CIO Breakfast

Outsourcing

Jeff Reid

March 20th, 2011

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Outsourcing – Agenda

Terms Current Global State Leading, rising

cities/countries Some Pros and Cons Possible Local Outsourcing Reasons to Outsource Reasons not to Outsource Issues to guard against More than just Apps Dev Personal Observations

Questions to ask yourself Getting Started Possible Resources to help

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Outsourcing – Glossary of Terms

OutsourcingOften viewed as involving the contracting out of a business function – commonly one previously performed in-house – to an external provider

Offshoring The relocation by a company of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting

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Outsourcing – Terms

Near-ShoringThe transfer of business or IT processes to companies in a nearby country, often sharing a border with your own country", where both parties expect to benefit from one or more of the following dimensions of proximity: geographic, temporal (time zone), cultural, linguistic, economic, political, or historical linkages

Remote Infrastructure Management (RIM) – Managing customers IT Infrastructure from low-cost remote

locations in adherence to various norms, specific guidelines to data security, meeting the service levels with high uptime for the customer’s mission critical IT Infrastructure, quality service delivery, and round the clock support

*Wikipedia

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Outsourcing – Current Global State

The current Global state of outsourcing:

Total value of outsourcing contracts signed in 2010 was $62.4B Eight (8) of these contracts were “mega-deals” of $1B or more

Consistent with the last 5 years of total contract value data

6% growth year on year according to outsourcing consultants TPI

*Outsourcing Insider, Audrey B. 9/13/2010

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Outsourcing – Current Global State

The current Global state of outsourcing

India - State of Ohio banned offshoring of project by government depts. CEO at Infosys says his company will be negatively impacted India still leads by a large margin (10% of Tata Consultancy Services employees

outnumber all of China’s outsourcing companies

China - Forging Ahead – They are in for incredible growth

KPMG partner Egidio Zarella

On 8/11/2010, announced no operating taxes on offshore service outsourcing business in 21 cities until 2013

Outsourcing grew with a 21% increase to USD 23.6B in 2009

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Outsourcing – Current Global State

The current Global state of outsourcing

Philippines – Convergys, a business process outsourcing company, plans to expand it’s

workforce from 17K to 22K employees Other companies are following suit

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Outsourcing – Leading, rising cities/countries

Cities leading in outsourcing

Bangalore Chennai Delhi DublinHyderabad Makati City Mumbai Pune

Countries being promoted as growing

Chili Taiwan Singapore Estonia

* M.M “Sath” Sathyanarayan

Some rising cities for outsourcing

Cebu City, Philippines Shanghai, China Beijing, China Ho Chi Minh City, VietnamKrakow, Poland Kolkata, India Cairo, Egypt Sao Paulo, BrazilBuenos Aires, Argentina Shenzen, China Hanoi, Vietnam Chandigarh, India Curituba, Brazil Prague, Czech Republic Pasig City, Philippines Dalian, ChinaCoimbatore, India Santiago, Chile Colombo, Sri Lanka Johannesburg, South Africa

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Outsourcing – Some Pros and Cons

Corporate benefits Lower costs Efficiency without the investment in people/technology Increased focus on core competences Increased corporate profits

Corporate drawbacks Increased project management complexity Loss of control Intellectual Property vulnerability

Offshoring for the USPros – Increased corporate profitsCons – Unemployment, loss of industrial base, and high trade deficit

* Kemarra Inc.

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Outsourcing – Some Pros and Cons

Offshoring for developing countriesPros – Cash generation, employment & training, business experience, and infrastructure build upCons – vulnerable to cheaper outsourcing and lock into low-wage economy

When there are reciprocal returns between countries OK if cash earned by countries providing outsourcing services returns to the

US via purchase of US goods One of the reasons for Foreign Trade Agreements (FTA)

When there are not reciprocal returns We see China buy far less goods from the US Outflow of US funds without cash returns to the US

* Kemarra Inc.

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Outsourcing – A change in stance?

President Obama visits India Sought greater economic cooperation with India to boost US job creation Boost exports as India is one of the fastest growing economies Claims the opportunity is 50,000 jobs

* Booz Global Engineering

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Outsourcing – Possible Local Outsourcing

Cost Mesa – Proposed Outsourcing Safety - All Fire Department Operations, City Jail Services, Animal Control,

and Special-event safety

Roads - Street Sweeping, Street maintenance, Parkway and Median maintenance, and Fleet maintenance

Facilities - Park Maintenance, Facility maintenance, Building Inspection, and Graffiti abatement

Operations - IT/Telecom services, Printing, Payroll Services, and Employee benefit administration

*Orange County Register 3/1/2011

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Outsourcing – Possible Local Outsourcing

Costa Mesa – Proposed Outsourcing Cost savings –

The city is running at a $1.4M deficit this year Has accumulated more that $130M in unfunded pension liability Estimate is that within five years $25M will go to pensions That is roughly one quarter of the city budget

Other reasons besides cost that companies Outsource Access to specialized or hard to find skills Unable to retain skills in your business environment Need isn’t full time The outsource provider can just to it better than you (i.e. ADP) The work is not “Core” to the business

*Orange County Register 3/1/2011

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Outsourcing – Possible Local Outsourcing

