Thursday, November 6, 2008

Offshore Outsourcing: Quantifying ROI

By Arpit Kaushik , CIO , 11/05/2008

Sponsored by:

Read any case study and you'll probably encounter overblown statistics that say offshore outsourcing reduced costs by 50 percent, reduced number of defects in production by 25 percent, reduced time to launch application by 40 percent and so on. Some even go a step further and extrapolate these figures to 'business value'. Example: launch time reduced by 10 weeks implies 10 weeks of additional revenue or reduced costs. So 10 divided by 52, then multiplied by annual revenues or IT annual spend equals business value from reduced launch time. Lo and behold--suddenly you have a number in tens of millions. Add up all the other sources of value and you may reach hundreds of millions and even billions as the business value. Sounds good, right? Especially in this time of recession woes.

But if this was accurate, customers would not be so unsure about whether offshore outsourcing has delivered value. Numerous surveys indicate that anywhere from 17 percent to 53 percent of customers have not realized business value/return on investment from offshore outsourcing. Yes, yes, statistics can prove just about anything, but whatever the number, there are customers who have not realized tangible business value from offshore outsourcing. And this article is for you folks.

When quantifying the business value of offshore outsourcing, customers must consider three important aspects that are often ignored: the appropriate comparisons, the hidden costs and the distinction between theory and reality.

Appropriate comparisons

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While building the business case for offshore outsourcing, the most common comparison is between onshore and offshore, apparently in answer to the question "if we had to do the project in any other way apart from offshore, how much would that cost?"

Many assumptions end up wrongly overestimating the onshore cost. Most common is using the same headcount number in both cases. When a project is done onshore, fewer people are required because of reduced activity level in areas like knowledge capture, knowledge transfer, project coordination and environment support. Then there is the productivity factor.

"Sath" Sathyanarayan, author of Offshore Development and Technical Support: Proven Strategies and Tactics for Success, says that even if offshore personnel are as competent as the local staff--which is your best case scenario and unlikely to be the case when you are getting started--there will a productivity loss because of systemic issues.

Also, the assumption that all the onshore work will be done by newly hired internal employees may not be the right one to make; customers almost always leverage contractors and existing employees. For the former, use the relevant contractor rates that are likely to get negotiated and the appropriate loading factor (you don't pay pensions, holiday allowances etc. to them). For the latter, consider if they can be treated differently: it could be a sunk cost for a period of time or a partially apportioned cost. Finally, internal employee costs are excessively padded by something called "an overloading factor"--to account for pensions, holidays, desk space, corporate overheads and so on. A figure of anywhere from 20 percent to 50 percent is normally used--choose the figure that reflects reality, and take into account that you can't recover any of those costs anyway.

Hidden costs

The straightforward costs are fairly easy to see--costs related to personnel, communication, IT infrastructure and tools/licenses (though sometimes the uplift required for converting single site to multisite licenses can be hidden).

Many cost elements are not obvious. In Hidden Costs Impact Value in Outsourcing, authors Whitfield and Joslin state that potential outsourcers in all industries commonly assume that outsourcing can be plug and play, that the company will only have to absorb limited up-front costs before large savings can be realized, and that offshoring for labor arbitrage will ensure more than 60 percent cost savings. In reality, 10 percent to 15 percent savings is more realistic for highly commoditized service areas, and 40 percent to 50 percent savings can be achieved only in optimal circumstances.

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Travel of a customer's onshore staff first comes to mind as a hidden expense: A leading European software provider indicated that it takes 40 trips per annum to manage its offshore product testing program.

Equaterra, an outsourcing consultancy, points out a couple of interesting examples of hidden costs:

-- Hidden cost of work retained onshore, internally.

One retailer had outsourced the work of 1,100 employees, but held onto 50 percent of the work for 200 of those employees. As a result, the company overstated its business case by US$24 million.

-- Hidden cost of internal, transitional headcount.

