The offshoring of work by foreign corporations has helped build India’s showpiece $76-billion IT industry.

Now many small businesses and families in the US and Europe are doing a mini version of offshoring by engaging ‘virtual assistants’ from Indian firms for their personal tasks, creating lucrative business opportunities. In the process, they are calling upon these loyal aides to play matchmaker, agony aunt and consciencekeeper.

Unlike traditional outsourcing which is a business service, remote assistance is a consumer-focused service that even provides emotional support to many.

One such provider is Bangalore-headquartered GetFriday, whose name is drawn from the term Man Friday, or personal assistant. Among the requests it received recently was one from an Australian client who wanted help before she had a chat with her boss.

The woman wanted to switch to a work-from-home schedule and needed assistance and tips on how to handle objections by the boss, mock sessions that simulated the event, and loads of emotional support. The switch did not happen because some key employees were about to leave and the work-from-home option wasn’t feasible at that point.

“Nonetheless, the client was happy,” said Sunder Prakasham, CEO of TTK Services, which runs GetFriday. Virtual assistance is fast catching up in US and Europe, opening opportunities for Indian entrepreneurs and start-ups such as Brickwork India and GetFriday.

Evalueserve, a research firm, predicts that person-to-person offshoring, both consumer services and services for small businesses, will grow to over $2 billion (Rs10,000 crore) by 2015 from the current $887 million.

At Brickwork, one of the more unusual requests it got was from Gail Dick, the owner of Millermeade Farms in the US and a passionate breeder of hedgehogs. When Dick wanted her website to be an encyclopedia of information on hedgehogs, she outsourced the work for around $12-30 an hour to a virtual assistant at the Bangalore-based knowledge process outsourcing start-up founded by former Karnataka IT secretary Vivek Kulkarni and his wife Sangeeta.

The virtual assistant helped her to format and reference the huge number of articles she had gathered over the years. The articles were based on hedgehog behaviour, including eating, bathing and sleeping habits, the diseases they suffer and patterns of hibernation they follow.

“Great! I feel like having a party as we are moving ahead on a project that has been in a stand-still for several years,” said Dick. The project was stalled for several years as Dick could find neither the time nor the experts who could do this job for her in the US. She would also have had to pay nearly double the amount for a similar service in the US.

Source:http://economictimes.indiatimes.com/tech/ites/offshoring-us-europe-opening-opportunities-for-indian-entrepreneurs-and-start-ups/articleshow/11100593.cms

Outsourcing of business services to China will more than double in value by 2015, research has predicted.

Global Locations Compass: China, published this week by the Everest Group, forecasts that the global services export market in the country will grow by between 20-25 per cent each year until 2015 hitting an overall value of $9.5-$10 billion (£6-£6.3 billion).

The report said the market in the country for IT outsourcing (ITO), which accounts for 65 per cent of its revenues, and business process outsourcing, which accounts for the remaining 35 per cent, has increased from $1.2 billion (£700 million) in 2007 to $3.5 billion (£2.2 billion) in 2010. It contends that the growth rate will continue and lead the value of the industry to hit around $10 billion (£6.3 billion) in 2015. It noted a number of recent developments in the Chinese market that will support continued growth, with the country benefitting from the economic development of the Asia region.

Commenting on the findings, Amneet Singh, vice president of global sourcing at Everest Group, said: “China offers a compelling regional language advantage and cost arbitrage and is thus best leveraged to serve the Asia region, which accounts for 60 per cent of China’s global sourcing revenues.”
The study revealed that more than 15 new delivery centres were established or expanded in the country over the past year and that services delivered by China’s second-tier cities (provincial capitals) have grown at a rapid pace, nearing the quality of service provided by tier-cities (including Shanghai, Beijing and Guangzhou). The report also forecast that cost arbitrage will remain favourable for the next 13-14 years, enabling companies to take a relatively long-term strategy on offshoring.

Singh believes that while competing countries, such as India and the Philippines offer better language skills to European and American businesses, China will continue to attract business from the regions. He said: “While lack of clear cost and language skills translate to a limited competitive advantage over India and the Philippines for work exported to North America and Europe, these regions still account for about 40 per cent of China’s global sourcing exports. China can serve as a risk diversification alternative to serve North America and Europe.”

Source:http://www.supplymanagement.com/news/2011/offshoring-in-china-to-hit-10-billion-by-2015/

Does offshore outsourcing make an IT organization more vulnerable to data loss or attack? Or are offshore providers actually improving network security for their customers?

According to a recent report, enterprise IT professionals are pretty evenly split on the issue. The survey, conducted by Boca Raton, Fla.-based Amplitude Research and commissioned by VanDyke Software, drew from a broad pool of 350 respondents working in corporate IT, including CIOs and CTOs. The majority of respondents were systems administrators and IT managers who deal with network security day to day. “They are uniquely positioned to judge the potential network security risks,” says Steve Birnkrant, CEO of Amplitude Research.

When asked how their company’s offshoring of IT had impacted their organization’s network security, 36 percent said it had a negative impact (nine percent reported a significant negative impact and 27 percent said it had some negative impact).

Meanwhile, the exact same proportion of respondents said that offshore outsourcing had a positive impact on their network security (nine percent reported a significant positive impact and 27 percent said it had some positive impact).

The remaining group indicated that they had not experienced any security impact from sending IT work overseas.

But concerns about the security implications of sending IT work offshore are waning, according to the survey, which has inquired about network security and offshoring for three years. The proportion perceiving at least some positive impact from offshore outsourcing increased from 24 percent in 2009 to 36 percent in 2011, while the percentage perceiving a negative impact declined from 50 percent in 2009 to 36 percent this year.

“It is possible that [some] enterprises could actually be exposed to more security risk [by offshoring], but we cannot say for sure,” says Birnkrant. “We can only go by what the survey respondents said to the particular questions we asked.”

The survey’s follow-up questions reveal that those unhappy about the security implications of their offshore outsourcing arrangements noted other issues with the relationship, such as language barriers and service issues, while those who felt offshoring strengthened their security efforts reported cost savings and better service and support.

When asked why they felt offshoring had a negative impact on security, 48 percent said they were simply uncertain about offshore security or concerned about increased security risk exposure. Nearly one in five (18 percent) said language barriers and communication difficulties were to blame, and 12 percent pointed to problems with service.

Those who said offshoring was making their organization more secure said the offshore personnel did a good job (42 percent), the deal delivered cost savings (39 percent), and that the 24/7 nature of the offshore model delivered better network monitoring and support (15 percent).

India remained the most popular offshore outsourcing destination for IT among respondents (79 percent), followed by China (40 percent), Mexico (26 percent), and the Philippines (18 percent). Approximately half of the organizations that outsource technology jobs offshore named multiple countries as outsourcing destinations.

Respondents were most likely to offshore help desk or user support (62 percent), followed by application development (52 percent), database administration (42 percent), application management (36 percent), data storage/backup (35 percent), and network monitoring (33 percent). Nearly eight in ten reported offshoring multiple types of IT services.

