Outsourcing As a Strategic Tool

OUTSOURCING AS A STRATEGIC TOOL

Kewal K. Verma, Ph.D. BCA International, Austin, Texas, USA Phone: 1-512-292-4314 E-Mail: [email protected]

ABSTRACT covers administration, customer service, finance, HR, real Outsourcing is a strategic tool used by companies to state, sales and marketing, distribution and transportation improve their ability to concentrate on the core [1,2]. Within information technology, outsourcing includes competencies, outsourcing non-core functions. Outsourcing maintenance and repair, training, R&D, applications is not contacting or fixing business processes. It is about development, consulting and reengineering, data creating value. It is about reengineering and being able to management, network management, etc. For a company, provide customers a greater value faster, at a lower cost and proper preparation for outsourcing would use benchmarking higher quality and competitive analysis tools and methodologies to examine its strengths and weaknesses to develop Outsourcing industry has grown to about $150 Billion outsourcing goals. The three main steps in outsourcing worldwide and is estimated to grow to $240 Billion (Dunn would be goal development, supplier selection and & Bradstreet) by the end of 1999 and about $630 Billion by implementation of the business relationship. Success of the the year 2003 (Dataquest). Outsourcing has grown in scope long term relationship depends upon taking care in defining and complexity and it covers information technology, the goals, responsibilities, expectations and schedule, and administration, customer service, finance, HR, real state, yet be able to have flexibility in the business relationship sales and marketing, distribution, transportation, health care agreement to accommodate an environment of rapidly and more. Key issues in outsourcing are the selection of an changing markets and technologies. appropriate supplier partner and implementation of the business relationship. A large number of global fortune 500 Several semiconductor manufacturing companies, such as companies have been outsourcing software development in Motorola, IBM, Intel, TI and equipment supplier India due to its strong infrastructure, investment friendly companies, such as Applied Materials, KLA, Lam Research and free market oriented business environment, and have either outsourced or formed strategic alliances with supportive Government policies. software development companies in India, Ireland, Hungary, etc. In the back-end assembly and packaging Key words: Outsourcing, strategic tool, competitive manufacturing industry, there are several areas, such as advantage, software, supplier selection, benchmarking, components and materials distribution, inventory control, competitive analysis, core competencies, software industry materials handling, package design and test, manufacturing in India. automation, factory design, and package and factory modeling and cost analysis that can benefit by the INTRODUCTION outsourcing services provided by software companies. Ever Worldwide companies are using outsourcing as a strategic increasing role of software products would help these tool to improve their ability to concentrate on the core companies better manage the factories, inventories, supplies, competencies. Outsourcing is not sub-contracting or fixing design and development, rapid learning, manufacturing business processes. It is a strategic decision about creating costs, and improve productivity, yields, cost and customer value. It is about reengineering and being able to provide satisfaction. Well-planned outsourcing software customers a greater value faster, at a lower cost and higher development project could offer the desired competitive quality. By outsourcing non-core functions, companies are advantage. able to concentrate on improving core competencies and look at the broader business issues. It has helped companies India has been recognized in a World Bank study as the gain competitive advantage by allocating resources to second most favored country for providing IT services. develop new tools, technologies, methodologies and Indian software companies have demonstrated their procedures. Outsourcing as an industry has moved beyond capability to deliver large projects, on time and at lower the IT infrastructure in scope and complexity. It has grown cost, utilizing state of the art technologies and global quality to about $150 Billion worldwide and is estimated to grow to standards. Software industry in India [3, 4] is $3.9 Billion $240 Billion by the end of 1999 and $630 Billion by 2003. strong and has grown at the rate of 54%. The software In addition to the information technology, today outsourcing export revenue for 1998-99 has been $2.65 Billion and has

PROCEEDINGS of the Technical Program, Fifth Annual Pan Pacific Microelectronics Symposium, Island of Maui, Hawaii, Jan. 25-27, 2000.