Quote of the dayCollectively, there are probably three or four (services) that are better candidates than others, Councilman Steve Mensinger said, mentioning street sweeping and IT

It just didn’t sound right to me as an IT guy, but maybe it doesn’t sound right to the street sweeping guy either

*Orange County Register 3/1/2011

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Outsourcing – Reasons to Outsource

Other reasons to Outsource Cost restructuring – move from fixed to variable costs Improve quality – Achieve a steep change in quality with SLAs Knowledge – Access to intellectual property and wider experience Contract – including legal penalties and legal redress Operational excellence – Access to established operational best practices Access to talent – Access to a larger pool of talent Capacity management – risk in providing excess capacity is the suppliers Catalyst for change – the outsourcer becomes the change agent Enhance innovation – Use external knowledge service providers Reduce time to market – ability to scale and add capability

*Wikipedia

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Outsourcing – Reasons not to Outsource

Reasons not to do Outsourcing Management processes – The outsources don’t work directly for the

managers but instead the contract is managed. It requires a transformation in how we manage.

Quality of service – Exceptionally important to your customer Language skills – Especially in call centers but in all communications Security – Legal, security, compliance Qualifications of outsourcers – Replace staff with less skilled Public opinion – In some of the US there is a strong public opinion against Employee morale – Employees feel threatened and/or lose jobs Ownership – Lack of “ownership” of the work being done

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Outsourcing – Issues to Guard Against

Issues raised on the Internet (Not credited to an individual) Longer for supplier to setup than expected Supplier unable to scale fast enough Supplier overwhelmed by volume of activity Unable to obtain and maintain connectivity and telecom Work ethic differs between organization and outsource supplier Supplier unable to perform on timely basis Supplier unable to meet SLAs and contract Contract exit language is inadequate

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Outsourcing – More than just Apps Dev

It’s not just applications development Application development (ADM) and Business Process (BPO) “have

achieved a degree of maturity”

Remote Infrastructure Management (RIM) Garner describes RIM as a “mega” trend predicting that these services

will “continue to increase in use as they will be critical for improving end-user service quality and reducing the cost of service delivery in outsourcing agreements”

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Outsourcing – Personal Observations

Personal observationsBoth sides have to be prepared, not just the Outsource company Communications plan – not just when but how Ability to create proper specifications/requirements/SLAs Reporting Training and repeat training after turnover

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Outsourcing – Personal Observations

Expectations are often unrealisticThe legal contract is important but doesn’t guarantee

success If only one side wins then neither side wins

You are entering into a Strategic Supplier relationship Are they also doing work for your competitor?

The issues don’t go away, they become different issues Manage the relationship instead of the workers

The need to do projects outside the SLAs might be a challenge Who washed your car? – Your kid or your neighbor’s kid

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Outsourcing – Personal Observations

Personal observations (Cont.)Turnover/Retention

You need to invest in the relationship Do they have some pride in your success? Do they relate to you?

What else Change management is important - continuous Governance too Need support/buy in from the business leaders End-User support/buy in is a key

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Outsourcing – Questions to ask yourself

Factor * M.M “Sath” Sathyanarayan Your score

1 Do you have clearly established goals for your offshore initiative?

2 Is your offshore organization meeting original expectations?

3Is there consistent expectation between head quarters and offshore organization at all levels?

4Do you have a clear understanding of productivity of your offshore organization compared with its U.S. counterpart?

5 Do you have a clear understanding of total cost of offshoring - not just salaries?

6 Do you have a clear understanding of the real contribution of your offshore organization?

7Besides engineering processes, have you integrated management processes, culture and goals?

8 Is it meeting current and future needs of the company?

9 Do you have regular program reviews? How useful are they to manage your initiative?

10 Have you established clear guidelines for project selection?

Total

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Outsourcing – Getting started

How would you get started1. Identify an expert to help guide you through engagement and selection 2. Organize a management Steering Committee3. Identify critical internal resources4. Identify/document what is good and bad about current situation5. Update/Review the company’s strategic business plan6. Develop a strategic systems plan7. Understand the architecture8. Understand your cost structure9. Identify current and anticipated usage10. Review the strengths and weaknesses of the outsourcing alternative11. Identify several outsourcing alternatives12. What is the order and makeup of the work to be outsourced

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Outsourcing – Getting Started

How would you get started (cont.)13. Develop a Request for proposal (RFP)14. Have a bidder’s conference15. Evaluate proposals against your RFP requirements16. Rank suppliers so that you have a backup17. Check references18. Negotiate the contract19. Manage the outsourcer and provide feedback

OR Talk to your friends who have done it and figure out who and what

worked for them.

GOOD LUCK !

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Outsourcing – Possible Resources to Help

Some possible resources for you (and they contributed to my efforts)

1. M.M. “Sath” Sathyanarayan. Global Development Consulting, Inc. (408) 865-0474. Sath@OffshoringSuccess.com. Www.offshoringSuccess.com

2. Laki Rajagopal. Manager – Client Services. Intelligroup. (630) 881-4174. lakshmikanthr@intelligroup.com.

3. Neeraj Arora. Business Development Director. Zensar Technology. (408) 876-8821. N.Arora@usa.zensar.com.