As Offshore Outsourcing Heads Into Its Second Decade, It's Bringing New

GET A GRIP As offshore outsourcing heads into its second decade, it’s bringing new risks and requiring new strategies

By Mary Hayes Weier

OFFSHORE OUTSOURCING of IT has changed everything about Scott McKay’s job at Gen- worth Financial, right down to Owhat time he gets to the office. McKay,CIO at the provider of life and mortgage insurance, now arrives between 6 and 6:30 a.m. so he can spend the first two hours of the day dealing with IT teams—employees and outsourcers—in India and Eu- rope before the U.S. workday starts. The first thing McKay does is click on a feed cus- tomized to deliver summaries of major news stories in India, plus other happenings around the world directly related to Genworth’s business. In 10 years, Genworth has gone from offshoring just a few IT projects to having about half of all its IT work done outside the United States. But McKay avoids the word offshoring—he,

like many a CIO, prefers the “g” word. “The concept of today’s IT architects and project leaders both hands- offshore outsourcing will continue to dissipate,” he on system work and deep company knowledge. U.S. says, “and we’ll focus on globalization.” companies that are putting ever-more strategic proj- OK, so what does that mean exactly? As companies ects and processes into the hands of offshore out- head into this second decade of offshore IT outsourc- sourcers must be even better at vendor management, ing, globalization is starting to be more than a polite or they’ll repeat last decade’s offshoring problems— way to say “dirt cheap foreign coding.” Cheaper is still unexpected costs, code that doesn’t meet business important. But businesses in North America and West- needs, vendors without the skills to meet a contract, ern Europe, at least those with any track record of suc- delays implementing critical new systems—on a big- cess with their offshore providers, are getting closer ger scale. With costs in India rising, and employee at- than ever to those vendors—for example, trying to trition rates of 12% or more common among IT service help them deal with employee retention, treating those providers, they’ll need to fight for top talent with every problems as their own. Companies also are holding bit as much energy as they do at home. their offshore providers more accountable for costs and outcomes, with shorter contracts and more incen- LOSING THE SWEATSHOP MENTALITY tives tied to business results. And they’re trusting their CIOs tend to say some variation of the following offshore providers with more-critical work. about offshoring today: It’s not just about low-cost la- Two-thirds of companies on the InformationWeek 500 bor. Note the “just.” Offshoring’s still about pursuing list of business technology innovators say they do off- cost savings, and companies still won’t go offshore un- shore IT outsourcing, up from 43% less they save at least 20% to 30% in 2004. Consulting firm NeoIT es- compared with using their own timates that 75% of the world’s staff, says NeoIT chairman Atul 2,000 largest companies are en- Vashistha. But the picture’s gotten gaged in offshore outsourcing, more complex, with more focus with 20% of their IT budgets spent INSIGHTS on factors such as accessing spe- on offshore contracts; it predicts cific skills, weathering ups and that could rise to as much as 40% downs of business cycles (what of budgets in the coming years. Genworth Financial FedEx CIO Rob Carter refers to as Cost cutting is usually the main “variable capacity”), and paying driver, but as companies rely ever used to have 80% outsourcers in part based on a more on foreign markets for rev- of its work specific business result. enue growth, they’re rethinking “The portfolio of IT work has where they want their employees, in India done changed dramatically, and we look including those in IT. For Gen- to India as a source of the latest worth’s McKay, it makes sense at night, to skills on the very latest of plat- that globalization of the IT work- serve U.S. cus- forms,” says Clive Selley,CIO of BT force follows globalization of the Group’s BT Wholesale division, business: About 30% of the com- tomers. Contractor who has worked with Indian ser- pany’s revenue now comes from vice providers for 15 years. BT outside the United States, and turnover soared. Says Wholesale still places routine ap- that’s projected to grow to 50% by Genworth CIO Scott plication maintenance work with 2010. About one-fourth of Infor- Indian outsourcers, but it also has mationWeek 500 companies say McKay, “The night Infosys,Tata Consultancy Services, they’re expanding their IT opera- and Tech Mahindra working on tions in China, India, or another shift was designed customer-facing projects, such as part of Asia. for short-term cost running the processes and sys- As offshore outsourcing heads tems for the entire “lead-to-cash” into its second decade, it’s bring- savings, rather than process for its broadband busi- ing new risks. CIOs must figure ness, from the time a would-be out how they’ll nurture the next designing your com- business customer expresses in- generation of IT leaders if, with pany to be a truly terest until it places an order, gets greater outsourcing, there isn’t a bill, and pays. Selley predicts BT the same career ladder that gave global business.” Wholesale will increasingly out-

