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Welcome to the March 2004
edition of CAPTure, our monthly
e-publication providing corporate executives, and the IT
financial and procurement end-user community with cost
savings ideas, first-hand information, and insight into
the current best practices, results, and innovation in IT
sourcing.
Seeing how Outsourcing has been such a hot topic of debate
the last month, often times breaking new political
boundaries, we offer some focus in that vain with a well
thought out article from an Associate, G. Patrick (Pat)
McGunagle, who has weathered through several instances and
offers some good guidance. As well, with the number of
overwhelming responses we had in regards to our January
CAPTure on Wireless Sourcing Best Practices along with the
recently announced acquisition of AT&T Wireless by
Cingular, we wanted to present some thought around the
continuing impact that wireless will have in IT, along
with an idea for potentially large savings on
International LD calling on cellular telephones:
Outsourcing: What’s a CIO
to Do? - As
companies continue evaluating the competitive advantages
gained with productivity improvements through strategic
outsourcing, it is always good to gain outside views on
past experiences, both successful and not so successful.
Offered in this article is an excellent quick history on
the business drivers that led to outsourcing as well as
suggestions in planning such outsourcing endeavors. Both
an IT and Sourcing executive can gain critical insights on
some key rules of thumb.
How will “wireless”
continue to impact IT infrastructure?
– It used to be “wireless”
was thought of as a cellular telephone for the end user,
and all those ugly towers covering our landscape.
Everyone understands in today’s world it is so much more
due to the continued push of mobile applications and a
more mobile workforce. We offer some quick market
landscape analysis of the continued evolution of this
important technology along with some links to some very
good places to go for quick reference that may be useful
when determining future solutions. We’ll finally offer a
quick tip on some potentially significant savings for
those companies that have a mobile workforce with
international calling via their cellular telephones.
We hope the insights
shared in this newsletter will assist you in your
procurement efforts in IT-related categories. We
appreciate your feedback, comments and requests for
topics, including the posting of a success story you may
want to share. For more information, please write to us
at
info@captoveridicus.com
or
visit us at
www.captoveridicus.com-
Robert Zitofsky - President, Capto Veridicus
Outsourcing: What's a CIO to Do?
Until
the recent comment by White House economist Gregory Mankiw
that the outsourcing of jobs to foreign countries is “good
for” the U.S. economy, a remark that ignited a firestorm of political recriminations,
the outsourcing issue had pretty much become yesterday’s
news. Yet there are some new wrinkles to the issue,
evidenced in recent events and in the experiences of those
who have taken the plunge, and these wrinkles will
challenge any CIO or executive seeking to manage a
successful outsourcing venture. The situation warrants a
fresh look at the entire issue of outsourcing.
With
a Long Tradition in U.S. Business, Outsourcing is Still a
Compelling Proposition for Improving Productivity.
Moving
production from higher-cost to lower-cost locations has
been a fact of business life for centuries. In the 20th
century, the manufacturing sector moved factories from
inner city to suburbs, from suburbs to regional centers,
and from regional centers to maquiladoras over the
Mexican border. Never politically attractive, the quest
for lower manufacturing unit costs nevertheless improved
productivity, enhanced quality, sharpened competition, and
increased shareholder value. In short, it worked, and the
mantra of “fewer people producing more goods and services”
has been both the economist’s definition of productivity
and the key to U.S. productivity throughout most of our
history.
Some 25 years ago, the
services sector caught on and began outsourcing
Information Technology and business processes overseas.
Typically, the pioneers were financial services companies.
Citibank is a case in point. It outsourced its processing
and service centers from metropolitan centers to Sioux
Falls, South Dakota in 1979; at about the same time, it
turned to an Indian subsidiary to develop IT applications
for its global branch network.
In the last five years,
however, a dramatic increase in services outsourcing has
taken place—the well-documented migration to India and
other Asian centers. The reasons are obvious. Bandwidth
is improved, reliable, and affordable. Call center
technologies make it possible. Not to mention the fact
that emerging markets offer a seemingly limitless supply
of cheap, educated labor. With a labor force of 480
million, India produces 90,000 IT professionals and two
million English-speaking graduates a year. Indian wages
are one-fifth those of the U.S., on average. The
combination of an appropriate labor pool and lower wages
makes outsourcing to India an attractive economic
proposition for Western companies, which have eagerly
moved IT development, investment research, financial
accounting, claims processing, and client service
activities to India—as well as to other emerging markets.
These considerable attractions become only more compelling
during periods of declining revenue and increased pressure
on earnings.
So the jump to India, China, or the Philippines has been a
natural, logical extension of the outsourcing principle.
