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The growing pains of offshore outsourcingJill Carlson
Where outsourcing goes Offshore outsourcing has been a major factor for American business for almost two decades and continues to evolve. According to DiamondCluster International, a Chicago-based global management consulting firm that conducts an annual global outsourcing survey, China came on strong in 2005 as a the No. 2 outsourcing destination for U.S. companies. In the 2004 survey, only 6 percent of survey respondents said they planned to establish offshore operations in China. In the 2005 survey, that number soared to 40 percent. India remains No. 1. "China is starting to look like India did 10 years ago," DiamondCluster partner Tom Weakland said. "As outsourcing capability in China takes off, it will put deflationary pressure on the traditional providers of commoditized outsourcing services and set an entirely new price point. The most aggressive providers are establishing operations in China now to grab market share. Taking a wait-and-see approach is not an option." Posting positive results In the Capital Region, Winterthur U.S. Holdings, the parent company of Sun Prairie-based General Casualty Insurance, has been using Satyam Computer Services Ltd. in Hyderabad, India, since 2003. Satyam offers IT services for customers in 55 countries and employs 28,000 IT professionals at development centers in India, the U.S., Great Britain, United Arab Emirates, Canada, Hungary, Singapore, Malaysia, China, Japan and Australia. Anne Smith, spokeswoman for General Casualty, said Satyam employees are used for mainframe and Web-based systems in their IT department and they work on relatively small projects such as adding fields or making other changes to existing database screens. That allows in-house IT staff to develop new software applications and work on larger projects, Smith said. She said no jobs were lost because of the contract with Satyam and that General Casualty actually added in-house IT staff. "There have really been some positive benefits to using outsourcing," Smith said. Because of the time difference, for example, Satyam employees are working while General Casualty IT workers are sleeping, resulting in a 24-hour workforce. According to Lisa Ross, CEO and founder of FAO Research Inc. of Cambridge, Mass., 2006 will be a strong year for finance and accounting outsourcing. In FAO Today magazine (January/February 2006), she predicts that new FAO outsourcing contracts will double this year over 2005. Large corporations such as IBM and Hewlett-Packard account for 85 percent of FAO outsourcing, according to the FAO Research quarterly review conducted at the end of 2005. Ross predicts that large businesses will continue to dominate the market demand for these services because of expense reduction, regulatory compliance and technology. No offshore outsourcing for us But not all businesses can benefit from offshore outsourcing. In the Capital Region, American Family Insurance, Spectrum Brands and Berbee Information Systems are a few that have passed on the practice. "We have not seen the need to go offshore for any of our requirements. There has not been a compelling project that would even suggest that low-cost labor would be of value to us," said Paul Shain, CEO of Berbee Information Systems, a provider of business technology services. CUNA Mutual also has not engaged extensively in offshore outsourcing. "Our involvement is limited to software development, and little at that," said spokesman Rick Uhlmann. Is there really a cost savings? Matthew Fuller is vice president of technology at The Guild, an online resource for original art and fine craft, headquartered in Madison. Previously, he was president of The Isthmus Group, a Madison technology consulting company, and he believes all the talk about cost savings from offshore outsourcing is more myth than reality. He said that while at first blush, lower wages paid to workers in India or elsewhere may seem attractive to corporations, cost savings can quickly evaporate. Companies must consider security risks, business continuity, software testing and travel costs, which are typically not included in the negotiated contract, he said. For businesses considering offshore outsourcing, Fuller suggests bolstering your relationship with a local consulting firm instead. "If your organization has the development lifecycle nailed down, then you're probably optimizing your project already," he said. Suppose the project manager in India or China leaves without finishing your project, causing your company to miss a crucial deadline and/or to exceed the budget, Fuller said. It can become a nightmare trying to solve the problem from thousands of miles away. The competitive nature of companies that fulfill outsourcing contracts can result in high staff turnover, Fuller said. The employees who then take over existing projects need to be brought up to speed on the U.S. companies they are working with as well as specifics of the projects. This can increase costs, lower outsourcing employees' productivity and steal the focus away from the U.S. company's in-house projects. Complacency also can present a problem, Fuller said. In the early stages of the outsourcing relationship, frequent visits and phone calls to the offshore company by executives from the U.S. company help to cultivate the relationship. But over time, the visits and calls might slow or stop and the lack of contact may cause the provider to lose any sense of