OUTSOURCING - Cybage€¦ · (d) Offshore Each strategy, which varies from client to client and...

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This document and all its contents contain information from Cybage Software Private Limited which may be privileged, confidential, or otherwise protected from disclosure. The information is intended to be for the addressee(s) only. Any unauthorized disclosure, copy, distribution, or use of the contents of this message is strictly prohibited. © Cybage Software Pvt. Ltd OUTSOURCING A Cybage perspective Abstract India is a successful outsourcing destination in the world of IT and IT-enabled services. This paper discusses both the benefits and the challenges in outsourcing and offshoring. The premise used is India as a destination for offshoring. This paper also touches upon various engagement models used in offshoring and shares a unique perspective on how Cybage determines which model is best suited for the needs of a particular project and client needs.

Transcript of OUTSOURCING - Cybage€¦ · (d) Offshore Each strategy, which varies from client to client and...

Page 1: OUTSOURCING - Cybage€¦ · (d) Offshore Each strategy, which varies from client to client and situation to situation, has its pros and cons from a cost-benefit perspective. For

This document and all its contents contain information from Cybage Software Private Limited which may be privileged, confidential, or otherwise protected from disclosure. The information is intended to be for the addressee(s) only. Any unauthorized disclosure, copy, distribution, or use of the contents of this message is strictly prohibited. © Cybage Software Pvt. Ltd

OUTSOURCING A Cybage perspective

Abstract

India is a successful outsourcing destination in the world of IT and IT-enabled services. This paper discusses both the benefits and the challenges in outsourcing and offshoring. The premise used is India as a destination for

offshoring. This paper also touches upon various engagement models used in offshoring and shares a unique perspective on how Cybage determines which model is best suited for the needs of a particular project and client needs.

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Table of Contents 1. Introduction .......................................................................................................................................... 3

2. India as Preferred Offshore Outsourcing Destination .......................................................................... 3

3. Benefits and Challenges of Offshore Outsourcing to India ................................................................... 5

4. Engagement Models for Offshore Outsourcing to India ....................................................................... 8

5. Engagement Models at Cybage ............................................................................................................ 9

6. Cybage Differentiation: ExcelShore® Model ....................................................................................... 11

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1. Introduction

The term ‘outsourcing’ refers to the practice of contracting out a company’s internal business processes and IT operations to a third-party organization, primarily to enhance internal focus on core competencies and reduce operational costs. This practice started in the late 1980s and gained popularity at the turn of the 21st century with special emphasis on offshore outsourcing (also known as offshoring), which involves relocating parts of a business function to another country. Today, a majority of Fortune 100 companies and a multitude of SMEs of various sizes offshore parts of their IT operations and business processes. Following is a diagram from the industry’s leading outsourcing analysts firm Horses for Sources. The pie chart provides an estimate of the size of the outsourcing market for the year 2013, which is expected to grow at 5 percent per annum till 2017.

Figure 1: Global Outsourcing Market

Source: http://www.horsesforsources.com/wp-content/uploads/2013/06/Webcast-deck-outsourcing-is-dead_HfS_FINAL1.pdf

2. India as Preferred Offshore Outsourcing Destination

Since the early 1990s, India has been riding the wave of offshore outsourcing. India accounts for 43 percent of the world’s IT services offshoring market (this is followed by the Western European Union at 12 percent) and 35 percent of the world’s BPO offshoring market in 2013. How India emerged and continues to maintain its dominance in the world outsourcing space has been spoken about quite eloquently

Indians account

for 43 percent of

the world’s IT

services.

offshoring market

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by Thomas Friedman in his acclaimed book ‘The World is Flat’. Also witnessing the surge in outsourcing are China, Brazil, Mexico, Russia, Ukraine, Romania, and Vietnam, along with emerging African countries such as Ghana and South Africa. The advantages India has over these countries are as follows:

The largest English-speaking workforce in the world.

More than three million graduates pass out of Indian colleges every year.

India has already experienced a couple of generations of outsourcing. Hence, stronger project

management and governance processes are in place here to mitigate the risks of offshore

outsourcing.

The Indian government provides significant incentives to software exporters through its

Software Technology Park scheme. This is a mature process, which has been in existence for 25

years.

