Why offshoring doesn’t matter

Recently, an enterprise client was debating whether the offshoring ratio — the percentage of resources located off versus on shore — proposed by a service provider was too high, too low or just right. About a half-hour into the conversation, I realized we were asking the wrong question altogether.

Trying to discern what constitutes too much risk when it comes to offshoring has been a common exercise for years. After all, the cost implications are significant. Service providers tend to get aggressive with offshoring because a) they have more people there, and b) it allows them to present a lower total cost when competing for business. Sourcing buyers, however, especially less mature ones, feel more comfortable with a larger onshore presence and may or may not understand how it impacts their business case.

Does the question about percentage of resources offshore matter? I’d say, not very much.

The world has changed. First of all, most providers that work with Fortune 500 clients are large and experienced — they are not in the business of taking on more risk than is reasonable. More importantly, as long as they commit to service levels their customers find acceptable, who cares where the work takes place? The challenge, contractually, is to make sure service levels trump all else to keep the provider focused on what does matter.

But the real reason the offshoring question doesn’t matter is because it is an obsolete one. It asks: Do you want expensive human resources close to you or do you want cheap human resources far away from you? And the answer to both of these is no. What you really want is a non-human resource. You want to automate as much as possible so human creativity can make a difference elsewhere, where it counts.

When software robots reduce the volume of work related to repeatable processes, humans can then focus on what the robots cannot do. Instead of counting bodies, you want an aggressive rationalization program that reduces the number of applications you have to maintain (and thus the number of people maintaining them, regardless of where they sit). You want strict compliance where it matters — places where robots are demonstrably better than humans — and extreme creativity elsewhere. (Some humans still have the edge here, but they are rare, and you should hire them wherever they are.)

It will take time for companies to move away from the obsession with offshoring ratios and what they consider to be the risks they pose. Today’s outsourcing buyers and providers should be asking a different kind of question about risk: What are the risks of not automating these functions? And what new risks does automation create?

The offshoring debate is yesterday’s debate. We need new incentives to encourage no-shoring — an environment where physical location is meaningless because code does the work.

Source: cio.com-Why offshoring doesn’t matter

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IBM Should Cut Down On Outsourcing To India

BM remains an American-based, not an Indian- based company, as a recent New York Times article gave the impression to some readers when it claimed that IBM employs more people in India than in America.

IBM may have outsourced a great deal of its operations around the world as many other large companies have done, but its center of gravity remains in America. IBM was founded in the U.S. 106 years ago, and its headquarters and major research facilities remain to the U.S.

But IBM is an American company in decline, as evidenced by the long string of drops in its sales.

IBM’s Key Financial Metrics 10/6/2017

Forward PE Operating Margin Revenues (ttm) Qrtrly Revenue Growth (yoy)Div&yield 10.63 16.22% $78.44B -4.70% 4.16%

Source: Finance.yahoo.com

IBM’s Key Financial Metrics 1/17/2017

Forward PE Operating Margin Revenues (ttm) Qrtrly Revenue Growth (yoy)Div&yield 8.78 20.88% $83.80B -13.90% 3.91%

Source: Finance.yahoo.com

The root cause of IBM’s long decline is the failure to make a timely transition from the traditional mature declining business segments to emerging fast growing segments.

To be fair, IBM’s revenues from “strategic imperatives” (cloud, Watson and analytics, security, social and mobile technologies) have been rising in recent years. But IBM is late in this space, which is already crowded with heavyweights like Amazon, Microsoft and Google.

Apparently, IBM’s leadership has been spending too much time to revive its traditional business rather than to renew its pioneering drive that made it a great technology leader back in the old days.

That raises a simple question: why keeping the old business around, anyway? Because these businesses are outsourced at a lower cost to India and other locations.

But that has been a trap. Outsourcing hasn’t helped IBM improve its operating margins, which continue to slide — see tables.

Besides, outsourcing leaves management with fewer resources to plow into new business initiatives. Hence, the slow speed of transition from traditional business segments to new business segments.

