Evolution of a Sourcing Strategy

The term offshoring continues to evoke mixed responses from executives and technologists alike. Business and IT leaders pursue offshore outsourcing for various reasons, but the key driver may be to ensure that their organizations remain agile and competitive. The quest to perfect their offshoring models is a big driver for technology and services companies, especially since they are expected to eat their own cooking. Case in point is the recent bid by Electronic Data Systems Corp. to acquire Indian offshore services company MphasiS BPL Ltd. for about $380 million.

Though a few articles in the media portray EDS's strategy as a dramatic step, it is in fact the culmination of a gradual evolution that began with a joint venture-like relationship with vendors in India a decade ago.

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Year

EDS in the Indian Market

1995

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EDS strikes relationship with vendors in India.

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EDS sets up liaison office in New Delhi.

1996

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EDS-India shapes up as a fully-owned subsidiary of EDS.

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EDS-India becomes first company in India to sign a multiyear outsourcing contract.

1997

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Strategy development occurs.

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Finance committee approves EDS-India’s three-year plan.

1998

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First center opens in Chennai, the commercial capital of southern India.

1999

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EDS-India is awarded ISO 9001 certification by KPMG in February.

2000

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EDS-India opens new office at DLF Plaza Tower, Gurgaon.

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India Solution center achieves CMM Level 3 in July.

2001

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EDS-India opens its fourth state-of-the-art facility in Chennai at Tidel Park.

2006

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EDS buys MphasiS.

Source: EDS.com

I began studying offshoring models, including EDS's foray into India, while doing research for my recently published book, Offshoring IT Services: A Framework for Managing Outsourced Projects. Organizations typically consider several inputs while formulating their offshoring road maps, and selecting an appropriate offshoring model is one of the key steps in the process. There are several factors to consider, including aspects of international business strategy -- selecting the country, scanning the landscape and deciding on the sourcing strategy. Tracing the history of EDS's foray into India is akin to walking down the offshoring memory lane. When the company set up its liaison office in New Delhi in 1995, offshore outsourcing was not even seriously discussed in the high-tech world. Instead, the focus during the mid-'90s was on the looming Y2k threat and on opportunities presented by e-commerce and the dot-com boom.

Between 1996 and 1999, EDS increased its offshore presence by expanding operations in India and setting up development centers, and by 2001, the company was operating four facilities, connected by global satellite and communication links. The company perhaps had an edge over smaller service organizations in that it was already successfully bidding for large multibillion-dollar outsourcing deals in the U.S. and elsewhere. The souring economy after 2001 affected EDS in more ways than one. Not only was the tech industry in doldrums, but marquee clients such as WorldCom Inc. and American Airlines Inc. that had signed multiyear, multibillion-dollar deals had gone belly-up, filing for Chapter 11 protection. This was also the time when offshoring began to be seriously considered as a viable option to leverage the global talent pool while competing on cost.

Fast forward to the present. Offshore is being used as a verb by business leaders who swear by Thomas Friedman's vision of a flatter world. EDS was perhaps faced with the equivalent of a "build versus buy" decision. It could have continued to build on its existing global operations, aggressively hiring and trying to grow, but perhaps decided that the alternative -- acquiring an emerging local player -- would get it there in a shorter time. Business leaders and sourcing managers are bound to be studying EDS's move closely.

Large software development companies such as IBM, Microsoft Corp. and Oracle Corp. are already comfortable doing business in a global marketplace; for them, moving development or maintenance of some programs and projects to offshore teams is a way to extend their geographic footprint. Similarly, software giants such as Accenture Ltd., Deloitte Touche Tohmatsu and Braxton Manufacturing Co. have been at the forefront of bundling newer services for their clients, and offshoring is the latest in their suite of services. Needless to say, Indian vendors including Tata Consultancy Services Ltd., Infosys Technologies Ltd., Wipro Ltd. and Satyam Computer Services Ltd. are already comfortable touting their "global delivery models." The three models most popular among strategists are joint ventures, subsidiaries and sourcing to vendors.

