Effective Outsourcing Strategies and Risk Management in IT

FB5003-4 IT Outsourcing and Risk Management I will support legislation that benefits the American worker and prevents the outsourcing of American jobs (Ed Pastor, former US politician) If you deprive yourself of outsourcing and your competitors do not, you re putting yourself out of business (Lee Kuan Yew, former SG President) Do what you do best and outsource the rest (Peter Drucker, former AT/US management consultant) 1

Learning Objectives Familiarisation with Outsourcing, Offshoring and associated Risk Management Issues What do organisations hope to achieve? Plans for the offshore process (so as to mitigate risks) 2

Outsourcing It means that (usually) non-core-competence activities are undertaken by a third party Typical examples include IT related services [ITO] New software development, inc. analytics, BI, big data Cloud-based solutions Mobile-enabled solutions Business process services [BPO] E.g. data entry, customer call centre 3

Why Outsource? To save money (costs) Work always moves to cheaper locations, but people usually don t move so they lose their jobs Where are these cheaper locations? To save time and get products to market faster To access better people (skills) and technology To enhance flexibility and the identification of new value opportunities 4

When Not to Outsource? Is the function a core strategic component or differentiator to your business? Do you need complete control of this function to deliver your value add? Do you perform this function better or at a lower cost than anyone else? If you answer yes to any of these 3 questions, then outsourcing does not seem sensible. http://news.sap.com/small-business-coach-outsourcing-hold-advantages-small-business/ 5

Locations Inshore or Offshore The work may be undertaken in a variety of locations Inshore within the same country Offshore at a more distant location Nearshore at a nearby country or time zone Backshore return the work to the home country Multisourcing and Microsourcing Split your project into many (small) parts and assign each one to a different provider Mobile or Nomadic software providers can be located anywhere, yet still provide services 6

Locations While India is the most popular destination, especially for low end work, South America and Eastern Europe are growing fast This is particularly the case for more complex work where qualified Indian workers are more expensive than those in EE. EU membership means that EE countries now must adhere to much higher standards of performance and work ethics Geographical proximity within Europe is one more advantage 7

Locations Offshoring often implies the involvement of a cheaper and less developed country E.g. a US firm outsources software development to India E.g. an Indian firm outsources software development to Vietnam But there are many hazards as well Managerial, HR, Work Style, Political, currency and wage fluctuations, competition for employees, regulatory issues Offshoring should be a strategic choice, not an accidental mistake Failing to plan for it is planning to fail at it! 8

Offshoring IT Services If you want the loan application processed today, click 1 and it will be done in Fiji today. Otherwise press 2 , it will be done in this country by next month . What % clicked 1 ? There is increasing offshoring of IT services Application processing, telemarketing, help-desking, airline reservations, data entry, etc. 9

Offshoring IT Services All these services are highly dependent on both IT and language The relevant data is mobile it can be sent through the Internet easily HSBC employs thousands of staff in China, India and Malaysia. English speaking countries (populations) have a distinct advantage But can you understand Indian English? 10

Languages and Skills Dubai, Israel and Singapore IT security skills PH, LK, IN, English language call centres SG Banking & Financial Services MY Asian Language Support MA French language call centres UY, CL, VE, CO - Spanish language call centres for Spain and Hispanic USA, e.g. help-desking, patient scheduling, data entry, helped by synchronous time zones. 11

Insourcing Insourcing implies that the work is done by an affiliate of the organisation, but not done centrally. Insourced work can be inshore (same country) or offshore (overseas), or nearshore (a nearby country) E.g. HSBC gets BPO work done by a subsidiary in China (Nearshore insourcing) 12

The Big Four: Brazil, Russia, India, China Large number of engineering graduates and well-qualified employees Thousands of software exporting firms But around 120 countries provide some offshoring services (RO, CR, PH, VN, PL, HU, MY, AR, FJ, ) The Indian firms in particular are now global firms in their own right with offshore operations to service clients locally . Offshore sites in AU, CN, HU, JP, UK, US, UY A significant threat to US- and Europe- based firms 13