Wall Street has taken notice, sending IBM’s shares south as the rest of the technology shares have been soaring. Over the last five years, IBM’s shares have lost close to 30% of their value, as the Powershares QQQ have gained 121.26% — see table.

IBM versus S&P 500

Company/ETF 1-year Performance 5-year Performance IBM -6.80%* -29.59%*Powershares QQQ trust 24.19 121.26

*It doesn’t include dividends

Source: Finance.yahoo.com 10/18/16

Outsourcing provides certain competitive advantages to early-movers – that is, to companies that adopt it first — but it isn’t proprietary. Others can adopt it, and therefore, isn’t a source of sustainable competitive advantage.

Then there’s corporate complacency whereby leadership of these companies fails to renew the pioneering drive that characterizes market leaders.

That’s what eventually happened in the PC industry, to companies like the old HP.

Outsourcing was supposed to cut costs, limit corporate size, and improve operating margins. But instead it ended up giving HP’s advantage away to Asian PC and printer makers, piece-by-piece, failing to re-ignite sales growth.

Meanwhile, HP failed to revive its old pioneer drive that made it a great technology company in the first place.

The rest is history, which IBM will be destined to repeat. Unless it scales back on its outsourcing activities in India and other locations.

 

Source: Forbes-IBM Should Cut Down On Outsourcing To India

How to Reduce IT Outsourcing Costs Without Going Offshore

When we’re talking about significantly cutting IT costs, we’re typically talking about tapping offshore markets where labor costs are significantly lower.

But going offshore always comes at a price, typically in the form of reduced efficiencies caused by communication breakdowns, cultural misunderstandings, time differences, and combinations of those problems and many others. Still, the cost-savings are a powerful draw. You can have better interaction and quality with full onshore team, but that comes with a high cost. What if we could have something in the middle?

There is another approach, which I call global shoring, which is very less talked about, is providing the cost-saving advantages of offshoring without any of the disadvantages.

The an equation representing global offshore modeling would look something like this: Senior team onshore + mid and junior team offshore = high quality and lower cost.

Initially implemented by large IT outsourcers, the global shoring model is now being adopted by mid-sized companies and small startups. With global shoring, a project’s leads, such as project manager, technical architect, designers, and senior QA professionals, are provided onshore, while developer, testers are offshore. Onshore team interface with the customer and perform high end responsibilities, while simple, routine, and repetitive processes are performed offshore at a significant savings in labor costs.

Global shoring has some surprisingly attractive advantages beyond the labor cost-savings.

Seamless Communication and Project Management

Having project managers and technical leads onshore enable you to talk with them on your time and your terms. The communication advantages are enormous when everyone is in the same time zone and on the same page culturally and technically. Problem-solving is faster, easier, and less chaotic. Complex misunderstandings can be eliminated with face-to-face, on-site appearances. It is always easier to explain your vision and needs to a team that is in the same country as you and understands your industry, company, and product cultures the same way you do. Your on-shore management leads can insulate you from having to navigate all the time, language, cultural barriers, and other obstacles to efficiency that offshoring can pose.

Intellectual Property Rights (IPRs) are Better Protected

When you hire a global shoring company with offices in same country as yours, your contracts will be in the law of the land. That means it will be easier to find and enforce any IPR infringement or copyright issues with a global shoring company than with an offshore company. If an offshore company infringes on your IPR, your legal options will be fewer, more complex, and costlier if the case must be pursued overseas.

Greater, More Focused, Quality Control

A global shoring company will provide senior QA and tech leads onshore, and, because they are overseeing offshore processes, a more deliberate and disciplined quality assurance approach must be taken. Time and calendar disparities will be planned for and accommodated in project timelines, ensuring that requirements and testing standards are met.

Better Customer Support (One, Much Closer, Throat to Choke)

If something goes awry in IT services provided by a global shoring company, you will know you can always reach out to them in the same time zone and they’ll be able to respond to you much more easily than an offshore company on a different continent and in a different time zone. Plus, proximity carries a greater weight of responsibility. It’s always easier to ignore someone a world away, than it is to ignore someone who could be knocking on your door later in the day.