urgency about projects. Gartner, a technology research firm based in Stamford, Conn., released a recent study that showed the most critical areas that outsourcing buyers need to be aware of when signing offshore contracts. They include a failure to draw up contracts that include proprietary rights; security and confidentiality; legal compliance; fees and payment terms; and auditing. The study said that intellectual property (IP) often presents problems because offshore countries and cultures have different attitudes toward IP protection. Gartner found that IP rights enforcement in Ireland is strong, but in China and Russia, enforcement is weak, and that can mean legal expenses if a dispute goes to court. Challenges in outsourcing Anne Smith of General Casualty said cultural differences have been one of the main challenges the insurance company has faced. "The employees at Satyam aim to please and don't know how to say 'no.' We ask for a project to be completed and sometimes Satyam employees don't allow enough time for testing the system, so we have to make sure to ask if what we are asking is a reasonable request. We have a key person managing the relationship as well as team leaders in various departments to help guide the project." The Guild recently conducted a small development test with an offshore firm to determine if the effort would be cost effective and if the finished project would conform to basic development standards. The results, Fuller said, were less than desirable. "We found in most cases that the offshore company promoted themselves as having industry best-practice development standards. However, when we reviewed their code, it was very obvious that the offshore company was far from using best practices and completely ignored the naming conventions our organization provided as a requirement. Documentation was often sparse if existed at all. Duplicate code was rampant in the applications we reviewed," Fuller said. The relationship was terminated before the project was completed. "Companies looking to offshore need to be sure their project specifications are crystal clear and well defined." Fuller said. "I would recommend that the project be broken down into very small segments or subprojects so they can see immediate results (positive or negative). Make sure there is a project leader or project manager overseas that has had a significant amount of time in the United States and understands the cultural differences." According to the Diamond-Cluster outsourcing study, the number of buyers prematurely ending an outsourcing relationship has doubled to 51 percent from the 2004 survey, while the number of buyers satisfied with their offshore providers has sunk from 79 percent to 62 percent. The study also indicated that 36 percent of the buyers said poor provider performance was the reason for early termination. "The blame cannot be heaped solely on the shoulders of providers," said Tom Weakland of DiamondCluster. "Many buyers are now several years into at least one outsourcing relationship, but they still lack effective measures to gauge the success of their outsourcing initiatives, which are critical for knowing and getting what you want." Jill Carlson is a Madison-based freelance writer. 7 steps to a successful offshore relationship 1. Don't assume the hard work is over during the ramp-up period. Healthy offshore relationships require constant attention and extensive re-examination every three years. 2. Hold quarterly meetings with senior-level representation from both customer and vendor. 3. Rotate people out of the relationship management position after a few years to prevent burnout. Or consider having some staff permanently on-site at the offshore location. The travel required to manage relationships offshore can take a toll on employees. 4. Keep close tabs on vendor staff turnover. Pay attention to all levels, from the executive ranks to middle managers to line workers; defections at any level can have a negative effect. 5. Work with your offshore provider to cushion against the sudden loss of key employees. For example, on an important project, designate an employee who can be ready to jump in if necessary. 6. Make sure performance metrics mesh with reality. If they don't, come up with new metrics that do. 7. Survey business users and internal IT staff about their experiences with offshore support or projects on a regular basis. They can be your best measure of how well or poorly the engagement is delivering. Source: CIO Magazine, April 15, 2006 Lessons to be learned Buyer lessons • Outsourcing is always harder than you originally thought • Cost savings alone is not a good reason to outsource • Clearly define your goals, measurement metrics and exit strategies up front • Outsourcing your problems won't solve them. Fix potential problems before handing the process over to someone else • Give providers a chance to be successful; transitions take time • Due diligence on providers is essential if you want to avoid surprises Provider lessons • Successful outsourcing requires strong buyer commitment • Be prepared to talk to buyers in terms of business value • Contracts and negotiations need to be customized for each situation • Work closely and communicate clearly with buyer management to be successful • Cultural differences need to be acknowledged and managed Source: DiamondCluster 2005 Global Outsourcing Survey jilly@chorus.net madison.com ©2009 Capital Newspapers. All rights reserved. |
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