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grown at 57.4%. Over 203 Fortune 1000 companies end of 1999 and according to Dataquest, $ 630 Billion by worldwide are outsourcing software development in India. The success of outsourcing projects by global corporations in USA, Japan, Europe and Asia in India has been due to its investment friendly and free market oriented business environment in India, along with its supportive Government policies. The supporting infrastructure [5, 6] of the Indian software industry includes its second largest in world supplier base of English speaking professionals, universities and institutes producing 115 Thousand engineering graduates and 55 Thousand software professionals every year, companies with SEI established highest CMM quality level, Government supported software technology parks of India under the STP scheme, and high speed satellite data links and services.

OUTSOURCING, A STRATEGIC DECISION 2003. Decision about outsourcing and what to outsource requires Figure – 1 The market for outsourcing continues to careful assessment and planning. In this regard, it is explode at CAGR of 14% different from subcontracting or fixing business processes. In contrast, outsourcing would involve carefully 70 – 70 – 70 (Wipro) restructuring the company around its core competencies and  70 % of all the software developed is owned by the business relationship with outsourcing partner. U.S. companies  70 % of all U.S. software is developed in the valley Right reasons for outsourcing and its benefits should be  70 % of all software developed in the valley is carefully analyzed and clearly understood. Although outsourced strategically the non-core functions are outsourced, a function that does not fit or is wrong or it cannot be done in Today outsourcing cover a lot more than just the IT house should not be selected. However, the selected partner industry, it covers: would have access to superior technology, higher quality standards, better manufacturing practices, be able to save Information technology – maintenance and repair, training, time. Consequently, it will translate to lower cost. applications development, consulting and reengineering, data management, network Internal benchmarking and competitive analysis tools may management, etc. be employed to evaluate internal processes and functions to Administration – mailroom, reproduction, training, etc. assess and evaluate your own company and also in the Customer service – tech support, field service, dispatch, selection of a supplier partner. etc. Finance – payroll, accounting, purchasing, records, etc. UNDERSTANDING OUTSOURCING HR – relocation, recruiting, training, insurance, etc. Using outsourcing as a strategic tool companies can gain Real estate - facility management, food services, competitive edge by outsourcing non-core functions to an maintenance, security, etc. outside organization and concentrating on internal Sales and marketing – mail, advertising, telemarketing, reengineering. The reengineering process is referred to the field sales, etc. fundamental rethinking and radical change in the business Distribution – freight, leasing, warehousing, operations, outlook, focusing on broader business issues, employing logistics, etc. resources towards developing new tools, technologies and Transportation – fleet management, operations, skills. A dramatic improvement in performance may be maintenance, etc. realized, providing value to the customer in terms of Health care – insurance, patient records, health services, productivity, quality, service and speed. Thus offering etc. customers a greater performance at lower cost. As indicated earlier outsourcing covers a lot more than just Global outsourcing the IT companies. Outsourcing industry has grown to about $150 Billion  Technology companies worldwide and is estimated to grow to $240 Billion by the

