Country or company?
Gartner Group advocates a “country before company” strategy for overseas outsourcing. In a paper published by ZDNet, Gartner vice president and research director Rita Terdiman writes “the country in which the offshore company is located may be as important, if not more important, than the vendor selected. Each country presents its own special set of risks (eg, natural disasters, infrastructure capabilities, vulnerability to terrorism, and political instability) and potential benefits (eg, labour pool and skills).”Criteria identified by Gartner include geopolitical risk, government support, infrastructure, labour pool characteristics, educational system, English proficiency, cultural compatibility, labour cost advantage, quality initiatives, and country laws (particularly regarding labour, intellectual property, data privacy, and encryption, plus visa regulations, tax incentives, import and export regulations, and the overall enforcement of contract disputes).
McCabe believes the two key considerations for the local industry when considering offshore software development are cost and competency. Organisations should first look for providers or locations that have the necessary skills, and then determine the cost-effectiveness of their services.
When outsourcing, people don’t worry about where the operation is located, just how quickly and cost-effectively it can do the job. “I don’t think they think in terms of ‘where are they located?’” he says.
Johnson says “the single biggest attribute in my mind is quality.” Of TCS’s 18 development centres in India, 16 are CMM 5 certified, and its Melbourne centre is expected to reach that level within a few years. “Quality costs you less, because you get it right the first time,” he says.
In addition to quality, organisations always look for competence and efficiency when outsourcing. Cost-effectiveness is always in the top three criteria in an RFP, he says.
He notes a Forrester report indicating that outsourcing is now seen as a first option by Fortune 500 companies, since it is hard for an internal IT organisation to keep up with the acquisition and disposal of business units in such environments.
However, interest in overseas outsourcing has dropped recently, according to META Group analyst Wissam Raffoul. Around 20 percent of the Global 2000 indicated interest in 2000, and this rose to around 40 percent in 2001. META Group forecasts the level of interest will be between 15 and 20 percent in 2004. Companies have now realised the need for a local presence and are also doing “more and more risk assessment before they award a contract” in this light of political instabilities such as the tension between India and Pakistan. Raffoul says overseas outsourcing is viable providing you can clearly define your requirements.
McCabe says there is “no question” that overseas outsourcing is more cost effective, but warns that the process must be managed: “nothing substitutes for having people on the ground,” so project managers will need to spend a lot of time on planes, shuttling between home base and the development site.
Consequently, an Australian organisation might only use a company in Eastern Europe if its specific competencies outweighed the disadvantage of the extra travelling time, says McCabe.
Joanne Collins-Smee, vice-president, Application Management Services, IBM Global Services Australia and New Zealand, agreed that any outsourcer should be happy for you to send staff to check on the progress of a project, but suggested the onus should be put on the outsourcer to send the project manager to visit the client with sufficient artefacts to allow the customer’s team to check the progress and quality of the work.
Contracts with TCS typically give the customer the right to request the replacement of specific members of the project team after a honeymoon period of 30, 60, or 90 days. If they exercise that right, “that’s fine by us,” says Johnson, even though it happens in between 20 and 25 percent of jobs.
“It’s very important that [we] think like the customer,” he says. This provides a way of dealing with unexpected events through a “get it back on track, get it done” mentality. TCS has an “Indian can-do nature—we’ll fix it,” he says.
But the relationship should be a two-way street. Johnson says services companies must be able to approach clients with concerns such as “we don’t think you are applying adequate skills in this particular area” when a key client employee is working on the project part time instead of full time, is on holiday, or is transferred, or promoted.
A longer-term partnership is better than using contract terms as weapons for bashing each other, he suggests, but clients should retain control and be a part of the process rather than being passive consumers of the services. “A successful partnership is a win-win,” says Johnson.
Not just India
While Indian companies such as Tata and Infosys “are a very big catalyst . . . they are gaining some ground,” McCabe says organisations should also look at countries in South East Asia such as Thailand and the Philippines. Thailand offers software development skills and “content factories” for data cleansing, translation and similar projects, while the Philippines is relatively close to Australia and has English-speaking workers with good IT skills.
