1. Offshore Outsourcing

2. Delta Air Lines
Delta Air Lines offshore outsourced some of its worldwide reservation services to India-based Wipro Spectramind. This third-party vendor manages Delta’s reservations from its Mumbai call center; a move that was expected to save $26 million in 2003 alone.

3. AOL
America Online has a large call center facility in Subic, the Philippines, handling all queries from the company’s 35 million subscribers. AOL operates a 24-hour customer service facility, staffed by 500 Filipino employees.

4. BellSouth Corporation
BellSouth Corporation is outsourcing IT work to a facility run by Accenture in India. By moving approximately one-third to one-half of BellSouth’s IT application work offshore, the plan is expected to save $275 million over five years.

5. Microsoft/Oracle
Microsoft announced a $100 million investment to scale up its Indian product development and R & D center. Oracle announced plans to double its software development workforce in India to 6000 people.

6. Customer Pressure to Do More for Less
Most large corporations have reaching (or are quickly reaching) the limits of cost-cutting using traditional methods. Offshoring is a possible solution.

7. Crucial Elements
Skills and management practices required to seamlessly integrate both individual projects and large-scale process offshore outsourcing activities into the overall company strategy.
Leadership that defines and communicates a unifying vision, together with a strategy for achieving it.
For long-term effectiveness, an organizational culture that encourages and supports offshoring.

8. What Is Offshore Outsourcing?
Offshore outsourcing is the delegation of administrative, engineering, research, development, or technical support processes to a third-party vendor in a lower-cost location. Can also include the re-engineering of processes.
Offshoring does not necessarily mean outsourcing. Business process outsourcing (BPO) involves the migration of services to an external provider, which may operate the processing offshore. Offshoring, though, may remain in-house.

9. The emerging trend of offshoring business processing (or white collar work) represent a fundamental structural adjustment, not a short-term business cycle phenomenon.
Call centers
Finance and accounting
Human resources
Transaction processing

10. Economies of Outsourcing
Costs in the U.S. and Europe 100%
Offshoring
Reduced Costs due to Low-Cost Labor 70%
Additional Transaction Costs
(legal, vendor selection) %
Additional Monitoring Costs
(travel, telecom) %
Overall Offshore Cost Savings 30%
Will be more attractive as telecom costs continue to decline and barriers between firms and countries are breached.

11. Business Models See Figure 2.2 (models/delivery methods)
Many combinations of locations and ownership structures that exist give rise to several distinct business models.
In each model, the relationship between the client and provider is structured uniquely.

12. A business model typically illustrates how a firm makes money
A business model typically illustrates how a firm makes money. This is relevant and pertinent for third-party vendors.
For companies building captive centers, offshore is part of their overall strategy.
Offshoring is seen more as a delivery mechanism than a new business model.
Different models are appropriate at different levels of organizational maturity and complexity.

13. Internal Delivery
Internal department provides services—finance, HR, etc.—to other business units and implements new services through internal projects.
Advantage: internal dept and business unit manage the relationship and can change rule and processes when needed
Shortcoming: most limited model in regard to dimension of operations and experience, innovation, and available additional resources.

14. Offsite Onshore Shared Services
Eliminates common but duplicate processes, activities, staff and individual business units have and brings them together to achieve a critical mass.
These “cost center” functions (accounting, HR, etc.—necessary but not strategic—are consolidated for economic of scale.

15. Offshore Captive Shared Services
Housing the shared services offshore
Very common in multinational firms.

16. Cosourcing (joint venture)
Companies that execute a shared services center with an external vendor.
A collaborative relationship based on shared objectives that reflect the appropriate balance between control and flexibility.
A viable model for organizations uncomfortable with outsourcing a complete business process
Outsourcing some parts to a joint venture with a vendor may offer a temporary or final solution.
Combines strengths of both parties.

17. Cosourcing, cont. (AT&T and Accenture
5-year, $500-million arrangement designed to transform AT&T’s residential credit and accts receivable mgmt functions
Accenture manages the integration of planning, initiative execution, and collection processes across multiple organizations within AT&T Consumer.
AT&T retains control of business planning, credit policy, and consumer interaction.
Good option when firms don’t have the skills or $$ to set up a shared service center on their own or don’t have mgmt talent necessary.
Advantage for company that cosources is that it doesn’t have to pay for everything upfront; vendor is guaranteed a revenue stream.

18. Offshore Development Centers
Joint ventures with offshore vendors.
An ODC is a dedicated, customized, and secure development center established by a vendor for a customer who needs to outsource substantial software development, maintenance, or engineering work.
Jointly owned; gives the customer more control but requires much greater management attention.