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source such “holistic customer experiences that span later, and CIOs were asked to cut IT budgets, many people, processes, and technology.” looked again to offshore development work. As busi- More are getting comfortable with that idea. This ness investment slowed and outsourcing rose, IT un- year, 40% of InformationWeek 500 companies said they employment shot up above 5.5%. Programmer jobs do business process outsourcing offshore, compared fell more than 20% in two years, according to Bureau with just 17% in 2004. TCS says that last quarter, for of Labor Statistics surveys. Meanwhile, Indian out- the first time, its maintenance and application devel- sourcing firms positively boomed: In 1996, annual opment revenue accounted for less than half of total sales at Tata Consultancy Services, now the nation’s revenue, with contracts to run business processes, largest IT service provider, were $150 million. Last manage infrastructure, and provide IT consulting now year, its revenue hit $4.3 billion—a compound annual the majority revenue source. growth rate of more than 100%. Hidden costs were one of the hardest lessons of the Reports of failed offshore projects trickled in, but past decade of offshoring. Many companies found they they tended to be small enough that companies could didn’t realize the promised savings once management keep them quiet, often contracting for rework from an- time and rework costs were factored in for products other provider. Some companies, burned by the ex- that, while coded to specification, didn’t meet expecta- perience, brought the work back in-house. That still tions. That’s leading to outsourcing contracts based happens plenty today: 20% of InformationWeek 500 less on the input—number of engineer-hours companies say they’ve taken back offshored work in worked—and more on the output, measured by the the past year.Too often, companies got back code that project’s success in terms of generating revenue from didn’t deliver the expected business benefit, because new products, meeting system up- the developers didn’t understand time requirements in an IT infra- the company and IT teams structure support agreement, or weren’t used to writing specs for the number of customer policies an outsider. “No matter how good processed in an insurance com- people program every day, if pany BPO contract. they’re programming the wrong Pankaj Vaish, a managing part- INSIGHTS thing, it’s not helping you,” says ner at Accenture who’s based in Ralph Szygenda, CIO at General India, is seeing more business Motors, which has offshored IT process outsourcing contracts Only a small share work for more than 10 years. based on savings from lower-cost of Infosys employees These problems aren’t causing labor plus a performance meas- companies to run from offshoring: ure. So if Accenture—which ex- are outside 36% of InformationWeek 500 com- pects its Indian workforce to panies have sent additional work reach 35,000 this year and surpass India, but that offshore in the past 12 months. the size of its U.S. staff—is collect- will change, The biggest risk these providers ing bills for a customer, the con- face is keeping up with growth, tract might include a percentage says CEO Kris having enough trained people to based on driving the typical ac- deliver quality work without counts receivable cycle from 30 Gopalakrishnan.“We blowing the labor cost advantages. days to 25 days and on the result- are recruiting in the Some of their customers are lend- ing improved cash flow. ing a hand, crafting closer rela- All this is a distinct shift from U.S. and the U.K., even tionships with their offshore the past. Offshore outsourcing got providers despite past problems its first big push in the late 1990s, at the entry level, they may have faced. as U.S. companies scrambled to and bringing those Judy Poirier was hired as VP of fix the Y2K computer date field IT at Celestica, an $8.8 billion-a- problem. When 2000 arrived people to train in year electronics manufacturer, in without disaster, it convinced U.S. April 2006 after a failed project companies that “those guys in In- India for six months the prior year to outsource man- dia can actually do good work,” and then deploying agement and support of the com- says NeoIT’s Vashistha.When the pany’s IT infrastructure to an In- U.S. economy sank two years them globally.” dian supplier, which she declined