“From a user perspective, [overseas outsourcing] is a very good thing,” says McCabe. He believes there is no danger of the local development community falling below critical mass, but predicts the biggest effect will be on the margins traditionally enjoyed by the largest professional services companies. Such companies will still be able to compete, thanks to good management and by being close to their market, McCabe says.
While he expects today’s leading edge skills will be more widely available in the future, there is always a time lag before large numbers of people acquire new skills. “Large developers don’t take risks in . . . skilling up,” he says, so small local developers that pick the right emerging technologies will always be in demand.
Collins-Smee claims there is relatively little interest in overseas outsourcing, even though Indian companies “are definitely visiting our customers.”
The success of traditional overseas outsourcers relies on “code factories”, Raffoul says, and “this model is less and less attractive” if applications are not well defined, in which case outsourcers must be able to provide a local, onsite presence, which drives up their costs. Since the primary motivation for overseas outsourcing is cost reduction, this is a significant issue.
“Customers in Australia are quite sophisticated and doing their analysis,” Collins-Smee says, and some are asking for a blended solution where portions of a project are allocated to local and overseas centres to best meet their criteria regarding risk, development time, and the need for specialised skills. In her experience, at least 20-25 percent of the project staff should be in Australia to take care of communications and project management issues. “Incredibly good project management is incredibly important,” she says.
Consequently, overseas companies are trying to position themselves as full-service companies, but that only increases the need for onsite presence, says Raffoul. At the same time, they are trying to widen their target market by appealing to a greater range of markets, despite their claims of focusing on key industries. Potential customers should therefore check whether an outsourcer is doing specialist work in their industry, or simply providing general-purpose applications in that sector, he warns.
Kanbay’s Spring points out that the same happens with the big consulting companies: a senior partner might be involved in selling you the service, but you will get relatively inexperienced people working on your project.
Beck agrees, saying that the cost structures of big consultancies force their staff to learn on the job.
Size matters
The size of these companies can be a concern, he suggests. Indian outsourcers’ revenues range from US$75 million to US$700 million, and according to Raffoul they shouldn’t be offered contracts worth more than 25 percent of their annual revenue.
Johnson says TCS’s size gives it an advantage. With around 21,000 IT professionals worldwide, it has a large inventory of skills and experience, and therefore can bring the right people to bear on a customer’s projects though the “sourced globally, delivered locally” model.
There is also a need to assess the skill levels of overseas outsourcers. “They all claim they are [at] level 5” of the Capability Maturity Model (CMM), says Raffoul, but the majority of their workforce is junior staff. “You need the skills behind the methodology,” he says.
But it’s not only foreign centres that are taking the CMM route. Level 5 certification for IBM’s Australian operation is pending, according to Collins-Smee.
A related issue is that most local organisations are around level 2 of this model, so there is a risk of communications problems. “They might be too smart,” says Raffoul, so you may need to upskill your own staff so they speak the same technical language as the outsourcers.
TCS’s Johnson disagrees. “That’s not our experience,” he says. Even if a customer does not have high methodological standards, it will generally aspire to them and will be able to work well with a CMM 5 certified supplier. “Part of the benefit of cosourcing is that you enhance the client,” he says.
Raffoul says “They [India] play well the methodology game” and position themselves on the basis of quality, but their weakness is distance from the customer—an onsite presence is necessary to deliver value—so companies such as Wipro are setting up branches in Europe, the US, and Japan. “They can’t stay 100 percent offshore,” says Raffoul. In general, Australian organisations like to choose an outsourcer among global vendors that have a local presence, he says.
Offshore outsourcers claim to deliver infrastructure services in competition with the likes of IBM Global Services or EDS, but are not succeeding because a local presence is essential. “You can’t rely on international reputations,” says Raffoul.