Cost is Cheaper than Onshore

A global shoring company will charge you rates somewhere in the middle of a full onshore company and an offshore company. That is still a great cost advantage. Typically, a global shoring company will do 30- to 40-percent of a project’s work onshore and 60- to 70-percent of the work offshore. The final savings are difficult to turn down, especially when they come without the disadvantages of full offshoring.

Global Shoring Creates Jobs Onshore

The best part of hiring an onshore company is knowing that you’re getting the advantages of offshoring, but you’re also helping to create jobs in your own country. In today’s business and political climate, that’s an attractive message to be able to communicate. global shoring provides you economic benefits while helping to support your own country’s economy.

Source: Inc.com-How to Reduce IT Outsourcing Costs Without Going Offshore

The impact of new digital business models on IT services

Suddenly, on-shoring is becoming more in vogue. Like many U.S. CIOs and their C-suite colleagues, you may be actively exploring how to duplicate or offset the loss of cost benefits from offshore/labor-arbitrage services. I have good news for you, along with a crucial tip.

Four primary factors are driving U.S. companies to make the move to onshore service delivery:

  • Uncertainty associated with the potential of changing tax laws and border taxes, which could introduce a tax of 20 to 30 percent on services done offshore.
  • Potential changing regulations and increasing regulatory pressures to relocate work from offshore resources to the U.S.
  • Potential of reputation damage of companies called out publicly in the news media for use of offshore workforces.
  • Uncertainty around rising costs due to changing immigration laws and use of H-1B visas, which could make offshoring more expensive for service providers and increase barriers.

Although these factors vary by industry and company, the net result is companies are looking even more closely at digital technologies and digital business models to offset the cost benefits of offshoring.

Let’s look at how these digital models apply to IT.

IT infrastructure

Many firms support their legacy infrastructure offshore and have significant teams in what is called Remote Infrastructure Management Outsourcing (RIMO) done offshore. A digital model applies to this in two ways:

  1. Cloud. It will accelerate the move to private and public cloud models. When you move to the cloud, you move into a highly automated environment, thus dramatically lowering the number of people to support the infrastructure. You can use that savings, and potentially the necessary support people can be more easily afforded onshore.
  2. Automation. By applying automation tools to the legacy IT infrastructure, you can dramatically reduce the number of people needed to support the legacy environment, once again making it more affordable to have the remaining people operate out of the U.S. instead of offshore. For example, you can eliminate 40 percent of the FTEs by using tools such as IPSoft’s Autonomics (featuring virtual engineers and toolset for all components of IT service management) or TCS’s Ignio (a cognitive system for enterprise IT operations). These digital models and technologies change the economics, making it much more affordable to do this work onshore rather than offshore.

DevOps Toolkit

Applying the DevOps set of tools (self-provisioning, automated testing, agile methodologies) in an IT shared services organization creates up to a 30 percent productivity benefit. A 30 percent increase in productivity goes a long way to offsetting some of the offshore/onshore cost issues.

In truth, these productivity gains can be captured using an offshore model. So the argument is a little more complicated because the opportunity to apply DevOps tools and techniques to shared services is independent of location. But if you adopt them, it will lessen the impact of moving work back onshore.

In a DevOps model, it’s necessary to move to cross-functional teams in pods aligned to the business that operate from app development through IT infrastructure. Designed to be highly productive teams, these IT employees naturally want to be close to the business users – therefore onshore. Using this model, we find companies enjoying substantial productivity gains well over 100 percent, which more than offset labor arbitrage/offshoring losses.

Source: cio.com – The impact of new digital business models on IT services

What 20 Years as a Remote Organization Has Taught Us About Managing Remote Teams

In his 1974 interview with ABC News, science fiction author Arthur C. Clarke painted a picture of how computers would change our way of life by the year 2001. One of his many extraordinarily accurate predictions: “Any businessman, any executive, could live almost anywhere on Earth and still do his business through a device like this.”

