1. Offshore and Outsource
CS 577b Software Engineering II -- Introduction
14 December 2017
Offshore and Outsource
CS 577b Software Engineering II
Supannika Koolmanojwong
April 6, 2011
© USC Center for Software Engineering

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© 2011 USC-CSSE

3. Outline IT Offshoring Twenty practices for offshore sourcing
Life After IT Outsourcing: Lessons Learned from Resizing the IT Workforce
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© 2011 USC-CSSE

4. IT Offshoring Davis, Gordon; Ein-Dor, Phillip; R
IT Offshoring Davis, Gordon; Ein-Dor, Phillip; R. King, William; and Torkzadeh, Reza (2006) Journal of the Association for Information Systems: Vol. 7: Iss. 1, Article 32.
2 types of offshoring
Outsource some of its activities to service providers in other countries.
In this case, the service provider hires, trains, supervises, and manages its personnel.
a contract specifies the services to be provided, as well as time and quality measures
Set up service operations in the other countries
managed as a remote service site.
Workers are hired, trained, supervised, and managed by the organization rather than by an outside contractor
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5. 6 popular offshore tasks
Programming, software testing, and software maintenance;
IT research and development;
High-end jobs such as software architecture, product design, project management, IT consulting, and business strategy;
Physical product manufacturing – semiconductors, computer components, computers;
Business process outsourcing/IT Enabled Services – insurance claim processing, medical billing, accounting, bookkeeping, medical transcription, digitization of engineering drawings, desktop publishing, and high-end IT enabled services such as financial analysis and reading of X-rays; and
Call centers and telemarketing.
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6. The Evolution of Outsourcing
Started with manufacturing
vertical dis-integration (outsource some parts)
Primary motivation : cost efficiency
Feedback
projects developed in India had only 10% more bugs than comparable U.S. projects
U.S. firms save 58 cents for every dollar’s worth of back-office services and IT jobs moved to India
Germany firms saves only 52 cents for every dollar it spends in India (because of the language barrier)
German offshoring is to Eastern Europe, where the savings are even lower because labor and
infrastructure costs there are higher than in India
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9. Nearshore Same continent offshoring
Becoming a more common trend, instead of offshoring
US to Mexico and Canada
Eastern Europe to Western Europe
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10. Issues from Offshoring
380,000 IT professionals are employed offshore and will be more
3.3 million service jobs could be lost to offshoring in the next 15 years
by 2010, 102,000 IT and software jobs will have been offshored from the UK =12% of today’s IT workforce
40% of Western Europe’s 500 largest firms have begun moving service operations offshore
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11. Benefits from offshoring
Cost savings
Job upgrading for countries sending work abroad,
Employment and income for the countries performing the work
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12. Future of Outsourcing International economics
offshoring benefits everyone in the long run
Entire global system is better off when goods and services are produced the most efficiently
Even countries that lose jobs can benefit if they innovate
IT offshoring will still expand
Various HR activities will be outsourced
For US
programming and systems development jobs in the US are being lost.
new jobs focus on the management of vendor relationships and the customizing of externally-developed software.
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13. The Risks In Offshoring Information Technology Activities
Compare to manufacturing jobs, IT activities may be less well understood and/or poorly documented by the client firm
Hidden structural, cultural, legal, and financial risks and costs are often overlooked
Deskilling the organization (will be able to maintain over time)
Disruptions arising from political upheaval or war in an offshore host country
Political stability risks of the offshores
Disaster recovery in the developing countries
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14. New tasks of the CIO
Monitoring an outsourcing contract -legal requirements
Managing accuracy and completion risks associated with offshoring
Managing the database and application software risks – configuration management
Managing knowledge required for systems – documentation, back ups, training
Considering a distributed computing solution
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15. Skills needed to manage offshoring
Relationship and contract management
client-vendor relationship; selecting a vendor, outsourcing contract, monitoring of progress, control exerted over the vendor, level of trust
Risk assessment and management
from political risk, to risks of natural disasters; infrastructure, transportation, back up sites.
Technology assessment and monitoring
Maturity of the technology, standards
Systems implementation and integration
learn the skills that are necessary to perform these tasks with lesser levels of outside help
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16. Skills needed to manage offshoring
Business Process Redesign
analysis and modeling skills must reside in internal function ?
Integrated business and IS planning
Strategic IS planning should never be outsourced
Mission-critical systems development and testing
Retain in-house; clients often wish to perform their own post-delivery testing
Security
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17. Outline IT Offshoring Twenty practices for offshore sourcing
Life After IT Outsourcing: Lessons Learned from Resizing the IT Workforce
04/04/2011
© 2011 USC-CSSE

