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Chapter 26. INFORMATION TECHNOLOGY OFFSHORE AND OUTSOURCING

What Offshoring Is
Offshoring refers to the practice of getting some or all of the IT work done through one or more external service providers, usually for a significantly lower labor rate per hour. Through well-managed offshoring, it often is possible to realize other benefits, such as improved turnaround time, increased quality, and 24/7 coverage for support operations.
Exhibit 26 shows how organizations typically are able to progressively lower the total cost of owmership (TCO) of applications using offshore resources.
Within the application life cycle, offshore tast can include application coding and testing or application support and maintenance(or both). Application development or support can be effectively delivered offshore by differentiating the task that need to be done on-site, such as requirement definition, functional specification, issue reporting, and acceptance testing and those that need not be done one-site, such as technical specification, coding, code fixing, and testing.
For successful delivery of the code or maintenance fix, and to integrate it back into the on-site code base, it is critical that the offshore resources understand exactly what it is they are coding and why. Also, the on-site team must be able to pinpoint which sections of code meet what requirement (traceability) and how they are coded (code development standards that conform to client norms). This on-site/offshore coordination is fundamental to the success of offshore delivery.
Currently most offshore providers are able to deliver services from a developing nation, such as India, the Philippines, or some of the Eastern European countries, because it is possible to deploy IT resources in these countries at 30% to 50% of the cost of these offshore resources have been increasing, and other nations, including China, Mexico, Brazil, and South Africa, are coming up as alternative sources.
Offshore versus Outsourcing
It is important to distinguish some terminology that is often used interchangeably: outsourcing and offshore. Outsourcing refres to the practice of getting specific business functions performed by an external service provider. Some or all of that may be done offshore (i.e., in a foreign country). Offshore need not mean that IT functions have been outsourced to an external provider. It simply means the work is being done in a foreign country.
Why is offshoring so hot?
Offshoring has become one of the key factors for determining the competitive advantage of corporations. This situation has come to pass because of two rather unrelated chains of events:
1. Many corporations increasingly use IT to drive or enhance their competitive edge. The size of the IT budget can directly determine the ability of companies to deliver specific services to their clients. A case in point: When Dell initially started to offer features such as configure, quote, and buy through their website, Hewlett-Packard and IBM lost personal computer market share. The Competitors also quickly came up with comparable websites. Because offshoring enables a significant reduction of the IT budget, it improves the IT efficiency for a given budget and hence competitiveness.
2. As corporations realize the benefits of offshoring in IT, they are extending the same concept to the other outsourced business processes, such as help desk, call centers, and collections. Increased demand for these services from the U.S. client organizations has spurred the growth of huge business process outsourcing centers in the offshore nations.
It is reasonable to assume that these economic imperatives will continue to drive offshoring in the near future.

PROVIDERS’ APPROACH TO OUTSOURCING AND OFFSHORING
As this trend gathered momentum and demand increased over the past several years, two distinct groups of service providers have emerged, with significant differences in their approach to providing solutions for the market.
1. The established multinational consulting firms, including Accenture, Cap Gemini, Deloitte, and IBM, have set up large offshore delivery centers, typically located in India and China. They are delivering the same portfolio of services but with an on-site-offshore or blended team and a significantly lower cost of overall technology solution delivered to the client.
2. The offshore-based pure technology firms, which do not have a comparable functional or consulting business, are trying to move into that space through acquisitions or organic growth.
The clear result of both these approaches is the overall cost of delivered consulting services is significantly lower today than it was three years ago.
VARIANTS: BUILD, BUY, RENT
To take advantage of this huge shift in the landscape of consulting services, client organizations are increasingly looking to redeploy a piece of their IT organization offshore. Typically there is a six- to eight-month learning curve for both the client and the provider or the on-site and offshore teams, until the integrated delivery matures. Because of this, building an offshore organization is a possible option, but the costs involved make it viable only when the number of offshore resources is significant (i.e., at least in the high hundreds).
Depending on the nature, size, and state of maturity of their IT organization, firms are looking at one or more of these options:
• Rent. Renting is by far the most common option. Just as consulting services were “rented” on-site, they are now rented offshore. Renting offers the advantages of speed and flexibility but is not necessarily the lowest-cost option in the long run.