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 GE, Microsoft, Intel, IBM, HP, SUN, Lucent, h) Risk sharing Alcatel, Nortel, CA, Cisco, NCR, Sequent, VLSI, i) Cost Analog Devices, TI, Cirrus Logic, Seagate, j) Consultants help Compaq, Oracle, EDS, Motorola, and more  Retail companies It may be risky to look for the business and strategic goals  Nike, J.C. Company, Dr. Pepper, Cadbury, Nestle, so similar that you may be considering a competitor rather and more than a partner. However, partners business and strategic  Finance companies goals should compliment that of your own organization.  Citibank, Wells Fargo, AMEX, Putnam, and more Cultural match and compatibility is very important in the communications and working together of various teams. WHY OUTSOURCING Considerations include the language, values, agreements, Based on the above discussion, in summary, organizations commitments, and written and verbal communications. would consider outsourcing to - Although the relationship develops over a period of time  Improve focus on core competencies and it is impossible to think of every possible scenario and  Improve focus on broader business issues situation, it may be worthwhile to agree upon some ground  Gain competitive advantage through new tools, rules as to how the agreements would be made and technologies, methodologies and procedures executed, and what a certain agreement would mean.  Accelerate reengineering  Shared/reduced risk associated with reengineering Technical expertise and the focus on quality are of utmost changes importance. After all, the outsourcing partner is being  Reduce operating cost selected based on the best practices in the industry in the  Control and redirect valuable resources relevant areas. Cost is very important, but upfront cost may lead to wrong decisions. The superior technology, skills, OUTSOURCING PROCESS STEPS focus on quality, availability of resources and qualified Outsourcing essentially requires three steps: people would provide the cost advantage in improved 1) Goal development product, quality and speed. 2) Supplier selection 3) Implementation of business relationship Since in most cases the partnership may last from six months to several years, business reputation, stability and 1) Goal development credibility of the supplier are important. Supplier may not a) Need assessment only be able to supply adequate resources, but it should be b) Expectations able to expand and grow with the industry and the client. Because of the relatively long-term relationship, the supplier Success of the outsourcing project may depend upon the should be able to accommodate ever-occurring changes in time and effort spent in a careful assessment of your own the market conditions and the technologies, and be able to capabilities, needs and expectations. Internal benchmarking share the associated risks. and competitive analysis tools may be used or outside consultants help may be worth the expense. Important Consulting help is available to identify potential partners consideration also being that a redistribution and relocation and best practices in the industry. International of resources, people, equipment, and operations will be organizations, such as SEMICON West and NEPCON West required. A clear understanding of the expectations and the have offered workshops on benchmarking. Consulting relevant schedule is essential in the supplier selection and companies and individuals are available to offer implementation of the business relationship latter on. benchmarking and competitive analysis help or offer customized training that may help in the supplier selection. 2) Supplier selection Following supplier attributes and considerations would 3) Implementation of business relationship prove to be very useful in the supplier section. It is difficult to say if one of the three steps is more a) Common business and strategic objectives important than the other. However, each step in the b) Business and cultural compatibility sequence if executed with due care, analysis and planning, c) Technical expertise would make the following steps easier. d) Quality focus e) Supplier resources Typically, following methodology and considerations would f) Business reputation - stability and credibility result in a strong and successful business relationship. g) Contract terms – flexibility a) Common strategies and goals

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b) Well-defined project goals and schedules c) Flexibility in agreement to accommodate change INDIA – A PROMISING CANDIDATE FOR d) Risk and rewards sharing OUTSOURCING IT SERVICES e) Employee support Global corporations in USA, Japan, Europe and Asia have f) Transition management been looking at India for – g) Relationship monitoring and management  Cost advantage Supplier with compatible business strategies and goals  Established quality standards would form a stronger and beneficial relationship. Perhaps it  State of the art technologies is somewhat related to size of the outsourcing project, but  Dedicated development centers the relationship is not that of a contractor or a true partner. It  Experience with large projects is a business relationship and needs to be treated as such.  On time deliveries Clearly defined expectations, deliverables and schedule must be defined and agreed, early on. As shown in figure – 2., in 1992, a world bank study has found India as a world leader in OEM professional services, Although a contract outlining deliverables and schedules is only second to Ireland. necessary, the relationship should be flexible to accommodate the rapidly changing tools, technologies and FACTOR WEIGHT INDIA IRELAND the market conditions over a period of time. In order to ensure commitment and dedication in a responsible business Segment expertise 6 12 6 relationship the risk and award must be shared. The supplier Labor cost 4 4 - 8 cannot be expected or forced to accept the risk unless there Labor supply 4 8 0 is a promise of an award. Ease of business 3 0 6 Ease of Visa 3 - 3 3 Out sourcing requires some restructuring and reorganization English speaking 3 3 3 at the outsourcing company. In addition to the technology, Tech. competence 3 3 3 equipment and processes, it may involve moving a number Edu. & training 2 0 2 of employees. As a worst case, a group of employees Govt. incentives 2 0 4 involved with the functions being outsourced may need to Security 2 0 2 be moved to a different function at a different location Telecom infra 2 - 2 4 within or outside the company. This transition period may Domestic market 1 1 2 be a trying period for both the outsourcing company as well Weighted average0 - 20 26 40 27 as the supplier. An upfront open and honest communication with the employees may be the best policy. Some companies have combined open communication with some counseling for the employees. Outside consultant may be useful in this situation.

