Offshore Outsourcing

Chris MooreMike Loomis

Survey of current status of offshore

outsourcing

•What is offshore outsourcing?

•Why are companies using offshore outsourcing for IT functions?

•When did the trend begin?

•Where are the top destinations for outsourcing IT work?

•Who is outsourcing offshore?

•How is offshore outsourcing accomplished?

Case study

Monsanto

HP Global Delivery India Center

Yash

General guidelines

Presentation Objectives

Offshore outsourcing, a type of business process outsourcing (BPO),

is the exporting of IT-related work from the United States and other

developed countries to areas of the world where there is both

political stability and lower labor costs or tax savings. Outsourcing is

an arrangement in which one company provides services for another

company that could also be or usually have been provided in-house.

Offshore simply means "any country other than your own." The Internet and

high-speed Internet connections make it possible for outsourcing to be

carried out anywhere in the world, a business trend economists call

globalization. In general, domestic companies interested in offshore

outsourcing are not only trying to save money in order to be more price-

competitive against each other, but also to enable them to compete with

businesses in other countries.

What is offshore outsourcing?

Source: whatis.com

Why are companies outsourcing?

Source: http: // outsourcinginstitute.com / oi_index. Online survey of 1,100 buyers of outsourcing services, 2003.

10%

12%

12%

18%

20%

25%

36%

38%

54%

55%

0% 10% 20% 30% 40% 50% 60%

Function difficult to manage/outof control

Share risks

Take advantage of offshorecapabilities

Reduce time to market

Accelerate reengineeringbenefits

Resources not availableinternally

Gain access to world-classcapabilities

Free resources for otherpurposes

Reduce and control operatingcosts

Improve company focus

Why are companies outsourcing offshore?

Source: http://ventoro.com. Online survey of 5,231 executives who are buyers of outsourcing services. 2004.

8%

10%

15%

19%

37%

40%

48%

71%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Gain industry expertise

Penetrate market

Cost predictability

Forced strategy

Gain technical skillsets

Improve time to market

Improve quality

Achieve cost savings

http://commonziffdavisinternet.com/download/0/2216

H. Ross Perot founded EDS in 1962.

“Back in the mid-1980s, the model was to use offshore labor for low-end, low-cost work such as language localization, device and printer drivers, and motherboard production.”

Source: Robinson, Marcia, and Kalakota, Ravi, Offshore Outsourcing, Mivar Press, 2004

In the early 1990s, Jack Welch implemented the “70-70-70” rule for GE’s IT work.

Source: Robinson, Marcia, and Kalakota, Ravi, Offshore Outsourcing, Mivar Press, 2004.

When did offshore outsourcing begin?

“One of the first mega-deals in the world of IT outsourcing was the 3.2 billion contract between Xerox and EDS in 1994. The initiation of offshore outsourcing took place in 1994 and 1995.”

Source: Erber, G, & Sayed-Ahmed, A., “Offshore Outsourcing: A Global Shift in the Present IT Industry,” Intereconomics, March-April, 2005, pp. 100-113.

“(N)early 100% of Fortune 500 companies” had no offshore outsourcing of IT functions in 1990; by 2002, 50% to 70% were outsourcing some IT functions offshore.

Source: Carmel, E. & Agarwal, R., “The Maturation of Offshore Sourcing of Information Technology Work,” MIS Quarterly Executive, 1(2), 2002, pp. 65-77.

December, 2003 Forrester Research Study: • 60% of Fortune 1000 firms were not outsourcing offshore • 30% `experimenters’; 5% ‘committed’; 5% ‘full exploiters’

When did offshore outsourcing begin?

India

China

Malaysia

Czech Republic

Singapore

Philippines

Brazil

Canada

Chile

Poland

Where is the IT work going?

Offshore locations ranked by financial structure

Note: Calculated on a scale of 1 to 4. Sources: A.T. Kearney, Economist Intelligence Unit, OECD, World Economic Forum Global Competitiveness Report, CB Richard Ellis, Forbes, EDS, local government statistics, independent compensation surveys.