Now, this prediction about remote working has not only come to life; it’s proved to be more beneficial than the traditional office model for some companies. The advisory firm we work for is one such company. Since its inception, in 1995, ghSMART has been a firm with a completely remote team. More than 80% of our work is done by teams of consultants and staff who operate out of their home offices. It’s working for us: ghSMART has seen more than 97% client satisfaction in the past decade, 93% team retention, and greater than 20% annual growth. Our journey of more than 20 years has led to a lot of success and has taught us some valuable lessons for how to make remote arrangements work:

Hire the right people. Having remote team members requires that we hire people who can deliver technically while working independently. At the same time, the fact that we do not have to maintain physical offices leaves us room to pay higher wages than others and attract top talent. By spending up to 42 hours researching and interviewing a given candidate, we take great care to ensure that we find and hire the right people. We don’t stop at interviewing and choosing good candidates; we give them detailed insight into the company’s finances, strategy, individual consultant performance, and implications on compensation so they can make a fully informed decision about whether to join us. We have learned that both we and our talented candidates make the best decisions when we provide each other with a large amount of good information.

Focus on outcomes. After spending as much effort as we do in bringing the right people into the firm, it only makes sense to set them free. The first and most important step in doing this is to set expectations. We tell our new teammates exactly what outcomes matter to us, and reward them for achieving and exceeding those outcomes. We do this through a scorecard that we give to consultants and staff members for their individual roles. As a leadership team, we strive to maintain consistency in the outcomes for each role so everyone knows exactly where the bar is and that it is not going to change unexpectedly. Once clear, consistent outcomes are set, management conversations shift from exercises in delegation to problem-solving sessions. Less micromanagement leads to more choice, decision making, freedom, and accountability at the individual level.

Help employees choose, and be responsible for, their own adventure. By determining the right floor and not restricting the ceiling, and by paying for value (once they exceed their outcome, consultants are paid a commission proportional to the additional work they deliver), we put the choice of how hard to work in a consultant’s hands. Our team members have the freedom to, say, take their child to a doctor’s appointment in the middle of the week while doing leadership coaching work with a CEO. Each consultant is free to choose the type of work they want to do, whom to do it with, and when to do it. We provide all our teammates with the information on what work their colleagues have done, and plan to do in the near future, so they can pick and choose where they want to serve.

Outside of client work, we allow teammates to invest in other areas, and even provide them resources when required. For instance, we often announce an innovation budget and invite applications to pilot ideas. As a result, our teammates voluntarily design new practice areas, conduct cutting-edge leadership research, and write books. We’ve noticed that our team members adopt a strong sense of commitment to the responsibilities they take on and do not abandon them when the going gets tough. They feel true ownership. Our leadership team ensures that this balance between choice and commitment, and the value of owning the outcome, is a respected, celebrated cultural attribute.

Centralize thoughtfully. We focus on letting our team members be the “CEOs” of their professional lives, but we have learned over time that not every aspect of choice adds value. For example, we previously enabled consultants to choose their own health care plan providers, and even set up their home office the way they wanted, but have since moved to a company plan and standard IT package to launch our team. This makes their lives easier without taking away the choices that truly matter. While there are more instances of such centralization, our leadership team maintains a very high bar for such decisions because too much control can erode mutual trust.

Arthur C. Clarke’s vision of a new world of remote work has largely come to pass. In a 2014 survey of business leaders at the Global Leadership Summit, almost 60% of leaders said that more than half of their workforce would be remote by 2020. Every year we learn more about the benefits of remote work, including increased productivity and the ability to attract Millennial workers. We have lived the benefits of a remote model: Our two-decade commitment to individual freedom and accountability has helped us turn our “remoteness,” which some might imagine would be a disadvantage, into a critical lever of our success. We encourage you to experiment with outcome-based, decentralized models as you seek to get the most out of your remote teams. We may have landed on a model that works only in our case, but we suspect that it can work for you, too.