Transition management and the initial relationship building require a great deal of effort and dedication. Often HR, legal people work together with the technical people. Careful Ireland 27 consideration must be given in forming teams for the India 26 transition as well as for implementation and maintenance of Singapore the business relationship. Team building, management Israel classes, brainstorming sessions and social events, such as Philippines department parties and company parties prove to be helpful. China Some companies are known to provide training classes in Mexico WEIGHTED RANKING their procedures and corporate culture to their supplier. Hungary It is very important to carefully select members from both the outsourcing organization and the supplier to form management teams to monitor and manage the business Figure – 2 World Bank study shows India as a leader in relationship. As can be expected during the relationship professional services. there are going to technical, schedule and people related issues that would require resolutions and workable solutions More recently McKinsey & company analysis has shown without terminating the relationship. that India is best positioned for outsourcing IT services.

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initiatives with Europe and Japan. These are known as the NASSCOM’s India Europe Software Alliance (NIESA) and NASSCOM’s India Japan Software Alliance (NINJAS)

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t Philippines c i n t a s i u h Q

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b r m o d u n N e ( V Low People sophistication High (Number, Cost, Language skill)

Figure – 3 India is best positioned for outsourcing IT services

SOFTWARE INDUSTRY INFRASTRUCTURE Software industry in India has a strong and sustaining infrastructure. Where as the domestic market growth rate has been impressive 48.3%, India exports software to 86 countries and over 203 fortune 1000 companies have outsourced software development in India. Figure – 5 61% of the exports go to North America. As shown in Figure –4, Software industry in India is $3.9 Europe is the next largest importer. Billion strong and has grown at the rate of 54%. The software export revenue for 1998-99 has been $2.65 Billion NASSCOM is the National Association of Software and and has grown at 57.4%. Service Companies. In India it plays a role similar to the EIA and SIA in the USA.

Table – 1 indicates that there are about 650 software companies in India involved in various application development segments.

Table – 1 Software revenue by application segment Application Segment Companies Involved (%) Banking 82 Insurance 55 Defense 38 Manufacturing 70 Hotels 56 Transport 65 Retail & distribution 73 Communications 78 Government 70 Others 55 Figure – 4 Software industry in India is expected to grow from $3.9 Billion to $5.7 Billion by 2000. The top ten are listed in Table – 2. Interesting thing is that As shown in Figure – 5, majority of the software exports, the export revenue of the top software company is almost about 61%, go to North America, Europe being the next the combined revenue of the next five companies. highest importer at 25%. In addition to the industry emphasis on exports to the North America, it has major