Copyright 2007 CMP Media LLC. Important Note: This PDF is provided solely as a reader service. It is not intended for reproduction or public distribution. For article reprints, e-prints and permissions please contact: PARS International Corp., 102 West 38th Street, Sixth Floor, New York, NY 10018; (212) 221-9595 www.magreprints.com/quickquote.asp IN DEPTH / OUTSOURCING to name. The Indian company didn’t have sufficient internal Web page, open to all, where employees can talent, took too long to train staff, and suffered from provide feedback on any manager.“Their ability to retain high employee turnover, Poirier says. Celestica resources in such a volatile market is a result of that pro- brought much of the work back to Canada, where the gram,” says Celestica’s Poirier, who now has HCL em- company is headquartered. ployees working “right alongside our employees in Mex- But here’s the telling point: Celestica didn’t bail out ico and Asia.” on offshoring. Poirier was brought in in part to help After two years of success with application develop- the company figure out how to do offshoring right. In ment, Poirier now is looking at HCL to help with major late 2005, Celestica tapped HCL Technologies to do a upgrades of IT systems, doing higher-value develop- one-time custom development project related to the ment of technology road maps and system design, as company’s SAP system. It was a relatively safe bet, well as software development and implementation. considering the maturity of SAP application develop- ”They’ve done it 15 other times with 15 other cus- ment skills in India. The project worked, and Poirier tomers, and we haven’t done it before,” she says. this year formalized a contract for more development work. Poirier says she’s sending more work to HCL THE TALENT PROBLEM because she sees it as a vendor that can collaborate Though IT service providers are making major ef- with Celestica and that has the right culture for retain- forts to retain employees, businesses experienced at ing people in the volatile Indian labor market. offshoring have learned the hard way they can’t leave Talent and attrition are the biggest risks to India as it up to the vendor to keep workers happy. an offshoring destination, and one of the top consider- Much of Genworth Financial’s IT work is done in In- ations for companies looking to send work offshore. dia and handled by three outsourcers: Genpact, a spin- Infosys hired 30,946 people in its out from General Electric that fiscal year ended March 31, but used to be GE Capital’s India- lost about 11,000 throughout the based business process service year.TCS hired 12,523 employees provider, plus Patni and Satyam. just in its second quarter, while About five years ago, when staff losing more than 3,200, and it turnover rates started rising in In- plans to hire another 9,000 this INSIGHTS dia, Genworth Financial discov- quarter. Late last year, TCS ered that the problem was the launched a program to turn sci- night shift. People quickly burned ence graduates into software pro- Judy Poirier, VP of IT out working at night just to please fessionals through a seven-month at Celestica, worries U.S. customers, and in a hot job intensive training program in market they could bolt for daytime technologies such as Java and about developing in- jobs. Between 2003 and 2006, Gen- .Net. The result was evident last worth launched “Project Daylight,” quarter: About half of its new house expertise which called for transitioning hires were “trainees,” of which as more work work previously done 80% during about 20% were science grads. the night in India to 85% during IBM had about 53,000 Indian em- is outsourced. the day. That meant pulling some ployees as of March, hiring about jobs back to the United States, like 10,000 in six months. Accenture’s “It’s all those call center work, and developing target of 35,000 Indian employees guys you turn to processes that required shifting is up from 8,000 last year. work from one time zone to an- HCL has taken some pretty radi- when you’re doing other as workdays end on one side cal human resources steps to com- of the globe and begin on another. bat attrition. The company’s motto something interesting In retrospect, “the night shift was is “employees first,” a twist on the or exciting, or are in a designed for short-term cost sav- “customer first” mind-set. An em- ings, rather than designing your ployee who has a problem with the crisis,” she says.“We company to be a truly global busi- company or a manager can submit ness,” McKay says. an electronic trouble ticket—like still have those people, Teradyne, a semiconductor many IT help desks use—and the but a lot of them have testing equipment maker, started appropriate manager must re- offshore outsourcing in the late spond within 24 hours. There’s an a lot of gray hair.” 1990s with its Y2K remediation