Source:http://www.networkworld.com/news/2011/102511-offshoring-and-security-it-managers-252369.html?hpg1=bn

Dispute resolution is always an important consideration when outsourcing IT. If that fails, however, you can always sue if your provider has breached the contract. “But you probably shouldn’t,” says Edward Hansen, a partner with the law firm Baker & McKenzie.

Outsourcing lawsuits are notoriously difficult to prosecute, can create such a distraction that it puts the organization at operational risk, and rarely benefits either party in the long term. Offshore outsourcing litigation is even more complicated.

“Sometimes, however, litigation is necessary to resolve outsourcing disputes when all other reasonable or contractually obligated means of solving the problems in the business relationship have been exhausted,” says Shawn C. Helms, an attorney in the technology transactions and outsourcing practice at Jones Day.

How do you know if it’s time to take your offshore outsourcing provider to court? Ask these six questions first.

1. What is the nature of the dispute? “There is a huge difference between discussing litigation in the context of a vendor that is underperforming versus one that has been negligent or violated a trust,” says Hansen. “For example, breaching the privacy provisions of an agreement is very different from failing to deliver on transformational savings.”

A well-drafted contract contains remedies for a privacy violation. But underperformance can be murkier. There may be something about the underlying economics of the deal that encourage bad performance, says Hansen, or you may have chosen the wrong partner. In either case, litigation is unlikely to solve your problems.

2. Do you have informal dispute resolution processes at your disposal? “A good contract will provide many alternatives to a suit,” says Brad Peterson, a partner in the business and technology sourcing practice of Mayer Brown. Look for dispute resolution provisions in your deal’s project management or governance mechanisms.

In addition, most contracts lay out “mandatory, mandatory, detailed, multilayered, and gradually escalating dispute resolution processes,” says Shawn C. Helms, an associate at Jones Day, starting with informal dispute resolution procedures and going all the way through litigation. “Most outsourcing disputes are resolved confidentially through out-of-court settlements so that service providers can protect their business interests and customers can maintain an ongoing relationship with the service provider.”

3. Can you withhold payment? Customers may seek to use financial leverage to right a wrong. Some contracts contain a provision call “Right of Set-Off” or “Right to Withhold Disputed Payments” that allow the customer to deduct from payments otherwise owed to the service provider amounts of money representing damages that the customer claims the service provider caused as a result of failing to perform its obligations under the contract.

“If the service provider disputes the amount of the deduction, it may be required by a forum-selection clause in the contract to file a lawsuit in the U.S. to have a court resolve the dispute, or it may be required by an arbitration provision to arbitrate the dispute in the U.S.,” explains Robert Kriss, a partner and litigator at Mayer Brown. “In the meantime, the customer holds onto the disputed amount or deposits it in an escrow account, depending on the terms of the contract.”

4. Do you have a binding arbitration clause in your contract? A well-written deal contains a provision obligating parties to arbitrate any disagreements through a neutral arbitration body such as the American Arbitration Association or the International Chamber of Commerce. That becomes especially important with offshore outsourcing, says Helms, “because foreign courts are often more likely to enforce an arbitration ruling against a local provider than a ruling by a U.S. court.”

Many countries have agreed by treaty to enforce arbitrated judgments. Just make sure the arbitrating organization is one whose awards are enforceable in the country where the outsourcer’s assets are located.

5. Where is your offshore provider based? “You have to determine first how you would enforce a judgment,” says Kriss. “If the offshore outsourcer’s assets are located in a country that will not enforce judgments rendered by U.S. courts, then you will have to bring suit in the country where the assets are located.” Indian courts, for example, will not directly enforce the U.S. judgments because the U.S. is not a “reciprocating territory” under Indian law. And pursuing litigation in India can be painful. “The Indian court system is infamously slow,” says Helms. And bringing a suit against a vendor in its own country may not be worth it anyway. “The outsourcer may have a home court advantage,” adds Peterson.

6. Is there money to collect? Should you decide to sue your provider, a court may decide in your favor, but you remain responsible for collecting your judgment. And there may be little money to chase. “Offshore outsourcing companies often have few assets. They may be leasing their facilities and equipment and paying out cash to the owners as soon as it is received. The offshore outsourcing companies with assets may have those assets pledged to first-priority lien holders,” says Peterson. “Thus, even if the U.S.-based customer manages to get a judgment against the outsourcing company, there may be little or no cash to collect.”

Make sure your vendor is not what the legal community calls “judgment proof” before you look to the courts for restitution.

Source:http://www.infoworld.com/d/the-industry-standard/when-your-offshoring-fails-guide-suing-the-outsourcer-170973

The US electrical giant has revealed two major IT initiatives in recent weeks – a new high-efficiency data centre and a return to in-house IT skills
GE, the US electrical equipment manufacturer, has revealed two significant IT initiatives in the last two weeks; a new green data centre and a strategy to employ more in-house IT staff.

The new data centre, located in Louisville Kentucky, has received Platinum certification in the LEED building efficiency standard (the US equivalent of Europe’s BREEAM).

The company says that by using “high-density servers”, it has reduced the floor space of the data centre, compared to the facility it is replacing, by 50%. It has also applied “high-efficiency cooling systems”, which have allowed the company to cut energy consumption by 34% compared to typical LEED-certified buildings.

GE located the data centre in an existing facility, and sourced half of the building materials locally, meaning that the construction itself was energy efficient, it says.

The company also revealed the security measures in the data center, which include optical hand scanners and three “monitored man traps”.

The new facility, built to support GE’s appliances and lighting division, will boost the company’s programme to revitalise its manufacturing processes, it said. This includes a $1 billion investment in various ‘manufacturing centres of excellence’, that it claims will create 1,300 U.S. jobs by 2014.

Moving IT back onshore
Earlier this month, the company – which pioneered the use of offshore outsourcing during the 1980s – confirmed plans to hire 1,100 IT workers in the US.

In an interview with Bloomberg Business, president of business solutions and CIO Cherlene Begley said that the company was rethinking the wisdom of offshore outsourcing.

“About 50 percent of the IT work was being done by non-GE employees,” she said. “That strategy may have had its time, but there was a lot of downside. We lost a lot of the technical capabilities that we have to own.”

She also said that having in-house development resources will improve its ability to deliver user-friendly applications. “With iPads and whatever mobile devices people want to use, the need for better user experiences is essential to competitiveness,” Begley said.

The 1,100 IT workers will be located near Detroit, thanks in part to tax incentives offered by the state of Michigan. According to US-based salary comparison website PayScale.com, salaries in the Detroit area have fallen by 3% since the credit crunch, compared to a 1% drop in the US national average.

The average salary for an IT project manager in the Detroit area is $84,000, according to Payscale.com. By way of a crude comparison, the Glassdoor website claims that an IT project manager working for GE in India earns an average salary of $91,000.

Source:http://www.information-age.com/channels/it-services/news/1649698/ge-builds-green-data-centre-scales-back-it-offshoring.thtml

OFFSHORING is the word on everyone’s lips. The Financial Reporting Council’s audit chief Paul George insists the phenomenon is nascent, but it is clear firms are twitching their noses at the prospect of this industry development.

Otherwise known as outsourcing, it seems firms are looking into establishing service centres in low-cost regions such as India, with a view to farming out simple procedures to make audit cheaper to execute.