19. Typical Offshore Development Centers
Facilities Management
Office infrastructure
Physical security
Communications infrastructure
Technology equipment
Standard office software

20. Typical Offshore Development Centers, cont.
Operations Support
Data security and backup
Computer maintenance
Systems administration
Accounting services
Office administration support
Visa and travel support
Government liaison

21. Typical Offshore Development Centers, cont.
Staffing, HR, and Training
Recruiting and hiring
Orientation and training
Retention program
Taxation and HR compliance
Employee benefits
Outplacement

22. ODC Model Stages
At the beginning of a project, the ODC assigns a small team of 2 to 5 with varying skills—business analysts, project managers, and IT professionals—to visit customer site and determine scope and requirement of project.
Once initial specs are documented, the project managers return to the offshore location to supervise a much larger team of 10 to 50 IT professionals to develop the applications.
Small team remains at client’s site to track changes in scope and address new requirements as the project progresses.

23. ODC Model Stages, cont.
Once the development state is completed and tested, a team returns to the client’s site to install the newly developed system and ensure its functionality.
The vendor will likely enter into an ongoing agreement with the client to provide comprehensive maintenance services from one of its offshore software development facilities.

24. ODC Model Stages, cont.
In contrast to development projects, a typical maintenance assignment requires a larger team of 10 to 20 IT professionals to travel to the client’s site to gain a thorough understanding of all aspects of the client’s system.
The majority of the maintenance team returns to the offshore software development facility where it assumes full responsibility for day-to-day maintenance of the client’s system, while coordinating with a few maintenance professionals who remain at the client’s site.
Sophisticated projects management and quality control measures and necessary.

25. Staff Augmentation, Contracting, Temporary Services
The oldest onsite outsourcing model.
Leverage supplemental staff to contain costs and handle overflow work.
Reduces costs of hiring, benefits, and termination
Can include offshore vendors
Many offshore vendors started as “body shops” that provided staff augmentation

26. Pure IT or Business Process Outsourcing
Companies delegate one or more business processes to an external provider that owns, administers, and manages the processes based on predefined and measurable service level metrics.
Multi-year contract (5 to 10 years) with one vendor for all in-scope services.
IT outsourcing
BP outsourcing
Two reasons for selecting this model
Lack of staff with appropriate skills
Not enough time to do the job right
Advantages: lower cost of procurement, reduced mgmt overhead, and service provider familiarity with client needs
Disadvantages: captive or even exclusive relationship and the tendency of service provider investments to set the pace for innovation.

27. First-Generation Offshore Outsourcing
Foreign companies come to the US or Europe to sell projects.
Projects then completed totally offshore with local, low-cost labor.
Chosen because of difficulty in recruiting employees; could easily turn projects “on” “off” based on business demand.
Works best for well defined projects needed little coordination (yet often using lesser-skilled talent; not good in a business process environment needing more interaction.

28. 2nd Generation Business Models
Arising as customer needs evolve; most sophisticated and span multiple 1st generation models.
See Figure 2.3.
Relationship Structure
Third-Party Vendor
Joint Venture (collaborative)
Completely Owned Subsidiary
Geographic Location
Onsite
Offsite in Same Country
Offshore in Foreign Country

29. Joint Venture (Collaborative) Completely Owned Subsidiary
Third-Party Vendor
Global Delivery Model
Hybrid Model (on-site, offshore)
Joint Venture (Collaborative)
Build-Operate-Transfer Model
Completely Owned Subsidiary
Global Shared Services Model

30. Global Delivery Model (blended outsourcing)
A company outsources to a multinational service provider such as Accenture, EDS, or IBM that offers a mix of onsite, offsite onshore, and offshore resources.
Allows vendors to innovatively distribute and manage engagements across multiple global locations. The company initiating the outsourcing receives a lower rate without the risk.
The distribution of outsourcing activities may vary according to the demands of the project.

31. Hybrid Delivery Model (onsite and offshore)
Combines onsite and offshore services to deliver results at reduced costs.
One of most popular models to have emerged: Continuous, near 24-hour work cycles.
Ability to structure and assemble teams with diverse, multiple skill sets; lower-cost resources; and the ability to quickly scale depending on the requirements.

32. Part of this model’s success can be attributed to the fact that this model enables clients to directly interact with the service provider through the onsite team and simultaneously enjoy the benefits of offshore outsourcing.
Challenges: project management and administrative costs, optimization of cross-cultural communication, and the supervision of onsite teams.

