Reality Check | Ephraim Schwartz » TAG: Outsourcing

May 06, 2008 | Comments: (0)

Outsourcing: Breaking up is hard to do

TAGS: Outsourcing

A few months back, I blogged about getting more value from your outsourcing strategy: Rather than sign a single $1 billion-plus deal, break your services up.

Smaller deals, focused on smaller projects or services, may be the new way to go, I conjectured. After all, outsourcing everything to a single vendor and making a long-term commitment -- often as long as 10 years -- can lead to problems down the road, especially when it comes to business process innovation.

I concluded, with the help of Peter Lowes, principal at Deloitte Consulting and leader of Deloitte's Outsourcing Advisory, that breaking a project into smaller pieces increases your chances of finding providers who take a specific focus, and thus your ability to maximize the value of your contracts.

However, something has been nagging at my conscience since then -- mainly that any multisourcing strategy comes with its own set of challenges. Here are the four main issues you need to be aware of before diving in:

More players, more complexity
Obviously more vendors means greater complexity, especially if you are dividing up a single project. Coordination and communication are key. In other words, just like you tell your children, everyone has to play nice and get along together. But as the IT coordinator and project lead that's your function.

Large providers seek large slices
The moment you make the pie smaller for each potential provider, the less interested they became in doing the job. They heard the cash registers ring, and now that the ring isn't so loud, they may opt out -- especially if they are a larger company. After all, the bigger the company, the bigger the overhead they have to deal with; at some point, the deal may not be worth it to them.

Project management begins in-house
You will need highly competent project managers who know how to juggle multiple projects, keep to a schedule, and have the technical expertise to separate the technical BS from serious issues that threaten to derail a project. The blame game has to stop at your desk.

Savings often give rise to new costs
That time commitment of more managers spending more time on multiple project will also increase the cost of your initiative. So, if you thought you were getting a good deal by hiring service providers who fit nicely into your smaller budget, don't be surprised when the cost you thought you saved pops up somewhere else.

Although there is less likely to be a single point of failure when you break up your outsourcing strategy, internal management costs can be significant, Lowes says.

Innovative outsourcing in action
The proof, as they say, is in the pudding. And here are a few examples of companies that have opted out of the "one company does it all" approach to outsourcing to notable success.

When General Motors' $5 billion contract with EDS came up for renewal, GM decided to instead divide the pie of about $7.5 billion among six vendors, including EDS.

Each provider, however, was awarded a worldwide contract in order to facilitate a "globally standardized work process," according to Lowes.

Moreover, the package features five-year contracts, instead of the typical 10-year contract, to spread risk while maintaining standards across global operations.

An even more unique approach to multisourcing comes from Xchange. This one will really keep the lawyers busy as well.

Xchange has what it calls an Enterprise Partnership model that involves the creation of a third entity, co-owned by the customer and the service provider.

The partnership is structured "though the use of a shareholders' agreement to govern the relationship between the customer and the service provider at a strategic level. "

The customer transfers relevant personnel to the new entity and becomes the new entity's first customer. In the future, the entity, which includes the original customer, has the option of providing service to new third-party customers.

If you thought outsourcing was just a way to reduce the costs and stress of completing a project, guess again. Ensuring a satisfactory outsourcing experience takes work before, during, and, when necessary, after separation to ensure that your company is getting the most value for its dollar.

Posted by Ephraim Schwartz on May 6, 2008 03:00 AM

April 22, 2008 | Comments: (0)

India to trap outsourcers in tax net

TAGS: Outsourcing

Events unfolding in New Delhi could have far-reaching repercussions, as the Indian parliament deliberates changes to its tax code that could deeply affect businesses here in the States.

Whereas some believe the pending legislation is "business-neutral," one specialist I spoke with said that the proposed changes could cost American businesses with Indian subsidiaries or Indian outsourcing initiatives a significant amount of money.

[ For more on recent trends in outsourcing and offshoring, see The ins and outs of outsourcing and offshoring ]

Don Jones, partner at BDO Seidman, an accounting and advisory firm, sees the potential changes as part of a larger trend, in which Indian tax authorities and its legislature have become more aggressive in the past few years when dealing with foreign entities that seek to do business in India.