As with manufacturing, the aim is to improve margins
through increased productivity and lower costs. And, as
with manufacturing, outsourcing works.
New
Twists: The Shift to Third Parties, New Types of Players.
Some interesting shifts are
already evident in the outsourcing of services. It’s true
that, for decades, multinational financial services
companies have shuffled their internal IT development and
outsourced their operations to countries where they‘ve had
a longstanding presence. A new wrinkle is the shift to
third-party outsourcing companies—specifically in the
emerging markets. Jump-started by the Y2K rush to convert
and test code, the number of companies outsourcing has
soared over the past three years, and the pace of the
shift has rapidly accelerated.
In 2003, according to
Nasscom, India’s software services trade association, 285
of the top 500 U.S. companies placed work with Indian
companies, up from 125 just three years ago. New U.S.
outsourcing companies, including many of the big
computing and consulting enterprises that have shifted
their business models toward becoming alternative service
providers and business process outsourcers for Western
corporations, have arrived on the scene. By dropping
anchor in India and other emerging markets, they are able
to take advantage of lower cost environments, and they are
competing head-on with such large on-site Indian
outsourcing providers as Tata, Wipro, and Infosys. IBM,
for example, is hiring more than 4,000 employees in Asia
this year, in addition to its 6,000 Indian employees.
Accenture has 4,800 Indian employees, and is expanding the
scope of its tech services to include business process
outsourcing. With 800,000 service jobs in
India today, a number expected to grow to two million by 2007, this is a
relatively small footprint.
Some
New Wrinkles.
Some new wrinkles are
emerging as these Western behemoths appear on the scene.
Attrition rates have increased to 12 to13 percent per
annum at the Indian outsourcers. Despite higher wages at
their Western counterparts, the rate has reached 25
percent—one quarter of all new employees leave after only
one year. As this writer has experienced across the
United States, Europe, and Asia, in countries where
banking, insurance, and investment firms have all
converged to low-cost regional centers, competition for
each others’ skilled employees or managers quickly ensued,
and higher wages and retention bonuses soon diminished the
labor savings originally projected to justify many of the
relocations.
Could a similar rise in
attrition negatively impact recently developed outsourcing
relationships? Might it negatively affect the value of
outsourcing as these companies compete for skilled labor
and balance the cost of career pathing with replacement
costs? The average age of an Indian engineer is 26 years
old. Most U.S. executives want programmers with eight to
ten years of experience and with some degree of
expertise. Such “career programmers” have yet to emerge
in India, where most seek management jobs after four or
five years. Unless these local Indian or Western
companies can provide meaningful career opportunities for
their local employees, they can expect high attrition
rates to be a normal part of doing business. This may
become hugely problematic where continuity is visible to
the buyer of outsourced services. Time will tell.
But attrition isn’t the
only risk. Political instability lurks under the surface.
Outsourcing call center operations to Charlotte or IT
development to Dublin is somehow easier for corporate
conventional wisdom to swallow than outsourcing to the
Middle East or Central Asia.
The quest for the next, cheaper frontier is inevitably
associated with new unknown variables, including political
risks that have to be factored into any considerations of
business continuity
New
Rules, New Responsibilities.
Beyond these risks,
offshore IT development and business process outsourcing
will likely carry more constraints and reporting
requirements in the future. Nearly 100 bills aimed at
keeping jobs in the U.S. have been introduced in 30 state
legislatures as well as in Congress. At the state level,
pending bills would require state contract work to be done
in the U.S., and prohibit the transfer of confidential
information overseas. Legislation in both the state and
Federal hopper would require call centers to disclose
their locations to consumers. Finally, at the Federal
level, there’s a bill pending that would restrict the
number of foreign workers allowed to enter the U.S. to
perform jobs previously done by Americans. As of this
writing, one bill has been passed by Congress and is
scheduled to go into effect in fiscal year 2004. It
requires private companies that bid for certain types of
work currently performed by government employees to remain
in the U.S..
Compliance with these restrictions will be a challenge,
and the financial impact of negative consumer attitude on
a brand or franchise reputation is unknown. Will a
consumer care if his tax return is prepared in India?
Will he care more if he has to pay several thousand
dollars to a top New York accounting firm for this return,
instead of paying only a few hundred dollars to H&R
Block? Is he concerned that his financial information is
transmitted to a third party in India? Where is the
value-added relationship? Does it shift? Will
outsourcing particular functions affect client retention?
Certainly Dell and Lehman Brothers Holdings were concerned
enough by negative customer and employee reaction to move
dozens of call center and help desk jobs back to the U.S.
Senior management must at least acknowledge, if not
resolve, these critical considerations before choosing to
outsource .
New
Complexity.