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19. Twenty practices for offshore sourcing Rottman, J. , and Lacity, M
Twenty practices for offshore sourcing Rottman, J., and Lacity, M. "Twenty Practices for Offshore Sourcing," MIS Quarterly Executive (3:3), 2004, pp
Offshore market size : $10- to $30-billion by 2005
Controversy
Stealing domestic jobs / Cut down bonus
Improving US economy
2003 – $36,000 service job went abroad = 0.25% of US IT jobs (worth $130,000 in US)
Cost saving 10-50% from offshoring, 68% -quality improvement
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20. BioTech Case
a Fortune 500 company and a leading provider of biotechnology-based products
$ Billions a year in sales
But generating significant net losses in 2002
an accounting restructuring and a major litigation.
an excessive amount of Sales, General, and Administrative (SG&A) costs.
Goal – reduce SG&A costs, especially IT costs
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21. BioTech Case
Biotech employs 600 IT personnel, with 200 domestic contractors
“Doing more with less”
Replacing some expensive domestic contract labor with cheaper, offshore equivalents.
Visiting other US companies that use offshore outsourcing
Set an intermediary to find Indian suppliers, since they have R&D site in Bangalore
2002, made a trip to India
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22. BioTech Case
CIO approved, set an Offshore Program Management Office (PMO).
The PMO signed Master Service Level agreements with 4 Indian suppliers, two large and two small
Start with small pilot projects to offshore PMO
To gain experience, learn about supplier and processes
Replatforming from PeopleSoft to SAP
back end systems development
entire end-to-end systems development
20-person day project to an 800-person day
Statements of Work (SOWs) appended to the SLAs
Fixed-price contracts were used when requirements were clearly defined.
Time and materials contracts were used when requirements were still emerging
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23. Risks of offshore projects
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24. Risks of offshore projects
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25. Challenges to the case
Learning curve with the offshore supplier, Time zone/language/cultural differences
Four major challenges
How can we swiftly move through the learning curve?
How can we mitigate risks?
How can we effectively work with offshore suppliers?
How can we ensure cost savings while protecting quality?
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26. To overcome the learning curve
Create a centralized program management office (PMO) to consolidate management.
PMOs set up preferred supplier relationships, negotiate, contracts, assess overall performance, define best practices, and disseminate learning
A separate PMO : if the offshore initiative represents a significant departure from domestic practices
An integrated PMO: if business requirements to drive the supplier selection and if they want the onshore and offshore suppliers to compete aggressively
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27. Learning Curve
2. Hire an intermediary consulting firm to serve as a broker and guide
e.g. NeoIT, SourceQuest, Soft Access, Cincom, TPI, and Providio Technology Group
2005, 64% of offshore contracts are brokered by intermediaries
3. Select locations, projects, suppliers, and managers to leverage in-house sourcing expertise.
Some firms select based on their domestic suppliers, (AT&T moves to offshore through partnership with IBM)
Or select based on suppliers’ maturity levels or domain expertise
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28. To Mitigate Risks 4. Use pilot projects to mitigate business risks
an ideal pilot size is ten to fifteen people for six months or two man-years, representing
Cost: $50,000 and $100,000
5. Give customers a choice of sourcing location to mitigate business risks.
Dell’s failure case in offshoring due to customer satisfaction of call center in Bangalore (need to re-shore)
Rates are lower with the offshore suppliers, but risks are lower with the domestic suppliers
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29. To mitigate the risks 6. Hire a legal expert to mitigate legal risks
