And in April, a Gartner Inc. survey of 200 European executives found that 55% renegotiated outsourcing arrangements -- both onshore and offshore -- before the contracts ended. The main reason: lack of flexibility, followed by higher than expected costs.
Yet despite the difficulty of managing international relationships, expectations and workflows, companies today are looking to partners in India, Russia and elsewhere not just for piecemeal development work, but for strategic business projects. Whether it's taking over a full product line or building half of an entirely new product, offshore partners are becoming intrinsically engaged in the real business of U.S. firms. With labor costs rising in India and elsewhere, it is business enhancement, not cost savings, that is now driving the migration of work.
"It's not just large multinational companies but also startups and midsize companies that are aggressively working with offshore partners," says T.M. Ravi, CEO of Mimosa Systems Inc. in Santa Clara, Calif., a 2003 startup that recently released its first product constructed with Indian help. "Our outsourcing operation is addressing the entire end-to-end product cycle. That's a major new trend. It used to be just tech service or support. Now you see that a lot of intellectual property development is happening offshore."
Yet empowering partners with more critical pieces of business means greater risk should the relationship go south. There are clearly lessons to be learned, and many CIOs are learning them the hard way. Defining goals, choosing partners, selecting metrics and building in effective governance seem like obvious steps yet still incredibly challenging in the real world. Even those who have worked with offshore partners in the past aren't immune to pitfalls with new ones.
Throughout Harold Williams' long career in the insurance business, he spearheaded outsourced projects at both Nationwide and Montana State Fund. Then last fall he became a vice president at Western Computer Services Inc. in Sandy, Utah. Western Computer Services, a subsidiary of four insurance companies under the umbrella of Farm Bureau Financial Services, had kept all its development in-house since its founding in 1972, and Williams saw an opportunity to outsource a job to India.
To develop the project and deploy a new interface required a fast turnaround -- six months -- and he didn't want to hire more staff or make room for consultants.
"This is the first time we've ever outsourced anything," he says. "I brought in some different ideas about getting to market sooner. I wanted a quick-strike approach. But my organization has fallen into some of the basic gotchas." These included problems in the quality assurance process at Western Computer Services. "We felt some pain. There's no substitute for experience."
Of course, there are success stories, too. Mimosa Systems used Symphony Services, a Palo Alto, Calif., firm with development centers in Bangalore, Mumbai and Pune, India, for half the development work on its first product, an e-mail archiving and recovery solution for Microsoft Exchange called NearPoint. "We were surprised with how extensively we used offshore operations," CEO Ravi says. "We expected that the efficiencies would be different between one person here and one in India. We expected maybe 75% efficiency, but we find it 100% or better. With the right planning, the offshore-onshore hybrid is very scalable, cost effective and robust for companies of any size."
Here are some of the ways to make that happen.
1. Define the offshore outsourcing goal
Determine the outsource goal, whether it's a strategic reinvention of the company or a cost-saving task being sent out of house. "The first principle is to understand the end objective of what you're trying to do," says Symphony Services CEO Gordon Brooks. Some outsource to cut cost, while others want to do something strategic. How you evaluate them is different. "Is this a project or a long-term extension of your own team?" Brooks says.
Atul Vashistha, CEO of consulting firm NeoIT in San Ramon, Calif., cites the examples of Dell, Capital One and Lehman Brothers as big firms that embraced offshore outsourcing -- for instance, Dell outsourced call centers -- and then had to retreat when quality suffered. "They took processes offshore that were not right for their organization, not well integrated or too complex," he says.
2. Design an offshore outsourcing road map
Cliff Justice, EquaTerra's multi-shore practice lead, says that many companies underestimate just how much work outsourcing in general involves. Removing part of the business means that the rest of the business needs to be reinvented as well. "Transformational outsourcing really requires a redesigned organization," he says. "Some companies will take a direct labor cost difference and some generic assumptions about the transition. But in reality there's a lot more to consider, such as the maturity of the process, the ability to document it and transfer that knowledge."
Vashistha says that a company has to start with a deep assessment of its applications and business processes in order to map out an outsourcing plan. What can be outsourced and in what order? He suggests developing a three- to five-year strategy. If the outsourcing objective is to transform the enterprise, then the commitment has to equal the goal and the right resources have to be allocated to achieve success.
The problem is magnified with offshore outsourcing, where companies hedge their bets. "A pilot [offshore] outsource is lower risk, but it doesn't actually make any difference. It doesn't move the needle," says Symphony's Brooks. "It has to make a difference. It's about making an impact, or it's not worth going offshore. The days of putting your toe into the water are over."
This was first published in June 2005