Review of the Offshore Outsourcing Industry

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A Review of the Offshore

Outsourcing Industry

and Best Practices


Pei-Fen Chan
Soojin Kang
Aaron Schiltz
Bill Bernskoetter

April 29, 2004

Executive Summary
In this season of political wrangling, the topic of Offshore Outsourcing is getting more than its fair share of press coverage. Through all the election ads, news stories and sound bites, two things remain certain: Offshore Outsourcing is a growing industry, already worth more than $30 billion in 2002 and, it promises huge cost-saving benefits to those managers that can navigate today’s choppy seas.
The Benefits of Outsourcing
According to the Information Technology Association of America (ITAA) offshore outsourcing will:

€ Lower inflation, increase productivity and lower interest rates.

These will result in increased consumer and business spending and boost economic activity.

€ Increase GDP

By reducing domestic production costs in addition to the aforementioned increases in spending, GDP is anticipated to increase by over $124 billion by 2008.

Create New Jobs

By 2008, 317,000 net new jobs will be created in both IT and non-IT industries. While offshoring will move jobs overseas, the subsequent increase in jobs will be at a rate of better than 2 – 1.

€ Increase Real Wages and Increase Demand for U.S. Exports

Offshoring will lower inflation and productivity gains will increase the purchasing power of the U.S. Dollar. New jobs overseas will increase those countries’s purchasing power increasing the demand for U.S. goods.

Top Countries for Offshore Outsourcing

India – With its huge, well-educated population, strong copyright protections and low cost of living it is the premier host of offshore initiatives.

China – Another country with an exploding, well-educated population. Dangers include piracy, bureaucracy and poor English speaking skills.

Malaysia – A small population by comparison but less bureaucratic red-tape than Canada! The Malaysian IT industry enjoys strong backing from its government.
The Dangers of Hidden Costs
Vendor Selection: Travel costs to and from potential vendors can add anywhere from 1% to 10% to the real cost of an outsourcing contract.

Transition: Expect transition periods of anywhere from 3 months to over a year to hand over work to vendor and set up necessary infrastructure.

Lay-offs: Beware of severance packages and the possibility of lawsuits and even sabotage by unhappy employees.

Cultural Costs: Workers in offshore countries may be less likely to speak up about problems, have higher turnover and may need more interpretation than expected.

Ramping Up: Most companies underestimate the costs of bringing their vendors up to ISO and CMMI certification.

Managing the Contract: Ongoing management of offshore site can be costly.

Wipro – A Major Player in the Indian Offshore Market

Under the sure guidance of CEO Vivek Paul, a University of Massachusetts MBA, Wipro has grown from its humble beginnings as a cooking oil manufacturer to being one of India’s major offshore services vendors. Currently, Wipro enjoys annual revenues in excess of $1.4 billion US and a workforce of 27,000. Wipro operates under the Six Sigma standard and has the highest possible certification levels for SEI CMM, CMMI, PCMM and ISO 9001. They count as customers companies like Boeing, Cisco, Ericsson and Best Buy. Wipro saves Delta Airlines $12-15 million dollars annual on call-center functions while extending operating hours and decreasing call-handling times.

Best Practices
• Manage your team even from a great distance – daily reporting is best.

• Have managers visit sites before signing contracts.

• Keep contracts shorter than 4 years, the world changes too fast to prepare longer terms.

• The more detailed the contract the better.

Bring in your best managers, from the IT and executive levels.

• Make a manager or team directly responsible for the success or failure of the initiative and give them the power to make it work.

• Clearly state your objectives to all stakeholders

• Make sure you AND your vendor adequately prepare for the transition.

Case Study 1 – PRT Group, Inc.; A Spectacular Failure
By focusing on their impending IPO and ignoring their site, their sales force, realistic

operations projections and their core capabilities, PRT’s offshore venture drove them into the ground and out of business.

Case Study 2 – DFS Group, Limited; A Spectacular Success
By extensively managing the contract they were able to save considerable amounts of

money and stave off bankruptcy even after the terrorist attacks of September 11.

Utilizing mini-agreements, some as short as 90 days, DFS saw increased productivity,

higher service levels and reduced costs; and forged a lasting partnership with another

heavy in the offshoring industry: Cognizant Technology Solutions.

Offshore Outsourcing Making Headlines

At a time when offshore outsourcing of IT work is catching the attention of U.S. IT executives because of the potential cost saving benefits, it is also making headlines because of its potential effects on our labor market and our economy. Time 1 and BusinessWeek2 have both ran cover stories in the past month questioning the practice of offshore outsourcing. The Time article “Is Your Job Going Abroad?” talks about how offshore outsourcing is dominating the political campaigns for president between President Bush and Senator Kerry. The basic conclusion of the article is that the short-term pain of job losses is expected to turn into a long-term gain for the economy. The BusinessWeek article “Where Are The Jobs?” discusses how the American economy is not generating enough jobs and many people are blaming offshore outsourcing, but BusinessWeek concludes that the real problem is America’s gains in productivity. Based on their calculations, only 300,000 of the 2.7 million jobs lost over the last three years can be attributed to offshore outsourcing, the rest are the result of America’s growing productivity.

Offshore outsourcing has been a big topic in politics lately. Senator John Kerry was quoted by a California newspaper 3 as denouncing the Bush administration for “rewarding Benedict Arnold CEOs” who move “profits and jobs overseas”. Missouri has joined over thirty (30) other states in drafting anti-sourcing legislation with the objective of protecting domestic jobs from going overseas4 . Kerry has also bought prime time commercial spots to challenge the Bush administration’s policy on the outsourcing of American jobs overseas. Secretary of State Colin Powell found himself in an emotional debate on offshore outsourcing on a recent trip to India. He had suggested that the Indian government should open up their markets to more U.S. goods and services to return the favor to the U.S. for outsourcing jobs to India and to relieve some of the pressure on the U.S. companies who outsource. This led to some heated debate with Indian college students on live television who called this statement “hypocrisy”, but Powell was quick to point out that “There is no quid pro quo here” and said that “ such a move was not a precondition for the continued outsourcing of American jobs to India”. 5 A recent article in the Post Dispatch discussed how outsourcing causes a controversy even when it makes economic sense. 6 This article talks about how even when you can show that outsourcing is good for the economy in the long run because it will provide for cheaper goods and services, most people focus on the short-term loss of jobs.

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