Offshoring - Transitions In 2014, Microsoft laid off 18,000 employees, many of them ex-Nokia factory workers in China Much of this work moved to Vietnam, some to Brazil and Mexico. This is a form of right-shoring Moving production to the right location 14

Right Shoring Move phone production to Hanoi Some capacity retained in BJ and DG Move other operations to Brazil and start to close Komaron (Hungary) Samsung has also moved production from China to Vietnam Why? Moving production closer to consumption. Costs. 15

Trade Wars and Right Shoring There are notable shifts in production for geopolitical reasons US firms like Apple moving production out of China 70% of US firms that manufacture in China are considering to relocate Other parts of SE Asia will benefit But it is not always easy to find alternatives 16

Consequences When jobs move, people lose their jobs! In early 2015, Southern California Edison laid off 400 IT workers as it outsourced work to India The same American IT workers had to train the people who would replace them! 17

The Provider (Vendor) Perspective In over 120 countries, firms have been set up offering BPO/ITO services Industry & Technology parks China graduates four times as many engineers as the US China has tens of software/technology parks, each focusing on domestic and global markets www.zpark.com.cn www.xasoftwarepark.com 18

Strategic Issues 1 Cost In India, we can get three security engineers for the cost of one in the U.S. But, is cheaper really strategic? Total Cost of Engagement? China is cheaper than India for programmers, more expensive for Supervisory & Mgt staff. There can be many hidden costs If you always worry about cost, you will get poor quality solutions. Quality costs! 19

Strategic Issues 2 Talent for Innovation Access resources unavailable at home But employee churn and provider reliability is a major problem Resource quality (esp at smaller providers) Knowledge transfer and the risk of IP loss/theft Do you share values with the provider? Good governance? Ethics? Efficiency? Flexibility? 20

Strategic Issues 3 Speed, Agility and Flexibility Respond to opportunities and get products to market faster If you can overcome the differences of language, communication style, culture Anything strategic requires a corresponding investment of resources and a long term vision. 21

Strategic Issues 4 Take advantage of time zone differences Send work from time zone to time zone US to S or SE Asia to Europe Non-stop work But coordination must be perfect Few success stories Small and simple tasks are more suitable 22

Strategic Issues 5 Deeper Localization Local responsiveness Almost all software has to be localized to local language and culture The closer you are to your customer, the deeper the localization Better customize products to the local markets, particularly the large and more promising markets 23

Strategic Issues 6 - Captive Centres (1 of 2) Captive Centres Wholly owned subsidiaries that work (more cheaply) for the parent company. Captive Centres account for about 25% of the global services market. 64% of Captive Centres employ more than 500 professionals, but smaller firms are adopting too More than half of all Captive Centres are in India Scale and scope of work is attractive New entrants in: PH, PL, CN, MY, CR, RO 24

Strategic Issues 6 - Captive Centres (2 of 2) Three Captive Centre Development strategies: Hybrid, Shared and Divested. Hybrid: The Captive Centre outsources (onshore) work to a local service provider, so that some work for the parent is done internally, some externally. Shared: The Captive Centre also takes on work from other clients, making it a profit centre and rendering it liable for acquisition by an investor. Divested: The Captive Centre may be sold if the parent is assured that it will not lose quality of service under new management. 25

Successful Captive Center Example ANZ Bank 1 Developed an integrated Captive Centre offshore in Bangalore for ITO and BPO operations. The bank set out to create ANZ in Bangalore with fully integrated ANZ culture. Work includes back-office processing for Credit cards, Mortgages, Wealth management products, A/C payable HR 26

