Introduction

Many organisations underestimate the effort involved in implementing an outsourcing strategy. This lack of awareness can range from the potential pitfalls that can arise to the level of resource involved in managing the outsourcing process. For example, there is a common perception that once an activity is outsourced that responsibility for the outsourced activity rests solely with the supplier. Many organisations also lack the skills to implement an effective outsourcing strategy. Managing an external supplier requires a different set of skills than those associated with managing an internal business function. For example, the manager responsible for managing the activity when it was performed in-house may not have the range of skills or experience to manage an external provider of the activity. This lack of awareness of the effort involved in managing external relationships can be particularly serious in the outsourcing of critical activities. Often the buyer will adopt a collaborative relationship with the supplier for a critical activity. However, developing collaborative relationships across organisational boundaries presents organisations with considerable challenges from an organisation change perspective. For example, when developing collaborative relationships, a culture of confrontation can stifle the intentions of the buyer in its attempts to develop a close collaborative relationship with suppliers. In pursuing collaborative relationships, the buyer has to consider a number of issues including the adoption of an integrated approach to the management of strategic change, the pivotal role of senior managers as facilitators of change, and the involvement of those most affected by the change.

Introduction

One of the major criticisms of outsourcing is that it is an operational tool and cannot be used as a means of building competitive advantage for an organisation. Proponents of this view argue that any activities sourced from suppliers in the supply market are also available to the competitors of the sourcing organisation. In the past, organisations have only outsourced those activities that were regarded as of peripheral concern to an organisation such as cleaning, catering and security and therefore had little impact upon the competitive position of the organisation. However, organisations are now outsourcing more critical activities such as design, manufacture, marketing, distribution and information systems. As a result of outsourcing more critical activities, organisations have been attempting to develop collaborative relationships with suppliers as they seek to reduce the risks associated with outsourcing. By employing astute relationship management mechanisms it is possible for organisations to leverage the capabilities of suppliers in a more effective way than competing organisations. Organisations are now beginning to recognise the benefits of adopting approaches for managing across and beyond the boundaries of the organisation. There is a growing awareness that competitive advantage can be based as much upon managing beyond the ownership boundaries of the organisation rather than on management within those boundaries. Competitive advantage can be achieved through the cultivation and nurturing of linkages between the sourcing organisation and its key suppliers.

Introduction

This stage in outsourcing evaluation and management is concerned with identifying the major activities that have to be performed in order to create and deliver the range of products and services offered by the organisation to its customers. This involves identifying the major activities that have to be performed internally as well as those performed by external sources. This will provide an outline of the scope of the organisation both upstream into the supply chain and downstream towards end customers of the products and services. In effect, it is concerned with identifying the current boundary of the organisation. Additionally, as will be shown in the following chapters, segmenting the organisation into activities allows an organisation to identify the activities that are a source of competitive advantage, activities in which it is equal to competitors and activities in which it is weaker in relation to competitors. In order to perform this analysis, the resources owned and deployed by the organisation must be identified as well as the activities that have to be carried out so that the organisation fulfils the needs of its customers. A number of frameworks appropriate for activity analysis are presented in this chapter including the value chain, value shop and value network. Analysing the organisation in terms of activities allows outsourcing evaluation to be carried out in a number of contexts including:

• an organisation may undertake an evaluation of its entire business and identify potential opportunities for outsourcing from this analysis;

• an organisation may select certain parts of the business that it considers as suitable candidates for outsourcing;

• […]

Introduction

The preceding analysis considered the dimensions of activity importance and organisational capability in the context of outsourcing. These two dimensions yield a number of strategic sourcing options as shown on the matrix in Figure 8.1. This chapter is concerned with evaluating the implications of each of these potential strategic sourcing options. These options should be considered in the context of the following key determinants.

• The disparity in performance – this is concerned with determining the sustainability of superior performance in an activity – either by the internal or external source. Some of the insights gained from the capability analysis will assist at this stage. Having a clear understanding of the source of superior performance can provide a reliable indication of the sustainability of such a position. For example, if the company's capabilities lag considerably behind the capabilities of external suppliers, then it may be difficult to justify a substantial investment of resources in order to match or advance upon the capabilities of these external suppliers.

• Technology influences – this is concerned with understanding the influence of technology on the choice of sourcing option. For example, if the environment is characterised by rapid advances in technology then any performance advantages the organisation possesses may be difficult to sustain over a long period of time.

• External considerations – factors in the external environment such as the political context, market growth rates, the level of competition and barriers to entry should also be considered. For example, in an industry characterised by high levels of growth and competitive rivalry, competitors can rapidly erode a superior performance advantage in an activity.

• […]

Why we wrote this book

Whether one is for it or afraid of it, we are convinced that managing offshoring is a competency that tomorrow's IT managers must learn. We wrote this book to help build that competency.

This book builds offshore competency in the breadth and depth of the material covered here: offshore economics, offshore strategy, offshore legal issues, how to get started in offshoring, and many other critical topics.