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Table – 2 Top ten Indian software companies indication of the growing and strengthening infrastructure. 1998-99 Exports Rank Software Company U.S. $ Millions ADVANTAGES OF OUTSOURCING IN INDIA 1 Tata Consultancy Services 168.6 1) Low cost – high quality 2 Wipro 71.9 a) Considering the currency conversion and the pay 3 NIIT Limited 44.8 scale, 30-40 percent lower development cost is 4 Pentafour 44.3 possible. 5 Infosys Technologies 35.2 2) Virtual software factories => reduced time to market 6 Tata Infotech 29.4 a) The 11-hour time difference allows combined 7 Satyam Computer Services 24.8 professional teams in USA and India 20-24 hour 8 International computers (India) 23.6 workdays. 9 Patni Computer Systems 23.6 3) Established high quality standards 10 DSQ Software 22.3 a) Five (5) companies have SEI’s CMM level-5 quality rating Except for the top six (6) or seven (7), Indian software b) 12 companies have SEI’s CMM level-3 and level-4 companies have shied away from packaged software. Part of quality rating the reason may be their inexperience in marketing and c) 20 companies have level-2 quality rating another may be that as compared to their competition in the d) over 115 companies re ISO 9000 certified USA and Japan these companies are significantly smaller. 4) Globally competitive skills and state-of-the-art However, because of the technical expertise and focus on technology, proven capability to handle large projects high quality, the Indian software companies make excellent 5) High speed (Satellitea0 data links and services available outsourcing partners. 6) Access to large pool of qualified English speaking professionals with mathematical and logical expertise From Table-3 on the types of services and software a) As of 1998, over 200K professionals are employed activities, following observations can be made about the by the software industry industry infrastructure. b) 150 universities and 460 institutions produce over 1. Dollar amount of the on-site services (59%) is 115K engineering graduates per year significantly more than the offshore services c) 55K professionals join software industry per year (32.2%). However, same amount of dollars would buy significantly more offshore services than on- 7) Strong and stable industry infrastructure site. a) $3.9 Billion software industry grown at the rate of 54% Table –3 Types of services and software activities b) IT companies with significant global operations (1998) c) 1998-99 exports by the top five companies range Types of Services U.S. $, M % of Total $35 Million to $169 Million. On-Site Services 917.3 59 d) Proven capability to handle large projects Off-Shore Services 500.65 32.2 e) Senior management often has U.S. experience, Off-Shore Packages 136.8 8.8 education or training Software Activity Domestics Exports f) As member of the WTO, Indian Government has $, M % $, M % supportive policies, including – Projects 239 28.6 489.76 31.5 i) Tax holiday, up to 5-years Professional Services 34.29 4.1 752.5 48.4 ii) Equity, up to 100% possible Products & Packages 434.6 52.0 136.79 8.8 g) Investment friendly and free market oriented Training 50.95 6.1 23.33 1.5 business environment Support & Maintenance 26.74 3.2 46.67 3.0 IT enabled 50.14 6.0 105.71 6.8 Top twenty or so IT companies in India have Global operations. Their access to the state-of-the-art-technology technologies is almost immediate, often before these 2. Exports in products and packages ($136.79 become available to the public in the U.S. Most of these Million) are significantly less than the domestic companies would typically have the following technologies consumption ($436.6 Million). and skills, and work with several domains and platforms: 3. The domestic size of projects ($239 Million) and Technologies available: OOPS, Client/Networking, products and packages ($434.6 Million) is a strong GUI/Multimedia, CASE Tools, 4GLs

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Hardware platforms include: IBM Mainframe, AS-400,  Tax holiday, up to 5-years operations without ES-9000, RISC-6000, DEC, HP, Unisys, DG, Tandem, income tax UNIX, PC, MAC, PS/2, Novell LAN, SUN, etc.  Dedicated high-speed data communication links Development Platforms: PC (DOS, Windows, NT, Apple),  Single point custom clearance and export Mainframe, UNIX, Midrange, etc. certification

Two organizations that have contributed most in the There are about twelve STPs located in different States development of the software industry infrastructure are – throughout India and its success has prompted several other states to apply for the construction of STPs or similar 1. National Association of Software and Service electronics parks. Companies (NASSCOM) NASSCOM, established in 1988, comprises of Member TELECOMMUNICATION INFRASTRUCTURE companies with revenues over $28 Thousand and Associate Most of the top twenty or so software companies in India Member companies with revenues less than $28 Thousand. have their own high speed data communication set up, In India it plays a role similar to the EIA and SIA in the including satellite dishes, dedicated direct high speed links USA. In addition its activities include: with their customers in USA and Europe  Advisory, consultative and coordinating body for the Indian software industry However, there are about one thousand (1,000) High Speed  Provides information on Government policies, Datacom Links, 32-256 Kbps, mainly provided by STPIs domestic/export opportunities, seminars and through SoftNET architecture, schematically shown in conferences abroad, visas, etc. Figure-6. Some of the characteristics of SoftNET  Represents industry on various Government of architecture are as follows: India committees and industry associations  A unique network integrating Intlstat IBS stations and  Maintains membership in international societies radio TDMA technologies and organizations, and lobbies with foreign  F3 IBS earth stations serve as International Gateways Governments  Provides software developers and exporters IP services  Provides assistance in achieving ISO 9000 through TDMA radio, campus LAN and Dial-up-Lines; certification, organizes in India and abroad typically – seminars, conferences, workshops, trade fairs and  Signal from India is sent to a location in Europe, trade missions such as Netherlands, via International satellite and  Does market research, maintains database and  From Europe to a location in U.S. via transatlantic publishes India software Directory fiber lines provided by an international carrier,  Promotes public confidence, respect for software such as AT&T, MCI, sprint or British Telecom industry and conducts anti-piracy campaign

