Outsourcing 2.0: The business rationale for exporting your job

It's not just a tactical search for cheap commodity work, now it's about 'strategic sourcing'

The word offshoring still causes some IT professionals to break out in a cold sweat and others to reach a low boil. Debates continue to rage on the merits and morality of getting technology work done by non-Americans for wages lower than those of their U.S. counterparts. But meanwhile, the practice of offshoring has not only become more prevalent, it has also begun to mature.

Call it Offshoring 2.0. The corporate view of this practice is evolving from the relatively simple idea of moving commodity work from the U.S. to (usually) India with the hope of reaping cost savings, to much more complex, multishore arrangements with more nuanced and strategic goals. These include achieving variable staffing capacity, freeing internal resources, finding the best talent, increasing speed to market and enabling follow-the-sun support.

In effect, offshoring has grown up. In its infancy, just a handful of adventurous companies sent highly codified work overseas. During its rebellious adolescence, it stirred a furious national debate, and the practice’s previously unrecognized management challenges and hidden costs came to light. Now it’s poised to enter a less tumultuous young-adulthood. At this stage, there is less mystery, and the benefits and pain points are better known. This enables companies with some experience to approach offshoring as part of a broader strategic sourcing strategy rather than in a tactical, one-off way.

“The ‘not built here’ mentality has really dissipated,” says Danny Siegel, director of data warehousing and business intelligence technologies at New York-based Pfizer Inc., which uses several outsourcing providers. “With budgets shrinking and requirements growing to improve quality and timeliness, there’s a lot of pressure on IT management to really rethink how they source for technology projects.”

It’s reached the point, Siegel says, “that I couldn’t care less if the people come from Chennai, Shanghai, Poland or the Ukraine — that’s irrelevant. As long as it’s a high-performance work team that gets the job done at a competitive price, great.”

Siegel considers it the job of the service provider — whether based in the U.S. or India — to provide him with the best and the brightest, whether onshore or offshore, “and that means global sourcing,” he says.

Changing the Name

Indeed, terms like global sourcing and strategic sourcing are starting to replace offshoring for companies striving to fit their use of overseas talent into their overall business strategies. And offshoring is no longer solely about cost. For instance, Siegel has occasionally requested that his outsourcer assign specific developers from other countries to a given project because he’s gotten to know and respect their work on other projects. “These are people who came up through the ranks and ended up being real stars with functional experience,” he says. “Seven years ago, that never would have happened. It took time for them to obtain the institutional knowledge and, based on that, move upstream.”

Tim McCabe, director of IT strategic sourcing at Delphi Corp., has also moved beyond cost-only goals when selecting a services provider. In fact, his title is a new one for Troy, Mich.-based Delphi. “It reflects a change of approach from sourcing as a tactical commodity to a much more leveraged global perspective,” he says. “It’s about the best way to get business done, whether it’s offshoring, outsourcing, resourcing or insourcing, as well as a broader view than just, ‘What’s the lowest price that I can pay for a service or commodity?’”

Delphi’s strategic sourcing approach does not explicitly require an offshore footprint, McCabe says. At times, he might contract with a domestic outsourcer that chooses to use offshore workers as part of its service. Other times, he explicitly chooses an offshore provider, but for reasons beyond cost.

For instance, Delphi has contracted with Tata Consultancy Services Ltd. (TCS) in Mumbai, India, to handle its global SAP development, deployment and support, but the goal wasn’t merely to tap into the SAP talent available there for a competitive price. It was also to optimize time-zone advantages, particularly when it came to supporting clients in the Asia-Pacific region.

But the TCS contract does not cover global application development and maintenance. In another strategic move, Delphi has moved away from multiyear agreements with single providers. Instead, like other large companies, it’s adopting a more technology- driven sourcing strategy that takes advantage of the core competencies of several providers.

“We can do that more readily than five or six years ago because suppliers are getting the message that we want three or four and we want them to collaborate,” McCabe says.

Moreover, there are times when he wouldn’t want the outsourcing staff to be physically removed from his onshore client base. “When you have an application with high-touch requirements, physical presence becomes critical, and in that case we understand the price difference and are willing to pay for that,” he says.

If the old offshoring model could be represented as a one-way arrow pointing from the U.S. to a lower-cost overseas location, the new global sourcing model has arrows that form a complex web. In the new model, work can flow from a client in the U.S. to an Indian company that passes along a coding piece of the project to a Chinese subcontractor and the consultative piece to its employees in the U.S. Or a U.S. provider might divide the work among a team of U.S.-born workers, offshore coders and foreign employees with deep functional experience.