By teaming up across the Atlantic (Erran is in the United States, Paul is in The Netherlands), we bring different views and challenged each other's assumptions. We bring different views in other ways, we formed a business-academic alliance (Erran is a professor of business and Paul is a consultant on offshoring). We also invited other experts to contribute: there are eight additional authors and co-authors of some chapters and some cases. For example, we invited an attorney specializing in offshoring, Rebecca Eisner, to author the chapter on offshore legal issues.

We have also collected many real-life examples: nine in-depth cases, all of which are first published here, as well as countless stories and anecdotes sprinkled throughout the book.

This book is also a resource for students and teachers in business and technology programs. As we wrote this book the first offshore outsourcing classes were offered. Today, the topic of offshoring should be a component of any management curriculum.

Finally, we also wrote this book for policy makers and analysts in or around governments.

Close to 100 nations are now exporting software services and products. The “offshore menu” is immense, with many nations to satisfy any taste. These nations span the economic spectrum from newly industrialized economies, through transition economies, to developing economies, and even some least-developed nations.

The 1990s was the first decade of software's true globalization. The 1990s saw the rise of three celebrated success cases, the “three ‘I's” – India, Ireland, and Israel. These were the three nations that seemed to appear overnight as global centers of important software activities. One of the most interesting features of the “three ‘I's” is that each of these three nations developed and specialized in different aspects of software. That is, each one progressed to become a global software player in different ways: India in offshore programming, Israel as an incubator of software products, and Ireland in programming services and localization services.

Three tiers of software exporting countries

The G7 nations produced much of the world's software in the first few decades of the computer era. High-tech exporting used to “belong” to these nations with the USA as the hegemonic power in software. Until roughly 1990, very few nations exported software products or software services at any non-trivial levels, including that which today we call “outsourcing”. The G7 nations are still at the core of the Tier-1 software nations (see Table 4.1), the Mature Software Exporting Nations. These G7 nations have a tradition of exporting high-technology and knowledge-intensive products and services.

Software exports have become a cause for excitement in dozens of developing nations. These are nations that are all searching for the recipe to become the “next India.” India, once known as a land of poverty, has now become an IT superpower. Major Western software companies, including Microsoft, Oracle, and SAP, are using Indian software centers to develop their products. India's independent firms compete with the top firms from the industrialized nations.

This excitement is understandable since many developing countries are primarily exporters of commodities, such as cotton or coffee. Other export sectors, such as textiles, handicrafts, assembly, or manufacturing, offer primarily low-skilled employment with low wages, often with “sweatshop” working conditions.

Offshoring Information Technology is an appealing book. Appealing not only because it deals with a topic of growing contemporary significance but also because it does so with lucidity, comprehensiveness, thoughtfulness and insightfulness. Over the last decade, offshoring of IT has become a mainstream business phenomenon and, as a result, managing offshoring has emerged as a critical business competence for firms. Erran Carmel and Paul Tjia in this book present a comprehensive treatment of IT offshoring and discuss the competencies required to successfully manage it. Dexterously guiding the readers through the offshore IT landscape and navigating through a range of pertinent topics, this book presents a well-crafted body of knowledge and guidelines to succeed with offshoring of IT. Recounting my experiences over the last 9 years or so, my immediate reaction to this book was: “Why the hell was this book not available a few years ago?” Had it been available, I thought, it would have positively influenced productivity and performance in offshore IT work – and saved sleepless nights for many people!

Circa 1995: The phenomenon of offshoring was starting to gain prominence. Attracted by its low cost structure and the ability to access a global resource pool, many multinational companies had begun leveraging the benefits of offshore IT either through their own subsidiaries or from third-party suppliers. Lured by its promise, I made the transition into the growing IT industry in 1996 to join a subsidiary of Siemens in Bangalore, engaged in communications software development.

Offshoring has become one of the most important social issues of the early 2000s. While there were muted political discussions in the 1990s, the catalyst to the backlash was the Forrester report of November 2002 in which this American research organization forecast that the US would lose 3.3 million IT and office jobs to offshore destinations by 2015.

For the first time, jobs that were migrating offshore were not in factories, or assembly lines, farming, or mining, but those of white collar, highly-educated professionals. This was new and quite unsettling. We have not seen this before.

Across the US and Western Europe programmers were losing jobs. Labor unions were responding to outsourcing with strikes or strike threats, such as those of the IT departments of the Bank of Ireland and of Swansea County Council in Wales (although in both cases no offshoring was involved). UK-based financial giant HSBC did face a strike due to offshoring IT-enabled services (ITES) positions in customer services. The American edition of Computerworld published a photo of a protesting programmer, with a sign reading “Will Code for Food.” Forrester followed-up its famous American report with a forecast that the UK would lose 750,000 jobs to offshoring by 2015, of which 150,000 would be IT jobs. In Australia offshoring was forecast to cost 40,000 computer jobs by 2015. The issue of offshoring became a crisis.

There are hundreds of such firms, large and small, all of which trumpet their offshore costs savings. Companies in the wealthy industrialized nations are dazzled by offshore programmers' low wages. Since cost savings are the dominant reason for offshoring, much of this chapter is devoted to dissecting the controversy regarding the actual costs and savings. Then, later in the chapter, we turn to the myriad of risks which companies face when offshoring.