Companies usually don't account for the costs of employees who help in the transition. For example, one pharmaceutical company kept about 20 percent of its staff for six months after the go-live date, which added $1.5 million in cost. Overambitious headcount estimates can cut projected savings by 10 percent to 20 percent.

-- Other examples of hidden costs are setting up (initial knowledge transfer, training, retraining et al) and managing the offshore outsourcing engagement (governance system, additional personnel, management time).

A McKinsey study indicates a figure of 10 percent for additional transactional costs and 10 percent for additional monitoring costs, though particular cost elements were not specified.

Theoretical versus actual impact

A recent whitepaper by a leading offshore outsourcer in collaboration with a top tier industry analyst, reported that their return on outsourcing model takes into account benefits from cost savings, efficiency gains and revenue improvement. But the bulk of the benefit actually comes from revenue improvement rather than tangible cost savings.

Assumptions on revenue impact are open to theoretical debate, and seldom evidenced in financial statements. It's not that there is no revenue impact for offshore outsourcing, but customers should make the distinction between what benefits will actually hit the books versus benefits that are more theoretical in nature.

Statistics can prove just about anything. You need to exercise diligence and your own prudent judgment in the quantification process, otherwise you will end up building unrealistic, unseen and infeasible expectations of business value from offshore outsourcing.

Tuesday, November 4, 2008

The next job you outsource may be your own.

Outsourcing vendor ACS to move 'higher-level' IT jobs offshore

Execs say firm plans to start offshoring development, project management work

Patrick Thibodeau

November 3, 2008 (Computerworld) IT workers and managers who believe their jobs are at too high a level to be sent overseas may want to look at Affiliated Computer Services Inc.'s plan to boost its offshore outsourcing operations by moving "more complex, higher paying" jobs to countries outside the U.S.

Dallas-based ACS, which provides IT and business process outsourcing services to a wide range of corporate and government clients, currently employs about 63,000 people, 20,000 of them in low-cost offshore locations. But in a conference call last Thursday on its financial results for the quarter that ended Sept. 30, ACS detailed plans to increase the number of employees working offshore by 4,200 during its current fiscal year, which began July. (A transcript of the call can be read on Seeking Alpha Ltd.'s Web site.)

"To have a greater financial impact, we will be moving a higher percentage of more complex, higher paying jobs offshore, including management and application development roles," ACS President and CEO Lynn Blodgett said during the call.

ACS has been gradually shifting jobs to offshore and near-shore centers in the Philippines, Mexico, Jamaica, Guatemala and India. In its 2006 fiscal year, just under 25% of the company's workforce was based outside of the U.S. Now, nearly 35% of its workers are overseas, according to a presentation used by ACS officials during the conference call (download PDF — see slide 14).

Tom Burlin, chief operating officer at ACS, filled in some of the details about the jobs that will be affected by the additional offshore moves. "We've done a great job in moving base production-level jobs offshore but have decided," he said, "to aggressively move more of our higher-level jobs, like production managers, higher-level back-office functions and higher-level development roles, to lower-cost locations."

The company said the expected savings from offshoring will give ACS more money to invest in areas such as sales, innovation and development of new products. "This is the right thing to do and the right time to do it," Blodgett said. "This investment will make us stronger, not only during this economic storm, but for years to come."

"High-level jobs are just as vulnerable [to offshoring] as mid- and low-level jobs," said Ron Hira, an assistant professor of public policy at the Rochester Institute of Technology and co-author of the book Outsourcing America. Every IT services firm, big or small, is shifting more advanced technology jobs offshore, Hira said.

"For U.S. IT workers, look out: You're not going to be safe," he added. "The Wall Street analysts will be pushing companies even more to accelerate their offshoring projects. This is just the beginning of a shift of technological capabilities to low-cost countries." The relocation of jobs, Hira claimed, is being "aided and abetted by horrible U.S. public policies that subsidize these shifts."

An ACS spokesman said it's too early to know whether the company's new offshoring moves will lead to layoffs of U.S. workers. The IT services firm's business continues to expand, he pointed out. But slide 19 of the conference call presentation shows that ACS is estimating $38 million to $42 million in "severance/transition transition" expenses as a result of the increased offshore activity, with as much as $25 million of that total expected to come during the company's ongoing second fiscal quarter.

