Archive for the ‘Outsourcing’ Category

Outsourcing’s Advantages

October 9, 2007

Outsourcing offers businesses the opportunity to cut costs and boost productivity — if it’s done right.

Offshore locations feature low-cost workers who can cut your labor costs by 50% or more. Tapping workers in India or China also affords the possibility of round-the-clock technical or customer support — when domestic staffers sign off in the evening, their Asian counterparts are just waking up. Companies can also transform labor costs from fixed to variable by working with an outsourcer. Need extra manpower during the holidays? A service provider can put more bodies on your account during crunch times. Finally, outsourcers can provide quick access to domain and technology experts who may be in short supply locally.

Despite these advantages, reports abound about outsourcing gone bad. Dell infamously had to repatriate some customer service operations after customers complained they couldn’t understand foreign phone reps. The bottom line: Outsourcing isn’t about blindly throwing work over the wall; it needs to be thought out and aggressively managed. Here are some pitfalls to watch for, and how to cope.

Many outsourcing projects fail because of lack of internal oversight. Forrester analyst Christine Ferussi Ross says businesses should establish formal vendor management offices staffed with professionals experienced in IT operations, contract negotiations, and procurement. Also needed is an individual with the diplomatic skills necessary to maintain vendor relationships over time. “Outsourcing implies some give and take,” says Ross.

Only 47% of 615 companies recently surveyed by Forrester reported having a centralized vendor management office.

Costs also need to be managed, or potential savings can evaporate quickly. Of concern lately for those outsourcing to India is the rising rupee, which has gained about 14% against the U.S. dollar over the past year. Businesses need to negotiate up front the extent to which their vendor is willing to insulate them from currency fluctuations. Labor costs in India are also rising — by as much as 15% per year — so companies interested in outsourcing for the first time might do well to scout out locations that haven’t been oversold, such as South America and China, and even second-tier cities in India. Not everything needs to be in Bangalore.

Deciding what to outsource is almost as critical as the decision to outsource itself. Not all IT projects or customer groups are created equally. Outsourcing the development of non-critical applications or customer service for low-revenue customers are good places to start. Dell’s mistake was offshoring service and support for its high-end business customers.

Regardless of what you outsource, the security of your company’s and your customers’ personal and business data must be a top consideration. When weighing vendors, it’s worth a trip to their facilities to inspect first-hand their security technologies and policies, even if that means a long flight. Most major offshore outsourcers, including India’s big four of Wipro, TCS, Infosys, and Satyam, have sophisticated security processes in place. Even so, it must be negotiated up front who is responsible for what if a breach occurs.

Outsourcing needn’t be fraught with peril, but it does need to be well managed.

Waqas Ahmed


Pakistan: Better Late Than Never In Outsourcing

September 9, 2007

Think software and services outsourcing, and places like Bangalore, Manila, and perhaps Budapest spring to mind. But Lahore or Karachi? The Pakistani cities might not be on the outsourcing map yet, but the country’s software shops are out to change that. “As a natural course, American companies would not look at Pakistan,” acknowledges Jehan Ara, president of the 250-member Pakistan Software Houses Assn. “So we have to get them to look at us, and once they do business with us and credibility is established, they come back for more.”

It makes sense for Pakistan to follow in India’s footsteps and try to boost its outsourcing business. The country, after all, shares India’s British colonial history and has some 17 million English speakers. It has a huge community of émigrés with experience in technology. And like India, it has a culture that values education and hard work. Wages, meanwhile, stand at about the same level as in India, with call center workers earning about $12 per day and starting software engineers pulling in $5,000 or so annually.

Still, Pakistan remains far behind India. Last year the country’s software and IT services business hit just $300 million, and exports made up only about 11% of that. India, by contrast, booked $12.8 billion in software and services exports in 2004. But the Pakistan Software Export Board, a federal body set up to promote outsourcing, forecasts that the business will grow by at least 45% annually in coming years. “Pakistan started late but now is catching up very fast in software development,” says Prime Minister Shaukat Aziz.

Lower-level operations such as call centers are expected to grow even faster: Some 120 centers have opened in Pakistan in the past two years. Today they employ 3,500 people, and that number is expected to grow by 60% a year. Arwen Tech, a Karachi company that runs a 600-seat center, saw its sales double last year, to $10 million, serving clients such as Pakistan International Airlines and the local franchisee for KFC Corp. Now the company is building a 1,500-seat facility and hopes to boost revenues tenfold, to $100 million, in the next five years as it attracts more international clients.

Pakistan could use the boost that outsourcing provides. Unemployment is officially pegged at 8%, although in reality it’s far higher than that, and the government is looking for ways to fuel economic growth. Pakistan needs technology to increase efficiency and productivity. And software exports will help the country move away from its reliance on textiles, which make up 65% of total exports.