India has the largest number of SEI CMMI Level 5 appraised companies in the world. This is a

testament to a strong engineering discipline and organized work force in the software industry.

Businesses in multiple disciplines: Be it in the realm of financial services, legal, hospitality,

healthcare, manufacturing, or technology—businesses are flourishing in India (which also has a

burgeoning middle-class population). This domain expertise can be harnessed by foreign clients

for driving business efficiency and developing new generation products and services for their

markets.

Cost of doing business in India continues to be significantly lesser compared to many other

countries.

Figure 2, from leading outsourcing consultant Tholons, gives a ranking of cities in various

countries for outsourcing, using the aforementioned criteria and other associated factors such

as climate, environmental stability, ease of travel, and technological maturity. Indian cities

occupy six top slots.

Figure 2: Top Outsourcing Destination Rankings

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Source:http://www.tholons.com/TholonsTop100/pdf/Tholons%20Top%20100%202013_Ranking

s%20and%20Report%20Overview.pdf

In outsourcing literature, it is common to encounter terms such as the following:

(a) Onsite: Working from the client’s location

(b) Offsite: Working from a location (not client location) away from the same city or country

(c) Nearshore: Working from a nearby country (typically in the same time zone)

(d) Offshore

Each strategy, which varies from client to client and situation to situation, has its pros and cons

from a cost-benefit perspective. For a defined business value realized from an outsourcing

partnership, the cost savings vary, as shown in Figure 3.

Figure 3: Typical cost savings as a function of distance from the client

India, being a primary offshore destination, offers a competitive rate of cost savings for an

outsourcing engagement. Due to longevity in this space, India is also recognized as a thought

leader in terms of driving more efficiencies and innovation from outsourcing relationships.

3. Benefits and Challenges of Offshore Outsourcing to India Organizations have experienced significant benefits in outsourcing their IT and business process operations to India. The exact benefits in terms of cost reduction vary, based on the nature of the work being outsourced. For commodity work items such as established business processes or well-defined software maintenance, typical cost savings are as per the following chart (courtesy McKinsey). For items that are not well defined and influenced by unfolding business realities, the cost reductions will be less. In these cases, the additional costs incurred, related to communication with an offshore team and governance, will be higher.

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Figure 4: Typical cost savings in offshoring to India

Other significant benefits in outsourcing to India, besides enhancing company bottom line, are

as follows:

Quality and productivity of work output: Research has shown that work done by Indian

engineers and BPO analysts, meets, and often exceeds, the requirements set by clients.

Access to a technology-savvy, educated work force: This can be leveraged for a flexible

allocation of resources on demand. It also enables a shift of the client’s financial model from

CAPEX spending to OPEX spending.

Ability to utilize a ‘follow the sun’ model: India being typically 10 hours ahead of the US time

zones and four to five hours ahead of the European time zones enables a continuous

workflow in which people are available round-the-clock to concentrate on business

problems and solutions.

Ability to focus on core competencies while outsourcing the rest: The client can enhance

business top line by allocating employees to focus on client-facing roles and emerging

opportunities. An effective outsourcing operation in India handles other types of work.

Enhancement in processes and operational efficiencies: This is an intangible benefit. Indian

companies are extremely process-driven and they bring a rigorous discipline in engagement

with clients. This influences a client’s behavior and leads to long-term improvements in the

way the client conducts business.

Apart from the preceding benefits, outsourcing work to India poses certain challenges that need

to be considered carefully prior to making it an outsourcing destination. The typical challenges

and the ways to address them are as follows:

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Possible reduction in employee morale: Outsourcing offshore has received bad publicity in

the media and the reasons cited are related to shifting domestic jobs overseas. This is a

perception that a company needs to understand and explain to its employees. In reality,

outsourcing can help a company enhance its revenue and profits, leading to high-valued

jobs being retained in-house.

Lack of personal touch or face-to-face communications: Since the offshore teams are

located in different geographies and time zones, they don’t have a direct connection with

the client. This can lead to a feeling of lack of visibility and control over what is occurring at

the offshore end. While technologies such as e-mail, chat, video conferencing, and on-line

collaboration tools have addressed some of these social needs, the problems still persist. To

sustain and build an offshore relationship, it is advisable for both parties to plan trips and

spend time at each other’s locations. Understanding differences in culture can also be

achieved in this manner.