ACS, which reported $6.16 billion in revenue for its 2008 fiscal year, does a significant amount of IT work for government agencies: about 40% of its business comes from government contracts. But most of the offshore work is being done for corporate clients, according to the ACS spokesman. The company has more flexibility to move corporate work offshore than government contracts often allow, he said.

In a separate move, pharmaceutical maker Pfizer Inc. detailed cost-reduction strategies in an earnings call last month and said it had "a wide array of outsourcing opportunities in various stages of implementation." That included projects within its manufacturing, logistics, finance, facilities, legal and IT departments, according to a transcript of the call posted on the Seeking Alpha site.

Citing unidentified sources, The Day, a newspaper in New London, Conn., today reported that over the past few months, Pfizer has been training foreign workers at facilities in New London and Groton, Conn., in preparation for transferring much of its IT work from locally employed contractors to outside firms.

A Pfizer spokeswoman said the company wouldn't comment about the Day's story. In regard to Pfizer's use of contract workers, the company said via e-mail that the number of its temporary workers "ebbs and flows." For instance, Pfizer said that on an average day, it has 800 to 1,000 contract workers at its sites in Groton and New London, in addition to the 5,400 company employees there. The contractors provide services "ranging from janitorial and cafeteria services to clerical and technical work," Pfizer said.

Obama's outsourcing threat not serious for India: Nasscom chief

4 Nov, 2008, 0515 hrs IST, ET Bureau
AHMEDABAD: The US democratic presidential nominee, Barack Obama's statement to put a break on outsourcing if elected as American President should
not come as a threat to Indian IT/ITeS companies.

India's apex IT body, Nasscom, chairman Ganesh Natarajan said Obama's government, if at all it comes to power, will focus more on creating new job opportunities for its people rather than cutting down on outsourcing. (His plan is to make it cost prohibitive for organizations that currently offshore/outsource positions that once existed in the US.)

Mr Natarajan was the chief guest at the 6th Convocation of Nirma University of Science and Technology. "Barack Obama's plans to cut down on outsourcing does not pose a threat to the Indian IT industry. Our expertise in several areas of outsourcing will always attract new projects from the US," he said while addressing the media.

He said, certain expertise was country-specific and won't be affected despite a change in government policy . He also said the Indian IT/ITeS companies should try and tap new and emerging markets in Japan, China , Asia Pacific, Africa and Latin America. (Great idea, however they have their own outsourcing/offshore initiatives).

Speaking further about the Indian IT industry, he said, the global slowdown has not affected the industry at all.
The industry was going almost on the lines of the growth projection as done for this year in 2007 by Nasscom.

As against the projection of 26-29 %, the growth has been 20-22 %. In terms of employment opportunities as well, the IT/ITeS industry will add 2.75 lakh workforce to the existing workforce of 20 lakh.

At this convocation, the 217 awardees for various post-graduate courses included 26 MSc students, 28 MPharm students, 102 MTech students, and 61 students of the MCA Programme.

The 768 awardees for the bachelor's degree included 658 students of B Tech, 64 students of BPharm and 56 students of BPharm (Hons). Additionally, 301 students were also awarded their diploma in engineering.

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Back to Article

The Dual Provider Approach to Outsourcing

W. Carter Santos
Special to Law.com
November 03, 2008

Under the dual provider approach to outsourcing transactions, the customer splits the volume of outsourcing services between the existing vendor and either a second vendor or an in-house captive (second source).

While the dual provider approach may be difficult to implement for small outsourcing initiatives with limited scale or complex outsourcing initiatives in which the services cannot be easily divided between two separate companies, this approach is well-suited for handling large volume, rule-based, repetitive tasks, such as outbound and inbound customer call support, data entry, print/mail and clerical functions, and/or large volume project work, such as for application development and maintenance functions (provided in this case, that the customer maintains adequate source code and documentation libraries for all outsourced work).

