Offshore outsourcing:

Offshore outsourcing: Managing IT-outsourcing dr. Erik Beulen, Accenture / Tilburg University / TIAS Business School 1

Agenda Definition Market developments Impact on the Netherlands Structuring offshore outsourcing relations Type of services Risks of offshore outsourcing 2

Definition 1/2 Outsourcing Handover the responsibility for the execution of (parts of) the IT services to one or more IT suppliers. IT outsourcing is based on contracts. Contract value > 5 mio Euro Contract duration >= 2 years Contract negotiations > 4 months (Transfer of staff and/or assets) Offshore outsourcing Offshore outsourcing is a special kind of outsourcing, in which the services to be delivered are performed on another geographical location than where they are used. 3

Definition 2/2 Strategic Delivery Model Local Sourcing Regional Sourcing Global Sourcing Client Sites Delivery Centers Delivery Centers Based on Assets& Products Low Cost Locations Multi-disciplinary Teams Methodology, Tools & Architectures (Accenture s Strategic Delivery Model) 4

Market developments 1/2 Pure Indian players Wipro 42.000 FTEs Tata 41.000 FTEs Infosys 35.000 FTEs HCL Technology 22.000 FTEs Satyam 20.000 FTEs Accenture employs over 129.000 FTEs including 38.000 FTEs in delivery centers of which + 20.000 FTEs in India. West goes East en East goes West! 5

Market developments 2/2 Tier Tier-1 Tier-2 Tier-3 Taxonomy Mature software exporting nations Emerging software exporting nations Infant stage software exporting nations Countries Most industrialized nations such as: USA, Canada, UK, Germany, France, Belgium, The Netherlands, Sweden, Finland, Japan and Switzerland. Entrance from 1990s: Ireland, Israel and India. Entrance from 2000s: China and Russia. Brazil, Costa Rica, Mexico, The Philippines, Malaysia, Sri Lanka, South Korea, Pakistan, Ukraine, many other Eastern European countries and several more elsewhere. Cuba, El Salvador, Jordan, Egypt, Bangladesh, Indonesia, Vietnam and 10-20 others. Noncompeting Non-competing About 100 of the mostly small, least developed countries of the world, including most African, and Middle-Eastern nations. These nations have few to no software exporting firms. E. Carmel (2003) Taxonomy of new software exporting nations, The Electronic Journal on Information Systems in Developing Countries, 13 (2), May. 6

Impact on the Netherlands Dutch perspective : unemployment ICT professionals is about 15% lower than the average unemployment in the Netherlands (average unemployment 6.1 % in January 2006, source : CBS : PB06-018, 16 February 2006). Labor market perspective : Research centrum voor onderwijs en arbeidsmarkt : prosperous future for studierichtingen Informatica en Bestuurlijke informatiekunde (2005). Spiegel on line (9 February 2005) : Softwareexperts sind wieder gefragt. Growth Dutch ICT Sector 2005 : 4.2% ( Dringend behoefte aan duizenden IT ers-intermediar 27 april 2006 ) Global perspective : Annual growth of IT spend and annual growth of external IT spend total IT spend offshore outsourcing < 5% (estimation, no hard data available) also applicable for the Netherlands, might be even lower than 2,5% annual number of Indian IT related graduates (Masters) is over 250.000 and emerging countries such as China, Eastern Europe, Russia, Brazil, the Philippines buy American or economic development of developing countries : that is the question 7

Structuring offshore outsourcing relations 1/4 Captive offshore outsourcing : internal shared service centers in developing countries Native offshore outsourcing : external service provider based in developed countries and have subsidiaries in developing countries for the actual delivery of the services Foreign offshore outsourcing : external service provider having their headquarters in developing countries and subsidiaries in developed countries which function mainly as sales offices 8

Captive offshore outsourcing Service Recipient Service Provider (internal) Geography HQ developed region(s) strategy information office Overall + overall management IT strategy region X region Y region Z developing region(s) service delivery + + management Offshore Operations 9

Native service provisioning Service Recipient Service Provider (external) Geography HQ partnership management HQ developed region(s) region X strategy information office IT strategy overall management + overall management + global office customer interface strategy overall region Y region Z management + management + customer interface customer interface coordination developing region(s) service delivery Offshore Operations 10

Foreign service provisioning Service Recipient Service Provider (external) Geography developed region(s) region X region Y region Z developing region(s) service delivery HQ strategy information office IT strategy overall management + overall management + management + management + overall Service Delivery customer interface customer interface customer interface customer interface Offshore Operations global office strategy partnership management overall Customer Relationship HQ 11

Type of services Characteristics Application Development Infrastructure Management type of service project based (< 12 month contacts) continious services (36 months contracts) service levels project deliverables in time service levels measured continiously of the entire contract period degree of interaction dynamics of requirements service provisioning part of costs of labor related to total costs of service provisioning both with end users and management high frequency of interaction, due to need for clarification of requirements during the project high, requirements are often changed during the execution of the project, due to changing requirements in the business mainly labor related costs low frequency with management, related to disturbance of service provisioning only low, requirements are stable during entire contract period labor related and investment related costs ability to benchmark limited to used rates for IT professionals possible per component (such as price per server or price per managed SAP-seat required non contract specific investements importance of security limited to certified service delivery processes limited to development environment (fysical security) for both certified service delivery processes and hardware both the service delivery environment (fysical security) and the communication (information security) Beulen, E., Fenema, P. van en Currie W. (2005) From Application Outsourcing to Infrastructure Management: Extending the Offshore Outsourcing Service Portfolio. European Management Journal, vol. 23, no. 2, pp. 133-144, April. 12