Further reading

Top 50 +50 2011 analysis: Audit

Audit inspectors optimistic despite firm shortcomings

Or at least, this is what we think. George, head of the FRC’s Public Oversight Board, isn’t sure himself what offshoring consists of, saying the body has just begun “fieldwork” to determine what firms are planning and what it could mean for the future of audit.
Outsourced expectations

Educated guessers think processes such as checking bank reconciliations and cross-casting numbers could be sent east, but no one is really sure of the extent of this practice, nor what it means for quality control.

Offshorers will have to put in place rigorous checks and balances to maintain standards, and regulators will be faced with tyre kicking not just in the UK, but potentially around the world.

PwC is among the firms most strongly associated with the phenomenon, after the FRC last year warned it against “arbitrary” offshore target setting. It was reported that the auditor hoped to ship 20% of its core audit hours to India by 2014, and the regulator questioned how this would affect quality and controls.

Whether PwC will curbe its eastern enthusiasm is unclear, but there is no doubt that top audit firms – which currently offshore around 1-2% of audit work – are seriously considering upping this number.

Head of reputation and policy Richard Sexton recently insisted offshoring is not about cutting costs but about boosting quality, and doubtless other proponents agree.
Many would argue that sending dogsbody work to cheaper centres will release resources to ramp up reviews of high-risk, high-cost issues in the UK. This is tough maths to prove, however, and it may never be possible to calculate an exact payoff between offshoring and higher UK audit spending.

Cost concerns

Mazars is not a fan of international delegation, and audit expert David Herbinet said he is “far from convinced” that the costs and benefits of such an exercise would work in clients’ favour.

“We have discussed offshoring, and it’s not for us,” he said. The 12-ranked firm believes audit is “a trade-off between intelligence and efficiency”, and fears offshoring places too much emphasis on the latter.

PwC does not agree. Deian Tecwyn, head of assurance risk and quality, said the firm only outsources when it is “convinced quality will rise”. A steering committee examines the suitability of processes for this purpose, and there are “a great number of checks and balances in place”.

For PwC, offshoring work does not even have to go abroad, as one “delivery centre” is located in Newcastle. Public sector members have in the past attempted to cut costs by establishing UK-based shared services centres, but Ian Carruthers, CIPFA policy and technical director, said such experiments have met with mixed success.

He questioned the value of outsourcing “tick and bash” processes, saying much of the cost of audit comes from face-to-face meetings and the involvement of senior staff, activities that could not and should not be farmed out.

This is the main fear of detractors – with so much of audit based on interaction and relationship building, how can it be parcelled off to various service centres and still hope to retain quality?

Firms are sometimes accused of tick-box auditing, an attitude that they say is forced upon them buy overly prescriptive regulation which focuses on minutiae rather than encouraging partners to use professional judgement.

One expert questioned whether offshoring is in fact a form of self-inflicted tick-box mentality, breaking down the audit into a series of menial tasks devoid of client interaction. However, supporters maintained that in every audit there will be routine tasks requiring no judgement, and these boxes can be ticked just as well from India as the UK.

Audit for tomorrow

But what if there is value in these mundane tasks? The more routine parts of audit – mechanistic checks and clerical functions – provide vital training for budding accountants, and sending them abroad could knock out a link in the chain that churns out tomorrow’s high-quality auditors.

The contradictory argument is that feeding newbies more challenging audit work will keep them interested for longer, reducing the graduate churn that sees top firms lose around 50% of their post-university intake within the first five years. This, arguably, would be a good thing for long-term audit quality, and such simple changes might help firms keep a tight hold on their brightest and best.

There is no shortage of examples of outsourcing work, from call centres to law firms sending routine tax compliance tasks abroad. But so far we lack examples of audit work in foreign climes. It is reasonable to assume among the Big Four that a small percentage of their audit hours go overseas, while smaller firms may have considered the tactic or already be working towards it.

This is the first year in which the FRC will take a serious look at quality and controls in offshoring, and Paul George admitted he is not sure what he’ll find. Around 20% of inspectors’ work looks at quality and risk management, while the remainder of the time is spent dissecting the audits themselves. The results are sure to be interesting.

In today’s risk-obsessed, cost-averse market, any innovation in the market is to be applauded, but firms and their clients are to some extent going in blind as more and more audit work is offshored. In the end, it is for companies and regulators to decide whether PwC and its peers are heading in the right direction. In the meantime, it is for the auditor to count the costs and the benefits.

Source:http://www.accountancyage.com/aa/analysis/2100225/offshoring-audit-passport-success

There have been two recent government announcements on outsourcing; one attracting attention in the national press, the other almost unnoticed. The latter – and arguably the most important – was the one from the Cabinet Office providing guidance to public sector organisations on offshoring.

Offshoring means relocating work from the UK to be done abroad. It can be done when outsourcing takes place or it can occur when existing suppliers choose to move some of the work abroad. Traditionally it has been for call-centre type work and data processing, but is increasingly seen as an opportunity to access expertise, say in ICT development, more cheaply than may be available in the UK.

Offshoring has already been operating, albeit under the radar. For example, several systems integration and facilities management suppliers have offices in Bangalore and work has been offshored there with risk of insufficient contractual safeguards.

So why has the advice been issued now? Policy documents like this tend to have a longer gestation period so it is unlikely to have been triggered by the proposal of Capita, in partnership with Birmingham city council, to offshore some jobs; a decision that has been rescinded.

Although the guidance has been seen by some as a change of policy by the UK government in favour of offshoring (the document denies this), and the government believes that some new players in the systems integrator and ICT market are needed to provide a greater diversity of suppliers, I don’t believe it necessarily marks a change in policy per se; the paper is quite clear that any proposals for a central government department to offshore jobs being done in-house must be referred to ministers.

As much as anything it reflects that existing suppliers may offshore certain activities and that there are risks in doing so. Therefore, when letting contracts, public sector contracting personnel need to be aware of possible risks, for example for data security, must take appropriate steps to mitigate them and consider whether any offshoring would be acceptable. The guidance is therefore relevant to the whole of the public sector, not just central government, to which it is addressed.

The guidance is made more important by the prime minister’s visit last year to Bangalore as part of a trip to increase business between India and the UK. . However, in accessing the undoubtable expertise and lower cost base that exists in, say, Bangalore, might the government be in danger of damaging the UK ICT industry for the sake of short term cash gains? The Cabinet Office document deals with this, but not very convincingly and one is left feeling that the government lacks a strategic view of how it expects the UK ICT industry to develop, and the part that public sector procurement might play in this.

The other announcement was about introducing competition for £1bn of various treatments, including audiology, into the NHS. Is this the start of wholesale privatisation of the NHS? Not very likely. Several of these areas are rather neglected by many hospitals and trusts and are ideal for new providers. It is probable that, had Labour remained in power, similar competition would have occurred, so this decision could be seen as a continuation of its policy.

The difference may be that if such competition does deliver better and cheaper health care than at present, the temptation to introduce competition at a much faster rate, into new areas, could become irresistible.