As the Indian tax system matures, and as its international business increases, India wants to capture more revenue in their taxing net, says Jones.

This year, the Indian federal budget is pursuing that goal more aggressively than ever before.

Here, as Jones laid it out for me, are the specific changes that will make it more expensive for U.S. companies to do business in India if the legislation is passed.

Transfer pricing
Most countries establish a profitability tax at a rate of anywhere from six percent to eight percent for services rendered to the parent company or to the company hired by a foreign company. In other words, if a U.S. parent company requires R&D services from its Indian subsidiary, the government would take between six percent and eight percent of the fee for those services as tax for profit.

The legislation currently before the Indian parliament would increase that percentage to between 15 percent and 25 percent.

Add to this the fact that 7,000 miles away, our own IRS will not accept those rates when the U.S. company tries to write it off.

Tax holidays
The tax holiday that India granted for units registered under its software technology parks provisions expire on March 31, 2009. There is nothing in the current legislation that will renew the tax holiday for tech companies, meaning they will have to pay the incorporated tax of 33.99 percent beginning in the second quarter of 2009.

Capital gains
An increase in India's short-term capital gains tax from 10 percent to 15 percent has been proposed as part of the current legislation.

Jones says this is the government's attempt to decrease the volatility of the Indian stock market.

Filing deadline shortened
The legislation will abbreviate the deadline for corporate tax filing from Oct. 31 to Sept. 30. As a result, more companies will be captured in the penalty net.

It's a bit like a speed trap, I suppose.

Increase in excise tax
This portion of the changes in the tax code will impact the software community directly. Packaged software will be subject to an increase in the excise tax from 8 percent to 12 percent.

While companies such as SAP and Oracle might be exempt from the increase because their software is technically not "packaged" software, companies such as Microsoft will be directly affected.

Broadening the definition of a service
The 12.3 percent service tax will be levied on a wider array of services, including maintenance and consultancy services related to software. In other words, services provided for IT -- that is, software for use in the course of the furtherance of business and commerce -- is now considered a taxable service.

This will be another direct increase in the cost of doing business in India.

Also included in the services tax net will be Internet-oriented services and telecommunications services provided through the Internet. This includes services provided in relation to Internet backbone services, carrier services, Internet traffic, and access services.

Add to this a turnover rate now being pegged at 105 percent, plus the weak dollar, and we can see that outsourcing in India is going to cost U.S. firms a great deal more going forward.

Related articles
• The ins and outs of outsourcing and offshoring
• Outsourcing to the Middle East
• Outsourcing moves to the core
• The truth about China

Posted by Ephraim Schwartz on April 22, 2008 03:00 AM

April 15, 2008 | Comments: (0)

Salesforce and Google ally -- for now

TAGS: Cloud computing, Google, Outsourcing, SaaS, Web 2.0

Hamlet: Act I, Scene V

        Ghost
    Ay, that incestuous, that adulterate beast,
    With witchcraft of his wit, with traitorous gifts, --
    O wicked wit and gifts, that have the power
    So to seduce! -- won to his shameful lust
    The will of my most seeming-virtuous queen:
    O Hamlet, what a falling-off was there!

I'm not sure who will be the queen and who will be the ghost as an outcome of the "global strategic alliance" between Google and Salesforce announced this week, but I do predict there will be one of each.

"O Hamlet, what a falling-off was there!" says the ghost of Hamlet's father, and for reasons I will explain, this glorious -- er, I mean, global -- announcement of a close relationship between Google and Salesforce reminds me of that very scene in Act I.

In the announcement, Kraig Swensrud, vice president of applications at Salesforce, described in detail the very tight integration between Salesforce's CRM app and Google's growing productivity suite.

O wicked wit and gifts, that have the power/So to seduce!
All is sweetness and light at the moment. If a salesperson equipped with the integrated apps puts a "to do" task in Salesforce, it will appear in the Google calendar entry. If two people are working on a presentation at the same time -- say, an art director changing the colors of the bars and a finance person changing the number of dollars in the bars in the graph -- both will see, in real time, the changes being made. Gmail messages will be automatically sent to leads or contacts in the proper component of Salesforce.

