August 5, 2015

IT Resourcing: Outsourcing and Offshoring

CIO Strategy Exchange, New York, 2009

“It is a sign of contraction of the mind when it is content, or of weariness. A spirited mind never stops within itself; it is always aspiring and going beyond itself.”
-Michel de Montaigne 1580

“Trade is the natural enemy of all violent passions. Trade loves moderation, delights in compromise and is most careful to avoid anger. It is patient, supple and insinuating, only resorting to extreme measures in cases of absolute necessity.”
-Alexis de Tocqueville “Democracy in America” 1840

Chapter I: Front View
This CIO Strategy Exchange Report is based on interviews conducted with two dozen members initially asked to describe business process outsourcing (BPO) or other major projects undertaken in India. Then, two further questions: What practices are most instrumental in achieving positive results? And in hindsight, what single practice would you do differently?

Broader Perspective: The boundaries were almost immediately expanded in two directions: geographic reach and alternate approaches. This paper provides case studies (i.e.snapshots) on the six distinct alternatives we encountered.

  • Captive Offshoring of IT
  • Captive Offshoring of Business Processes
  • Outsourced Offshoring of IT
  • Outsourced Offshoring of Business Processes
  • Staff Augmentation, or Time-and-Materials
  • A Blended Approach

But first, we’ll describe how several astute members selected the best locations considering wage rates, available competencies, office rents, tax climate, local infrastructure and IP protection. In addition to India, the most attractive geographies (in alphabetical order) are Brazil, Central America, China, Indonesia, Mexico, Poland, Philippines, Romania and the less costly U.S. regions.

Then the snapshots, followed by short profiles on principles and practices used by members to manage their offshore outsourcers. And finally, explore the issue of setting expectations realistically– especially on cost differentials and creativity.

Vendor Identifications are supplied in each CIOSE member snapshot. Our purpose is to provide “back-channel” references before other members engage these vendors for similar assignments. To expand the data, we include customer satisfaction rankings from the 2008 Black Book of Outsourcing, summarized by the Wall Street Journal (July 6, 2008). One caution: some Brown-Wilson rankings seem erratic, and not wholly accurate predictors of performance. Do a few extreme survey responses overweigh a supplier’s overall rank, we wonder? For example, Infosys “completely fell off the high client approval ranks,” trumpets the press release. But our CIOSE friends wouldn’t agree. Hmmm…

With those caveats, here is the vendor roll call for the last three years. (Less relevant firms omitted.) Of particular note are the top scores for HP, Perot and CSC. Is it coincidence their operations are less concentrated in India than the other industry leaders? Perhaps it is, because five Indian firms are ranked within the top twenty vendors. At the other end of the spectrum, Brown-Wilson found customer satisfaction plummeting for IBM Global, clearly displaced from its No. 1 position just three years ago. Notes the WSJ: “IBM needs to work on the Indian BPO arm, Daksh, which continues to amass both poor client satisfaction scores and expensive contract cancellations around quality issues.”

Recession or Decline? “India’s seemingly unstoppable outsourcing industry is grappling with the woes of the financial firms that make up as much as half of revenues for some players,” observed BusinessWeek (October 13, 2008). “In the first half of 2007, financial companies around the world handed out at least 48 major outsourcing contracts with a total value well in excess of $5.5 billion… The first half of this year saw just eight such contracts with a total reported value of $767 million.”

Tata (TCS) is cutting travel, electricity consumption, and even the deployment of Microsoft Office. Most firms have dropped plans for additional office space. Wipro’s Chairman announced: “We live in tough times; the macroeconomic challenges are impacting business across all segments.” As its total number of clients declined from 915 to 882, the firm reduced headcount, stopped large-scale hiring and shelved the opening of a new software center in Atlanta. Infosys also reports having fewer clients. Satyam’s collapse in January because a margin call revealed the CEO’s accounting shenanigans to puff up corporate revenues and cash reserves raised fears of broader corruption. That, plus the growing regional tensions between India and Pakistan and the general acceleration in geopolitical risk could impact the Big Five of India far longer than anyone hopes.

Price wasn’t the primary basis for contract awards, asserted most CIOSE members in interviews conducted a few months ago. Of course, material savings always matter and more so nowadays. But in normal times, the most critical selection criteria are satisfactory prior relationships and relevant vertical experience. Also prized is vendor sensitivity to client culture, the critical ingredient in ensuring a rapid (or at least reasonable) pace of implementation and process improvement. Member responses closely mirror the Black Book survey of factors that influence selection, shown below with the percentage of respondents who cite each factor in parenthesis.

  1. References, reputation and known client experiences (78.3%)
  2. Vertical competencies, industry-specific acumen (70.1%)
  3. Cultural fit (69.5%)