A Shore Thing?

Risk and reward have always been major factors in offshore outsourcing. The trick, of course, is to mitigate the former while maximizing the latter.

Working for the past four years with New Delhi-based HCL Technologies Inc., Priceline.com Inc. virtually bet its future on offshoring. Determined to cut capital costs, improve time to market, and ramp-up quickly to meet explosive growth, Priceline.com had, at one point, 166 HCL consultants working on projects across four continents, while 20 other consulting companies also did work for Priceline.com and 4 other affiliate companies, says CIO Ron Rose.

Given that “the business units were making 650 modifications to the Web site a month,” recalls Rose, “keeping up with that velocity was very difficult.” But offshoring worked — the quality of the work passed muster and so did the savings, which Rose will only say amounts to “tens of millions of dollars.”

Realistic Expectations

Yet as some CFOs have discovered, offshoring doesn’t always live up to the promises highlighted in a vendor’s marketing material. Sure, technology workers in China, Malaysia, or the Philippines are far less costly than their American counterparts, but mounting an ambitious outsourcing effort overseas often involves substantial upfront costs, including travel (flying teams of programmers and managers — theirs and yours — back and forth), training, and establishing the infrastructure and the management team needed to implement and supervise the project.

Gartner analyst Debashish Sinha says that, realistically, by the time you factor in transitional costs and add the management overhead needed to supervise a substantial overseas technology initiative, an offshore-outsourcing client can’t expect major cost reductions until year two or later. “In the first year, you’ll probably see a savings of 18 to 20 percent, and maybe 25 to 28 percent the second year,” he asserts. That’s well below the numbers being touted by some offshoring champions.

The good news is that offshoring’s rewards often extend beyond immediate savings. “In India, there’s an improved labor dollar, but the workforce is also highly skilled and highly motivated,” notes Nick Santoro, CFO of Uniprise, a division of UnitedHealth Group Inc. in Minnetonka, Minnesota. In two previous senior-finance positions, at Nasdaq and Citicorp, Santoro was involved in offshoring. He says the approach can work well, as long as the outsourcer is SEI Level 5-compliant (that is, certified by the federally funded Software Engineering Institute), the governance model is strong, the client spends considerable time onsite, and communication flows freely.

Hot Spots vs. Hot Sites

To limit their exposure to a crisis, a number of companies are taking a multiple site, multicountry approach to offshoring. That way, if there’s trouble in the Philippines, a company can promptly transfer its processing or programming work to another location. “You need two ‘hot sites,’ not merely a theoretical failover site,” cautions Rose, so that processing can be transferred almost instantly. “You also need load balancing across both sites to ensure both sites are truly operational, and each site should be on a separate power and communications grid.”

As part of its business-continuity preparation, IBM Global Services, which has major offshoring centers in India and several other countries, can move work around within the host country, move it to another country, or even bring it back to the United States if needed. “We have a transition methodology in place worldwide,” says Mike Dawkins, general manager of global operations.

Discuss

Your email address will not be published. Required fields are marked *