work. Last year, it cut a five-year, $70 million contract ning IT not company employees, Ciali wants to make with HCL Technologies to outsource 80% of its IT sure contractors are satisfied and motivated. “There’s a work. About 70% of the outsourced workers—more lot of work we do to be sure they’re feeling challenged,” than 200 workers—are in India and 30% in the United Ciali says. That includes working with HCL to make States, many of them on guest-worker visas from In- sure HCL employees have upward mobility and new dia. HCL handles infrastructure and desktop support opportunities while still staying on the Teradyne team, and application development. Teradyne’s remaining and having IT teams rotate between the United States internal IT employees focus on architecture design, and India. “It does wonders for making their jobs more project management, data analysis, and leading and real in terms of how critical IT is to the business,” Ciali implementing new application projects, which they says. “They can put a face to a name, and that does a lot then turn over to the outsourcing team to run. to create a team environment.” Teradyne decided that a large permanent IT staff BT Wholesale’s Selley may be the customer, but he didn’t fit the cyclical nature of its business. CIO Chuck sees himself as competing for talent at the top Indian Ciali says outsourcing lets Teradyne ramp up for big firms. “The quality of the opportunity that we place projects and down during leaner times, and lets it with a supplier in large part dictates their ability to re- draw on specialists it can’t afford to hire. “We don’t tain and develop talent,” he says. need a storage architect on our staff, as we don’t lever- A BT Wholesale executive team recently gave a age those skills that often,” Ciali says. “HCL has greater presentation in Bangalore called “Joining The Dots,” skills in that space.” intended to help contract workers from Infosys, TCS, But with more than three-fourths of the people run- and Tech Mahindra understand BT’s strategy and the Offshore Deals Change With The Times

ANY SEVEN- TO mon, sees companies switching sup- risen 37% this year, says TPI. 10-year contracts pliers, rebalancing what’s onshore Indian operations are suffering un- signed as the off- and offshore, and in some instances der the rising rupee, making contract M shore industry bringing select work back in-house. pricing a “difficult discussion,” started to boom are winding down. He also sees higher-level executives McMahon says. It’s why Indian firms Often in their place are shorter taking charge of offshore contracts. are often the ones pushing to tie proj- pacts, with fewer megadeals as As offshore salaries rise, the easy ects to a business outcome measure- buyers split their work among multi- pickings contracts that save 70% ment such as revenue increases or ple service providers. on simple coding are gone, says cost cuts, so the buyer focuses less “The days of 10-year contracts Atul Vashistha, chairman of out- on the price of hourly labor. are few and far between,” says Paul sourcing consulting firm NeoIT. But Capgemini often has negotiated Spence, CEO of global outsourcing companies can still save 30% on contracts that include around a 5% at Capgemini, where the average many types of IT projects, he says, annual price hike for salaries. That deal length today is 6.4 years. Cap- and “we have a long time to go” be- doesn’t help in India or Poland, gemini still sometimes lands a fore that gets squeezed. where annual salaries are rising whopper, like its $9 billion, 10-year There were 228 outsourcing con- about 15% and 9%, respectively, deal with the United Kingdom’s tracts worldwide valued at more says Spence. So Capgemini has Revenue & Customs department, in than $50 million in the first three started negotiating contracts that shift which much of the work is done off- quarters of this year, a 16% drop work over time along a pyramid, shore. But that deal happened only from like-sized deals last year, con- where the most-educated and high- because both sides can renegotiate sulting firm Technology Partners In- est-paid people fill the top 15%. They some aspects of the contract over ternational finds. That hurts global work on the contract early on to build the years, to react to technology giants—Accenture, Capgemini, and implement, then shift work to changes, for example. IBM—and can help the Indian firms, lower-salary workers to maintain it. As long-term deals end, Dan which then get a slice of big deals. It’s just one of the ways contracts are McMahon, a senior associate with The value of contracts split between keeping up with the changing off- outsourcing advisory firm Pace Har- Indian and U.S. customers has shore market. —MARY HAYES WEIER