Successful Captive Center Example ANZ Bank 2 IT graduates in Bangalore were paid at A$8k/annum, compared with A$45-50k/annum in Australia. By focusing on culture, ANZ Bangalore is also producing individuals who can move out into other parts of India and further instill the culture there. There are cultural differences in India, hierarchy is revered and staff members are less prepared to come forward and are unlikely to say no. We make sure that all staff know about our standards and our values. We spend a lot of time explaining the ANZ brand, and telling staff if you see stuff you know will hurt the ANZ brand, you must tell us Fred Bertram (MD for Operations Technology & Shared Services, ANZ India) 27

Strategic Issues 7 - Diversification or Centralisation? Diversification has long been a good practice in the financial investment industry but in outsourcing, the same is not true. Most providers are located in a single country, and even a single location, concentrating the risks. Diversification can help to reduce the impact of risks. 28

Diversification - Example A French company offshored 2,000 high-end IT jobs Initially it planned to locate them all in Bangalore, India. Later decided to adopt a more diversified approach: 65% in India @ $20k/year/head 15% in Romania @ $25k/year/head 15% in Egypt @ $20k/year/head 5% in France @ $40k/year/head Why these countries? Romania - closer proximity to European markets. Egypt - new talent availability. Total cost slightly higher than an all-India approach, but diversification reduced risks. 29

Diversification Issues In the more popular offshore locations, the providers compete with each other for the best talent this produces a lot of turnover, as well as higher wage costs. Few locations are better than all others on all counts diversification brings in new skills, new languages, new values. India is obviously highly penetrated by offshore work, yet there are many other providers in South America, the Middle East and SE Asia. Time zone issues, suitability of the local skill base, proximity to key customers, government initiatives can all play an influencing role. 30

Strategic Issues 8 Costs, but not just Salaries Pay attention to the contract types, payment terms, charge rates, and fees Cost reimbursable Fixed price Time & Material And lots of hidden costs, such as 31

Hidden Costs? Search and contract Infrastructure costs Restructuring costs Knowledge transfer costs Currency movements and fluctuations Dispute resolution Governance costs Travel costs in the early stages Unpredictable risks wars, financial collapse, terrorism, regulatory changes (e.g. nationalisation, tax breaks), IP theft, corruption, proprietary knowledge, etc. 32

Is Offshoring Too Dangerous? Offshoring can be exciting or scary Depends on your appetite for adventure, for the exotic, for risks Many lessons have already been learned, and can be read, so companies considering offshoring have no excuse not to know in advance what they are getting into. What do you think are the risks? Are the risks over stated? Is it really that dangerous? 33

Planning International Outsourcing / Offshoring https://books.google.com.hk/books/about/Outsourcing_and_Insourcing_in_an_Interna.html?id=xKjUz9JN_D4C&redir_esc=y 34

Three Major Offshoring Steps Laying the foundations Establish goals and perform internal organizational and external environmental analyses Do we have a plan, a strategy? Who is involved? Are we ready? [a year? 18 months?] Identifying the providers Which country? Which providers? Selection criteria? RFI and RFP. [6 months] Assessing & Selecting the Provider Visit the offshore location. Meet the people. Observe their work. Sign the contract. [at least a month] 35

Laying the Foundations 1 Assessing Are we are ready? How good is our project management? Can we manage an offshore project? Can our people work with them? Are changes in work norms acceptable? What is our appetite for risk? The hardest step is re-engineering internal processes so as to ensure that they are ready. 36

Laying the Foundations 2 The Launch Team Offshoring is complex it needs a powerful team Build a strategic vision, commitment and push for implementation Agile and able to make quick decisions Expertise in offshoring Learn from others experiences (including consultants) 37

Laying the Foundations 3 Strategy & Plan Precisely why are we doing this? How are we going to achieve this goal? What are the risks? Operational issues HR costs, skill sets, current & future operations, exactly what are we offshoring, Develop a business case for offshoring With performance indicators to measure later success Costs, satisfaction rates, productivity rates, delivery times, benchmarking against competitors, Planning for resistance to change How to keep key people, retrain some, let others go 38

