Offshore Outsourcing of IT Work

Global sourcing of information technology (IT) is the idea that IT work can be seamlessly distributed anywhere in the world to the best source in terms of overall value.¹ The “best source” can include combinations of in-house provision, offshore captive centers, outsourcing to multiple suppliers, and even joint ventures.² Senior executives dream of creating agile global IT networks to lower costs, increase quality, realize seamless sunrise-to-sunrise production, deliver faster, and disperse risks. We present evidence in this book, based on 232 interviews with people from 68 companies, that some companies are indeed achieving these business benefits from global IT sourcing.

This chapter presents a case study of a Fortune 500 biotechnology company (hereafter called Biotech)¹. In our learning curve (Figure 1.2), the Biotech case maps to Phase II — pilot projects driven by the promise of cost savings. This chapter presents a highly realistic picture of the client’s experiences with offshoring of IT work for the first time and how best and worst practices quickly emerge from experience. In telling this story, we hope that other clients may apply Biotech’s lessons to accelerate their own path on the learning curve.

In Chapter 1, we presented the four phases of the offshore learning curve. We noted that the most mature customers in Phase IV typically pursue one of two strategies for offshore. Either, (1) offshore outsourcing becomes institutionalized or (2) offshore outsourcing actively contributes to corporate strategy. In this chapter, we present a Fortune 500 retail company that has been offshore outsourcing since 1997. Retail’s ten years of offshore outsourcing has become “institutionalized,” meaning that global sourcing is deeply embedded and accepted in the organization. Clients who primarily want to use offshore suppliers to lower costs, to do more work with a flat IT budget, and to keep internal headcount steady by using offshore suppliers to manage fluctuations in demand for services will benefit from reading this chapter.

As evident in the previous chapters, decision-makers often rationalize offshore outsourcing by comparing hourly rates for domestic and offshore workers. This approach is dangerous because it assumes domestic and offshore workers are equivalent “factors of production”. Once engaged in offshore outsourcing, senior executives are often disappointed. Many complain that offshore suppliers do not understand their business, deliver late, and produce poor-quality work. In reality, the problems are not caused primarily by the supplier — they are primarily caused by the client’s naive focus only on costs and failure to invest properly in the relationship.

According to Accenture, shared services is defined as “the consolidation and redesign of business processes into a standalone service.”¹ Organizations create shared services to dramatically reduce costs, improve service, and even increase revenues. Studies have shown, however, that organizations do not always achieve the full benefits they expect from shared services. IBM, for example, found that the results of shared services have been “mundane rather than magical” among a survey of 210 senior finance managers.² Another study of 140 executives in North America and Europe found that expected benefits exceeded actual benefits in the majority of cases. Overall, the survey also found that 67 percent reduced costs, 66 percent improved performance, 56 percent increased productivity, and 42 percent increased customer satisfaction. Among the 67 percent who reported cost savings, the average cost savings was only 14 percent.³ Furthermore, the average time to fully implement shared services was two years in Europe and twice that long in North America. Given the time and investment required, senior managers question, “How can we realize the full potential of shared services?”

With over 2 million IT workers, 1.3 billion potential consumers and a booming economy, China has gained the attention of multinational corporations as an offshore destination for IT work. Those firms wanting to complement India as the preferred location for software development and back-office centers also look at China as a growing market for their products and services. This chapter looks at China’s ability to compete with India in the global ITO/BPO market. A national, concerted effort by the Chinese government involving ICT infrastructure investment, the creation of a national ITO/BPO image and efforts to attract foreign investment is underway. As this chapter shows, even with China’s impressive growth in the market, it is not quite ready to capture a significant portion of the global market. China’s service providers are currently immature, small and fragmented. Additionally, intellectual property concerns and lack of English proficiency hamper China’s current efforts to compete for North American and European business. However, the government and suppliers are actively addressing these challenges, thus CIOs should keep an eye on China.

While much of this book focuses on offshore outsourcing from the client and supplier perspectives as experienced by senior and middle-level managers, this chapter focuses on the Indian IS professionals actually doing the work. In our research, we found that Indian IS professionals are often viewed as factors of production during the formulation of a client’s initial business strategy for offshoring IT work. Clients largely justify sending work offshore because of the lower hourly wages for presumably equivalent work. When clients actually engage in offshore outsourcing, however, these “factors of production” finally become anthropomorphous. This is when the human resource issues enter the forefront of client-supplier relationships.

In this final chapter, we look at 13 emerging trends in global spend on information and communication technologies (ICT), information technology outsourcing (ITO), and business process outsourcing (BPO). These trends are evident from our own case studies, government reports, and industry analysts. The overall trends indicate growth in all three markets (ICT, ITO, and BPO). Furthermore, countries from all six continents will actively participate in these markets as both clients and providers. We also predict growth in niche markets such as rural sourcing, nearshoring, knowledge process outsourcing, and freelance outsourcing.