Source:http://www.guardian.co.uk/public-leaders-network/2011/aug/01/offshoring-guidance-relevant-public-sector

As AIG, AOL, Dell, Target and other companies sold or shuttered their wholly-owned offshore IT and business process centers over the past five years, outsourcing industry experts predicted that the offshore captive center model was headed for the history books. But, according to a recent research report by outsourcing consultancy and research firm Everest Group, the captive model is staying alive-and thriving.
In fact, reports Everest Group, most large-scale captives continue to operate and have grown both in terms of scale and the complexity of services they provide. New captive set-ups are outpacing sell-offs, and divestitures are steadily declining. Last year, ten new captives were opened and 13 captives expanded, while just two were sold, according to the report.

Captive centers will continue to play a major role in offshoring for the foreseeable future for two reasons, says Eric Simonson, Everest Group’s managing director. “First, it is a large part of the market, representing about 25 percent of delivery within India. Second, the model is different from third-party models and that is not widely understood. A captive can not only deliver the typical services of a [third-party] service provider, but also many other services which are just part of the normal business. In effect, a [captive center] is a corporate campus which happens to be based offshore.”

The IT captive center in India dates back to the 1990s and was led by technology and financial services companies that set up shop on the subcontinent (see box, below). At that time, the primary motive was to attain low cost while maintaining or increasing quality, says Simonson. Some companies were also spurred by interest in expanding their businesses in the region.

The History of Captive IT Centers in India
1985: Texas Instruments establishes the first captive center in India, focused on research and development.

1990-1998:General Electric, British Airways and Dun & Bradstreet establish and grow captives in India. All are eventually converted into third-party service providers.

1998-2005: The captive model is adopted broadly across large technology, global banking, financial services and insurance firms.

2005-2008:Rapid adoption of captive model across most industry sectors.

2008: More than 500 captives are operating in India.

–Everest Research Institute

By 2006, captive operations delivered about $8 billion worth of IT and business process activities, according to Everest Group. And even as some industry watchers suggested that the model was no longer viable for most companies, captive center activities grew at a compound annual growth rate of 10 percent, to reach $10.6 billion in 2009, according to Everest Group.

Although divestitures have occurred and approximately 20 percent of captives have downsized, that does not indicate that the model itself has failed, says Simonson. Companies that sold their operations were in search of short-term cash while third-party service providers were looking for acquisitions to expand their capabilities, according to Everest.

Those captive centers that were shut down altogether tended to be newer centers that struggled to build robust operations and recruit and retain talent in an increasingly competitive market, Simonson says.
“This is a sign of some captives struggling, not the model struggling-and most of those shut down were very small and barely got started,” Simonson says. “It should be expected that not all new entities (captives or other operations) will be successful.”

Simonson points out that 30 percent of the top 20 IT service providers that Everest tracks have been acquired in the last three years, yet that does not mean that the IT service provider model is struggling. “Failures of some entities does not mean the model is flawed,” Simonson says. “The landscape continues to evolve.”

While captive offshoring success was defined in the past by meeting cost reduction goals and effectively managing risk, going forward additional value will be required.

“The value may be in terms of ability to ramp up and down resources for ad-hoc needs, create new ideas that advance the status quo, contribute talent to the global leadership of an organization, or provide an option to enter or better serve new geographic markets,” Simonson says. “Success increasingly becomes about the impact the captive has on the broader organization, not just the cost of a process or activity.”

To gauge the health of the captive center market in the future, adds Simonson, analysts will need to look not at the number of new captives established, but at the growth of existing captives. “The captive market will continue to grow, but largely by existing organizations both scaling and evolving the nature of work they perform,” he says. “[But] most firms for whom captives make sense already have a presence.”

While India remains the center of the captive universe, add Simonson, the model will be even more important in other offshore locations. “For example, large high-tech companies will see China captive operations as important for a combination of localization of products for east Asia, providing back-office support to other east Asian geographies, and supporting the domestic China market,” Simonson says. “Due to the diversity of languages, industry knowledge, and domestic market business opportunities, the use of captives outside of India is more precisely defined.”

Source:http://www.cio.in/news/research-firm-captive-model-offshoring-thriving-145272011

Because I write about IT outsourcing I often forget that the proportion of IT outsourced is only a fraction of the work that is done in-house.

There is massive potential for growth with loads of greenfield sites. This is multiplied when it comes to offshoring.

I recently met an executive at an Indian service provider. He told me that the company he works at is seeing a lot of companies, many of which are mid-sized, considering offshoring IT for the first time. This comes after a few years of outsourcing to onshore suppliers.

With this in mind now could be the time that Eastern Europe shows its hand. Nearshoring to countries such as Romania and the Ukraine could be a happy medium for first time offshores.
Computer Weekly journalist Kathleen Hall has been looking into this. See this link for an article she wrote about Eastern Europe’s IT outsourcing service capabilities.

But what has Romania got over India?

To give you a taster here are five reasons to outsource to Eastern Europe:

1. High skilled labour

The former Soviet Union had a strong educational emphasis on engineering and the sciences. As a consequence, many of the countries in this region today have a highly skilled workforce in areas such as computer science, but at much lower labour costs than the UK.

2. Cultural similarities

Some companies believe that Eastern Europe has a distinct advantage over places such as India when it comes to outsourcing because employees tend to take a more collaborative and less process-driven approach to projects.

3. Time zones

Eastern Europe covers a vast region, but most of the countries within it are just a few hours away from the UK in terms of time difference, making it easier to communicate within working hours.

4. Data protection

Eastern European countries within the EU could be a good choice for work which requires adherence to the Data Protection Act.

5. Growing labour market

While skills shortages remain a problem in the UK, growth in IT outsourcing in Eastern Europe continues to increase. In 2009, Romania was found to be the country with the highest growth of IT specialists, increasing by about 12% compared with 2008. Ukraine followed with over 9% growth.

Source:http://www.computerweekly.com/blogs/inside-outsourcing/2011/07/eastern-europe-could-benefit-from-a-wave-of-first-time-offshorers.html

It’s almost July, and once again we’re facing the most patriotic weekend of the year, when you can bet you’ll be hearing at least a little high-flown talk about what it means to be a real patriot. (Hint: In today’s atmosphere of public discourse, the guys who aren’t patriots belong to whatever political party isn’t yours.)

The dictionary defines patriotism as “devoted love, support and defense of one’s country; national loyalty.” A relatively few Americans demonstrate their patriotism “in the defense of one’s country,” at least in the literal sense; and all props and respect to them. The rest of us will be patriotic by putting up a flag, watching fireworks and eating hot dogs.

Over the years, some of us have tried to demonstrate our national loyalty by “buying American.” But in today’s confused global economy, this has become increasingly ambiguous (what if it’s made here with imported parts? What if it’s made there with American-made parts? What exactly constitutes “made in the U.S.A.” anymore?). Even the most rabid self-proclaimed patriot can’t claim to have never bought cheap imported goods at Wal-Mart, driven a foreign-made car, or eaten fish from China, vegetables from Mexico or meat from Canada (according to USDA’s “U.S. Food Import Patterns, 1997-2007″).