This article discusses the primary benefits to the dual provider approach as well as the often overlooked benefit of using the approach as an exit strategy for outsourcing transactions.

PRIMARY BENEFITS

The primary benefits of a dual provider approach are as follows:

• The natural tension between the vendor and the second source creates competition in favor of the customer.

• As a result of the competition, the customer will likely receive discounted pricing. This is especially true if the customer uses two vendors (rather than a captive) in the same geographic region.

• As a result of the competition, the customer will likely receive improvements in the quality of the services, as the customer can compare the vendor's service performance with the second source. The customer can reward strong performance by allocating a higher percentage of the volume to the best performer and penalize poor performance by allocating a lower percentage of the volume to the weak performer. (Or the customer could reward the strong performance by allocating a salary increase, and penalize the poor performance by allocating a salary decrease. Leaving the costs to the customer the same.)

• To the extent the vendor, or the second source, can take on the entire volume of the outsourced service, the customer has a viable business continuity/disaster recovery ("BC/DR") option if disaster or political instability affects the vendor or the second source. This is especially true if the vendor and the second source operate in different geographic regions that would not be impacted by the same events. (This is a great idea, however, I believe overhead costs would make it cost prohibitive).

• By using two different sources, the customer mitigates the risk that it may become too dependent on one vendor's technology and/or processes.

DUAL PROVIDER APPROACH AS AN EXIT PLAN

Another benefit to the dual provider approach which is often overlooked is its viability as an exit plan. Under the dual provider approach, if the customer chooses to exit the outsourcing transaction with the vendor, the customer can transition the additional volume of services to the second source with minimal effort. This is in stark contrast to the substantial effort typically required to transition the work to a new vendor or back in-house to the customer (new source) when the customer is not currently providing the services (new provider approach). To fully illustrate the benefits of the dual provider approach as an exit plan, the pitfalls of the new provider approach must first be considered.

Under the new provider approach, the customer's exit plan focuses on negotiating contractual rights into the outsourcing contract (transfer contract rights) to facilitate the transfer of the services from the existing vendor to the new source. Transfer contract rights include the right to: (1) obtain the vendor's assistance and cooperation in transitioning the services; (2) hire vendor employees; (3) use vendor software/intellectual property post-termination; (4) train side by side with the vendor; (5) obtain updated systems diagrams, process flow and workflow documentation from the vendor; and (6) purchase equipment used to perform the services.

However, enforcing transfer contract rights can be difficult, time-consuming, uncertain and expensive and is dependent, to some degree, on the level of cooperation from the vendor. During the transition period, the vendor has little incentive to cooperate because the vendor will not retain the existing business or win any new business from the customer. The vendor may, among other things, dispute the customer's transfer contract rights, delay fulfilling the customer's requests and/or seek a change order with a price increase whenever a customer request does not fall within the exact words of the contract. Yet, transitioning the services to a new source will likely require exercising at least some of the transfer contract rights. This is because the new source will need, or can benefit from, the labor, training, processes, documentation, equipment and/or technology employed by the terminated vendor. Transitioning the services to a new vendor also requires the customer to go through the arduous process of selecting, negotiating and contracting with a new vendor (through a request for proposal or other process).

Additionally, transitioning the services to a new source can take a substantial period of time (often six months to one year) and in many cases, the customer is not ready to take the services over or transition them to a new vendor when the contract with the terminated vendor ends (timing risk). The timing risk tends to arise because the customer often underestimates the transition time when providing the termination date to the vendor in the notice of termination. If this happens, the best-case scenario for the customer is that the terminated vendor agrees to continue performing at much higher prices and the worst-case scenario is that the vendor simply walks away leaving the customer without the services or the ability to transition to a new vendor.

