Like it or not, offshore outsourcing is becoming increasingly central to IT. As the drumbeat grows ever louder, chances are you'll eventually be asked to get in step.
But how do you design and implement an effective offshore initiative? What are the key issues to keep in mind? The offshoring landscape is littered with the spectacular failures of companies that missed or lost sight of the big picture.
"People who jump on the bandwagon to make some quick savings get quickly frustrated," says Ramakrishnan Ramamurthy, general manager and practice head at Bangalore, India-based Wipro Technologies.
To avoid becoming an offshoring cautionary tale, heed the following tips from expert offshore outsourcing consultants, vendors, and analysts.
1 Never outsource your core value.
Firmly establish which IT functions are central to your company's competitive advantage, advises Frances Karamouzis, research director at Gartner. Those functions are the ones you'll want to keep in-house or at least onshore. Managers need to consider how they expect their companies to remain competitive and what intellectual capital they must retain in order to thrive, she says.
After deciding what you should not move offshore, put everything else on the table. "The scope is really the big kicker," says Ben Trowbridge, managing partner at Alsbridge, an outsourcing consultancy. "People go into an offshore deal thinking it's only the nonthinking work they can move offshore -- the raw coding. In reality, they can probably move a much wider scope." Karamouzis recommends a complete portfolio analysis for every application development project or IT process. For example, examine how offshoring will affect customer retention, the supply chain, and so on. Make offshoring part of a broad business strategy. Unfortunately, many companies dive in tactically in search of cheaper labour rates on specific projects, Wipro's Ramamurthy says. "The ones who succeed are the ones who've thought it through, ... have very clear areas they want to outsource, and have a long-term strategy."
2 Get boardroom ownership.
Get senior management committed to your offshoring initiative in its initial phases. "The CEO, the CFO, someone pretty senior has to own a direction and a broad business case for offshoring early -- and keep steering the team back to that business case," Trowbridge says.
With buy-in from the big shots, you're better positioned to get everyone else on board as well. To do so, develop a communication and change management strategy for handling the various internal issues that will arise. "Passive resistance in the organization can doom the outsourcing relationship," says Cliff Justice, multishore practice leader at consultancy EquaTerra.
"The internal organization needs to be equipped to handle the discontinuity," agrees Balaji Yellavalli, head of global sourcing solutions at Bangalore-based Infosys Technologies. "That means discussing outcomes honestly with employees and planning for change."
3 Forge internal competencies.
Build a strong internal project management team. "The greatest challenge is getting yourself prepared and putting the governance structures and people in place," says Peter Bendor-Samuel, CEO of The Everest Group, an outsourcing consultancy. "Managing this when it's remote takes some organizational redesign. There have been plenty of cases where people have badly stubbed their toe."
Create an internal "centre of outsourcing excellence", Bendor-Samuel says, that can provide the "superstructure" of tools and best practices for effective outsourcing project management, including governance vehicles, incentives and penalties, oversight mechanisms, risk mitigation strategies, service descriptions, and metrics.
Internal competencies include the ability to manage internal demand so that the offshoring vendor isn't overwhelmed with excessive or conflicting requests. "The client organization has to become very good at developing requirements," EquaTerra's Justice says. "You can't do that at the water cooler any more."
All of this costs money, notes Alsbridge's Trowbridge, who estimates that a large airline, for example, might spend 2 percent of its budget managing the outsourcing relationship. "Don't underpower this. If you don't spend it now, you'll spend it later," he warns.
"I don't care how smart the client thinks they are. Ultimately, you're trying to mitigate risk by identifying the risk, and having a good strategy and internal governance process to deal with it."
4 Fix your process before offshoring it.
A key maxim of outsourcing is, "Don't outsource a broken process." This goes double for offshore outsourcing. Companies must clean up their internal IT processes before sending them abroad, says Ashish Paul, president of the Indian subsidiary of outsourcer Cincom Systems. "If you can create productivity gains before offshoring, you can do a more efficient job. Don't try to migrate a process offshore that's broken. Fix the process first."
Executives at Infosys and Wipro advise synchronizing client and vendor processes and methodologies up front -- for example, make sure both have the same level of CMMI (Capability Maturity Model Integration) or ITIL (Information Technology Infrastructure Library) capabilities. "It's always better if there is a synergy between the two companies' ways of working," Wipro's Ramamurthy says.
5 Demand domain expertise.
Because there are dozens of reputable companies offering "global sourcing" services, you must weed through them carefully. "Pricing is fairly comparable," Bendor-Samuel says. "It's the approach and cultures you'd be picking."
Bendor-Samuel considers a range of factors when evaluating vendors, starting with an understanding of various approaches. "You want to be able to pick specializations," he says, noting that many companies are moving toward a "multisourcing" model, using multiple vendors with specific domain expertise.
Other criteria to look at include financial strength, legal and regulatory compliance capability, security practices, and the ability to provide insurance against eventualities. But Gartner's Karamouzis notes that many of the leading Indian companies are on par with one another in these areas, which can make the job of evaluating more challenging. "They all started from the same heritage, and clients are saying they all look and feel alike. Their value proposition is very similar," she says. "They're trying desperately to find differentiators. It's a dog-eat-dog race."