But what about “hiring American,” especially at a time when more than 13 million Americans are out of a job? Although in some cases offshoring and outsourcing have bad reputations (and ironically, have become less affordable to U.S. businesses as salaries in developing countries have increased), many businesses maintain they can’t survive without delegating at least some their back-office functions to Peggy from Kazkovia.

I recently asked a LinkedIn insurance group about the impact of offshoring and outsourcing on the insurance industry. After quickly defining the difference between them (outsourcing can include American workers), respondents grouped themselves into camps of pros and cons.

Offshoring supporters claim that delegating “tedious mundane tasks” to foreign workers allows U.S. insurance businesses to compete and frees up their professionals to better serve customers. One company that outsourced its data processing functions to China realized annual revenue increases of 100 percent and profit increases of 166 percent, according to a source.

Others drew a clear distinction between offshoring and outsourcing. “There are many models of outsourcing and the key for each agency is to find the model that works for you–meets your personnel and information security requirements, and matches the organizational culture of your firm,” wrote one. “The insurance industry has actually embraced offshore outsourcing to a certain extent, especially in strategically progressive firms. The good news is that it is has been widely used to support the U.S.-based insurance professional staff. The result is that we haven’t seen a lot of downsizing and trading U.S. jobs for foreign jobs like the manufacturing sector has experienced.”

Still others were concerned with the quality of work delivered by offshore concerns. “When so many businesses are taking advantage of offshore talent, it makes you wonder why the insurance industry has had a rather tepid response to offshore outsourcing,” wrote Sharon Emek, who heads up the WAHVE outsourcing firm, which connects retired, experienced insurance professionals with businesses. “But there is good reason, and everyone who works in insurance intuitively knows why. Our business is complicated, requiring long-term solid experience and an expert knowledge base.”

“I would never buy insurance from any carrier that offshored my business,” wrote one respondent, who was concerned with the quality of service. “It is annoying enough being forced to deal with India, Philippines, Mexico for tech support on my computer or cell phone.”

Others were worried about what offshoring could do to a company’s reputation: “Think of your competitors. Assuming you are an American company, do you want your competitors saying, ‘We use local talent, while that company sends American work overseas’? Ultimately, there is a cost/benefit analysis for each company but I would be very reluctant to make that decision.”

And although none specifically addressed the moral issue of hiring cheap foreign labor when Americans need jobs, it’s a question I’d like to raise. Yes, U.S. businesses have a responsibility to deliver results to shareholders and keep costs low to remain competitive. But don’t they also have a responsibility to be good corporate citizens and support the economy of their home country?

It’s hard to argue against the cost savings and convenience of offshoring and outsourcing. But keeping in mind the growing educational levels of workers in developing countries, the future of offshoring will probably involve not just telemarketers and back-office functionaries, but risk managers, underwriters, agents and brokers.

Source:http://www.propertycasualty360.com/2011/06/30/offshoring-outsourcing-and-the-fourth-of-july

In the last week, we’ve seen outsourcing hitting the headlines again, as the Public and Commercial Services (PCS) union refused to rule out strike action over Hewlett-Packard’s (HP) plans to offshore 200 jobs to India.

The jobs in question are largely responsible for providing IT support to the Department for Work and Pensions, with talks over offshoring evidently at an ‘advanced’ stage. So what does this tell us? Can we expect a deluge of offshored public sector contracts? If so, is the general scepticism around offshoring justified?

Of course, the DWP is not the only place we’ve seen the question of public sector offshoring raised in recent weeks. We’ve also seen Birmingham City Council announce that up to 100 council ICT jobs are scheduled to be transferred to India through Capita, while the £600m BPO deal at the Personal Accounts Delivery Authority to outsource the administration of the National Employee Savings Trust (NEST) scheme may see as much as 60% of the work going abroad.

I suppose the first thing to say is that offshoring is nothing new, and we’ve seen plenty of examples of public sector and local government authorities offshoring successfully in the past.

Last July, the Prime Minister even visited India with a firm promise that: “In terms of being open to [offshoring]… you will find Britain one of the most open and progressive countries.” So why has news of several recent public sector offshoring deals caused such a stir?

Clearly, there’s a fear that British jobs will be lost – despite the fact that HP has already given assurances that affected employees who are based at sites in Newcastle, Lytham St Annes and Sheffield will be relocated to other positions within the organisation.

It seems that for many, the greatest worry is that in the race to make savings, we could see the burden of increased unemployment passed onto the taxpayer, as more and more low-paid jobs are sent abroad for the sake of making savings.

In my view, however, offshoring has a role to play – although it’s clear that it must be part of a bigger overall strategy. It’s no use relocating services to India or Sri Lanka on a short-term basis just to make a quick saving on costs.

Organisations must examine their own core competencies and understand where they have a skills gap, and decide whether or not an offshore provider has both the right level of competency and the correct cultural fit to make a contract work in the long term. This is something that organisations might want to review even if they have offshored, because markets change both here and overseas.

I know this is a common refrain from me on these pages, but any contract entered into on the basis of cost alone is far less likely to succeed than one which has been carefully structured, and fits in as part of a broader, overall strategy.

This is something that the unions who are protesting against these moves could try to understand – because if it benefits the way services are provided in the long run, then perhaps offshoring isn’t the great evil it’s being made out to be?

If you’d like to hear more about offshoring, the NOA will be running an Offshoring Day in September.

Source:http://blogs.computerworlduk.com/hart-of-outsourcing/2011/06/is-offshoring-the-answer/

A major union may call industrial action over HP’s outsourcing of 200 government IT support jobs from UK sites to Bangalore in India.

The affected workers, at sites in Lytham St Annes, Newcastle and Sheffield, provide IT support to the Department for Work and Pensions (DWP). On Friday, the Public and Commercial Services (PCS) union said it was considering the industrial action in response to HP’s intended transfer of the positions overseas. However, HP insisted that the workers would most likely be redeployed into other roles.

“PCS is calling on the government to fully consider the wider economic arguments,” the union said in a statement. “It is consulting its members about the proposals and has not ruled out industrial action.”

Source:http://www.silicon.com/technology/it-services/2011/06/06/indian-offshoring-of-public-sector-it-jobs-sparks-union-backlash-39747499/

Offshore outsource vendors, particularly those in India, are increasingly asking their customers to assist them in obtaining visas and in other immigration matters for their on-shore workers. These requests can place the customer in an awkward position, particular if, as was shown recently, the vendor becomes the subject of a governmental probe to uncover whether those visas were improperly obtained.

Customers should think carefully about whether to become embroiled in matters that should be the exclusive purview of the vendor. Many businesses decline to assist vendors in this regard, saying this is an internal labor matter for the vendor. They do not want to become involved in potential labor and immigration issues. In instances where this cannot be avoided, the customer should demand strong protections in its vendor agreements to ensure the customer has no liability or risk in assisting in these matters.

Source:http://blogs.csoonline.com/1534/visas_and_outsourcing

The R&D offshoring or outsourced product development (OPD) market in India is estimated to reach $13.1 billion by 2011 growing by 11.4 % over 2010.

According to a study conducted by Zinnov management consulting, Wipro is the top ranked R&D offshoring service provider. This is followed by HCL, Patni, Infosys, Mahindra Satyam and MindTree.

