language call centres • Morocco – French language call centres • Central/South American countries – Spanish call centres for Spain and Hispanic USA, e.g. help-desking, patient scheduling, data entry, helped by synchronous time zones. • Active govt support in UY and CL. • In sub-Saharan Africa, where English is spoken, e.g. KE & BW, there are similar trends.

28. Its not just Salaries • Salaries are a major component, but also consider • Housing • Medical insurance • Local transportation • 13th/14th/15th month bonus, etc. • And lots of hidden costs, such as…

29. Hidden Costs…? • Transaction costs • Infrastructure costs • Knowledge transfer costs • Currency movements and fluctuations • 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.

30. Is Offshoring Too Dangerous? • 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?

31. Three steps (Common Sense?) • 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]

32. 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.

33. 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)

34. Laying the Foundations 3 • Strategy & Plan • Precisely why are we doing this? • 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…

35. Identifying the Providers • In India, there are thousands of providers! • Many have offshore agents • Globally, there are tens of countries that do offshore work • Which one do you want? • General skills or specific? Language? • Risks? IP protection? Security? Culture? Time? • What is your strategic concern? Cost, quality, efficiency?

36. 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? • So many expats don’t like their assignment… • Spousal/family issues. • Is makes no sense to select a country that no one wants to visit or live in.

37. 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 Provider Selection Criteria Weight the criteria; matrix the providers

38. 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

39. 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 • Need to do a good requirements analysis • Try to stimulate the provider’s creativity by asking more specific/difficult questions • Ask for references of work they have done.

40. Assessing & Selecting the Provider • Evaluate the RFPs • Identify false promises, too good to be true offers • Learn that “yes” means ‘yes’, ‘no’ and ‘maybe’. • Often all simultaneously • Check the references • Ask what worked, and what didn’t. • Technology always has problems. • Soft issues – culture, values, trust, wavelength. • Don’t only look at cost.

41. 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.

42. Offshore Things to Do • Don’t just visit the HQ, but also the work site, national software association, … • Talk to other ‘foreigners’ who are 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 – how good are their soft skills? • Walk around – literally

43. 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

44. Contract Specificity • It would seem sensible to have specific contracts • More quality and satisfaction?? • Consultants report that a less than complete contract means more room for creativity and flexibility • The vendor can then work within a framework and be creative – which is more satisfying for vendor staff • They are not just being told what to do • An onsite supervisor can help • It requires the client and vendor to have similar cultural values – tolerance for uncertainty • A client-vendor matching process is needed

45. Psychological Contracts • It is not just the legally drafted contract that is important • It is also useful to get psychological buy-in from the vendor • This can act to complement and support the legal contract • The buy-in can also reflect the need for disciplined creativity

46. Insourcing and Outsourcing • You need to do the requirements analysis • Don’t trust others to know your business better than you do • Outsource the software development • Software testing must be done by the users, not the developers • Developers tend not to do such a good job here • And if the software is not carefully tested, the chance of rejection is higher.

47. Summary • 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.

48. China’s Progress • Currently only 10% of Chinese software is exported, compared to 78% of India’s, though the value of the Chinese software market is double India’s. • China has 18,000 software companies, strongly supported by govt policy and economic growth. • China plans to have • 1000 new software firms with global sourcing expertise, • 100 global software firms to set up business in China • 10 cities within China identified as locations for world class software development

49. China’s Progress • The top ten Chinese software firms engaged in offshore work have, together, about the same revenue and headcount as the 4th largest Indian firm. • Together, these top ten firms account for less than 30% of the total Chinese market. • This indicates a considerable degree of fragmentation in the market (too many micro providers). • Market consolidation is likely.

50. Key Chinese Providers • CVIC SE (1991) • iSoftStone (2001) • Neusoft (1991) • Subsidiaries in: JP, US, DE, RO, FI, CH, AE, PE • 23000 employees • 9000 large customers • Beyond Soft (1995)