A.T. Kearney Offshore Location Attractiveness Index 2004

.42

.91

2.24

2.45

2.56

2.50

2.64

2.84

2.74

3.00

2.88

3.14

3.17

3.19

.32

.22

.27

.26

.22

.33

.27

.17

.28

.23

.27

.22

.25

.23

.26

.34

.13

.17

.21

.26

.21

.16

.23

.09

.29

.23

.23

.30

.00 .50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

Canada

Singapore

Czech Republic

Poland

Chile

Malaysia

Mexico

Brazil

Russia

China

Thailand

Philippines

Vietnam

India

Compensation Infrastructure costs Tax and regulatory environment

Offshore locations ranked by business environment

Note: Calculated on a scale of 1 to 3. Sources: A.T. Kearney, Economist Intelligence Unit and Foreign Direct Investment Confidence Index 2003, A.T. Kearney/Foreign Policy Globalization Index 2003, World Economic Forum Global Competitiveness Report, Business Software Alliance, local government agencies.

A.T Kearney Offshore Location Attractiveness Index 2004

.30

.63

.37

.68

.74

.75

.83

.91

.91

1.03

1.03

1.06

1.26

1.41

.11

.04

.13

.15

.22

.19

.20

.25

.19

.29

.24

.28

.41

.40

.06

.02

.05

.00

.07

.13

.10

.01

.24

.11

.28

.38

.40

.43

.04

.01

.17

.10

.16

.19

.18

.24

.23

.25

.22

.30

.41

.39

.00 .50 1.00 1.50 2.00 2.50 3.00

Russia

Vietnam

Philippines

China

Thailand

Mexico

India

Brazil

Poland

Chile

Malaysia

Czech Republic

Canada

Singapore

Country risk Infrastructure Culture adaptability Security of intellectual property

Offshore locations ranked by people skills

Note: Calculated on a scale of 1 to 3. Sources: A.T. Kearney, Organization for Economic Cooperation and Development, World Bank, U.S. Census Bureau, World Economic Forum Global Competitiveness Report, Carnegie Mellon Software Engineering Institute, Customer Operations Performance Center, Educational Testing Service, local government agencies.

A.T. Kearney Offshore Location Attractiveness Index 2004

.04

.25

.25

.19

.26

.41

.19

.14

.23

.42

.61

.48

.82

1.03

.04

.06

.01

.02

.09

.11

.05

.21

.01

.08

.00

.60

.04

.47

.08

.14

.08

.27

.09

.00

.28

.23

.33

.19

.33

.21

.44

.25

.04

.00

.15

.14

.15

.13

.14

.15

.17

.14

.25

.07

.45

.21

.15

.12

.21

.11

.17

.21

.22

.16

.18

.11

.17

.00

.19

.13

.00 .50 1.00 1.50 2.00 2.50

Vietnam

Thailand

Chile

Malaysia

Mexico

Brazil

Poland

Russia

Czech Republic

Philippines

Singapore

China

Canada

India

BPO experience Size and availability of labor Education Language Employee retention

A.T. Kearney Offshore Location Attractiveness Index 2004

3.25

3.65

3.12

3.44

2.88

2.99

1.00

3.17

3.59

1.47

2.64

3.09

3.32

3.72

0.51

0.70

1.26

1.19

1.57

1.68

2.48

1.41

0.92

2.63

2.02

1.77

0.93

1.31

0.89

0.35

0.74

0.57

0.88

0.70

1.94

0.86

0.94

1.36

0.92

0.73

1.36

2.09

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00

Russia

Vietnam

Mexico

Thailand

Poland

Chile

Canada

Brazil

Philippines

Singapore

Czech Republic

Malaysia

China

India

Financial structure Business Environment People skills & availability

India is the top offshore location

Note: The numbers in the bars are index numbers. The weight distribution for the tree categories is 40:30:30, meaning that the financial structure is rated a scale of 1 to 4, and the business environment and people skills are on a scale of 1 to 3. Source: A.T. Kearney.