Identifying the Providers In India, there are thousands of providers! Many have offshore agents Globally, there are tens of countries that do offshore work Which one do you want? General skills or specific? Language? Risks? IP protection? Security? Culture? Time? What is your strategic concern? Cost, quality, efficiency? 39

Selecting a Country While selection of the provider is often done carefully, selection of the country is the subject of much less care. It may relate to personal factors or connections. Who is going to have to go and work there, to supervise and control? Can they cope? So many expats don t like their assignment Spousal/family issues. Is makes no sense to select a country that no one wants to visit or live in. 40

Provider Selection Criteria General Criteria Company size & stability HR policies Quality management Technical expertise Business domain knowledge Track record Methodologies used Costs Quality initiatives ISO, CMM, 6 Sigma, etc. Weight the Criteria; Matrix the Providers Extra care criteria Infrastructure SW production environment International experience Language skills Employee turnover Org culture flexibility, responsiveness, soft skills Global presence Disaster recovery & backup 24-hour support 41

Send an RFI, Using the Criteria Who we are What we are looking for Questions about the provider History, customers, management, geo-locations, turnover, infrastructure, security Questions on services offered Domain expertise, platforms, skills, subcontractors Questions on strategy Vision, market share, alliances 42

Send an RFP to the Shortlisted Firms What we expect in the proposal How are you going to undertake a specific project Need to provide sufficient project details Need to do a good requirements analysis Try to stimulate the provider s creativity by asking more specific/difficult questions Ask for references of work they have done. 43

Assessing & Selecting the Provider Evaluate the RFPs Identify false promises, too good to be true offers Learn that yes means yes , no and maybe . Often all simultaneously Check the references Ask what worked, and what didn t. Technology always has problems. Soft issues culture, values, trust, wavelength. Don t only look at cost. 44

The Offshore Visit Important for large/complex projects, long-term cooperation and situations where there is a high degree of dependence on the provider (i.e. it is hard to switch) Launch team members should be involved, but also other members of senior management and those who are not yet convinced about offshoring. Plan the site visit carefully not on the plane 45

Offshore Things to Do Don t just visit the HQ, but also the work site, national software association, Talk to other foreigners who are there Don t visit too many and don t only listen to sales pitches they are all the same. Do speak to project managers and programmers how good are their soft skills? Walk around literally 46

Recommendations & Contract Negotiations To offshore or not. Project objective, functionality scope, Comparison of providers Financial justifications to top mgt. Legal/contract issues: price, SLA, IP & confidentiality, penalties & incentives 47

Sample Contents of an Outsourcing Contract Scope and detailed description of services and products to be delivered. Rights and obligations of both parties Governance structure, representation and reporting requirements General conditions about security, privacy and warranties Implementation and delivery plan and schedule Change control procedure and price Measurements for customer to accept the services/products delivered and how the payments will then apply. Dispute resolution procedures, includes limitation of liability, termination and re-negotiation conditions. Ownership of rights, products, licenses and intellectual property. 48

Sample Content of an SLA 1. Background and Purpose a. Background & Objectives b. Customers and stakeholders 2. Services in Scope and Out of Scope a. Scope/responsibility matrix b. Service interdependencies and related responsibilities 3. In Scope Service Description a. Basic requirements b. Objectives/critical success factors 4. Performance Measurement Regime a. Key Performance Indicators b. Service fee adjustments 5.Reporting a. KPI reports b. Other reports 6.Governance a. Structure b. Roles and responsibilities c. Meetings and reviews d. Evaluations, reviews and audits e. Communications framework f. Management procedures (problem escalation, variations, etc.) 49

Differences Between Contracts and SLAs Contracts Spell out legal: obligations, rights & responsibilities guarantees liability termination Should be: Air tight Written for Service Failure SLAs Spell out service: definitions requirements & expectations KPIs and measures relationships Should be: In use and under change Written for Service Success 50