Source: Harvard Business Review- What 20 Years as a Remote Organization Has Taught Us About Managing Remote Teams

‘Boutique Collective’ – The new trend for IT outsourcing

Outsourcing no longer equals offshoring. To many it will come as a surprise that out of the £6.6 billion worth of outsourcing deals struck in 2015, 90 per cent involved services being delivered onshore in the UK – with half being awarded to new local operators.

The onshore trend is driven by UK companies taking a more strategic approach. They are doing this by increasingly looking for outsourcers that can function as business partners and a genuine extension of in-house teams. And IT services are the most popular sector for UK companies to outsource. According to industry research by CACI, it leads with a 57 per cent share, considerably larger than the second most frequently outsourced service, network infrastructure (25 per cent).

With outsourcing such a hot topic for senior IT professionals, these trends reveal what a strong opportunity local outsourcing presents, particularly for business-sensitive projects that require a larger workforce than current in-house teams provide.

Strategic outsourcing

In the past, large corporations created the perception that the UK only has large and expensive consulting firms for onshore outsourcing, while alternative options have been less obvious.

However, as the UK increasingly becomes both a customer and a provider of outsourcing services, we find ourselves in a more complex market. This will continue to open the door for local, specialist providers – also dubbed “boutique” outsourcing providers – which can offer high-level expertise to businesses and government alike. And businesses are now also tendering smaller contracts to a more diverse range of providers within the UK. So perhaps the key change in the market is outsourcing partners becoming strategic business partners rather than just being seen as a distant supplier.

For specialist outsourcing providers, however, these trends also present an administrative challenge. Businesses who need an array of different specialist services can spend hours drafting up multiple contracts, which means that time and money can be swallowed up by admin. Yet this challenge can be solved by partnering several specialist outsourcing companies under one umbrella. This concept of partnering specialist outsourcing companies has been dubbed the “boutique collective” and is one of the most exciting developments of UK outsourcing in recent years.

The boutique collective

The boutique collective has many advantages over larger outsourcing operations. To begin with, it ensures that UK companies can subcontract a whole range of functions locally to strategic partners. It also collects a broad spectrum of experts under one umbrella, resulting in lower management cost.

What we advise clients at CACI is that subcontracting services to boutique collectives can narrow down the outsourcing to a small number of strategic partners that are leaders in their field. As part of this, it is therefore essential to understand the scope of what a strategic partner can offer within their area of expertise, to avoid stretching their services to the point of reduced quality. This is because a potential issue with employing boutique companies is what has been dubbed the “boutique paradox”. This paradox can occur if a company is so happy with the boutique company or collective that it continually asks the boutiques to provide more outsourcing services. This could lead to boutique specialisms becoming more generalised and eventually result in a service that is very similar to what large outsourcing firms offer in bulk.

To avoid the boutique paradox, boutique collectives will have to be set up so that individual companies’ specialisms continue to dominate the value proposition. For strategic outsourcing partners, it will also be vital to ensure they are able to collaborate well with each other. Companies should make sure all their onshore outsourcing partners can work together in a way that resembles the ideals of the boutique collective as closely as possible – even if they are competitors.

Onshore taking the lead

A single prescriptive model for how outsourcing should be managed will never exist, but by staying ahead of the trends of Outsourcing 2.0, UK businesses will be in the optimal position to take advantage of new opportunities. Even as cost is still the primary rationale for many outsourcing decisions (51 per cent), technical expertise (19 per cent) and flexibility (16 per cent) are not too far behind, leading the way for more strategic, onshore outsourcing.

For offshoring, high transaction costs and increased quality and management overheads have turned the trend against large scale offshore operations. And in the years leading up to 2016, the race to outsource operations offshore has slowed down significantly. Being the more flexible option, meanwhile, onshoring is ready to take the lead in the world of Outsourcing 2.0.