India is the top offshore location

Source: A.T. Kearney

Who is outsourcing offshore?

WIPRO Epson NCR Thomson General Motors Honeywell Sun Microsystems

SATYAM Texas Instruments TRW Ford Motor Company World Bank Reuters U.S. Robotics

TATA GE IBM Boeing Dell Citibank Microsoft

PATNI GE AT&T Emerson Electric Hewlett-Packard Bendix Met Life

How is offshore outsourcing accomplished?

How is offshore outsourcing accomplished?

Captive Model

Company builds, owns, staffs, and operates offshore facility.

High cost, high risk, high control.

Joint-Venture Model

Customer and supplier share ownership in offshore operations.

High cost, high risk, control depends on amount of ownership.

Source: Rottman, J. & Lacity, M., “Proven Practices for IT Offshore Outsourcing,”Sourcing and Vendor Relationships, Vol. 5, No. 12, 2004 Cutter Consortium.

How is offshore outsourcing accomplished?

Build-Operate-Transfer Model

Supplier owns, builds, staffs, and operates the facility on behalf of the customer. Ownership and employees transfer to the customer after completion.

Medium cost, medium risk, medium control.

Fee-for-Service Model

Customer signs a contract for services in exchange for paying the supplier a fee.

Low cost, low risk, low control.Source: Rottman, J. & Lacity, M., “Proven Practices for IT Offshore Outsourcing,”Sourcing and Vendor Relationships, Vol. 5, No. 12, 2004 Cutter Consortium.

Company background

Description of outsourced IT activity

Total offshore picture

SAP development

Offshore suppliers

HP Global Delivery India Center

Yash

Management practices

Practices before offshore outsourcing

Current offshore practices

Challenges

Comparison to best practices

Monsanto Case Study Objectives

Monsanto Case StudySourcing Challenge Practices to Overcome the Challenge

13. Design effective organizational interfaces.

14. Elevate your own organization's CMM certification to close the process gap between you and your supplier.

15. Bring in a CMM expert with no domain expertise to flush out ambiguities in process.

16. Negotiate the CMM documents for which you will and will not pay.

17. Tactfully cross-examine, or even replace, the supplier's employees to overcome cultural communication barriers.

18. Require the supplier to submit daily status reports.

19. Let the project team members meet face-to-face to foster camaraderie.

20. Consider innovative techniques, such as real-time dashboards, to improve workflow verification, synchronization, and management.

21. Manage bottlenecks to relieve the substantial time-zone differences.

How can we effectively work with suppliers?

Source: Rottman, J. & Lacity, M., “Proven Practices for IT Offshore Outsourcing,”Sourcing and Vendor Relationships, Vol. 5, No. 12, 2004 Cutter Consortium

Interviews:

Monsanto PMO Manager

Monsanto Development Coordinator

Monsanto Systems Analyst

HP GDIC Offshore Coordinator

Yash Offshore Coordinator

Monsanto Case Study

Company background

Monsanto employees: 15,000

IT staff: 600 (contractors not included)

2004 Monsanto revenue: $5.5B

2004 IT budget: $96M (1.8% of revenue)

Monsanto Case Study

Monsanto Case StudyHerbicides

Seeds

Traits

Animal Agriculture

Source: www.monsanto.com

Monsanto Case Study

Chief Information Officer

HR Generalist

IT LeadIT Operations

IT LeadEnterprise Infrastructure

Information Security Officer

IT LeadIT Strategy &

Communications

IT LeadInternational Commercial

IT LeadNALAN Commercial

Operations LeadASI

IT LeadEnterprise Applications

IT LeadEnterprise Architecture

Monsanto Case Study

Chief Information Officer

HR Generalist

IT LeadIT Operations

IT LeadEnterprise Infrastructure

Information Security Officer

IT LeadIT Strategy &

Communications

IT LeadInternational Commercial

IT LeadNALAN Commercial

Operations LeadASI

IT LeadEnterprise Applications

IT LeadEnterprise Architecture

Description of offshore outsourced IT activity

Monsanto Case Study

SAP Development• SAP is an Enterprise Resource Planning packaged software.