By comparison, transitioning the services under a dual provider approach is faster and less disruptive than the new provider approach and largely avoids the timing risk. The transition is faster because, as stated above, the customer (i) will spend little time, if any, exercising its transfer contract rights (as the second source already has the knowledge and resources to perform) and (ii) will not need to engage in the selection, negotiating and contracting process, as the second source is already under contract with, or under the control of, the customer. In fact, the transition of the additional volume of services under the dual provider approach typically only takes as long as necessary to hire and train the additional labor resources needed to accommodate the additional volume (usually one to three months). The transition is less disruptive to the customer's business because the second source (a) already performs the services, (b) is familiar with the customer business, and (c) will only be transitioning an increased volume of the same services rather than an entire new suite of services. Given the ease, certainty and speed of the transition, the timing risk under the dual provider approach is almost non-existent.

CONCLUSION

For the appropriate outsourcing initiatives, the dual provider approach provides the customer with price and service quality leverage through competition as well as disaster recovery/business continuity coverage. Additionally, the dual provider approach gives the customer a faster, less disruptive and certain exit plan relative to the new provider approach. However, even if the customer employs the dual provider approach as an exit plan, the customer should still negotiate adequate transfer contract rights into the outsourcing contract just in case the customer loses the second source during the life of the outsourcing contract.

The downside to a dual provider approach is that the customer has to manage and govern two different providers and, if a captive is not used, negotiate two different contracts. Additionally, splitting volume may mean giving up a volume pricing discount to a single vendor. Overall, the benefits of the dual provider approach far outweigh the detriments and the dual provider approach should be strongly considered for the appropriate outsourcing initiatives by sophisticated customers with adequate resources.

W. Carter Santos is an assistant vice president, outsourcing transaction counsel in the Global Sourcing Office at Equifax Inc.

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Obama Nama: Outsourcing firms may feel the jitters
2 Nov, 2008, 0000 hrs IST,Neha Dewan, ET Bureau

NEW DELHI: He might be the great American change agent. But US presidential candidate Barack Obama's win could dash the career hopes of many India

ns. His fierce anti-outsourcing stance — the subject of many a debate in the past — could spell bad news for the BPO firms and the IT industry. But strangely enough, the results of a recent poll by consulting and market research firm Tecnova shows that 82% of the respondents in India expect Obama to win. In fact, most respondents in India feel that Obama is the right representative for political stability, world peace and financial strength.

With the US going to polls next week, the last leg of the battle is currently on between Democrat presidential candidate Obama and Republican rival John McCain. And it's not just India that is showing confidence in an Obama presidency, the sentiment is similar in other countries as well. Market research network GlobalNR's findings across 21 countries including India surveyed by Tecnova, indicates that Obama has more positive perceptions as compared to McCain. The recent survey conducted globally among 10,392 people found that on an average 73% were in favour of Obama.

Clearly, India Inc at present has other considerations on mind. The possible negative consequences of an Obama victory on the Indian subcontinent does not seem to be influencing their expectations. Sujay Sen Gupta, president (global market research) at Tecnova India, says: "Obama has strong reservations on outsourcing and has made many statements during his election speeches that he would discourage this when he comes into power. This is definitely not good news for the burgeoning Indian IT and ITeS sector. However, the research results still show very high support for Obama amongst the Indian respondents, which clearly indicates that common people are thinking of other aspects."

Sure enough, Indian observers feel that Obama is more likely to improve international issues such as world peace, global poverty, environment, human rights and the economy. And the survey findings bear testimony to that. According to the Tecnova research, 54% of the Indian respondents strongly feel that world peace will improve if Obama is elected as the president of the US. And 43% believe that financial stability in the world will improve if Obama comes to power as against only 24% who think the same if Republican presidential candidate McCain comes to power. More than 49% feel that the environment will improve if Obama wins and more than 51% believe that overall economic condition will improve in the US in the coming 12 months.

The race is on. But positive perceptions and mass public support may have already made the battle easier for Democrat Obama. Another indication, perhaps, of an elusive win for McCain?

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Relax, jobs in India are safe!
Shweta Rajpal Kohli, Vasanthi Hariprakash
Friday, October 31, 2008 (Delhi, Bangalore)

With job losses making headlines in the US, the big question on
everyone's mind: Are jobs in India safe? And will pink slips and
salary cuts become the order of the day here as well?