Labor arbitrage: finding the lowest wages

A software development manager is shopping for the lowest-cost labor suppliers and is drawn to the low-wage offshore nations.

Before you learn to play a new game, you probably ask some questions. What are the rules? What is the objective of the game? How do you win? What are the best strategies? How do you avoid being thrown out of the game?

Business is like a game. Every business person who embarks on a new business deal needs to ask questions to get the information they need to make the right decisions. Some of the questions will be about business and financial issues, and others will be about the rules. You need to understand the rules, and how to play within them. You also need to understand the key risks, and the solutions to mitigate those risks.

In this chapter, we begin with an introduction of seven key legal areas where rules affect your offshore business. Next, the discussion moves on to deal structures, risks and risk mitigation through contract provisions. This chapter focuses on “what” you should be concerned about, not necessarily “how” you can address it. “How” you play the game and play within the rules is beyond our scope.

Key legal considerations in offshoring

Seven of the key offshore legal issues are as follows: intellectual property (IP) protection; labor and employment rights; export control restrictions; privacy and data transfer restrictions; government approval of offshoring; taxes; and currency conversion exposure.

IP protection

The laws protecting IP rights vary from country to country. They are like a patchwork quilt, with holes.

Many software developers that we meet are relatively new to the topic of culture. They may have traveled and learned some of the superficial differences between some countries, such as greetings, but in order to become effective participants of global software development organizations, a deeper understanding is vital. The first two sections of this chapter serve as a mini-primer on this topic.

What is culture?

Culture, in the anthropological sense, according to Geert Hofstede, is the “collective programming of the mind distinguishing the members of one group… from another.”

Every adult is a member of many cultures.

While much of this book is written from the viewpoint of the consumer of offshore work (the end-user), this chapter is written from the provider viewpoint. These are the thousands of small- and medium-sized offshore companies (with a handful of large ones) that are seeking to market their services to clients in roughly 20 wealthy, industrialized nations, along with a smattering of clients in mid-tier nations that are also beginning to shop abroad.

We estimate that there are now some 4000 companies in low-cost countries trying to capture a piece of the rapidly growing offshore market. A handful of these service providers, all Indian, have grown into huge and powerful multinational enterprises. These global Indian firms are competing with firms from the industrialized nations and are successfully attracting large customers. For small- and medium-sized Indian companies however, growth has proven to be more difficult.

The marketing of IT services is even more challenging if the offshore provider is not from India. While IT professionals from most industrialized nations are well aware of the “India brand,” providers from other nations are at a disadvantage. Prospective clients may often not consider firms from the emerging Tier-2 nations, such as Mexico, the Czech Republic, or the Philippines. The invisibility is even more problematic for the “infant” Tier-3 nations, such as Colombia, Egypt, Belarus, or Indonesia. However, with the continued demand in the global markets for offshoring, there are many business opportunities for small- and medium-sized providers, even for those from “unknown” nations.

Offshoring requires distributed collaboration in which people work across distance and time. This is a key difficulty in offshoring. In this chapter, we first take a close look at the root of the problem: Why is it so difficult to collaborate across distance and time? We then present the many small solutions to this problem. The difficulties in distributed collaboration cannot be eliminated, but they can be mitigated somewhat through a mosaic of solutions described in this chapter: applying principles of formalisms and informalisms, managing time differences, using a mix of collaborative technologies, selecting the right staff, and designing the optimal organizational structure.

We like to be close

In spite of the hype about our new “virtual world” in which “distance is dead,” we humans like proximity. We perform better when we are close together. We thrive when we have face-to-face interaction. We crave proximity.

In order to understand why distributed work is more difficult for us humans, Kiesler and Cummings gathered the results of decades of group psychology research. We begin by summarizing their thought-provoking findings.

The mere proximity to another human introduces a “social facilitation effect.” That is, our physiologic performance changes: alertness increases, our heart rate goes up, and our blood pressure increases. Television producers introduced laugh tracks to comedy shows because we all tend to laugh when others laugh; we smile when others smile.

Offshoring has become the management fad of the moment; the innovation du jour; the accepted reaction to cost pressures; or before 2000, during the technology boom, the reaction to labor shortages in industrialized nations.

Does any of this constitute a strategy?

In order to begin answering this question, the notion of “offshore strategy” needs to be qualified for each company. It needs to be seen in a broader context and not in isolation. First, for medium- and large-sized companies, offshoring is part of a broader globalization strategy. Second, also for medium- and large-sized companies, offshoring IT is just one part of the larger scope of knowledge and service activities that companies source globally, along with IT-enabled services (ITES) and research and development (R&D) of all kinds. Thus, strategic offshoring is, but, part of an overall sourcing strategy which deals with the portfolio of strategic options: whether these options be at home, abroad (in both high-wage and offshore nations), inside the company, outside the company (outsourcing), and through various collaborations.

Accordingly, an exacting definition of IT offshoring strategy:

Admittedly, few companies take such a holistic view of their offshoring strategy. Most companies offshore with a more isolated set of goals, and with a shorter time horizon, in an evolving, or even reactive strategy.