Shaw Pittman, Milbank Tweed – Legal firms specialize in outsourcing
help with tax implications, protection of intellectual property, business continuity, regulatory compliance, visa formalities, governing law, and dispute resolution
7. Openly communicate the sourcing strategy to all stakeholders to mitigate political risks.
Domestic IT staff - panic and question the future of their careers; Offshore staff - isolated and treated with suspicion
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30. To mitigate the risks
8. Use secure information links or redundant lines to mitigate infrastructure risks.
India is in the process of laying fiber optic cables to 100,000 Indian buildings as compared to 30,000 buildings wired in the U.S.
9. Use fixed-price contracts, when possible, to mitigate workforce risks
Unproductive supplier employees take more hours
fixed-price contract with clearly defined deliverables.
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31. To Effectively Work with Offshore Suppliers
10. Elevate your own organization’s CMM certification to close the process gap between you and your supplier.
11. Negotiate the CMM processes you will and will not pay for to not waste money
12. Cross-examine, or even replace, the supplier’s employees to overcome cultural communication barriers
cultural differences
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32. To Effectively Work with Offshore Suppliers
13. Let the project team members meet face-to-face to foster camaraderie.
14. Consider innovative techniques, such as real-time dashboards, to improve workflow verification, synchronization, and management.
with transferring work, keeping track of programming and database versions
15. Manage bottlenecks to relieve the substantial time zone differences
Change the working hours or have co-located staff
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33. To Ensure Cost Savings and Protect Quality
16. Consider both transaction and production costs to calculate overall savings realistically.
U.S. average labor cost per year per IT employee is $63,33114, compared to less than $6,000 in many offshore countries
Transaction costs are considerably higher with offshore sourcing % to 57%
vendor selection, transitioning the work, layoffs and retention, lost productivity due to cultural issues, improving development processes, and managing the contract
transaction costs of domestic outsourcing 4-10%
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34. To Ensure Cost Savings and Protect Quality
17. Size projects large enough to receive total cost savings.
18. Establish the ideal in-house/onsite/ offshore ratio only after the relationship has stabilized
15% of client staff on site to maintain direction,
15% supplier staff on site to serve as liaisons and project managers,
70% of the supplier staff offshore
Or 50/50 , or 30/70
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35. To Ensure Cost Savings and Protect Quality
19. Develop meaningful career paths for subject matter experts, project managers, governance experts, and technical experts to help ensure quality.
“All of the best project managers I have ever worked with all started as coders. If all the hardcore coding is being done offshore, where will we get our good project managers?”
20. Create balanced scorecard metrics.
measures that consider costs, quality, timeliness, and risks
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36. O&D M-O U-O Learning Curve Mitigate Risks
More Important For Offshore
Unique to
Offshore
Equally Important for Both Domestic & Offshore
Challenges
Practices
O&D
M-O
U-O
Learning Curve
1. Create a centralized program management office to consolidate management X
2. Hire an intermediary consulting firm to serve as a broker and guide
3. Select locations, projects, suppliers, and managers to leverage in-house sourcing expertise
Mitigate Risks
4. Use pilot projects to mitigate business risks
5. Give customers a choice of sourcing location to
mitigate business risks
6. Hire a legal expert to mitigate legal risks
7. Openly communicate the sourcing strategy to
all stakeholders to mitigate political risks
8. Use secure information links or redundant lines
to mitigate infrastructure risks
9. Use fixed-price contracts to mitigate workforce
risks
04/04/2011
© 2011 USC-CSSE