• SAP runs your entire business: sales & distribution, purchasing, finance, HR, production planning, etc.

• These business functions are grouped into SAP “modules” and are integrated.

• Module business logic is based on industry best practices.

• SAP has to be customized when it is implemented because every business will have variations on this business logic.

• SAP developers write custom programs within the SAP system, using a programming language called ABAP, to account for these variations.

• The programs can include reports, interfaces to external systems, documents, and modifications to SAP transactions.

Monsanto Case Study

HP GDIC(Hewlett Packard Global Delivery India Center)

• Originally Digital GlobalSoft.

• Bought by Hewlett Packard in 2004.

• Headquartered in Bangalore.

• CMM level 4 certified

• 2500 employees, ~1000 SAP Developers in Bangalore

• Career path: Developer, Tech Lead, ODC Manager, Offshore Coordinator

• Experience: Majority of Developers have 2 – 4 years.

Sources: www.hpglobalsoft.com; Offshore Coordinator of HPGDIC, interviewed in person by Mike Loomis and Chris Moore on November 1, 2005

Monsanto Case Study

Yash• First client was John Deere.

• Headquartered in Moline, IL.

• Named ‘Fast 500’ IT Consulting Firm by Inc. Magazine

• Staff in U.S. and Hyderabad, India.

• Privately held company.

• Annual revenue in $20-$30M range.

• IT specialties: SAP, Oracle, Microsoft, Interwoven

• 200 employees

• ISO9001 certified, not CMM certified

• Experience: Typical Developer has 5 years.Sources: www.yash.com; Offshore Coordinator of Yash, interviewed in person by Mike Loomis and Chris Moore on November 2, 2005

Monsanto Case Study

SAP Development – In-house Roles• Project Manager

• Business Users

• Systems Analysts

• Development Coordinators

• Developers

Monsanto Case Study

SAP Development – In-house Communication

Users

SystemsAnalysts

DevelopmentCoordinators

Developers

Monsanto Case Study

SAP Development – Offshore Roles• Project Manager

• Business Users

• Systems Analysts

• Development Coordinators

• On-site Offshore Coordinator

• Offshore Technical Lead

• Offshore Developers

Monsanto Case StudySAP Development – Offshore CommunicationUsers

SystemsAnalysts

DevelopmentCoordinators

On-siteOffshore

Coordinator

OffshoreTech. Lead

OffshoreDevelopers

Monsanto Case Study

SAP Development – Process1. Systems Analyst designs request. Systems

Analyst writes specification.

2. Development Coordinator assigns work to Offshore Coordinator.

3. Offshore Coordinator reviews request, seeks any clarification from Systems Analyst.

4. Offshore Coordinator works with Offshore Technical Lead to assign work to Offshore Developer.

5. Offshore Developer develops program, works with Offshore Technical Lead for assistance, works with Offshore Coordinator for request clarification.

Monsanto Case Study

SAP Development – Process6. Offshore Developer tests program. Offshore

Technical Lead reviews program with Offshore Developer.

7. Offshore Technical Lead/Offshore Developer deliver finished program to Offshore Coordinator. Offshore Coordinator informs Systems Analyst that program is ready to test.

8. Systems Analyst tests programs, notifies Offshore Coordinator of any problems. Offshore Coordinator may fix problems on-site, or return program to Offshore Developer/Offshore Technical Lead for fixes.

Monsanto Case Study

SAP Development – Process In Detail

1. Systems Analyst designs request. Systems Analyst writes specification.

• PMO Manager: “Specifications typically evolve as the project moves along….we are a highly interactive culture. It’s like a group of people standing around each other working (together).”1

• Systems Analyst: “(With offshore) more effort is needed to write specifications….it was taking double the time, because you have to do a lot more pre-work developing the design.”2

• Development Coordinator: “The specifications in general need more detail, but an experienced developer would ask more questions.”3

Sources: Systems Analyst of Monsanto, interviewed in person by Chris Moore on November 3, 2005; Dev. Coord. Of Monsanto, interviewed in person by Chris Moore on November 2, 2005.