All this goes to show that the wrong way to start any project is by focusing on where the work will be done, says Lorrie Scardino, an analyst at Gartner Inc. “If you’re trying to figure out where to do things, that’s backwards,” she says. “Too many executives come at this by saying, ‘Let’s offshore.’”

A more strategic approach, Scardino says, is to move through a series of questions that begins not with “where” but with “why.” Why are you outsourcing in the first place? What results are you expecting to gain from it? Then it makes sense to define the scope of what you intend to outsource, Scardino suggests. For instance, are you going to outsource your entire ERP platform, or just upgrades and patches?

Next comes “who,” Scardino says. That requires looking at various delivery models, such as utility computing and on-site arrangements. Only when you know which providers are best at what you want done should you start exploring where the work should be done, she says. “Imagine if you decided, ‘We’re going to do all our application development in India,’” she says. “What are you going to do in three years, when India is just as expensive as San Antonio, Texas, which is cropping up as low-cost location in the U.S.? If your whole strategy is just offshoring to India, that’s a very weak strategy.”

Another sign of offshoring’s growing maturity is the number of companies that claim they’re engaging in it not for savings but to find qualified personnel.

In fact, in a recent survey of 530 U.S. and European companies by Duke University and management consultancy Booz Allen Hamilton Inc., nearly three quarters of the companies that seek offshore talent for high-end functions such as product development or research and development reported that access to qualified personnel is the most important reason they do so.

“There simply aren’t enough high-skilled engineering and science graduates available in the U.S. to meet the demand for these resources,” says Vinay Couto, an analyst at Booz Allen. “Employers complain that the quality and skills of the available graduate pool within the U.S. is not sufficient to meet the high standards required for functions such as product development, engineering, design and other innovation-centered functions.”

Finding domestic talent isn’t so difficult on a “onesies-twosies” basis, according to McCabe, but “if you’re looking for a large concentration of skills to handle a lot of work, it’s not always here onshore.” Or at least you won’t find it without putting in some effort.

“If I need a lot of .Net programmers, it’s easier to call an offshore provider,” agrees David Baruch, CIO at Equity Office Properties Trust, one of the largest owners and managers of office buildings in the U.S.

Baruch also agrees with another of the study’s findings: Companies are moving past external factors such as political backlash to confront internal ones, such as the managerial and organizational changes they have to make to take advantage of offshoring.

Chicago-based Equity Office started outsourcing three years ago when Baruch needed to supplement his relatively small staff of 100 people to complete a big project. He signed on with a U.S.-based provider that used offshore staff for the project. Baruch has continued to expand his use of overseas resources, albeit with a different provider. Today, offshore personnel account for about 20% of his staff’s peak work output, including maintenance and higher-level project work.

The first challenge of the transition was getting his own staffers to accept the offshore model. “While it was painful in the short term, they realized there were benefits in the long term because it was work they didn’t necessarily want to do,” Baruch says. The second part was getting IT staffers to pass along required knowledge to the offshore provider and “having them understand what we’re trying to do from thousands of miles away,” he says.

Today, Baruch sees the relationship more as co-sourcing than offshoring. “They have a certain set of responsibilities in the development process, we have a certain set, and we measure each other to be sure we’re each holding up our end of the bargain,” he explains.

Baruch says that low cost is just one benefit he gets from tapping overseas talent. It also gives him variable staffing capacity, which allows him to maintain a stable workforce with deep business skills. Outsourcing gives him scheduling flexibility, so he can ramp a project up or down as needed. In addition, it enables marginal projects to achieve returns on investment that they otherwise never would. “For projects that people would have historically passed on, there’s now value in doing them because it takes a third of the cost to do it,” he says.

Over time, Baruch can see other business processes that Equity Office currently outsources eventually moving to an offshore provider. “It’s all a question of what you want to outsource, how you want it to be done and the value derived from doing it,” he says. “Then you can talk about where the work lends itself to being performed — onshore or offshore, with high-priced or low-priced talent.”

As others with offshoring experience gain this type of understanding, Scardino predicts, “offshoring will be recognized pretty universally as a destination, not a strategy.”

Brandel is a Computerworld contributing writer in Newton, Mass. Contact her at marybrandel@verizon.net.

Copyright © 2007 IDG Communications, Inc.

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