The top six players constitute 58% of the total R&D service provider market, the study highlights. The participating companies had been ranked based on parameters like human capital, capabilities, financials, ecosystem linkages, infrastructure & business sustainability. A notable company missing from the study was TCS.

The US continues to lead in R&D outsourcing, while Europe has been slow to increase distributed R&D.

The leading verticals in offshoring R&D include software, telecom, semi conductor, semi-conductors etc.

The study adds that over the last 18 months the driving force in R&D offshoring has been convergence and mobility, emerging markets, cloud computing, enterprise adoption and green initiatives.

The study also highlights that of all the R&D outsourcing work in India, two-thirds of it is towards MNC captive centers while one-third is to the R&D service providers.
The study adds that the focus on conceptualization and design has increased in mature outsourcing verticals such as software. However it has remained concentrated on development and Q&A in newer verticals.

Source:http://timesofindia.indiatimes.com/tech/news/software-services/RD-offshoring-to-grow-11-per-cent/articleshow/8438378.cms

Small business owners have been told offshoring is not as high-risk a strategy as many people perceive it to be.

This is according to David Ellis, partner at the management consultancy, who said that while many firms had concerns about outsourcing important financial processes overseas, the risks were often perceived rather than genuine.

“When you do things like management of information or management of accounts – things that businesses rely on – then they get a bit nervous,” he observed.

Last week, research published by Ovum suggested enterprises view outsourcing finance and accounting processes to overseas companies as a “high-risk strategy” and continue to shun it in favour of in-house workers.

One way to ease these fears, Mr Ellis observed, is to move simpler operations offshore in the first instance.

He said: “In terms of implementation, what people often do is start with the more basic activities and then move up the complexity scale.

“But I think it’s fair to say that it’s a fairly proven path and therefore the risks are quite often perceived as opposed to real.”

Source:http://www.taxassist.co.uk/News/Small-Business/Offshoring-not-high-risk-small-businesses-told-12146.html

Ovum reports that many financial officers would rather outsource to the cloud than to offshore services
Chief financial officers may be wary of the risks that cloud computing initiatives hold but they see offshoring their financial processes as being more dangerous.

Research by Ovum found that 29 percent of CFOs in the UK and US viewed cloud as “posing an unacceptable risk” for finance and accounting systems, but 38 percent expressed similarly strong concerns over outsourcing to India. Even more (44 percent) were troubled by the thought of a move to South and Central American countries.

Popular India Is Least Satisfactory

India proved to be an interesting region for financial offshoring. Although it proved to be the most popular country for those who have already taken the plunge, it also rated as the lowest for satisfaction. On a scale of one to four,
Asia-Pacific came top (3.78), the UK was down the list at second bottom (3.61), but India was a distant last with only 3.08.
“The fact that India received the lowest satisfaction ratings of any region, and by some distance, indicates there is a very real trade-off in terms of satisfaction versus cost. India is known to produce some of the lowest-priced accounting staff in the world but it would seem that, in many instances, vendors are cutting corners as well as costs,” commented Peter Ryan, Ovum lead analyst.

One of the main obstacles to an offshore move was loyalty felt towards existing staff. This was stated as the case by 44 percent of the CFOs.

“We don’t know if this is due to a sense of responsibility for their staff,” Ryan said, “or a desire to keep their skills – but it is likely to be a combination of the two. Concerns over losing control, which is traditionally seen as the biggest barrier, was pushed into joint second place with the worry that it would not save enough money to be worthwhile (31 percent).”

The CFOs were also sceptical that outsourcing within their own country would prove worthwhile. This was contrasted by the feeling expressed by those who already outsource. This group felt that processes had become more efficient than in-house operations. On a rising scale of satisfaction from one to four, the average rating for outsourced processes was 3.28, compared to 3.22 for in-house operations.

The lure of a 20 percent cost reduction still would not tempt the resistant CFOs to move operations offshore, but the more adventurous outsourcing group could be lured to switch suppliers for a reduction of just 15 percent.

Source:

India’s top three technology firms are likely to post strong quarterly profit and indicate robust revenue growth for the year ending March 2012 as overseas clients boost technology spending in an improving global economy.

However, salary increases and currency volatility could put pressure on margins for the country’s top software service exporters, Tata Consultancy Services Ltd, Infosys Technologies Ltd and Wipro Ltd.

“On the whole, this year will be better than last year. There may be some improvement in pricing and the business outlook will be slightly better than last year as the US market is improving,” said K. K. Mital, head of portfolio management services at Globe Capital in New Delhi.

“Wage inflation and the rupee’s appreciation will limit profit improvement.”

Companies could raise salaries by 10 per cent to 15 per cent on average this fiscal year, analysts said. However, some of them expect higher billing rates to offset the effect of salary increases on margins.

In April, research firm Forrester forecast the US technology market to expand 8 per cent in 2011, up from 7.4 per cent projected previously, with software, IT consulting services and technology outsourcing growing faster than last year.

The United States is the largest market for the Indian technology firms, contributing more than 50 per cent of their revenue.

Investors will await management comments on the pipeline for deals, hiring targets and salary rises as Indian firms battle for contracts and employees with larger global rivals such as IBM, Accenture and Hewlett-Packard.

“We will have to see how these companies manage their margins this year,” said Srividhya Rajesh, vice president-equity at Sundaram Mutual. “We have to see if Infosys is willing to give up margin expansion for growth.”

The country’s top three technology firms, who manage computer networks and maintain IT operations for several Fortune 500 companies, are expected to see profit growth of 14 per cent to 22 per cent for the fourth-quarter ending March, according to a Reuters poll of analysts.

Revenue is seen rising 18 per cent to 31 per cent this fiscal.

Growth outlook
Infosys, which sets the tone for the near-$60 billion outsourcing sector, opens the earnings parade on Friday and analysts expect India’s No. 2 software services exporter to forecast dollar revenue growth of 19 per cent to 20 per cent for fiscal 2011/12.

“The demand environment seems to be pretty good with the trend for offshoring continuing,” said Srividhya. “We are looking at pretty strong growth this year. It will be volume driven. We do expect to see some price increases this year.”

Source:http://timesofindia.indiatimes.com/tech/news/software-services/Top-IT-cos-to-post-strong-results/articleshow/7962016.cms

Before Egypt turned off the Internet, the country had received increasingly high marks from leading analysis firms as a promising offshore outsourcing destination, despite the nation’s political risk.

When it comes to outsourcing, there are some things that analysis firms can no doubt do well. They can assess the labor pool, the educational system, and cost of business — anything that can be measured and quantified. But as Egypt’s political turmoil demonstrates, it’s very difficult to predict the sweep of history.

Management consulting firm A.T. Kearney released an annual index this week that measures the attractiveness of offshoring locations, and it put Egypt fourth on the list after India, China and Malaysia.

In December Gartner included Egypt on its list of top 30 countries for offshore services.

These rankings, according to the analysts who did them, weigh many things (in Gartner’s case 10 separate criteria), including game-ending political risks, and then base rankings on an overall assessment.