Monsanto Case Study

SAP Development – Process In Detail

2. Development Coordinator assigns work to Offshore Coordinator.

• Development Coordinator: “I look for clearly defined requirements, not complex where possible. We learned it was best to keep complex work on-site.”3

• PMO Manager: “Each individual IT team worked with their offshore resources differently. People tried different ways of working with offshore. We tried a few projects without the offshore coordinator, and those did not work.”1

Monsanto Case Study

SAP Development – Process In Detail

3. Offshore Coordinator reviews request, seeks any clarification from Systems Analyst.

• Systems Analyst: “The offshore coordinator’s experience is critical.”2

• Development Coordinator: “I will sometimes talk with the Offshore Coordinator, and maybe we will both talk with the Systems Analyst. If I am more comfortable with the Offshore Coordinator, he gets more range.”3

Monsanto Case Study

SAP Development – Process In Detail

4. Offshore Coordinator works with Offshore Technical Lead to assign work to Offshore Developer.

• Offshore Coordinator: “I do not actually assign work to the developers. I work with a technical lead (in India) to make assignments.”4

• Offshore Coordinator: “I have a skill matrix to determine a pool of possible people to assign work to. I then work with a technical lead (in India) to make assignments.”5

• Systems Analyst: (Not aware of assignment process.)2

• Development Coordinator: (Not aware of assignment process.)3

Monsanto Case Study

SAP Development – Process In Detail

5. Offshore Developer develops program, works with Offshore Technical Lead for assistance, and works with Offshore Coordinator for request clarification.

• Offshore Coordinator: “This is a Monsanto model. At other clients, developers work directly with the systems analysts. I am not sure if one model is better than the other.”4

• Systems Analyst: “The time zone difference mostly works to our advantage. People are constantly developing.”2

• Development Coordinator: “Time zone difference has advantages and disadvantages, but mostly it is a disadvantage. During heavy testing, we only get one turnaround per day.”3

Monsanto Case Study

SAP Development – Process In Detail

6. Offshore Developer tests program. Offshore Technical Lead reviews program with Offshore Developer.

• Offshore Coordinator: “Developer creates a test plan, but Monsanto does not get it, because they didn’t want it. The technical lead (in India) does peer review of the developer’s program.”5

• Offshore Coordinator: “The Offshore Coordinator will sometimes have to work with the systems analyst to gather test data for the developers. There is also a QA team that tests program.”4

• Development Coordinator: (Unaware of code reviews.) “We had to create a code checklist for the developers to follow to ensure quality.”3

• Systems Analyst: (Unaware of code reviews.)2

Monsanto Case Study

SAP Development – Process In Detail

7. Offshore Technical Lead/Offshore Developer deliver finished program to Offshore Coordinator. Offshore Coordinator informs Systems Analyst that program is ready to test.

• Systems Analyst: “Communication was lacking, sometimes I wasn’t notified that a program was ready.”2

• Development Coordinator: “The Offshore Coordinators would usually test code before turning it over and would fix any problems. Some offshore coordinators were more diligent than others.”3

• PMO Manager: “One of the cultural barriers was that we would never hear bad news, until it was too late. And then when you would finally hear bad news, the response was ‘but people are working very hard.’”1

Monsanto Case Study

SAP Development – Process In Detail

8. Systems Analyst tests programs, notifies Offshore Coordinator of any problems. Offshore Coordinator may fix problems on-site, or return program to Offshore Developer/Offshore Technical Lead for fixes.

