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, 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 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- 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. informationweek.comFor article reprints, e-prints and permissions please contact: PARS International Corp., 102 West 38th Street, Sixth Floor, New York, NY 10018; (212)Nov. 221-9595 5, 2007 44 www.magreprints.com/quickquote.asp IN DEPTH / OUTSOURCING 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.

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