Still, Pakistan faces major hurdles. First, there’s the question of security: Few Western execs are willing to entrust sensitive data to such a troubled country. And despite its 55 tech institutes, Pakistan may face a shortage of IT workers. About 75,000 people work in the sector today, and the government believes a further 7,000 will be needed each year to keep the industry growing at current rates. But the country’s tech schools produce just 5,500 graduates a year — and only about a fifth of those are competitive and well trained, the Software Export Board says.

The country is working to fix those problems. A new government commission aims to beef up education standards. Since 2001, Parliament has scrapped corporate taxes on software exports and simplified the investment process. In the next three years, the government also plans to open IT parks in Islamabad, Karachi, and Lahore. And the Pakistan Software Houses Assn. last year sent two delegations to India, then in February invited a group from Bangalore to Karachi and Lahore in an effort to learn from the Indian experience.

Outsourcing companies have developed their own strategies for beefing up their business. One is to look for customers in places other than the U.S., where Pakistan’s image problems are most acute. In 1996, Lahore’s NetSol Technologies Inc. won a contract from Mercedes-Benz Leasing Co. in Thailand to install a software program from Britain. Later the company developed its own package, which it went on to sell to DaimlerChrysler in nine Asian countries. The NASDAQ-listed company now has 270 employees and this year expects sales of $10 million. In April NetSol signed a $2.3 million deal with Toyota Motor Corp. and hopes to expand into Europe.

Karachi IT services firm System Innovations looked for work even closer to home. The company was conceived five years ago by Amer Hashmi, a six-year veteran of IBM’s Global Services division in Toronto. The 34-year-old Hashmi saw an opportunity supplying software to state-owned Pakistani companies, and today counts the electric monopoly, Citibank’s Pakistan operations, and Habib Bank Ltd. — the country’s second-largest — among his 50 clients. Now, with 100 employees and $10 million in sales this year, Hashmi hopes to triple the company’s size in the next 12 months by boosting sales to U.S. corporations. He plans to open offices in Texas and Ontario this summer.

Others have set up front offices in the U.S. to win customers. Lahore’s Techlogix Pakistan, one of the country’s first software exporters, gets 95% of its business from the U.S. Most of that comes in from a four-member sales team in Boston, which funnels work to 90 software developers in Pakistan and a further 35 in Beijing. The company booked $8.2 million in revenues in 2004 serving 18 clients, including General Electric Co. and Massachusetts Mutual Life Insurance Co. “Our U.S. office has to offer the same kind of relationship-management as top-notch U.S. companies,” says Kewan Khawaja, co-CEO of Techlogix. It may be a while before Karachi or Lahore has the resonance of Bangalore or even Budapest. But plenty of ambitious Pakistanis are working to make it happen someday.

Waqas Ahmed

Outsourcing With Confidence

August 28, 2007

Call it the low-cost labor chase. Fed up with Bangalore’s swiftly rising costs, high turnover, and overstretched infrastructure, companies are looking to send IT operations to other cities. Need some inexpensive tech support? Check out Ho Chi Minh City. Want to develop a security system? Take a look at Bucharest.

But be warned. The labor may be cheap, but the risks can be high. Companies that shift work to developing countries have to be prepared to deal with language and cultural differences, potential political instability, and possibly even the theft of valuable intellectual property. Here’s a guide for going global.


Take a trip Before you sign a contract, spend some time at the offshore outsourcing center, even if it’s on the other side of the world. Many companies send business to centers overseas without ever visiting them.Consider culture Offshore workers may speak your language, but they may not fit the company culture. Want programmers to challenge ideas and propose alternate courses of action at times? You may be better off in Moscow than Bangalore.

Look beyond the bottom line Many outsourcing deals are focused solely on cost but break down in the third year after every last penny has been squeezed out. Instead, consider what you’ll need over a three- to five-year period and choose a vendor capable of innovating or making enhancements when the time comes.

Seek maturity The Software Engineering Institute rates the maturity of business processes of some offshore IT providers. Look for providers with CMMI (capability maturity model integration) Level 5, the highest possible rating.


Forget about time If your employees will need to collaborate with workers in other countries, pick an offshore destination in a time zone that will allow some overlap of the workday.

Give it all away Not all work is appropriate to send offshore. For instance, some organizations that outsource entire help desks are starting to take back pieces that are especially complex.

Expect instant results There’s an illusion that sending IT work offshore will immediately yield high productivity. Success takes time.

Pick the wrong partner Offshore providers often cater to specific countries. In China, for example, some providers have experience serving domestic clients, while others work primarily with U.S. and European companies.

Jump the gun If you’re just beginning to send work offshore, consider a locale where providers have years of experience. Emerging destinations such as China or Vietnam offer lower costs but present bigger challenges.