Egypt’s rise as an offshore and regional tech venue is relatively new and rapid. It has succeeded in getting a number of U.S. firms, including Microsoft, Hewlett-Packard and Oracle, to establish offices in a government-backed tech office park that opened in 2003.

But in the wake of the crisis, tech work is being shifted out of country.

With no Internet, Egypt has descended into what might be a modern version of the Middle Ages. What was missed? One person who has studied historical trends for insights about future directions is Ian Morris, a professor of classics and history at Stanford University and author of the recently published, “Why the West Rules–for Now: The Patterns of History, and What They Reveal About the Future (Farrar, Straus and Giroux, 2010)”, said that “we shouldn’t be particularly surprised that unrest has broke out in North Africa.”

“The conditions for violence have been there for a long time, and even before Mubarak took power,” Morris said by e-mail. Egypt’s prior leaders, Gamal Abdel Nasser and Anwar El Sadat, “constantly had to be maneuvering to keep the lid on a powder keg.”

“But I can also see why analysts might have ranked the danger in Egypt lower than that in, say, large parts of sub-Saharan Africa or central Asia — the Egyptian dictators have been very good at crushing and buying off challengers, and at least since 1973 the army has had a lot of respect in Egypt,” said Morris.

Long-term historical trends “can give us a rough sense of the likelihood of unrest in different places — very unlikely, say, in Demark, very likely in Somalia — but not of the specifics of what will set off violence, when exactly it’ll happen, or why some particular event like Mohamed Bouazizi burning himself in Tunisia will bring the Egyptian government to the verge of collapse, while the Libyan and Syrian rulers have survived, so far, anyway,” Morris said.

At this point, in its still unsettled state, anything seems possible for Egypt. But even if it emerges quickly from its problems it’s unlikely to see a smooth return to its outsourcing effort, according to Prof. Leslie Willcocks, director of The Outsourcing Unit at the London School of Economics.

Egypt’s “outsourcing initiative was part of a much bigger economic development initiative, and it was all ‘owned’ by an inner group within the government and related agencies,” Willcocks said by e-mail. “Any handover of ownership of these projects is likely to be very disruptive, and will slow the processes in hand.”

“Any new government would be foolish to throw away the advances made,” she said. “But worse things have been done in other countries as a result of political upheaval.”

The emerging markets “are by their nature risky in some regard,” said Ian Marriott, a Gartner analyst, who worked on the top-30 list. He cited riots in Indonesia, Thailand, concerns about gang violence in Mexico and the bombings in India as examples of continuing global volatility.

Marriott said that in terms of Egypt, Gartner did raise in its report the uncertainty of the politics in that country, the upcoming election and mistrust of the young people in it. “We called out to the extent that we could that there is a degree of political instability there,” he said.

But you can’t “get too far into the politics,” Marriott said. “You have to make a balanced business decision.”

Similarly, A.T. Kearney looked at political risk as well as broad spectrum of its business environment.

Gott said political risk is assessed as part of the overall business environment that includes such things as IT security, infrastructure, and level of corruption. But what gave Egypt strong marks are its workforce, with a large output of graduates in engineering and increasing levels of certifications.

Egypt had been moving up in its rankings, said Johan Gott, a manager at consulting firm and author of its Global Services Location Index.

Five years ago, Egypt was an unknown in outsourcing, Gott said. “Egypt was a late comer,” he said. “[But] Egypt exhibits many of the same quantities that India had when India started to grow.”

The Egyptian government estimates its outsourcing market at more than $1 billion, but Frances Karamouzis, an analyst at Gartner, estimates that Egypt’s offshore services, measured as an export, is about $150 million.

Karamouzis said she reviewed three years’ worth of material from key Egyptian entities, included presentations and written material, “and there was never a single slide that had extensive data and positioning regarding geo-political risk, government issues, treasury risk, crime, safety issues, and other items,” she said by e-mail.

“[Egypt] will now have to be in crisis mode to create materials, marketing collateral, substantiated data and factual information in order shift perceptions and reality,” Karamouzis said.

Morris said that long-term patterns are good for predicting general trends and statistical probabilities but not so good for predicting details, such as that Ben Ali, the former president of the Tunisian Republic, would have to flee Tunisia and that Hosni Mubarak, the Egyptian president, might have to resign.

“And, of course, taking the long-term view, it could well turn out that after a few weeks of violence Egypt settles down again and emerges from all this with a stronger government and becomes an even more attractive location for offshoring technology,” Morris said.

Source:http://www.computerworld.com/s/article/9207680/Was_Egypt_oversold_as_top_offshoring_spot_

The questionnaire I posted yesterday has so far had 8 respondents. Very small I know, but a start.

Here is the link to the survey. I urge IT professionals to reveal their views about the outsourcing contracts signed by their business decision makers.

The last survey I promoted got 170 after a slow start.

Ok only eight respondents but here are some results.

All 8 respondents said their employer has offshored some IT and 6 out of 8 said the contracts have delivered less than expected.

So far half (4) said IT outsourcing contracts have delivered less than expected. Three have delivered as expected and one more than expected.

5 out of 8 respondents said their business will outsource more this year.

We have had 7 UK respondents and one from the US. Thanks to all.

Once again here is the link to fill in the quick survey.

Source:http://www.computerweekly.com/blogs/inside-outsourcing/2011/02/are-it-outsourcing-and-offshoring-contracts-failing-to-deliver.html

If there’s been one constant during the years that Dr. Arie Lewin has studied the corporate offshoring experience, it’s this: Very few companies understand the strategic value of global sourcing. Even today, just five percent of companies that offshore IT services do it really well, says Levin, professor of strategy and international business at Duke University’s Fuqua School of Business and director of its Center for International Business Education and Research (CIBER).

According to results from the sixth annual offshoring survey conducted by CIBER in conjunction with The Conference Board, average cost savings achieved by offshoring (both third-party outsourcing and captive center operations) has declined consistently during the last five years, in part because just a handful of companies have an optimized enterprise-wide sourcing strategy. And despite all the knowledge readily available about offshoring management requirements, companies continue to get tripped up by the so-called “hidden” costs of global sourcing.

Nonetheless, more than half of the companies surveyed expect to expand their offshoring initiatives during the next 18 to 36 months, the study found. Nearly a third have already moved up the value chain to offshore innovation-related services.

CIO.com talked to Dr. Lewin about eroding offshore labor arbitrage advantage, the effect of offshoring on domestic IT job opportunities, how companies who succeed at offshoring look beyond cost cutting, and why executives continue to be surprised by the management overhead required to make offshoring work.

CIO.com: You found that the average savings yielded by offshoring IT services has decreased from around 38 percent a decade ago to 27 percent today. To what do you attribute that decline?

Dr. Arie Y. Lewin: First there is the fact that the labor arbitrage effect is eroding, and there’s nothing you can do about it. There are inflationary cost pressures in offshoring across most countries and especially at hot spots like Bangalore. For most locations labor arbitrage dissipates over three years. If you are only counting on labor arbitrage you will be disappointed.