role IT and process engineers play in it. The team ex- of the “incubator for the big IT brain” within compa- plained BT Wholesale’s market segments, key com- nies. As offshoring of both routine and high-end work petitors, new products, and what it plans to launch grows, there will be fewer people who joined the com- over the next few years. “It’s about spending time with pany 10 years ago, developed core applications that people and explaining our objectives rather than just are still in use, and understand the inner workings of describing a piece of software they need to deliver by the IT infrastructure that grew alongside their careers. Friday,” Selley says. “We want those employees to bring “It’s all those guys you turn to when you’re doing ideas back to us, too. It’s been far too unidirectional something interesting or exciting, or are in a crisis,” between the U.S. and U.K. and suppliers in India.” Poirier says. “We still have those people, but a lot of BT Wholesale pays close attention to attrition rates them have a lot of gray hair.” How do you build those when choosing providers in India, but Selley says the raw skills without entry jobs? Poirier doesn’t have the an- numbers don’t reveal much. What matters is whether swer, and she doubts other CIOs do either. they’re keeping the experienced and skilled engineers. Selley acknowledges it’s a problem, particularly at a Selley insists that tapping the talent pool at big offshore company like British Telecom, which considers tech- companies like Infosys now out- nology its core. “It’s very easy to weighs the cost advantages. “Those focus on shifting more of your IT guys are hardworking and ambi- work to a low-cost, highly compe- tious, which fuels them to learn tent outsourcing supplier and more and have an impact,” he says. lose the plot on what you’re try- GM CIO Szygenda also sees a ing to do with your internal capa- role in helping outsourcers work bility,” Selley says. The company through problems. Part of it is INSIGHTS constantly questions which core self-interest: He wants GM to be elements it must own and what it able to work with multiple out- “can afford” to let a partner do. sourcers, so he has demanded Clive Selley, CIO of “It’s a question you just have to that they use certain standard BT Wholesale, sees keep asking and keep answer- processes for common IT tasks. ing,” he says. But he also sees that as a model himself as competing BT Wholesale tries to address for the broader industry to adopt. the problem by building teams of Carnegie Mellon University’s to attract the staff and outsourced workers at Software Engineering Institute best people co-location sites in the United and General Motors this month Kingdom and India, focused will publish a set of standards for for the projects around a specific customer func- buying services such as IT— tion. Its lead-to-cash customer called the Capability Maturity he outsources, center in Puna, India, is staffed by Model for Acquisitions—that so he has top execs three or four BT people from the draws partly on GM’s experience. United Kingdom and a half dozen Szygenda says 75% to 80% of the visit India to brief from BT India, alongside a major- 15,000 contract IT workers GM ity of employees from an out- uses worldwide follow its stan- outsourced teams on sourcer.“One of my senior guys is dard processes. BT strategy. out there right now,” says Selley. “This is a long way from the ‘90s, FEARS OF A BRAIN DRAIN “The quality of the when you sent over one piece of Offshoring didn’t kill the U.S. IT discrete work. It’s become very market, which employs more peo- opportunity that we collaborative, and the whole ple—more than 3.6 million—than place with a supplier model now is coding it together.” any other time this decade. But One path CIOs may need to take offshoring creates another loom- in large part dictates more often is poaching from the ing risk to IT organizations and to provider.About 60% of Applied Ma- the profession. their ability to retain terials’ IT services is outsourced, As businesses shift more strate- and develop talent,” and employees within the company gic projects offshore, Celestica’s tend to be IT leaders such as pro- Poirier worries what will become he says. gram managers or directors. “But

there are lots of opportunities for people to cut their tive model” in India. It relies on Genpact to hire people, teeth in outsource organizations,” says Ron Kifer, CIO since it can offer a better career path. Yet those who at Applied Materials. “We simply recruit people later in work for Genworth are required to think about and per- their careers for opportunities in our organization.You form their jobs as if they were an offshore division of still have people coming up through the ranks, but not Genworth, working entirely on its projects. This struc- necessarily having started here as an employee.” ture provides Genworth with a “core of people who stay focused on your business and industry and have deep HIRE OR OUTSOURCE? subject matter knowledge, and they grow As the lines blur between outsourced with you over time,” McKay says. worker and employee, CIOs start to won- Avnet, a distributor of semiconductors der: Would we be better off assembling and other electronic components in 73 our own offshore staff? countries, as well as a provider of supply A tempting notion, and one that a list of chain services, has had an internal IT top U.S. employers couldn’t make work. team in Bangalore for about five years. Dubbed “captive” centers, they have a About 18 months ago, it began building a spotty record for IT work, especially in In- GOING LOCAL Why team in Shanghai, and several months Wipro’s buying into dia. A number of banks and other busi- the United States: ago it established an IT team in Bucha- nesses—including Apple, Citibank, and informationweek.com/ rest, Romania. The company hires off- GE—have given up on their IT operations 1150/h1b.htm shore outsourcers when it needs addi- in India, deciding that offshore service BORDER WARS tional coders to ramp up a project, but the providers could run such operations more EU tries “blue card” to important customer-oriented work is efficiently. rival U.S. green card: handled by the internal IT team. Retention can be one problem: Ambi- informationweek.com/ CIO Steve Phillips doesn’t expect tious tech talent often quickly decide their 1159/blog_card.htm salaries in India and other developing IT career opportunities at a U.S.-based ON AND OFF In the countries to stay as low as they are, but company are small compared with places outsourcing shuffle, he says it’s never been just about cheap where IT services are the central busi- offshore’s winning: talent. “We’re a global operation, and if informationweek.com/ ness. Attrition rates can be as much as 1154/blog_out.htm we’re going to provide follow-the-sun 30% higher, estimates Forrester Research support, we need folks across the world,” analyst Sudin Apte. he says. Avnet recently took an SAP sys- Yet some companies with global operations are find- tem live for a customer in Asia, and a problem arose ing it effective to have employees at their own IT de- that was initially handled by an employee in Banga- velopment centers around the world, especially if they lore. The employee left work for the day and handed have growing revenue from a region or a manufacturing off the project to a U.S. employee, allowing Avnet to presence there.That’s driving IT centers in places such resolve the issue within 24 hours, Phillips says. as China, Latin America, Eastern Europe, and India. Not many companies can pull off the coordination Genworth Financial’s McKay calls his a “virtual cap- needed to “follow the sun.” At Avnet, the global IT team