The Joint Venture Model

In a joint venture, an organization ties up with a local company either by taking an equity stake or forming an independent company by jointly contributing resources. The goal is generally to work toward a "win-win" deal where each organizations benefits from the other's strength. By capitalizing on the strengths of a local player, the client organization can mitigate some of the risks of internationalization. Similarly, the local player can benefit from partnering with a strong player and the opportunity to scale up the value chain.

A joint-venture contract may sometimes include build, operate and transfer (BOT) clauses to motivate both parties to work toward a clearly defined exit strategy. The BOT and build, own, operate and transfer clauses may involve an option for the domestic company to sell its stake to the foreign company after a stipulated period or after agreed-upon milestones.

The Subsidiary/Captive Development Center Model

Organizations may sometimes decide to bypass the joint venture model altogether and directly go in for a subsidiary or local office if management is comfortable with dealing with the nitty-gritty of internationalization and local market operations. Some of the popular terms used to describe the model include offshore development center, captive development center and in some cases simply branch or local office. Subsidiaries operate as independent business units or branches, executing programs and projects for on-site teams. From this perspective, the mode of managing a subsidiary is similar to managing projects and programs in a global delivery model promoted by software service delivery and offshoring companies.

The key challenge in a subsidiary model, apart from internationalization and localization of business management, includes aspects pertaining to management of expatriate staffers, line workers, technical experts and line managers from multicultural backgrounds. The local-office model is extremely popular among high-tech organizations that are comfortable in management of technology development and innovation and look to offshoring as an extension of their diversification strategies.

Sourcing to Vendors

The joint-venture and subsidiary models of sourcing may involve deep commitment on the part of a sourcing organization, a move that management at traditional companies may sometimes be averse to. To counter the perceived risks of these models and to capitalize on the benefits of offshoring, companies resort to outsourcing projects, programs or individual work orders to offshore vendors. Interestingly, sourcing to vendors is also the most visible offshore outsourcing model, and it encompasses a wide range of work, from sourcing small projects to multiyear contracts amounting to millions of dollars. Some of the popular forms of outsourcing to offshore vendors include:

  • On-site subcontracts (with offshoring): Most offshore outsourcing firms trace their history to their software services mode and continue to offer on-site project support along with some staff supplementation.
  • Pure offshore projects: This model of offshoring is less prevalent and generally seen only in small-scale development of software components or modules.
  • Offshoring individual projects: Managers at client organizations who have well-defined deliverables, programs or modules to be developed outsource them to vendors with whom they may have relationships.
  • Global delivery (on-site/offshore) model: This is the classic offshoring propagated by most software service vendors, where they take on the project, module or program from a client organization, deploy a small team on-site that works with the client managers and teams and coordinates work with the offshore team that does bulk of the work.
  • Multivendor offshoring (a.k.a. multisourcing): In the discussion on offshoring models that we've looked at thus far, we have assumed the relationship between a client and a single vendor. However, in reality, a client may have multiple vendors working on a project or initiative. Organizations attempt to reduce risk in their outsourcing strategies by empaneling a selected list of vendors (preferred vendors) from which individual projects and managers opt to select and source work.

Suitable Model: A Leaf From EDS's Playbook

As strategies for offshoring mature and are tested on the ground, experts are beginning to benchmark successes (and failures) from the field. Organizations and business leaders spend considerable time strategizing and planning sourcing models suitable for their specific business needs. Service delivery firms and clients continue to learn and experiment with the pros and cons of the different models.

The actual distribution of work tasks, activities and projects across on-site and offshore locations varies depending on the specific needs of the projects and initiatives. Some applications, programs and projects may lend themselves to offshoring to teams across the globe more than others. Similarly, the risk tolerance and overall globalization strategies of organizations may vary. Some companies, because of their business models, size and geographic spread, may be more willing to explore offshoring strategies. As EDS's move illustrates, there is hardly a cookie-cutter approach to sourcing, and one may have to draw a customized road map to migrate from one model to another as the organization's understanding of the offshoring business matures.

K. Mohan Babu is a technologist and senior manager at a large software services company. The views expressed in this article are his personally. The ideas for this article were abstracted by the author from his book, Offshoring IT Services: A Framework for Managing Outsourced Projects (Tata McGraw Hill, 2006). Contact Babu at mohan@garamchai.com.

Copyright © 2006 IDG Communications, Inc.

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