Where IT development is concerned, outsourcing presents an added burden
of complexities. The fact is, IT development is tough
enough; outsourcing it overseas may just exacerbate the
difficulties.
Can
anyone deny that the landscape of IT developments in the
U.S. is littered with failed projects? Over the past 20
years, only a handful of IT projects have been on time, on
budget. Most have either been abandoned, written off,
truncated in scope, or compromised in functionality. Their
expected benefits didn’t materialize, or their expenses
exceeded budgets and forecasts.
Yet
everyone knows what it takes for successful development,
wherever it occurs: clarity of purpose in business
requirements, discipline in controlling scope creep,
precision in defining functional specifications, and good
governance. One needs to establish success criteria and
carefully define business expectations, timeframes, and
accountabilities. When all of this is correctly managed,
application development is straightforward, whether
performed in-house or by a third party in
India.
As
happens more often than not, however, one or more of these
requirements is not met and disaster looms—typically in
the form of iterative prototyping with various analysts
and users in order to get acceptance. Throwing
requirements “over the wall” and getting usable code back
simply doesn’t happen in the real world. Add in time zone
differences, varied interpretations of expectations,
cultural differences, unanticipated re-work and travel
requirements that can often strain budgets and timeframes,
and you may overburden an already demanding challenge.
ValiCert,
a security software firm, is a case in point. ValiCert had
high expectations when it began shifting development work
to Infosys in 2001. In a recent Wall Street Journal
interview (March 3, “Software Firm’s Lesson in India: Some
Jobs Can’t Be Exported”), SVP David Jevans recalled
optimistic projections that the company would “cut the
budget by half here and hire twice as many people there.”
Working round the clock in two geographies and 14 time
zones apart, ValiCert planned to deliver new software
faster and better. The reality was, however, that Indian
engineers omitted features Americans considered
intuitive. U.S. programmers, accustomed to chatting
informally with colleagues over cubicle walls to get
things done, spent months detailing written instructions
for their Indian counterparts, delaying new products.
“Things we could do in two days would take a week,”
according to ValiCert’s U.S. product team leader.
Re-creating its operation in Bangalore, the technology
center of India, ValiCert discovered its rent was no
cheaper than the space it paid for in its
Mountain View, California site
amid the office glut in Silicon Valley. After several
struggles, programmers who had worked around the clock for
days on one project quit, jumping to other jobs in
Bangalore’s vibrant market. Of nine people from the
original team in mid-2000, only three still work for
ValiCert.
But
there is a happy ending. After several iterations, a
change in the way work is divided between California and
India, and a 2003 merger with Tumbleweed, another
California-based company with engineers in Bulgaria, the
company has found success. Outsourcing doesn’t inherently
make things worse, but it does present an added layer of
project complexity that needs to be anticipated and
managed.
What’s
a CIO to Do?
New
layers of complexity, new rules of responsibility,
political uncertainties, attrition: all these are new
aspects to what remains a traditional but potentially
powerful productivity tool. So what must the CIO or other
senior decision-maker keep in mind when planning to
outsource, especially to an overseas location?
Essentially, the answer is to stick to basics. Here’s what
I mean:
Don’t
Forget to Re-Engineer.
Outsourcing a business activity without first improving it
through re-engineering misses several opportunities, e.g.
cost reduction through streamlining, changing or
eliminating an inefficient process and seeking quality
improvement, This can result in paying a third party to
maintain a poor process. So, the first step in
outsourcing—wherever you outsource to—is to Know
What You Are Outsourcing and Be Sure to Maximize Current
Business Process Value First.
Don’t Forget the “Know Your Customer” Rule.
The
most important and least frequently followed rule is to
remain customer-centric. Many companies look at the cost
of a call center and measure the success of outsourcing to
another party by the reduction of those costs. Often,
however, the call center representative’s “face time” with
the company’s customer is greater than that of the sales
force. The customer’s call can be an important source of
competitive intelligence. Losing the “voice of the
customer” by not capturing the reason the customer calls
is an opportunity cost that can exceed any unit cost
savings. Are there flaws in the company’s products or
processes that are causing the client to call? Building
in this knowledge of the customer’s needs and
expectations, then recycling that knowledge into
innovative product and system developments are key
determinants of client retention and profitability. In
our world of commoditization, pressures on costs, pricing,
and rapid innovation, excellence in customer management is
the last frontier of differentiation.
Know
What You’re Trying to Accomplish and How You’ll Measure
It.
Finally, when deciding whether to farm out development or
business activities to a third party, consider what you’re
trying to achieve and how you’ll know when you’ve achieved
it. This knowledge requires a clear shared vision across
the enterprise and agreement on a scorecard that will
track the progress and success of the effort—a level of
attention and detail that may not be given when these
activities are performed in-house.
