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If you don't do them well, you can't compete, but doing them better than anyone else provides limited benefit. Companies should carefully examine these tasks for outsourcing opportunities, keeping in mind that they may require the outsourced resources to have specialized or more developed skills.
Activities that are necessary, but a commodity level of service is sufficient - Commodity tasks are necessary for keeping a company functioning, but they do not require specialized skills. Performing these tasks at a level higher than the industry norm provides the company no value.
According to industry estimates that for most companies, only 20% of their activities provide strategic advantage, 50% of their activities are critical, and 30% are at the commodity level. However, most companies outsource few critical tasks, though outsourcing critical tasks represents a large opportunity. Several Independent Software Vendors (ISVs) that have outsourced development have found that about 20% of their work (focused on architecture and product strategy) must remain in house, but the rest can be outsourced, including such critical tasks as new product development. Some of the other critical tasks, such as user documentation and user interface development, require more expertise than the offshore outsourced resources generally provide, so companies have to use a higher ratio of onsite to offshore resources to outsource them successfully.
Comparing Outsourcing Delivery Models - Three service delivery models are available to companies pursuing offshore resources:
Global service provider with strong local presence -- Work with a service provider that offers local (onsite or regional) resources and supplements these resources with offshore resources for specific tasks. Global service delivery companies, including Accenture, Avanade, BearingPoint, Cap Gemini Ernst & Young, Headstrong, IBM, Intelligroup, and Keane, supplement their onsite and regional capabilities with offshore development centers. However, for most companies buying services from these providers, the bulk of the resources provided are domestic. Specialized service providers such as Sapient and Virtusa and Application Service Provider (ASP) Corio also fit into this model.
Direct management of offshore resources -- Some work with a service provider that has minimal local capability and offers offshore services. This is the traditional delivery model of the pure-play offshore providers, such as HCL Technologies, Infosys, LUXOFT (in Russia), Satyam, Tata Consultancy Services, and Wipro. Note, however, that the large pure-play offshore companies are recognizing the need for onsite capabilities and developing domestic capabilities to supplement their offshore resources. This is also alleviating localized conflicts in originating countries.
Develop offshore capabilities in house -- Many companies have begun to expand offshore sales and support offices by adding additional technical resources as part of a distributed IT organization. They are able to reap the rewards of low-cost technical resources while minimizing the loss of control that typically accompanies outsourcing.
Evaluating factors for defining an offshore model - When choosing an offshore model, companies must evaluate process maturity, communication requirements, control requirements, project and resource flexibility, global experience, and industry-specific factors:
Process Maturity -- Successful offshore outsourcing requires a mature process for defining requirements, developing specifications, implementing the specifications, accepting the finished work, evaluating the results, and providing feedback toward a new implementation cycle. Companies cite immature processes as one of the primary causes of project failure with offshore resources.
Communication Requirements -- Individual projects have unique requirements for the amount of interaction required among project participants. Projects requiring serial communications are better suited for offshore development. Projects requiring highly iterative communications are better suited for onsite or offshore development in a company-owned facility.
Control Requirements -- Control requirements determine the level of governance and oversight required to complete a project successfully. Some companies require a high degree of control because the management culture rewards a hands-on management style. Some projects require a high degree of control because of their strategic importance or sensitivity. A lack of strong processes is another factor driving management control. Companies need to establish strong relationship management skills in order to successfully manage outsourced relationships.
Project and Resource Flexibility -- Project flexibility determines the ability of a company to start and stop projects and to raise and lower staffing. Some companies have fixed resource levels but ever-changing project requirements; other companies can vary their resource levels, but have very fixed project requirements.
Global Experience -- Global experience is a measure of the amount of expertise a company has in managing its own global resources. Companies with a high degree of global experience have sales, support, and perhaps technical resources in multiple countries and continents. Companies with minimal global experience have minimal global sales resources and no support or technical resources.
Industry-Specific Criteria -- Industry-specific regulations and unique business processes affect a company's ability to move work offshore. Regulations such as ITAR define what information can flow offshore, and regulations such as the Pharmaceutical industry's CFR 21 Part 11 define rules affecting change management procedures. A lack of experience with industry-specific processes is a common cause of failure in offshore processes.
Brief History of Outsourcing
The concept of outsourcing is not new yet the current exponential growth of this industry began in the early 1980s when contract manufacturing as a cost reduction strategy began to take hold in many westernized corporations. While these first steps in outsourcing resembles contract manufacturing, global outsourcing's major growth came as a result of the Y2K concerns all companies had regarding their computer systems. Y2K is the Year 2000 roll-over of systems and the intricate maintenance and programming needed to make these systems capable of running in the 21st century. Indian global outsourcers especially benefited from this market dynamic, with Infosys, Satyam, HCL, WiPro, and many others owing their first contracts and resulting market successes to this market dynamic.
From their collective work on modifying and maintaining software to combat the Y2K potential problems, outsourcers became adept at software programming and maintenance. Their customers for Y2K software enhancements started turning to these outsourcers for the fine-tuning of other systems as well, and as a result an entire industry of what began as outsourcing programming re-work and maintenance eventually has turned into a multi-billion dollar industry that today is 7% of India's GNP. IBM recently announced, in June, 2006 that they would be investing $6B in India in the next few years and significantly increasing their headcount there as well.
A secondary yet just as significant market development continues to be the many forms of compliance that U.S. publicly traded companies must contend with in the form of Sarbanes-Oxley (SOX) legislation which was enacted in 2002 by the U.S. Congress and ratified into law that same year. There are many other forms of compliance as well, yet SOX has been the continual fuel that has propelled outsourcing into the size and importance of an industry it is today. The fact that Infosys, in remarking about their financial performance for a given quarter, mentioned that $1 of every $3 earned was directly attributed to SOX one can see the impact of this compliance legislation on both the costs of U.S. corporations on the one hand and industry-making size of spending with outsourcers on the other. Compliance requirements within many U.S. corporations are often outsourced as headcount is thin enough already and there are not enough IT personnel available to complete existing projects much less take on new ones. The bottom line is that SOX and its many requirements on companies has created an even greater opportunity for outsourcers to show the many benefits of offloading critical work to a third party. The successes companies are having outsourcing compliance requirements leads naturally to considering outsourcers for other business critical tasks including manufacturing, accounting, routine financial and taxation work, and the enhancement and maintenance of application software to just name a few.
Advantages and Disadvantages of Outsourcing
Despite the many advantages companies report from outsourcing, there are just as many disadvantages and challenges to overcome. There is a summary of the advantages and disadvantages of outsourcing:
Lower costs from both a process and wages perspective - The primary motivation for many companies to outsourcing production and services or both is the ability to significantly drive down their wage costs, yet there are also the process costs that can also be significantly reduced. Take for example the direction of Infosys to offer outsourcing services for industrial manufacturers' order management systems, a task so critical to the overall functioning of a company, and yet Infosys is getting new clients throughout the rust-belt region of the U.S., in traditional industrial manufacturers. Clearly the process paybacks of outsourcing order management fall outweigh the cost reductions from wage reductions. In fact for many manufacturers the wage reductions are incremental to the process reductions and opportunity to focus on their core business including for manufacturers who sell to consumers, their brands.
Improving service and support - Thousands of manufacturers, financial services and healthcare companies are taking this route to deliver higher levels of performance on a 24/7 basis while achieving significant cost reductions in the…[continue]
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