Outsourcing on verge of cultural evolution

A growing number of CIOs are placing a higher importance on cultural fit when exploring offshore outsourcing possibilities. But some experts warn far too many still focus on only short-term cost savings.

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CIOs who consider cultural fit to be as important as cost savings have the most successful outsourcing relationships.

In fact, experts say there's a direct correlation between a successful outsourcing arrangement and how well the two companies mesh culturally. This is particularly important in offshore relationships.

"Those that are dissatisfied are focused on only the cost," said Lance Travis, vice president, research, at Boston-based AMR Research Inc. "They went into this relationship trying to get the cheapest price. To those that were satisfied, cost was important, but so was cultural fit."

The irony, said Travis, is that in terms of actual cost savings, businesses that gave weight to cultural fit saw the greatest return.

Those that are dissatisfied are focused on only the cost.
Lance Travis
vice president, researchAMR Research Inc.
As offshore outsourcing matures, firms are realizing the impact that cultural differences can have on a business relationship. In the early stages of offshore outsourcing, the cultural fit wasn't such a big issue because people were just looking for cheap labor. But as those relationships evolve, what businesses eventually realize, say observers, are that while they're busy looking at the bottom line for the savings, the business is tied in knots over cultural clashes.

While the trend in outsourcing may be slowly inching toward long-term strategic success, a recent report from research firm Gartner Inc. says that far too many CIOs are still focused on short-term savings when they should be looking at outsourcing more strategically. As a result, they're setting themselves up for failure. Stamford, Conn.-based Gartner estimates that offshore spending on IT services will reach $50 billion in 2007. By 2008, more than 2.3 million offshore service workers will be employed by U.S. companies. But according to a recent Dun & Bradstreet survey, 20% of those outsourcing relationships will fail in the first two years, and 50% within five years.

"If you have a good partnership where everybody is taking a bit of the risk and a bit of the reward, you have a more flexible relationship and you're more likely to find success," AMR's Travis said. "If you set up the relationship so it's just focused on driving every penny out of it everything gets very restrictive and in the long run, it just doesn't work that well."

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Tony Viola, director of marketing at IT services firm Patni Computer Systems Inc. in Cambridge, Mass., says he has seen a significant increase in the number of CIOs making cultural integration a top objective. In fact, in a recent survey conducted by the outsourcer at an annual event of CIOs and other IT managers, cultural fit was cited by 24% as the top factor in selecting an outsourcing vendor -- along with cost. That's up 14% from last year's survey.

"Without a doubt, integration of staff is an issue," Viola said.

Cultural fit, however, goes way beyond language barriers, which is sometimes the easiest of obstacles to overcome. CIOs currently sourcing outsourcers need to think about not just the language differences but corporate culture, domain and business process, quality standards, management tools, legal issues and communications, as well.

"It becomes more and more important as you're trying to use outsourcing as a way to transform a business. The quicker you can integrate the quicker you can see results," Viola said.

Good fit requires work

Cultural fit was very much on the minds of IT executives from Cisco Systems Inc., software provider FileNet Corp. and Safeco Insurance Cos., who spoke on a panel at Gartner Inc.'s recent outsourcing conference in Orlando.

San Jose, Calif.-based Cisco has been outsourcing in India for 10 years and is starting to leverage its Indian vendors and even individual employees to go into other countries, said Bob Durham, strategic partner manager for Cisco. "A lot is driven by relationships," Durham said, adding that Cisco's expansion into China began with an employee who spoke Mandarin.

Sean McEvoy of Costa Mesa, Calif.-based FileNet said his company is also setting up shop in China. FileNet began outsourcing in Ireland, a partnership that "worked well," McEvoy said. But with only 5,000 IT graduates a year in Ireland and high demand from U.S. companies, the high quality comes with a price. The number of IT graduates in China is an "order of magnitude greater" than in Ireland and many other countries, but management expertise can be hard to come by. To ensure a good cultural fit in China, FileNet looks for Chinese graduates who have earned a master's degree in an English-speaking country.

Karl Gouverneur, vice president of IT strategy and architecture at Seattle-based Safeco, said outsourcing began as a cost-cutting measure for the insurance giant but has become a "part of our business strategy, because our executives realize we live in a global economy." The company outsources in India, Mexico and Venezuela. Latin America does not produce the same large number of IT graduates as India, but the company has found the easier travel time, visa procurement and cultural similarities a plus. "Like all service industries, it comes down to the individuals. You have to find the right players," he said.

Finding a company that has the right cultural fit requires work, said Jeff Kaplan, president of ThinkStrategies Inc. in Wellesley, Mass. It's crucial to find an outsourcer who has similar work ethics and common goals. Look at the company's IT systems and organizational processes and see how they maximize those metrics, for instance. "If the outsourcers have implemented systems and processes that support the kind of corporate objectives that you do, that can often be a reflection or indication if they have common goals."

Businesses are also beginning to see the value in bringing in external consultants to help with bridging cultures and using a mediator or interpreter to help smooth over differences during negotiations.

Outsourcing industry veteran Diane Kandis, who has managed outsourcing relationships for companies such as General Electric Co. and now The Proctor & Gamble Co., says having a mediator is essential.

"You want to make sure you have someone in that role," she said.

Kandis also recommends businesses cross-train employees -- meaning have managers from each company train in the respective country.

"It provides tremendous value," Kandis said.

Senior News Writer Linda Tucci contributed to this article.

Let us know what you think about the story; e-mail: Kate Evans-Correia, Senior News Director

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