Waqas Ahmed

Outsourcing: Beyond Bangalore

August 17, 2007

After 10 months of working with software developers in Bangalore, India, Bill Wood was ready to call it quits. The local engineers would start a project, get a few months’ experience, and then bolt for greener pastures, says the U.S.-based executive. Attrition rose to such a high level that year that Wood’s company had to replace its entire staff, some positions more than once. “It did not work well at all,” recalls Wood, vice-president of engineering at Ping Identity, a maker of Internet security software for corporations. Frustrated, Wood began searching for a partner outside India. He scoured 15 companies in 8 different countries, including Russia, Mexico, Argentina, and Vietnam.

That path is being trod by a lot of executives, eager for new sources of low-cost, high-tech talent outside India. Many are fed up with the outsourcing hub of Bangalore, where salaries for info tech staff are growing at 12% to 14% a year, turnover is increasing, and an influx of workers is straining city resources. Even Indian outsourcing pioneers Tata Consultancy Services, Wipro Technologies, and Infosys Technologies, which have helped foreign companies shift software development and other IT operations to Bangalore, are starting to expand into smaller Indian cities, as well as China. “Overall, in terms of productivity and quality of life, beyond Bangalore is better,” says Wipro Chief Information Officer Laxman Badiga. “Bangalore is getting more crowded, and the real infrastructure is getting stretched.”

So companies are setting their sights on a slew of emerging hot spots for IT outsourcing. Need a multilingual workforce adept at developing security systems and testing software? Buna ziua, Bucharest. Want low-cost Linux developers? Bienvenidos a Buenos Aires, where many companies adopted open-source software after the devaluation of the peso in 2002 made licenses from abroad prohibitively expensive. Other cities on the list include Moscow and St. Petersburg in Russia and Prague in the Czech Republic, according to consulting firm neoIT. Other hot spots include Mexico City, São Paulo, and Santiago in Latin America; and within Asia, Dalian, China, and Ho Chi Minh City, Vietnam.

The Search for Lower Costs

Make no mistake: India remains an IT outsourcing powerhouse, with $17.7 billion in software and IT services exports in 2005, compared with $3.6 billion for China and $1 billion for Russia, according to trade organizations in each country. And India’s outsourcing industry is still growing at a faster pace than that of Russia and other wannabe Bangalores.

Yet many companies can’t resist the lure of cheaper labor. “Ninety percent of all outsourcing deals in the market today have been structured around cost improvement only,” says Linda Cohen, vice-president of sourcing research at consulting firm Gartner (IT). By the third year of an outsourcing deal, after all the costs have been squeezed out, companies get antsy to find a new locale with an even lower overhead.

But moving IT operations into developing countries like Vietnam or China can also pose big risks, such as insurmountable language and cultural differences, geopolitical instability, and the risk of stolen intellectual property. “You keep following the money, but how often are you going to move people around?” asks Cohen. Even the routine day-to-day management of an offshore team can require significant project management expertise. “If you don’t have experience and don’t do it well, it can negate savings,” says Barry Rubenstein, program manager of application outsourcing and offshore services at IDC.

Mix of Outsourcing Locations

Plenty of providers are ready to help clients overcome those obstacles. Companies including Accenture, EDS, IBM Global Services , and Genpact are building global networks, comprised of operations in a variety of cities, aimed at giving customers a mix of worker skills and labor costs. “We tailor where you want your people, based on the premium you want to pay,” says Charlie Feld, executive vice-president of portfolio development at EDS.

Continental Airlines, for instance, uses an EDS center in India for development of some software that runs on mainframes, but the airline handles some finance work through an EDS office in Brazil. Accenture uses its global network of facilities in a similar fashion. “Today we are about 35% in high-cost locations, such as the U.S. and Britain; 20% in medium-cost locations like Spain, Ireland, and Canada; and about 45% in low-cost locations like the Philippines, India, China, and Eastern Europe,” says Jimmy Harris, global managing director of infrastructure outsourcing at Accenture.

When Bob Gett, CEO of Boston systems integration firm Optaros, decided to hire an overseas outfit to handle development of some applications or programs designed to perform specific tasks, he scouted out six or seven countries in Eastern Europe. He finally settled on Akela, an outsourcing company in Bucharest, Romania. Gett found Romania attractive because of its good education system, multilingual population, and abundance of technical talent.

Benefiting from Geography

The move reduces costs by 60% to 75%, Gett figures, letting Optaros offer competitive pricing to customers. “We’re going to where the most cost-effective talent is in the world, but it has to be feasible,” he says. “It can’t be where there are economic, time zone, or language barriers.” In fact, Gett needs his application developers to interact directly with customers in the U.S. and Western Europe, so he appreciates that Akela workers speak English and French and are closer to the Optaros Geneva office than workers in India would be.