The second factor is whether you are doing captive or third party outsourcing. Most large IT services offshoring is done via a third party. On the external provider side of the equation, [many] are getting better at what they do, which allows the most efficient to charge at market rates but make higher profits. An important source of savings is excelling in process optimization. One company that is at the state of the art with process optimization and process reengineering is the Penske truck rental company. Penske lives by and breathes process optimization. They’re perhaps the only example that [offshore outsourcing provider] Genpact can brag about. They understand that process reengineering means steep jump in savings.

Well, 27 percent savings on traditional IT services is still nothing to sneeze at-particularly today when every dollar counts. But you propose that cost reduction alone is no longer enough to justify moving operations offshore – that companies need a “multidimensional value proposition.”

Lewin: Companies that stand out in our database are those that have implemented a corporate-wide strategy to guide offshoring decisions. For example, they already had in place strategy for tier two and tier three cities in India. They are among early companies locating in China. They were first in demanding that their providers provide nearshore options.

Unfortunately very few companies understand the strategic value of global sourcing. They think of [offshoring management] as a core capability, not something to patch on. This is a discipline. You can’t do it just from one day to the next. You need to be thinking through the next thing that you’ll be ready for. Think “cloud.” Now that cloud is here, will you be a company that wait until it is perfect or be an early adopter on a fast learning trajectory?

CIO.com: You found that as companies expand offshoring activities, they actually see a decline in overall efficiency, likely attributed to a loss of managerial control or the “hidden costs” involved such as training, staff recruitment and retention, and government and vendor relations. Why are companies still blindsided by the overhead required to make offshoring work?

Lewin: There are many companies just starting offshoring. But it is amazing to me that somehow they started down this path, and they don’t recognize what they’re getting into.

Two companies asked me to come in after they commissioned a McKinsey report [on their offshore option]. The report outlines all the important details about hidden costs. But most of the executives did not read or comprehend beyond the first two or three sections of the report. Much of the implementation process was one of trial-and-error discovery.

The bigger source of inefficiency is in companies in which offshoring gets C-level attention. They lay out guidelines and risks and may also prioritize strategic drivers. But they don’t direct attention to creating and internal organization that can manage and coordinate the global sourcing strategy. So the different and functions find themselves reinventing the wheel.

There’s not a central organizational unit-a center of excellence for global sourcing of business services-that, for example, does the vendor and country selection so that the business unit doing the outsourcing only has to deal with processes that they want to outsource. When you have an overall strategy, but much is still left to the business or function manager, there’s going to be inefficiency.

When it comes to IT services offshoring, only five percent of companies are really phenomenal.

CIO.com: The perceived connection between offshoring and domestic job loss has driven a great deal of anti-offshoring sentiment in the U.S. particularly given the current levels of unemployment in America. Yet just 34 percent of your respondents said offshoring had resulted in local layoffs.

Lewin: The more telling finding is the ratio of offshore employment to domestic employees. For most industries, it’s a small ratio. But for software development, the ratio is very high. To me, this is a worrying signal. At time when unemployment is high, companies report that access to talent is the reason they are offshoring.

There are at least two factors at play. Small, entrepreneurial firms are far more likely to offshore innovation services than large companies. They need engineers. In some cases, the skills they need-like VSLI [very-large-scale integration] design-no longer exist in the U.S. In other cases, the venture capitalists ask the new firm, ‘What is your innovation outsourcing strategy?’ So even though the talent might exist in the U.S., the VCs believe that for speed to market, cost, or some other reason, the start-up firm ought to find a way to get the work done abroad. And they find that the passion and commitment to get work done offshore is higher than hiring someone in-house or on a part-time basis.

Secondly, there is a structural shift going on in the employment of technical talent. Companies are learning to substitute full-time positions with hiring engineers, programmers, and technical personnel on-demand for a particular project. That decreases the desirability of the profession to young people.

Another problem is that American companies no longer invest in keeping up the skills of their technical personnel. Unlike other countries who understand the importance of keeping up the technical skills of their people, they’d rather let them go. So unless the affected employees invest in themselves, at some point in their careers they become not employable.

We used to have a proud tradition of companies investing in maintaining their human capital. Some of the things I see are crazy. We have an example of a major technology company in this country, that rather than hire new people to replace those who are retiring, are engaging an Indian engineering company to in source their engineers do the work. When those people leave, where does that intellectual property go? Back to India in the brains of those people. Such practices only solve a short-term problem.

From a long-term point of view, the statistics are clear that fewer Americans are entering science and engineering careers as indicated by the number of advanced degrees awarded. The trend began in 1995. Part of our research approach is to look for “small, initiating events” whose impact may not be seen for a number of years. In 2003, Congress allowed the H-1B quota to lapse which greatly reduced number highly skilled workers that companies could bring in. The H-1B shortage was about 130,000 visas. In addition the cumulative shortage of American nationals earning advanced degrees in science and engineering reached about 49,000. Indeed, in 2004, the unemployment rates in almost all engineering subfields were at historical lows.

In 2008, something else has happened. Companies began to realize the strategic importance of entering new markets like Brazil and China and they needed learn how to do product development and other work in those countries. If you’re Boeing, where is your source of major top line growth? It’s not in the United States. Companies are facing the challenge of creating an organization and processes that are aligned with their new markets.

CIO.com: When you asked service providers about their biggest concerns, pressure on margins was number one. Should that concern customers at all?

Lewin: Customers will benefit greatly. The new variables [putting pressure on provider profits] are that some countries have developed national policies to attract the outsourcing industry. Go to Dalian, China and there are at least 200,000 Japanese-speaking Chinese doing work for Japanese companies. According to KPMG, the current value of executed contracts is $5 billion-just in Dalian. Many countries are following the lead of China to establish national aspirations to attract the outsourcing industry-Sri Lanka, Morocco, and Egypt.

The competition is not just among providers, but also between countries. At a new tech park being built outside of Shanghai, a deputy mayor told us that a million people will be conducting back-office work for financial services companies within five years. In India, the total number of employees directly employed in the provider industry is only about one million people.

CIO.com: Companies are starting moving up the value chain with their offshoring-32 percent of your participants indicated that they now offshore innovation services. But it’s not clear what exactly is driving that. You found that 88 percent of those who offshore innovation services say access to qualified offshore talent is the driver, but less than a third say a domestic shortage of qualified personnel is a driver. And, as you note, unemployment rates in the U.S. have reached historical highs due to the recession. So what’s going on here?

Lewin: It’s important to point out that the vast majority of engineering work-86 percent, according to a study by [India's IT services trade group] NASSCOM and [consulting firm] Booz Allen Hamilton-is still done in the Western world.

But you have to watch for those small, initiating events. Those companies that let their engineers retire and didn’t replace them are an early trend. What are all the factors that are going to drive innovation offshoring? I don’t have a good answer for that. Different companies and different industries have different reasons.

It’s all part of an emerging trend that we call the disassembly and reassembly of the organization. If you’re the CIO, you’re always in the hot seat because of the high cost of IT and because it is so highly visible at the level of C-suite. The CEO must be always questioning these costs. The pressure is always on. But there’s still a lot to be done offshore. This is not the end of the story by any means.

Source:http://www.computerworld.com/s/article/9207358/IT_Offshoring_Savings_Declined_for_Past_5_Years?taxonomyId=14&pageNumber=1