As mentioned earlier, two of its initiatives include NASSCOM’s India Europe Software Alliance (NIESA) and NASSCOM’s India Japan Software Alliance (NINJAS).

2. Software Technologies Parks of Indian (STPs) Software Technology Parks of India (STPIs) is an autonomous organization set up by Department of FIBER Electronics (DOE), Government of India, under the STP Scheme. Among the government schemes, STP is a shining example. Under this scheme Indian and foreign software companies become members on fee bases and the Figure – 6 Telecommunication Infrastructure, participating companies are provided – International Carriers in Operation  Infrastructural facilities; floor space, amenities such as EPABX, fax, internet, teleconferencing Integrating SoftNet and ERNET systems, Figure – 7, Point equipment, backup power; computers, IBM AS- to Point communications can be extended worldwide, 400, ES-900, RISC-6000, Pentium machines; including – office LAN and data communication services  Direct connections to countries with Earth Stations  Duty free foreign equity operating on Intlsat 66 deg.

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 Connections to other countries through transit  IT continues to dominate outsourcing, but other arrangements with other carriers areas are following strongly  Local loops through Microwave Radio  India represents a strong software industry with  Direct links, dedicated links and teleconferencing equally strong industry infrastructure and are possible. supportive Government policies and schemes  Indian software companies are among the world SoftNET – ERNET INTEGRATION leaders in IT services and potential candidates for INTLSAT establishing outsourcing business relationships. IOR 66 DEG. INSAT 2B REFERENCES [1] “Outsourcing: A Maturing Industry”, The Outsourcing Institute – www.outsourcing.com [2] InfoServer, The Journal for Strategic Outsourcing SoftNET ERNET Information, Jan 1999 – www.outsourcing-journal.com [3] Record 68% Growth of Indian Software Exports in STPI - 1998-99: NASSCOM Report - www.nasscom.org [4] Software Technology Parks of India – www.stpi.soft.net STPI [5] Personal visits and communications with Indian BANGALORE software companies, May 1997 and January 1998. INTERNATIONAL NATIONAL [6] Benchmarking Indian Software Industry, part of a project “Strategic Technology Tour of India ‘98” for MCC, Austin, TX. Figure – 7 SoftNET – ERNET integration

The success of the STP scheme has acted as a catalyst for the Indian Government to introduce several other policies and schemes to create investment friendly and open business environment in India.

GOVERNEMNT SUPPORT - PLOICIES AND SCHEMES  Software identified as a Thrust Area for economic development.  India signed ITA agreement at WTO  Automatic permission for 51% foreign equity and up to 100% foreign equity permitted  Income tax holiday – up to 5-years  Duty Free Imports subject to export obligations  Software Import via high speed Datacom/internet links  Indian Copyright Act, strict penalties to protect IPRs  Special Schemes to facilitate the import/export of technologies, hardware and software:

 Software Technology Parks of India (STPI)  Export Processing Zones (EPZ)  100% Export Oriented Units (EOU)  Electronic Hardware Technology Parks (EHTP)  Domestic Tariff Area (DTA)

CONCLUSIONS  Outsourcing is a fast growing industry.  Outsourcing industry is expected to grow at CAGR of 14%, from $240 Billion by the year-end 1999 to $630 Billion by year 2003.

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