Outsourcing doesn’t relieve management of this
responsibility; on the contrary, the responsibility is, if
anything, greater. What’s the objective: Lower cost?
Improved quality? Speed to market? Customer service? All
of the above? Have you benchmarked yourself with others
inside and outside your industry? How have you defined
success? Is the definition shared by your seniors? Will
your customers see the change as an improvement? Often,
expectations are incompatible.
So
far from being yesterday’s news, outsourcing is a potent
weapon in the CIO’s productivity arsenal—if its evolving
challenges are well understood and if it is undertaken
with careful analysis and the right approach. Done right,
outsourcing can bring the productivity improvements,
quality enhancements, competitive advantage, and added
shareholder value that have long been its hallmarks.
About
the Author: G. Patrick McGunagle is an
experienced financial services executive who led
large-scale IT and operational outsourcing and
re-engineering activities in the United States, Europe,
Asia, and Latin America. He has pioneered back office
innovations in banking, insurance, and brokerage
operations consulting with firms engaged in or considering
business transformation. For more information regarding
this article, or to reach Mr. McGunagle, write to
info@captoveridicus.com or
gpm@aol.com .
How
Will "Wireless" Continue to Impact IT?
For those of us
that were around when what we called “wireless” was a bag
phone the size of a small suitcase, it has been an amazing
evolution and its scary to know that we are just
scratching the surface in what many believe will have
tremendous impact on a furthering of productivity gains
for many years to come.
I
think we all know what a BlackBerry is, yet I was
astounded to learn that as of just a few months ago, there
were only over 1M units out there? How many of us
personally had a network setup in their home even 2 yrs
ago? A social barometer for many kids these days isn’t
who has a pc at home, but who has a wireless network
router for access in any room, along with a device for
messaging. I personally now have a cellular phone with
internet access/ a camera/ and email integration; a
wireless network at home; wi-fi built into my laptop; a
wireless data card in case I don’t have access to a
landline, ethernet, or wi-fi; a wireless keyboard and
mouse; a GPS system……..where does it stop?
For
the business enterprise the impact will be most felt in
how IT designs its infrastructure and how to ensure its
clients (both internal and external) can securely gain
access to applications and information. I am stunned
constantly as to how many new enterprise initiatives are
now including questions and topics related to wireless.
Think about it: Voice and Data, Cellular, LAN,
Application integration into wireless, Security, CRM
access via wireless, Intranet/Extranet access via
wireless. For those in IT Procurement……..this isn’t an
anomaly or trend, but a fact.
“Wireless” is going to continue to change the competitive
landscape of telecommunications vendors, force paradigms
in costing of infrastructure, and challenge the best minds
in security - thus enabling access to information only
AT&T commercials dreamed of 15 yrs ago (remember those!).
The biggest obstacles for true adoption are probably
standards being accepted by the mass marketers/producers,
security, and of course cost.
There
are now specific trade shows for wireless and mobility,
magazines dedicated to this topic, and a slue of companies
ready to take you over the threshold. We offer the links
to the left as resources in mining through the clutter and
which we have found useful in researching during sourcing
initiatives.
How About Some Cellular Cost Savings!
On a
cost savings note, we offer a unique idea for those of you
who are trying to minimize your cellular costs relating to
International outbound dialing, which can be outrageously
high, and is often overlooked as a point of negotiation.
Based on recent analysis we have found the average savings
is at least 50% off the rates most Fortune 500 clients get
in their cellular contracts today.
We
have access to a solution that in essence is the
following:
-
Everyone in your enterprise dials a single US access
number (most just put it as a speed dial)
- The
user gets a dialtone and enters in the international
number they want to reach plus # (can even program a
speed dial for the most frequently called int’l numbers)
-
That’s it!! Because the enterprise is contracted with
the solution provider with a database of its mobile
numbers, there is no need for anything but dialing the
initial access number.
-
Corporate IT gets a single invoice electronically which
can then be cost allocated back to the user or dept.
-
There is no term or minimum revenue commitment
A
demonstration of the service via webinar will take place
on Thursday, April 1st at 2PM EST. To sign up
send a request to
intlcelldemo@captoveridicus.com. Please provide your
name, company, phone number and email to receive the
instructions. Information on the service can also be
requested at the same email if you can’t make the webinar.
Coming Up:
Look for the launch of our featured “procurement message
board” where participants will be able to anonymously post
Q&A on best practices and success strategies in IT
procurement.
{return to captoveridicus.com}
© 2004
Capto Veridicus, LLC.
This work is unpublished, and unauthorized reproduction is
prohibited. All rights reserved. |
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