Companies such as Genpact, Accenture, Wipro, and Infosys are hoping Romania’s expected admission to the European Union will make it even more appealing for companies from Western Europe to do business there.
Dalian, a seaport in northeast China, is also turning out to be an ideal center for outsourcing, in large part because of its geography and history. Located in the northeast corner of China, Dalian is close to both Korea and Japan and was, in the first half of the 20th century, occupied by Japan. So there’s still a labor pool of Japanese speakers.

Intellectual Property Issues

Dalian’s labor costs are lower than in Japan, so it’s become a center for application development for Japanese companies. U.S. firms outsource some technology work there as well. General Electric and Nissan outsource work to Genpact’s operations in Dalian. Genpact was the first outsourcing firm to locate in the city in June, 2000. Accenture and IBM Global Services have since moved in.

There are certainly challenges for companies that wish to outsource to China, including the potential theft of intellectual property. To combat this, Infosys Technologies has disabled USB drives on PCs to limit the ability of workers to take data out of the office. “We’ve taken extraordinary efforts to protect the intellectual property of our clients,” says Stephen Pratt, CEO Infosys Consulting, a subsidiary of Infosys Technologies, which has operations in Shanghai.

For U.S. companies that need to collaborate closely with offshore workers, South America is an attractive option because the time zones are similar and the infrastructure is strong.

Infrastructure Counts

Brazil boasts a mature software and IT industry, and the nation’s providers such as Politec, Stefanini IT, and ActMinds are keen to do more offshore business. Stefanini, which has served clients such as Whirlpool and Johnson & Johnson, derives about 20% of its revenue from international operations, but the company would like to expand that to 50% by 2008.

Total Brazilian software and IT services revenue is $17.16 billion, while revenue from offshore software development is a much smaller $205.3 million, according to Brazil IT, an association of Brazilian IT services providers. “If we can get a client interested enough that they will go to Brazil, they will do business with us,” says Eric Olsson, principal consultant with Politec, which has done work for clients such as insurer MetLife, software colossus Microsoft, and SAIC, a provider of a host of scientific and engineering services. Companies are drawn to Brazil’s modern infrastructure, with airports and highways that are first world, says Olsson, whose company is the largest IT services provider in Brazil.

Good roads and the developers who drive on them don’t come cheap, though. A software engineer in Brazil costs $20 to $35 per hour. That’s lower than in the U.S. but pricier than in India.

Threat to U.S. Workers

And while a technically skilled global labor force is a boon to companies, the picture isn’t so rosy for U.S. workers. Instead of competing with just India, now U.S. IT workers will need to go up against workers all over the world. In 2005, about 24% of North American companies used offshore providers to meet some of their software needs, according to Forrester Research. Over the next five years, spending on offshore IT services is set to increase at a compound annual growth rate of 18%, according to IDC.

The effect in the U.S. is that starting salaries in the engineering field—when adjusted for inflation—have stayed constant or decreased in the past five years or so, says Vivek Wadhwa, executive in residence at Duke University. “It doesn’t make much sense to get into programming anymore,” says Wadhwa, who worries that a lack of talent in certain industries, such as telecom, along with the outsourcing of research and development will erode U.S. competitiveness. But U.S. companies say that hiring programmers in India, who might make a fifth of what programmers do in the U.S., allows the companies to survive in a globally competitive economy.

After traveling the world, Ping Identity’s Wood finally settled on Luxoft, an outsourcing provider based in Moscow that has served high-profile clients such as Boeing, Citigroup’s Citibank, and Dell. While programmers are typically 20% more expensive in Moscow than in Bangalore, Wood found that there wasn’t much difference in the hourly rate for the kind of work that he needed. “Indian companies are cheap until you ask for people with experience, and we wanted workers with eight years or more of experience,” he says.

Russia’s high-end software developers are drawing plenty of offshore business to Moscow and St. Petersburg, which together account for about 60% of the country’s software development exports. Those exports have grown from $352 million in 2002 to nearly $1 billion in 2005, according to RUSSOFT, an association of software development firms from Russia, Belarus, and Ukraine. Providers EPAM and Luxoft are starting to gain some international recognition as well, both making Brown & Wilson’s Top 50 Best Managed Global Outsourcing Vendors for the first time in 2006.

For Wood, the biggest benefit of working with Luxoft is a cultural one. “One of the reasons we’re in Russia is that we found a common value set. Their work ethic is strong, and these people are very outspoken,” says Wood. He says engineers in Moscow have no trouble proposing a different course of action when necessary. He says he found workers in Bangalore to be reticent. And since Russian developers stick around longer—turnover is now in the low teens—Wood has plenty of time to take those opinions to heart.

by Rachael King of
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Waqas Ahmed