Overheads in communication (not typically encountered with employees): More time and

energy need to be invested in documentation and communication. The client needs to work

more on documentation and communicating requirements, reviews and approvals of

artifacts and project plans, and addressing issues with the remote team. This can prove to

be a major challenge when business priorities are shifting. In such a scenario, discussing

issues by walking into each other’s cabins or meeting up near the water cooler is not

possible with an offshore team. It is advisable that the client spends a reasonable amount of

time planning for this coordination in the early stages of the relationship. As the

engagement matures and the offshore provider gains more direct and ‘tacit’ knowledge of

the client’s business, the amount of time spent can be reduced.

The need for offshore tasks to be well-defined and more formal training to be imparted:

This is also related to communication. The offshore team has to define tasks appropriately

(with timely updates as necessary). Along with this, the client has to provide training for

domain and any specialized technology (as required) to enable the offshore team to deliver

successful results. This time and effort spent by the client needs to be budgeted for in

advance.

Preservation of information security and protection of IP: Clients have concerns about

sending confidential data and IP-related content to an offshore firm. The clients fear theft,

tampering of data, and its leakage to their competitors. While these are genuine concerns,

mature offshore providers use stringent, ISO-certified processes to ensure protection of the

clients’ valuable information. Offshore project teams and management are sworn to

secrecy, offshore machines dedicated to projects for a specific client are protected by

firewalls, and VPN access is given to client networks to ensure information security.

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A client needs upfront preparations to address these challenges. Additional outsourcing costs

(as defined in Figure 4) tend to pile up if these issues are not addressed in advance, leading to

what literature defines as ‘hidden costs’ or ‘intangible costs’ of outsourcing. Many offshore

providers from India, who have experienced the last two decades of outsourcing, typically

advise clients on these areas on a regular basis during the relationship. Mature providers such as

Cybage also engage in proactive monitoring of problems before they disrupt any work by

ensuring appropriate checks and balances are in place, including escalation mechanisms for the

senior management.

4. Engagement Models for Offshore Outsourcing to India

The most popular engagement models for any outsourcing engagement (onsite, offsite, near-shore, or offshore) are Fixed Price (FP) and Time and Material (T&M). Substantial information on the pros and cons of these engagement models is available. To summarize—the FP model works for an engagement with a tightly-defined scope and requirements, which are unlikely to change. In contrast, the T&M model works for an engagement which is flexible, adjusts to business realities, and whose scope and requirements undergo changes over time. While the client makes the decision on which model is appropriate for a specific engagement, it usually involves a dialog with the offshore provider to flesh out multiple scenarios with their attending benefits and caveats. Recently, a majority of new development projects in the software world follow the Agile model, which is a radical departure from the previous Waterfall model of execution. In the Agile model, since the requirements continue to evolve with time—a T&M model over the product development life cycle—with a fixed number of offshore technical staff usually delivers the best results. When the product goes into maintenance and support mode, again a T&M model with a fixed number of staff delivers better results since the work content cannot be defined in advance. Typically, a T&M model assumes that the client has an extended team offshore; this team works as ‘virtual employees’ of the client. The scope and work content for this team can be realigned as per business priorities, and the team can be ramped up and down as required to achieve the objectives. An FP model can work well in the context of a technology refresh initiative in software development, where a stable and well-documented product needs to be migrated to a new technology platform. Another example of this model can be in the area of automating testing for a product with well-defined test cases. While an FP model reduces a client’s risks in outsourcing by freezing budgets in advance, any deviation from the specifications may trigger a change request and associated fees, which can increase the cost of the project significantly. An FP project also requires specific deliverables to be available at specific times from the client (for example: specifications, reviews and approvals, test results) to prevent offshore idle time and associated cost escalation. A recent phenomenon has emerged wherein many clients (usually small companies) work with freelance software developers and testers. This is done through a few web portals, which match the client’s requirements to a specific resource(s) in their subscription pool. This works for small

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projects, which typically do not require a team, and whose frequency is intermittent and duration small. In this paper so far, we have not considered this scenario since these are one-off tasks and do not require strategic planning, internal preparations, or building long-term relationships between the client and the offshore provider.