• Offshore Coordinator: “The Offshore Coordinator must be a senior level developer.”5

• Offshore Coordinator: “The Offshore Coordinator often makes program changes.”4

• Development Coordinator: “Sometimes there were too many changes for the offshore coordinator to make, and they became a bottleneck. Development coordinators had to take over the organization of issue resolution, and Monsanto developers had to take over some of the code. (This was not common to all projects)”3

Monsanto Case Study

SAP Development – General Thoughts• Ideal Offshore Coordinator to Developer ratio

• Offshore Coordinator: “1:6 or 1:7.”4

• Offshore Coordinator: “1:5.”5

• Development Coordinator: “1:5.”3

• Systems Analyst: “Not more than 1:6 or 1:7.”2

Note: During the high-point of offshore development, it was 1:13 for HPGDIC.

Monsanto Case Study

SAP Development – General Thoughts• Camaraderie

• Systems Analyst: “You know….I’m surprised….even though they are from my own country, I don’t have same level of rapport with them. Rapport is very important.”2

• Development Coordinator: “There is no camaraderie. I know some names (of the developers), but don’t know them well enough to know their strengths and weaknesses.”3

• Offshore Coordinator: “We should have sent some developers to the client site for a while. Then you would have a team.”5

• Offshore Coordinator: “I told my wife I don’t want to do this (offshore outsourcing)….I feel bad for these people.”5

Monsanto Case Study

SAP Development – General Thoughts• Language

• Offshore Coordinator: “Language is not an issue. English is the language spoken at business meetings, even at the offshore office.”4

• Development Coordinator: “(During interviews) sometimes I thought they did not understand us. It could have been a lack of technical understanding or a language problem.”3

• Systems Analyst: “Not an issue. Most speak at least three languages, the regional language, the national language, which is Hindi, and English.”2

Monsanto Case Study

SAP Development – General Thoughts• Status Reporting

• Offshore Coordinator: “I provide a monthly status report to show what is being worked on, and defects and other metrics. I also provide weekly a status report to give detailed status on what is being worked on.”5

• Development Coordinator: “During critical times, we had daily conference calls with all the developers. This helped.”3

• Offshore Coordinator: “The daily conference calls were helpful for damage control. Often times, the developers don’t feel the same pressure that I do.”5

Monsanto Case Study

SAP Development – General Thoughts• Future of the Relationship

• Offshore Coordinator: “The Monsanto relationship (with our company) is good and healthy.”4

• Development Coordinator: “Lately it’s been easier, but we haven’t assigned complex work. I don’t think you can have the majority of your staff offshore.”3

• Systems Analyst: “Now I am not as frustrated as I used to be….because it was taking me double the time….but the latest offshore company I have been working with is better.”2

• PMO Manager: “Our expectations were not met. The developers were not very skilled. It wasn’t a good fit between the offshore model and the Monsanto model.”1

Monsanto Case StudyBest Practices

Source: Rottman, J. & Lacity, M., “Proven Practices for IT Offshore Outsourcing,”Sourcing and Vendor Relationships, Vol. 5, No. 12, 2004 Cutter Consortium

Sourcing Challenge Practices to Overcome the Challenge Yes No

13. Design effective organizational interfaces.

14. Elevate your own organization's CMM certification to close the process gap between you and your supplier.

15. Bring in a CMM expert with no domain

expertise to flush out ambiguities in process.

16. Negotiate the CMM documents for which

you will and will not pay. 17. Tactfully cross-examine, or even replace,

the supplier's employees to overcome cultural communication barriers.

18. Require the supplier to submit daily status reports.

19. Let the project team members meet face-to-face to foster camaraderie.

20. Consider innovative techniques, such as real-time dashboards, to improve workflow verification, synchronization, and management.

21. Manage bottlenecks to relieve the substantial time-zone differences.

How can we effectively work with suppliers?

Offshore Outsourcing

Questions?

Additional References

1PMO Manager of Monsanto, interviewed in person by Chris Moore on November 9, 2005

2Systems Analyst of Monsanto, interviewed in person by Chris Moore on November 3, 2005

3Development Coordinator of Monsanto, interviewed in person by Chris Moore on November 2, 2005

4Offshore Coordinator of Yash, interviewed in person by Mike Loomis and Chris Moore on November 2, 2005

5Offshore Coordinator of HPGDIC, interviewed in person by Mike Loomis and Chris Moore on November 2, 2005