Risks of offshore outsourcing Offshore outsourcing: delivery and process risks Cultural Language and communications Different time zones Managing scope changes Human capital Rotating onshore resources Infrastructure Security and privacy Knowledge transfer Understanding of business processes of Service Recipient Geopolitical risk Size of the offshore outsourced IT service Length of the contract = infrastructure management Risk profile application = development limited moderate strong Beulen, E., Fenema, P. van en Currie W. (2005) From Application Outsourcing to Infrastructure Management: Extending the Offshore Outsourcing Service Portfolio. European Management Journal, vol. 23, no. 2, pp. 133-144, April. 13

Case Study Application Development On site Activities performed on site: - Decide/prioritize. - Alignment with Engineering / UAT. - Define functional and detail designs Quality Assurance Engineering Project management Functional experts make functional & detail design UAT Implementation Off Shore Activities out tasked: - Define technical design - Coding & unit test - Define test scripts en execute system readiness tests Development SRT Solutions Business Start with pilot project including a set of predefined and non critical Change Requests Communication barriers 14

Case Study Infrastructure Management European Service Provider versus US based CPG company Infrastructure management, two Statements of Work: 1. routine change work: monitoring desk, perform initial trouble shooting on EGN pages not received, midrange system password reset, routine changes for DNS management, routine changes to printers 2. UNIX commodity work: patching midrange systems, file system management, server decommissions, server reboots, and kernel parameter changes. Contractual structure as part of contractual framework : SLA and BSC per SOW 15

Geography NA region EMEA region Belgium CPG Inc. HQ US Information Office US strategy program manager SD supervisor contract manager IT strategy partnership management overall management management European Service Provider regional HQ US customer unit manager Overall global client executive contract manger regional client executive customer interface global office strategy overall customer interface Asian region Poland service delivery management India service delivery 2 client executive 0.4 FTE SD manager 7.4 FTE IT professional 3.5 FTE IT professional customer interface Offshore Operations Offshore Operations 16

2005 in Dutch 2005 co-authored chapter with Erran Carmel 2006 co-authors Pieter Ribbers and Jan Roos Curriculum Vitae Erik Beulen, PhD, is employed at Tilburg University in the Netherlands as an assistant professor, associated with TIAS Business School and is also employed as a senior manager with Accenture. He obtained his Ph.D. from Tilburg University. His research concentrates on outsourcing, offshore outsourcing, governance and the management of outsourcing s. His papers have been published in journals such as European Management Journal and Communications Association for Information Systems and the proceedings of the HICSS and ICIS. Erik has contributed chapters in editorial books of Wendy Currie, Wim van Grembergen and Erran Carmel. He is the author and co-author of various Dutch language books on the subject of outsourcing and offshore outsourcing. In 2006 Erik has an up coming book on outsourcing with Routledge, UK. erik.beulen@uvt.nl / erik.beulen@accenture.com +31613430398 17

Literature suggestions 1. Vashistha, A. and Vashistha, A. (2006) The Offshore Nation : Strategies for Success in Global Outsourcing and Offshoring, McGraw-Hill 2. Beulen, E, Ribbers, P. and Roos, J. (2006) Managing IT-outsourcing, governance in global partnerships. Routlegde, United Kingdom. 3. Carmel, E. and Tjia, P. (2005) Offshore Outsourcing of Information Technology Work. Cambridge University Press, United Kingdom. 4. Beulen, E. (2005) Offshore outsourcing. ICT Bibliotheek, Sdu Uitgevers, Den Haag (in Dutch) 5. Brudenall, P. (2005) Technology and Offshore Outsourcing Strategies. Palgrave Macmillan 6. Downey, J. (2005) Indian Take-away: Offshore Outsourcing for Small to Medium-Sized Enterprises. Exposure Publishing 7. Kobayashi-Hillary, M. (2005) Outsourcing to India : The Offshore Advantage. Springer 8. Robinson, M., Kalakota, R. and Sharma, S. (2005) Global Outsourcing: Executing an Onshore, Nearshore or Offshore Strategy. Mivar Press, Inc. 9. Blount, G. and Morstead, S. (2004) Offshore Ready: Strategies to Plan and Profit From Offshore IT-enabled Services. APQC, Houston, USA. 10. Robinson, M. and Kalkola, R. (2004) Offshore Outsourcing, business models, ROI and best practices. Mivar Press Inc., USA. 11. Thondavadi, N and Albert, G. (2004) Offshore Outsourcing, path to new efficiencies in IT and Business Processes. 1st Books Library, USA. 12. Carmel, E. (1999) Global Software Teams, collaboration across borders and time zones. Prentice Hall, New Jersey, USA. 18

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