Source: itproportal.com-‘Boutique Collective’ – The new trend for IT outsourcing

Does location really matter when offshoring your IT services?

Not too long back, many global IT service providers were known to move delivery of IT services of their clients to offshore locations (like South Africa, Latin America or India) without informing their clients. This was seen as an internal lever to make customer contracts more profitable in a multi-year deal as services were first stabilised in a high-cost onshore delivery location before being shipped to an offshore location. With maturing client awareness, most contracts today include provisions requiring the service provider to state up-front the offshore play along with details of all countries from where services would be delivered. In many cases it also includes the specific cities from where the services will be delivered in the period of the contract.

As an enterprise, what do you do with this visibility? Beyond knowing that some of your services will be delivered from a particular offshore location, does it really matter? Further, can you use this to ensure you get better quality of services or even more cost efficient services when discussing with your down-selected IT service providers? Yes, yes and yes!

To understand this, we should delve deeper into what goes inside most IT service providers’ organisations when it comes to building their location strategy. From my personal experience with some of the largest global IT service providers, offshorebased IT service providers and other mid-sized providers, the location strategy is at times built with a well-crafted plan but at other times has seemingly bizarre rationale. It is important to understand that in most cases the location strategy is a downstream effect of growth of their business. Service providers operate in a highly competitive market and would ideally like to ramp up the size of their delivery locations as new business comes in which provides them revenue to fund these expansions. Unfortunately, most service providers still have a labour-intensive delivery model and clients expect services to start within weeks of signing contracts. Thus lead time (of few weeks) is too short to stand up new facilities to deliver for new contracts.

In case of very large and even mid-sized providers operating for couple of decades, the location strategy today is often seeded in the way they grew historically. In several cases, historically few locations emerged when either existing space was available at short notice, or there was a good real estate deal available – and sometimes even when it had to be the home town of the top leader under whom the delivery of a major client was dependent (typically a vice president or someone as senior)! Access to skills and tax holiday criteria are some other factors which have driven the locations that were developed historically.

In today’s times when things are better organised and that approach cannot be taken any longer, most service providers retain hard shell spaces in major cities where they operate. These places can then at short notice be converted into warm shells with interiors and other aspects of getting the space ready for delivery. Thus the longest lead time of identifying and acquiring space is taken care of. With the current space challenges at most significant offshore locations, it is also a challenge to find new space contagious with existing operations. In most cases the service providers look for spaces either in the same IT park (if not in the same building) or even in the same city to still leverage local management.

Many service providers have Centres of Excellence (for specific verticals like Insurance or Retail) in a particular offshore location. Most often these are cities where they started few major clients in that vertical historically and it helped to move across team members across accounts which resulted in these developing into hubs for a particular industry vertical. It also helped to cross-leverage best practices and management focused on a particular vertical.

So, what can a CIO and her team do with this awareness when signing their next significant outsourcing contract? Here are few imperatives which can help:

Insist all locations being used to deliver services for their contract are stated up-front. Further the service provider should be obligated contractually to inform and get a concurrence in advance before changing the locations to deliver services.

  • Ask for the names of other major clients from their industry vertical that are being serviced from that location? A good set of clients from the same vertical ensures that there will be access of skilled resources, seasoned managers and that the account is not a victim of BOCA (best option currently available) factor.
  • If feasible, insist on getting services delivered from a single offshore location (or not more than two or three locations if the contract is really big). Clients have been known to have discovered that services were being delivered from as many as six to eight offshore locations. This leads to poor quality of service due to poor control, lack of strong management and operational rigour.
  • Ask for a discussion with the local leadership team who would be responsible for the delivery of services. Understand their experience in delivering for the industry vertical. This is more relevant for consulting, application services and BPO (as against IT infrastructure services).

While there are several factors that determine successful delivery of services for a contract, given the same provider, the choice of location can have an important play. It finally comes close to the mantra in real estate which states that only three factors are important to consider when choosing a property: location, location and location!

Source: outsourcemag.com-Does location really matter when offshoring your IT services?