Outsourcing IT:Global Opportunities and Challenges Venu Nair, PMP
Outsourcing Defined.. • Outsourcing: • Farming out of services to a third party. • With regards to IT, outsourcing can include anything from outsourcing all management of IT to an IBM or EDS or outsourcing a very small and easily defined service, such as disaster recovery or data storage, and everything in between. • Often used interchangeably—and incorrectly—with offshoring – it’s a subset • Classic Make vs. Buy Decision • Globalization - “The World Is Flat” best seller by Thomas Freedman
Offshore outsourcing of software development has become a common practice in recent years. Most of the Fortune 500 companies have or started to outsource software development, maintenance or support to software companies in India. India has the majority in organizations worldwide that have achieved Level 5, the highest in SW-CMM ratings Offshore Outsourcing
What is a make or buy decision? • Sometimes it makes more sense to buy services rather than perform the task in-house • The argument for outsourcing • Proficiency • Complexity • The argument against outsourcing • Control • Flexibility • The verdict • Either can make operational and financial sense • Arguments for, can become arguments against
Deciding whether to make or buy • What do you want to accomplish? • How is it done now? • What can you do? • Make • Buy
Set objectives • What? • Improve quality • Reduce time • Cut costs • Why? • Rationale • Importance • When? • Timeframe
Needs assessment • Identify your needs • The more crucial the task, the more details need to be specified • Workflow and outputs • Policies • Steps • Time increments • Staff and system capabilities • Classify your needs • Long-term, medium-term, immediate • Low, medium, and high priority
Outsourcing Availability of options Competitor offerings Appropriateness (esp, offshoring) Gains from technology Interface issues In-house Core competencies Competing priorities Career path Skills to task Supervision Corporate culture Review options
Outsourcing Advantages • Financial • Avoid heavy capital investment, thus releasing funds for other uses. • Improve cash flow and cost accountability. • Technical • Be freer to choose software due to a wider range of hardware. • Achieve technological improvements more easily. • Management • Concentrate on developing and running core business activity. • Delegate IT development (design, production, and acquisition) and operational responsibility to supplier.
Outsourcing Advantages (cont.) • Human Resources • Draw on specialist skills, available from a pool of expertise. • Enrich career development and opportunities for staff. • Quality • Clearly define service levels. • Improve performance accountability. • Flexibility • Respond quickly to business demands. • Handle IT peaks and valleys more effectively.
Outsourcing Strategies (Clemons, 2000) • Understand the project.Clients must have a high degree of understanding of the project, including its requirements, the method of its implementation, and the source of expected economic benefits. • Divide and conquer. Dividing a large project into smaller and more manageable pieces will greatly reduceprogrammatic risk and provides clients with an exit strategy if any part of the project fails. • Align incentives.Designing contractual incentives based on activities that can be measured accurately can result in achieving desired performance.
Outsourcing Risks(Clemons, 2000) • Shirkingoccurs when a vendor deliberately underperforms while claiming full payment. • e.g., billing for more hours than worked, providing excellent staff first and later replacing them with less qualified ones. • Poachingoccurs when a vendor develops a strategy and strategic application for a client and then uses them for other clients. • e.g., vendor redevelops similar systems for other clients at much lower cost, or vendor goes into client’s business. • Opportunistic repricing or holdupoccurs when a client enters into a long-term contract with a vendor and vendor changes financial terms at some point or overcharges for unanticipated enhancements and contract extensions.