5. Engagement Models at Cybage

Cybage offers two models of engagement, which are explained with the help of the following

diagrams: (a) A pure offshore model (b) A hybrid model.

Figure 5: Pure offshore model

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Figure 6: A hybrid model.

In a pure offshore model, the entire delivery team from Cybage is located offshore. The client interacts with the delivery team through well-defined interfaces, as depicted. Governance procedures are well-defined, and communication protocols for regular status checks, reviews and approvals, and escalations are put in place to ensure integrated operations between the client and Cybage. This model works well when the project requirements are relatively stable and there is little or no connectivity required between Cybage and the client’s business or client-facing team, or when the size of the offshore team is relatively small. In the hybrid model, while a majority of the execution still occurs offshore, a smaller onsite staff is stationed at the client’s location—either for a limited period (at different phases of an engagement) or throughout the engagement. This model works well for projects which do not have well-defined requirements or documentation, thereby requiring Cybage engineers to visit a client to perform business analysis or system architecture, and the appropriate knowledge transfer. This activity usually lasts for a limited period. However, for larger engagements where multiple streams of work are involved, the need to have an onsite Cybage team stationed on a more permanent basis at the client location arises often. This onsite team performs liaising and coordination of work between the client’s in-house team and the offshore team to ensure effective integration. This blended model also works well for some other engagements (not large) where the client does not have the bandwidth or capacity to manage an offshore team.

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6. Cybage Differentiation: ExcelShore® Model Cybage has developed an extensive Business Intelligence-driven IT system—‘ExcelShore®’—which is dashboard driven, guiding our senior managers to make intelligent decisions on offshore project execution, using real data which has been mined for more than seven years. This system improves the efficiency at every level of offshore project execution: from selecting the right team (based on technology skill sets) to task-mapping to setting up an appropriate team hierarchy to time management to consistency in execution across projects, leading to delivery excellence throughout an outsourcing relationship. The key parameters that a client looks at while selecting an outsourcing vendor includes quality, speed, consistency, responsiveness, attrition risk, scalability, and value addition. Whilst it is argued that cost is also one of the parameters, this is where our thought process is different. We believe that cost is the denominator of all the preceding parameters and the ability of an organization to optimize each of these parameters per unit cost provides the true value proposition to any client. This optimization is realized by ExcelShore® through mathematical and statistical algorithms working on real data gathered from projects and performance appraisal systems. The ExcelShore® system scientifically leverages the entire fact file of the organization in such a way that clients can benefit from every single capability that the organization possesses, while simultaneously minimizing the risks in the process and thereby delivering a measurable ROI to the client. This is the biggest factor that differentiates Cybage from other outsourcing providers. The system has been the subject of attention in the outsourcing world and has prompted Gartner to rate Cybage among cool application service providers in the software industry.

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About Cybage Software Pvt. Ltd. Founded in 1995, Cybage Software is a leading offshore software services company offering solutions that accelerate, simplify, and enrich business processes to give its clients an edge over competition. We are an SEI CMMI Level 5 version 1.3 and ISO 27001 appraised company based in Pune, India. Our success is built on a pool of 4,500 software professionals. Based on a remarkable record of quality, consistency, and outstanding technological prowess, we have partnered with more than 200 global software houses of fine repute. Our array of services includes Product Engineering (OPD), Enterprise Business Solutions, and Value Added Services. Cybage specializes in the implementation of the Offshore Development model.

The Cybage domain expertise spans across several business verticals such as Media and Entertainment, Travel and Hospitality, Healthcare and Life Sciences, Retail and Distribution, and Hi-Tech. Cybage has eight technology-focused Centers of Excellence (CoEs) – E-commerce, Enterprise Mobility, Customer Relationship Management, Business Intelligence, Enterprise Content Management, Cloud Computing, Education and Learning, and Supply Chain Management. Our unique model of operational efficiency, ExcelShore®, helps de-risk our approach and provides the best value per unit cost.

To know more about us, visit us at www.cybage.com or write to us at [email protected].