HINA IS LIKE NO with a relatively modest approach Chinese engineers, and Sierra At- other country on the and see what results we can de- lantic, a U.S. company with 1,100 offshore outsourcing liver,” says CIO Clive Selley. “It’s a developers in Hyderabad, India, ac- C landscape. massively important, vast popula- quired ArrAy, which has 200 technol- It has a rapidly growing base of tion with a fast-growing economy, ogists in Guangzhou and Shanghai. low-cost IT pros, but other dynam- and we need to be able to under- Challenges include a much lower ics dominate the picture. With eco- stand the marketplace.” rate of English competency than In- nomic growth of more than 11% a Tata Consultancy Services plans dia has and looming risks of inflation year, China’s poised to become the to hire slowly in China so it can fo- from an overheated economy. world’s third-largest economy, and cus on keeping those it recruits. Five years ago, would-be cus- many CIOs think they need a pres- “We would like to go from the tomers focused on the security of ence in the country. Call it the “just 1,000 people we have in China their data and intellectual property in gotta be in China” syndrome. Yet now to 20,000 or 30,000, but in a China, says Dean Stevens, general the last decade of offshoring has way that the attrition rate is low,” manager at Symbio, which has of- taught them the risks—like not get- says N. Chandrasekaran, chief op- fices in China and Maryland. He ting the right talent for projects—of erating officer at TCS. rarely hears that concern today; now jumping into a hot market. Companies specializing in China- the focus is on how China will avoid British telecom provider BT based IT outsourcing include China- India’s dilemma. “The No. 1 concern Wholesale has established a small Soft, DarwinSuzsoft, NewSoft, Sym- I hear is, ‘Can you get the engineers IT center in China and a relation- bio, and WorkSoft. In August, private and resources I need to get my job ship with an IT services provider equity firm Francisco Partners in- done, and what’s your retention there. “Our philosophy is not to vested $48 million in DarwinSuzsoft, like?’ ” Stevens says. “They’ll often study it to death, but to get in there a U.S. company that employs 800 say, ‘The problem I ran into in India worked together on common life-cycle development only about cost savings, but the savings look likely to stay processes and common change processes. Phillips ac- well into the next 10 years. Even without the cost sav- knowledges that takes a lot of documentation and ings, many CIOs insist they need offshoring because they forces everyone to do that work in English. And it can’t get enough qualified talent here. That’s debatable. takes a lot of travel: Phillips’ top 10 IT leaders from But even if they could, there’s a sense that globalization is the different locations meets face to face every quar- a goal in itself—as more companies see their success piv- ter, most recently at the Shanghai location. oting on non-U.S. sales, they see a solely U.S-based IT For CIOs,“globalization” means a growing dependence organization as a weakness. Look for more companies to on IT pros all over the world, whether staff or those con- offshore bigger projects with higher stakes. tracted through offshore suppliers. Problems that have marked the first decade of IT offshoring will continue, Write to Mary Hayes Weier at [email protected]. thanks to talent shortages, communications failures, and rising costs. CIOs like to point out that offshoring isn’t