33. Global Shared Services Model (Captive Centers/Offshore Insourcing)
A combination of onshore shared services and offshore captive centers
Consolidates the scattered, autonomously run internal services operations of a multinational organization into mega-service centers
Creates a customer-focused mind-set and dedication, which enables high-quality, cost-effective, and timely service
Global Center run as an independent business, with its own budget and bottom-line accountability

34. Advantages
Have guaranteed markets for their services and an established hierarchy
Helps alleviate organizational issues of control and politics that crop up when firms relocate back-office activities offshore to external vendors.

35. Build-Operate-Transfer Model
Brought about by increasing number of captive subsidiary failures.
Many obstacles: legal, taxes, hiring, and management
A firm contracts with an offshore partner to build a shared services or offshore development center and operate it for a fixed interim period.
The offshore partner can initiate operations and reach operating stability much faster than it can with an in-house effort.

36. Three Phases
Build—client receives own foreign presence (brand identity) at lower price than comparable outsourcing arrangements.
Operate—offshore partner provides a comprehensive set of operations mgmt services; the client can focus mgmt time on core business rather than operational issues
Option to Transfer—Client can bring the operation in-house at any time
A well defined process to ensure smooth transition should be spelled out in outsourcing contract

37. Offshore Multisourcing
Many companies hire multiple offshore vendors to mitigate risks
Achieve advantages of best-of-breed strategy
A sign that companies are taking a more cautious, risk-averse approach to outsourcing
Companies new to outsourcing tend to use multisourcing; companies more comfortable with the process and larger organizations may use one provider. To reduce complexity, very large companies look for one dominant provider and that provider will then work with a big network of companies.

38. Offshore Revenue Models
Time and Material Revenue Model
Time and materials billing: attractive option when scope, specifications, and implementation plans of a project are not easy to define at the outset
Can be costly if have lax oversight of the work; task sheets should be generated on a daily or weekly basis for each of the employees on the project.

39. Fixed-Price (Fixed-Time) Revenue Model
Customers are attracted because of the upfront commitment on timing and the concept of risk sharing on potential cost or time overruns
The customer pays a prenegotiated fixed price for the complete project, which is linked to well-defined deliverables.
Good for projects with clear requirements and project schedules.
Changes in scope are subject to a predefined fixed hourly rate and must follow a standard, already established change request procedure.

40. Cost Plus Revenue Model
Typically used for the build-operate-transfer model or for complex multiyear, multi-element arrangement.
Contracts principally structured on a fee-for-service basis and stipulate that the vendor receives a fee that is no greater than the client’s historical cost of operating the functions assumed by the vendor.
After vendors have recovered their costs or achieved a negotiated minimum cost reduction, they may be required to share further savings with the clients in a negotiated gain sharing arrangement.

41. Risk-Reward Revenue Model
Vendors that enter multiyear partnerships with clients favor risk-reward or gain sharing models for outsourcing contracts.
Vendors are open to linking their revenues with the actual benefits their clients realize.
Value Pricing (“pay as you save”)—the outsourcer builds first and is paid as savings materialize (performance based)

42. IT Outsourcing
Cost savings from offshore outsourcing are too compelling to ignore.
Evolution of IT Outsourcing and Offshoring
Contractors and Staff Augmentation
Legacy Software Project Outsourcing
Packaged Software Outsourcing
Offshore Development Centers
Captive IT Development Centers

43. Risk Management Security Confidentiality of Information
Disaster Recovery
Loss of Knowledge and Innovation
Potential for Poorer Quality
Language and Cultural Barriers

44. Creating a Business Case
Evaluate whether an offshore IT strategy is suitable for your organization.
Identify core and noncore IT processes.
Justify your decision to offshore IT by estimating the potential ROI.
Design an offshore engagement model.
Select vendor(s) and negotiate the contract(s).
Develop an implementation plan.

45. Strategic Vision Why are you considering offshoring IT?
Expectations and assumptions behind the decision.
Stakeholders in favor?
Internal political climate?
Scope: core versus noncore IT processes and applications

46. Types of IT projects being offshored is changing.
Innovation is beginning to overtake application maintenance in the category of projects going offshore.
CIOs are not willing to spend more than necessary on packaged applications software like CRM or ERP. They are looking at investing in services-oriented architecture composed of elements like enterprise portals, integration engineering, and network identify management—increasingly being executed with a hybrid onshore-offshore business model.
See Figure 4.2.

47. Financial Justification Offshoring IT
Tangible Benefits
Low-cost labor arbitrage (what is your current baseline?)
Faster time to market (24-hour development cycle)
Intangible Benefits
Less recruiting, more refocusing (spend effort on core processes)
Business flexibility and agility (access to world-class talents)
Quality and user satisfaction (vendor quality focus?)

48. Costs Vendor selection costs
Transition costs (3 months to a year to hand-off to vendor)
Severance and retention bonuses (must retain as consultants)
Contract management costs