If You Decide to Outsource • Make sure the supplier you choose • Understands your market and your industry • Is a leader in the field • Has a proven track record • Take your time and make sure you create a very thorough RFP • Be realistic about how things will go during for the first 6-12 months
Lessons Learned • Manage the relationship and be hands-on for at least the first year • Clarify with expected outcomes, results, timetables and budgets • Schedule regular progress reviews • Evaluate regularly • Be open and candid • Allow mistakes and learn from them
Lessons Learned • Consider them an extension of your staff, your partner • Treat them with respect • Don’t assume that your way is the best or only way • Be proactive at resolving disputes quickly • Measure regularly in face-to-face meeting (monthly is preferred) • Communicate both the positives and the challenges to your provider and to your internal executive staff
Outright failure.The system is never completed, and little or nothing is salvaged from the project. Abandoned.The system is completed, including some or all of the originally specified features, but either it is never used or usage stops after a short period. Scaled down. The system is completed and used, but lacks much of the functionality of the original specifications. Runaway.The project requires much more money and time than planned, regardless of whether it is ever completed or used. IT Failures The following definitions indicate the range of possibilities for the various types of IT failures:
Cultural Aspects India
Protocol and Communication • The Indian manner is polite and respectful, especially when dealing with senior managers or government officials. Respect for the hierarchy and those senior in age or status is ingrained in the culture and affects business interactions. For example, in meetings, junior managers may not speak or disagree publicly • Punctuality may vary. It's best to reconfirm appointments. The pace of business varies, depending on the region/city and type of business. In private industries, it's more competitive, especially in newer high-tech industries and financial services. It may be a good idea to build more time into schedules and deadlines. • One of the lasting contributions of the British Raj is the wide use of English in business and government. However, accents, style, usage of words differ in different regions. • Indians mix English with their local language. Some Indians' style may be more indirect than direct, in which case you will need to listen carefully. If someone is very direct or assertive, he or she will be known for this style.
Supervising and Socializing • Priorities may differ. Sometimes family matters take precedence over business. Some Indians may not sense the same kind of urgency, or they may respond, "no problem," which should not be taken literally. A person may be conveying what he or she hopes to do, rather than disappoint the other by saying no. • There is a middle-class of highly trained technocrats who have been to the best schools, are up on the latest management techniques and business jargon, and are fully conversant with Western ways of doing business. Treat them as colleagues rather than uninformed "developing country" managers. • If there is an opportunity to meet your colleagues socially, it's a good idea to attend. Relationships are important in India, and will facilitate your interactions. • When socializing, just be aware of some personal preferences surrounding food and alcohol. Hindus avoid beef and many are vegetarian. Muslims do not eat pork. Many conservative Indians of all religious backgrounds avoid alcohol.
Cultural Tips • Indians often respond positively to a question by shaking their head in a way that Westerners interpret as 'no‘ • The word “no” has harsh implications in India, non-committal answers are considered more polite. For example, if you have to decline an invitation, it's more acceptable to give a vague and noncommittal answer such as “I'll try” or “We'll see” rather than “No, I can't.” • The hierarchical nature of Indian society demands that the boss is recognized as the highest individual in authority. • In some offices, employees may rise each time the boss enters the room to acknowledge respect. • Employees do as they're told; even if they know the boss is wrong, they won't argue • Talking about your friends and family is an important part of establishing a relationship with those involved in the negotiating process.
Cultural Tips - Continued • Eating meals with hands is very common India and that is one of the reasons that finger bowls are provided in many elite restaurants • Indian culture is what Samuel Huntington of Harvard describes as a “strong” culture, meaning, in part, that Indian culture is able to withstand an influx of outside cultural ideas and products without losing its own internal identities. • Whereas Western management techniques and business practices were quickly integrated into traditional lifestyles in the growing Indian software industry, most Indians continue to eat indigenous foods, watch local movies and TV, and to wear traditional clothing. Western companies in the vast Indian consumer market, therefore, have successfully “Inidanized” their products to appeal to the large middle class.
Summary • It’s not painless, but it’s worth it, if you execute it well. Good Luck and Thank You!
Reference • www.cio.com – Various articles on Outsourcing • Outsourcing Lessons Learned – SAE Corporation • Economist – London – Summer 2001 • Outsourcing and Offshoring – Kaufmann-Willis Group