37. not pay for to avoid wasting money
More Important For Offshore
Unique to
Offshore
Equally Important for Both Domestic & Offshore
Challenges
Practices
O&D
M-O
U-O
Work with
suppliers
10. Elevate your own organization’s CMM certification to close the process gap between you and your supplier X
11. Negotiate the CMM processes you will and will
not pay for to avoid wasting money
12. Cross-examine or replace the supplier’s employees to overcome cultural communication barriers
13. Let the project team members meet face-to-face to foster camaraderie
14. Consider innovative techniques, such as realtime dashboards, to improve workflow verification, synchronization, and management
15. Manage bottlenecks to relieve the substantial
time zone differences
04/04/2011
© 2011 USC-CSSE

38. 18. Establish the ideal in-house/onsite/offshore
More Important For Offshore
Unique to
Offshore
Equally Important for Both Domestic & Offshore
Challenges
Practices
O&D
M-O
U-O
Cost
savings while
protecting
quality
16. Consider both transaction and production cost to calculate overall savings realistically X
17. Size projects large enough to receive total cost savings
18. Establish the ideal in-house/onsite/offshore
ratio only after the relationship has stabilized
19. Develop meaningful career paths for subject matter experts, project managers, governance experts, and technical experts to help ensure quality
20. Create balanced scorecard metrics
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© 2011 USC-CSSE

39. Outline IT Offshoring Twenty practices for offshore sourcing
Life After IT Outsourcing: Lessons Learned from Resizing the IT Workforce
04/04/2011
© 2011 USC-CSSE

40. &
You’re fired !!
Layoff survivor
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41. Life After IT Outsourcing: Lessons Learned from Resizing the IT Workforce Ranganathan, C. & Outlay, C. N. (2009). Life After IT Outsourcing: Lessons Learned from Resizing the IT Workforce. MIS Quarterly Executive
IT Outsourcing Adjustments
Resizing —downsizing (layoffs)
Outplacement (transferring employees to a vendor) - part-time, temporary, and casual staff, and fixed-term contract arrangements
Inplacement (internal transfer) – retain expertise and knowledge of employee - less disruptive than the other two resizing approaches
IT resizing
organizational repositioning and readjustment of the roles and size of the internal IT workforce
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42. Challenges in IT resizing
Inadequate clarity about new roles and responsibilities
Resistance to change
If not handled appropriately, it would lead to stress, loss of trust, and reduced commitment
Maintaining knowledge and sustaining internal capabilities
potential loss of valuable expertise
Retraining and retooling
Blending external contractors with internal IT workers
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43. Psychological contracts
= Employee’s relationship with his or her employer
Impacts from psychological contract violations
negative effect on employee attitudes
insecurity, dissatisfaction, and poor organizational commitment, and cause employees to start looking for other jobs
performance related
poor output and inferior work
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44. Downsizing “survivor’s syndrome” - result in poor performance
resistance to change, fear, withdrawal, and paralysis due to increased cynicism and burnout
employers expect more and more from them after downsizing
move quickly to rebuild the psychological commitment
single round layoff, rather than multiple waves (prolong the negative effects)
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46. Outplacement Favor implementing outplacement in multiple phases
Create an invisible two-tier workforce structure of “insiders” and “outsiders.”
Need strong working relationships, & social networks across the two-tiers, are critical to outsourcing success
Working with contractors who are former colleagues
Dual identity -> awkward and ambiguous relationship
Persistent expectation ->No flexibility on contractor – work based on agreement; leads to frustration and fractured relationships
social ties suffer – emotional distance, not invited
Unhealthy competition (paranoia and backbiting)
Favor implementing outplacement in multiple phases
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48. Inplacement The least psychological contract violations
opportunities for career advancement and a chance to gain new skills
developing cross-functional expertise and cross-pollination of IT-business ideas
Challenges
loss of trust, if they perceive to be unfair
uncertain about their future career path and position
Although the knowledge is there, but may be unwilling to share (because she thought she was moved out)
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50. Six lessons for resizing
1. Adopt a People-Centric Approach to IT Outsourcing
Plan carefully
talent-matrix listing the skills and capabilities of its IT workers; technical proficiency, productivity parameters, also “soft” parameters (ties to others)
2. Stay Engaged; Don’t Delegate to HR
HR - lack intimate knowledge of IT workers
Manager - Engage themselves in the resizing process, otherwise, it will magnify the psychological barriers and further distance
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51. Six lessons for resizing
3. Provide Advance and Ongoing Direct Communications
honestly and directly communicate to their IT staff the reasons for outsourcing, the resizing plans, and the assistance that will be available
multiple town hall meetings to explain the company’s rationale and plans, in addition to having one-on-one meetings
4. Treat Everyone Fairly
If retained employees are not convinced about the reasons for outsourcing and resizing, and if they are unhappy, difficult to contain their emotional distress and remain productive.
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52. Six lessons for resizing
5. Devise Support Systems for Both Displaced and Retained IT Workers
open forums, counseling sessions, and opportunities to interact and have a dialogue with senior management
6. Don’t Underestimate Outplacement Impacts and Support Needs
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