A startling report released by industry body Assocham claimed that
companies in key sectors like real estate, finance and aviation will
trim their workforce by as much as 25-30 per cent in the coming weeks.
But after the top economic policymakers stepped in to rubbish these
findings, Assocham has withdrawn the report.

"Assocham has withdrawn the report," says Montek Singh Ahluwalia,
Deputy Chairman, Planning Commission.

Finance Minister P Chidambaram explains: "An economy growing at 7 per
cent is a job creating economy, not a job destroying economy. The only
difference between an economy growing at 7 percent and an economy
growing at 9 per cent is the pace of job creation. Don't confuse a
slow pace of job creation with no jobs."

But as the crisis unfolds, companies have decided to wait and watch.

"There is a looming uncertainty in the market today, but as of now
there is no instance of real job cuts happening in a large phase.
Probably what we are getting to hear or see is those normal appraisal
cycles where you try to find bottom performers who are not doing well
and who are being asked to leave or being redeployed in various other
projects," says Amitabh Das, CEO, Vati Consulting.

Though downsizing will be seen as the last resort by companies in
India, many HR heads say the tough economic environment means fat
bonuses and increments may have to go.

Boeing exec: less design outsourcing in future

By TIM KLASS

The next new Boeing Co. airplanes will be designed, developed and produced with less reliance on outsourcing than the long-delayed 787 passenger jet, a key executive says.

Even the next derivative of the 787 will rely more on in-house design, said Michael J. Denton, vice president of engineering and the top technical executive of Boeing Commercial Airplanes.

In an audio blog posted on a Boeing Web site for the company's contract talks with the Society of Professional Engineering Employees in Aerospace, Denton gave Boeing's most complete statement to date on what will be done to avoid a recurrence of the problems plaguing the 787.

Negotiations began Wednesday with the union representing Boeing engineers, scientists and technical workers.

The first 787 delivery is currently set for next August and could be further delayed by the strike by the International Association of Machinists and Aerospace Workers that began Sept. 6. The walkout by Boeing's commercial aircraft production workers could end Saturday with a ratification vote on a tentative agreement supported by union leaders. Outsourcing was the thorniest issue in the dispute.

SPEEA and the Machinists say that if the 787 had been designed and built in-house like previous Boeing planes, it would have been out the hangar door by now.

Denton said Boeing, faced with prohibitive costs for developing the all-composite 787, got subcontractors to share in the initial investment and outsourced much of the design work, partly to avoid hiring a raft of engineers who would then have to be laid off for lack of other work after the plane was ready for full-scale production.

For example, Boeing sent Mitsubishi a general concept, shape and technical requirements for the wings, leaving the internal structure and other details to be designed by the Japanese company. The only major component of the 787 done in-house in the Seattle area was the tail fin.

In many cases, "our assessment of the partners' capability to do that design work ... was higher than their capability," Denton said.

Compounding the problem, "we were late in discovering that (some of) the partners were really struggling," he said. "Our engineers and production workers are basically correcting problems that should never have come to us."

Changes already are being made in work on the 787-9, a longer version of the 787-8, the initial model, Denton said.

"We will do more of the detailed design on the 787-9 than we did on the dash-8," Denton said. "We're working out those details with some of our affected partners now."

In the future, Boeing hopes to stick with the "partner model" for financing.

"However, we will probably do more of the design and even some of the major production for the next airplane ourselves as opposed to having it all out with the partners," Denton said.

Ray Goforth, SPEEA executive director, told The Seattle Times that Denton's comments were "a helpful sign that the company is addressing the concerns raised by the technical work force."

SPEEA's two contracts expire Dec. 1. One covers about 14,200 scientists, engineers and other professionals with average salaries of $82,666 and the other covers nearly 6,700 manual writers, technicians and other hourly workers paid an average of $68,157. About 550 are in Utah, California and Oregon and the rest are in the Seattle area.

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