Steps to Success: Know what you're getting into with offshore outsourcing

Thinking about hopping aboard the offshore bandwagon? You'd better know what you're doing before you sign the dotted line. Five steps could help keep your offshore venture from turning into an ordeal.

IT conferences are not known for controversy, but things change when the topic is offshore outsourcing. This summer, for instance, laid-off IT workers picketed the 2003 Strategic Outsourcing Conference at the Waldorf-Astoria Hotel in New York City.

In this economy, the concept of saving money by sending IT jobs overseas has taken strong hold in corporate America. And the ensuing ruckus has percolated onto the front pages of national newspapers, and all the way up to Capitol Hill. But despite the hullabaloo, the trend is only growing hotter.

Stamford, Conn.-based Gartner Inc. estimates that one in 10 IT jobs at U.S. technology companies will head overseas by the end of 2004. Meanwhile, Forrester Research says that, by 2015, about 3.3 million jobs will have moved offshore -- that's about $136 billion in annual wages.

"It is an increasing trend," confirms Tsvi Gal, CIO at Time Warner Inc.'s Warner Music Group in New York. "It's not because we like it, or we want jobs to leave the U.S. The issue is that the demands on IT are growing, while the budgets continue to shrink. We really are asked to do more with less, and we just cannot fund it in the U.S."

To some extent, offshore outsourcing is a logical extension of the idea of the global marketplace, which technology like the Internet has helped create.

"Once you agree to move [work] outside the corporation, how hard is it to go even further away?" says Gerard McCartney, CIO of the Wharton School at the University of Pennsylvania. "If you're going to move work to Ohio, you might as well have it in India, as long as there's a robust Internet connection."

That being the case, it's not surprising to hear that the jobs aren't coming back. According to a Gartner report titled "U.S. Offshore Outsourcing: Structural Changes, Big Impact": "The movement of IT-related work from the United States and other developed countries to vendors and offshore sites in emerging markets is an irreversible megatrend."

Gal, who currently oversees offshore projects worth between $2 million and $3 million, says that, while offshore outsourcing is never a fun decision, CIOs need to realize that this employment model is here to stay. With that in mind, IT executives would be wise to do their research now, so that when the time comes for them to outsource, they'll be able to do so in the best possible manner. "This is not an easy thing, and you need to know what you're doing," Gal said.

The following tips can help:

Factor in the hidden costs.

While replacing a $60,000 annual salary with one of $6,000 is a compelling proposition, CIOs need to remember that there are other factors that will bump up the costs of offshore outsourcing. "You have to look at the total cost, not just the hourly rate," Gal says. For example, the vendor selection process alone can cost thousands of dollars.

Moreover, moving the work overseas involves significant time and travel expenses. Companies will also need to hire onshore liaisons, and they'll need to beef up network and security measures to support the offshore project. Travel costs will go up. And finally, there's the cost of laying off staff -- and the costs are both fiscal and psychic. Severance packages don't come cheap, and the CIO will have to deal with a morale problem as the staff survivors come to terms with the new reality.

Do your homework.

Companies that haven't yet moved into offshore outsourcing can expect a steep learning curve. "It takes a lot of knowledge to ramp up," says Carrie Lewis, a senior analyst at Boston-based Yankee Group. "It takes time to evaluate vendor solutions and even evaluate your own internal business to determine what functions can best go offshore."

Gal agrees. His top three reasons to choose offshore outsourcing are "cost, cost and cost," but he emphasizes that companies will not reap a rich fiscal harvest if they aren't careful during the evaluation portion of their decision-making process.

"Take your time to make the right decision," he says, and make sure that what you see is what you'll get. For example, if a company shows you a great project that it did for another company in your sector, "make sure that the team assigned to you is the one that did the project," Gal says. "Experience is not transmitted in the water."

Consultants might be worth the investment.

Building relationships with offshore outsourcers requires deep experience, and many CIOs can't afford to invest the time. In such cases, Gal says, bringing in the hired guns (another possible cost) can telescope the process.

"It may be worth hiring a consultant that has the experience," he says. "It's not a shame to learn from others."

Lewis says that many companies choose an American consulting firm, such as Accenture Ltd. or EDS, that already knows the ropes of offshore outsourcing. "These companies can manage the offshore aspect," she says. "It's very common for enterprises to do."

Be specific about deliverables.

Know exactly what you're getting. To start with, the terms of engagement must be very clearly specified, Lewis says, and that means a very detailed contract.

"You need to be very clear and granular about what you want the outsourcer to do, how they will do it, and what you expect the finished project to look like," she says, "to the point of spelling out that if X situation comes up, the outsourcer must contact this person."

Actively manage the project.

Vendors would like CIOs to believe that they can toss project specs over the wall and then forget about things until the finished project appears magically at the door. It doesn't work that way, says Lewis.

"Companies need to develop their own team for managing the project," she says. "They need to put together a team at various levels of the company and across functions."

Clearly, with the traction that offshore outsourcing already has in the corporate world, CIOs can only expect to see more of it. While nobody likes to be the person cutting jobs, the reality is that this trend is here to stay. Smart CIOs will learn how to make the best use of it.

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