Outsourcing and offshoring in a recession more flexible, panelists say

Outsourcing and offshoring activities in a recession thrive on flexibility from both clients and providers, according to panelists at the 2009 MIT Sloan CIO Symposium.

Forget about the bulky, long-term contracts that used to define the outsourcing and offshoring industry. The new watchword in outsourcing is flexibility, as the industry seeks to recover from recent bad press with the Satyam scandal and improve what it can offer customers -- while also benefiting its own bottom line.

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Action steps for non-Satyam customers

Such were the takeaways from a session at last week's MIT Sloan CIO Symposium in Cambridge, Mass., where enterprise CIOs, analysts and the heads of outsourcing companies gathered for a discussion on the state of outsourcing and offshoring in 2009.

In an industry roiled by the economic recession and bad PR, flexibility seems to be both the olive branch of good will and the way to keep outsourcing service providers afloat as they lower rates to remain competitive. Yet in a Forrester Research Inc. survey of 947 North American and European companies on how the slowdown in the economy is driving decisions and IT spending, more than 40% of respondents said they were increasing their application outsourcing efforts, among other areas, said Christine Ferrusi Ross, vice president and research director at the Cambridge, Mass.-based analyst firm.

"In my view, this is more than cost cutting -- it's about productivity," said Shekar Pannala, CIO of enterprise e-commerce services at The Bank of New York Mellon Corp., who has a great deal of experience with outsourcing in both China and India.

Addressing outsourcer failure
The panel also discussed how to react to a massive outsourcer failure, such as the scandal at Indian IT services firm Satyam Computer Services Ltd.

 

In January, it was discovered that Satyam, a global IT services firm based in Hyderabad, India, had been listing assets far in excess of what it actually held, a scandal that has been referred to by some as "India's Enron." IT services provider Tech Mahindra Ltd. has since stepped in to buy Satyam.

Shekar Pannala, CIO at The Bank of New York Mellon, said his company has very elaborate security policies, including on-site visits, to try to ferret out any misgivings regarding outsourcing companies. Company leaders discuss possible crisis situations, such as outsourcer bankruptcy or fraud, well in advance and put governance policies in place to confront them, he said.

Many Forrester Research Inc. clients are requesting additional audits of outsourcing and offshoring firms, even at additional cost, added Christine Ferrusi Ross, vice president and research director at the consultancy.

Regarding Satyam, the rest of the industry vowed not to talk ill of the company or poach its resources, said Som Mittal, president of Nasscom. "There is a sense of responsibility not only in the company, but in the industry." --R.L.

Indeed, the recession has made it easier for companies to consider starting or increasing their outsourcing and offshoring efforts, panelists agreed, as clients seek ways to save money on their outsourcing contracts, and outsourcing and offshoring companies are more inclined to make these tradeoffs in exchange for flexibility.

"It's easier to dip your toe in the water," said Gary Swart, CEO of oDesk Corp., an online marketplace for freelance Web developers and designers, among others. Examining his own growing business, he said he's seeing increased desire for domestic outsourcing. "I don't view the risk as significant as it once was."

Moreover, "what's changed is that projects used to fail because everything had to be scoped, with all of the requirements up front," Swart said. Now, companies are looking to shorten the length of contracts and find other means of creating flexibility in their service agreements.

In addition, service providers are willing to work on a more performance-based model in order to mitigate risk for clients, Swart said.

Brian Keane, CEO of Dextrys, a global IT services firm that offshores to China, agreed that the emerging flexibility in IT outsourcing contracts is key.

"Technology has the ability to ramp up or down on a variable basis," Keane said. He cited cloud computing as one part of this broader trend toward agility, as this subscription-based model makes it easier for companies to pay for services on an on-demand basis. Outsourcing and offshoring contracts might be moving more toward this model, whereby clients pay for services on an as-needed basis, with the rules of the arrangement clearly spelled out in the contract.

The economic downturn has provided some great opportunities for outsourcing and offshoring vendors to trade some savings for some flexibility on how and when the work gets done, said Som Mittal, president of the National Association of Software and Services Companies, or Nasscom, the premier trade body and chamber of commerce for the IT-business process outsourcing industry in India. For instance, clients might offer more flexibility to complete work in a particular location or at a particular time that's more convenient to the outsourcer. "I think that's a real relationship," he said.

The vast majority of outsourcing and offshoring failures stem from mismatched expectations, Ross said. This can happen if the customer does not provide context or an understanding of precisely how it likes work done, and the outsourcing firm does not ask the right questions.

"Clients need to communicate across cultural boundaries," Ross said. Those companies that do not yet have governance models in place for such levels of communication should consider them before moving forward, she said.

"In my view, this is more than cost cutting -- it's about productivity."
Shekar Pannala
CIOThe Bank of New York Mellon

Mittal said it's not solely a matter of communication, in the traditional sense, between a client and vendor. Rather than just throwing work to an outside company, clients must bring the outsourcing or offshoring company into the fold, using communications technology, personal visits and other effective methods.

"Relationship investment has to be made on both sides," Mittal said.

Mittal advised those with concerns to bring them to the table up front and find solutions. There is sometimes a tendency not to speak up, particularly across cultures, but it's important to refresh ideas to derive value, he said.

On the other hand, outsourcing and offshoring service providers can sometimes get too comfortable in their relationships with clients, and other providers in the marketplace might offer better prices or services for the client.

So, is it better to pay a premium to stick with a longtime outsourcer, or go with an unknown outsourcer at a lower cost? The panelists agreed on a case-by-case approach.

"It never hurts to test the waters," Pannala said.

"It always makes sense to evaluate what's out there," Keane added, advocating for implementing metrics for success, based on a governance program. "It's less about the hourly rate and more about the value of the overall relationship."

 

Let us know what you think about the story; email: Rachel Lebeaux, Associate Editor

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