• Build. Organizations whose IT is more strategic to their business, such as those in financial services, have tended to set up their own offshore IT centers. Although this is not a quick fix, if done right, it can enable the parent organization to gain significant competitive advantage not just in the United States, but in the offshore country as well. An interesting variant is to buy initially while building.
• Buy. As offshore providers set up and become adept at servicing the market needs, client organizations buy into some or all of the providers’ business, so that they can incresingly control whom the services are delivered to, where, and how.
POPULAR START-UP OPTIONS
Offshore services starting with IT has been discussed, specifically with application coding or bug fixing. Support usually is taken up later, after development or maintenance (or both) is transitioned successfully and working with the offshore team is well established. In making a choice between development and maintance, timing is often the deciding factor. If there is a significant development effort planned around the time the offshoring initiative takes off, it is a good idea to do some of the development offshore, since then the maintenance can follow seamlessly. The knowledge transfer required for development often takes less time than it does for maintenance, because it is easier to understand specifications than code written by someone else. Between these two, maintenance is often the task chosen to be offshored, for these reasons:
• A significant part of most IT budgets is allocated to maintenance. So if offshoring works well for maintenance, cost savings are maximized.
• Maintenance is often the least popular among the in-house staff, so outsourcing it enhances IT staff motivation if they get to work on other development initiatives.
• By its nature, maintenance tasks can be offshored gradually, balancing risk of service disruption with cost savings.
HOW OFFSHORING IS DIFFERENT FROM ENGAGING A LOCAL SERVICE PROVIDER
Some of the key differences in engaging an offshroe provider compared to using on-site resources follow. An understanding of these differences is essential for evaluating the risks associated with offshore delivery.
• Regulatory: What goes out and what does not. Offshore resources often will be accessing data related to the individual customers/clients; in industries such as healthcare, such access is subject to regulatory controls.
• Control of intellectual property. Offshore resources could be working on similar applications for competitors.
• Culture. Working together in the United States, often in the form of meetings, is routine.
• Infrastructure. Making the development and/or production technical environment available outside the United States, through high-band-width networks, with adequate security and controls, building in redudancy for reliability and ongoing support infrastructure all take investment, careful planning, and execution.
• Licenses. When companies add offshore resources, even in situations where there is no net increase in the number of licenses, vendors often are reluctant to extend use of licenses outside the country, without additional license fees.
ENSURING THAT RISKS AND REWARDS ARE BALANCED
Generally, the risks associated with offshore delivery are slightly higher and different in nature compared to on-site IT work. Because offshore is always at another location, these risks are in addition to the ones already in consideration for the on-site location:
• These can be geopolitical, economic, legal, and labor-related risks. In the case of on-site IT, all of these risks are taken care of by corporate departments
• Transfer of knowledge to offshore resources and the need to have them travel internationally introduces logistical complexities, some risks, and potentially significant expense.
• Other risks are inherent in the fact that delivery is remote and not monitored as frequently as with on-site services.
• Data and code are accessed from outside the organization.
• Finally, in those instances where development and support work is done simultaneously in two locations, the constant need to keep the code in sync introduces additional risks.
In spite of these risk factors, offshoring has been successful over the past several years. As with any initiative, an awareness of the different sources of risks and adequate planning for mitigation procedures is possible and does significantly enhance the chances for success.
The Future
Analysts are predicting an increasing flow of IT and business process work offshore. The current publicity about U.S. jobs going offshore may run its course. IT delivery organizations in the United States seemingly use more offshore services than less, and this trend is catching on in the other business functions as well. Offshore investments take time to pay off. IT maintenance work required by organizations is increasing over time. Taken together, these facts indicate that distributed IT delivery will be the norm rather than the exception.
DECIDING IF OFFSHORING IS GOOD FOR A COMPANY
If a company’s IT has been effective in utilizing a contracted workforce, if the firm continues to engage contractors for IT work, and if the IT organization has progressive individuals who want to say with the leading edge of technology, leaving routine work to contractors, offshoring is a must, provided the volume justifies the expenditure.