It is indeed quite an integration effort from both parties, due in large part because both companies have the same 100 percent Web- and multitenant-based architecture. On top of all that, next summer, the partnership will become even more integrated by giving customers a single bill that combines both companies' services.

However, my skeptical mind tells me the seeds of discontent are being sown alongside the integration. Because let's face it, both Mark Benioff and Google co-founders Larry Page and Sergey Brin are no fading flowers.

With witchcraft of his wit, with traitorous gifts
How, I ask, will both companies and their leaders be willing to compromise their portion of the partnership if at some later date the other decides it wants to upgrade its service in a way that is not immediately compatible with or beneficial to the other's application?

Who will give in if Google wants to upgrade Apps in such a way that does not sit well with Benioff and company? Who will give in if Google wants to partner with an ERP company that is not part of Salesforce AppExchange? How will Google react if an AppExchange member offers a productivity suite integrated with Salesforce that suddenly grows in popularity?

I see trouble ahead.

O Mark, what a falling-off was there!
Like all great partnerships that fail, there are winners and losers. One needs the other more. So who will be the queen and who the ghost?

Google will receive the crown, and Salesforce will be crowned. Google will buy out Salesforce, or the two will come to a parting of the ways, in which case Google will have lined up another CRM company, leaving Salesforce to scrounge around for another productivity suite that has the brand recognition and industry clout of a Google.

Ay, that incestuous, that adulterate beast
Salesforce meets Microsoft? Stranger things have happened.

Posted by Ephraim Schwartz on April 15, 2008 03:00 AM

April 08, 2008 | Comments: (0)

SaaS favors Google over Salesforce

TAGS: Google, IT strategy, Outsourcing, SaaS, Web 2.0

To say that strategy and technology are finally becoming interlinked in business is pure BS.

It has always been thus.

I'm certain that when the first cash-register salesman convinced the first general-store owner to buy a cash register, the sale went through because he was able to convince the owner that this new technology would improve the general store's bottom line.

SaaS as strategy
Even when companies bought and failed to successfully deploy technologies for technology sake in the late '80s and early '90s, you'd have to say they were well-intentioned. By that I mean, no company decided to spend $100 million on SAP R3 because it was cool technology. Some cash-register salesfolks reincarnated as SAP sales representatives convinced them it would, eventually, improve the bottom line.

There is a difference today, however, as Web 2.0 and SaaS (software as a service) are emerging to create technologies that perfectly serve businesses virtualization as a business strategy.

According to Ben Pring, vice president at Gartner Research, virtualization is just a synonym for the ongoing trend to outsource more and more processes.

Call it what you will, Web 2.0 or SaaS, coupled with outsourcing is a match made in heaven.

"First companies bought SAP instead of using home-grown ERP; then they used companies like EDS to handle customer support; now SaaS is just another version of this story," Pring says, who will elaborate on these points at the Gartner Symposium/ITxpo in Las Vegas this week.

I suppose this is all about that old chestnut, "Focus on your core competence and let somebody else do the rest."

But what Pring predicts will happen next really caught me off guard. He believes that a company such as Salesforce.com can grow linearly during the next three to four years but that there will be no exponential, sudden leap in the number of customers it serves. And if it did happen, Salesforce.com couldn't handle it anyway.

Enter a company like Google.

"Google is prepared for the exponential. They built out the architecture and the infrastructure to manage that kind of growth," Pring says. Whereas Salesforce celebrated its 1 millionth user a couple of months ago, it is estimated that Gmail serves well over 5 million users.

What's more, as I mentioned in "A step closer to the integrated cloud," Google is looking to acquire ISVs from the CRM, ERP, and BI markets. By combining those offerings with front-end productivity applications, Google could create a service that, over time, will be hard to beat -- a back-end, front-end suite that Pring believes businesses will more readily buy than anything Salesforce develops via its AppExchange partnership model.

Google: Point SaaS solution killer
Google certainly has the cash to acquire ISVs to round out a complete application suite. Perhaps we are witnessing the oncoming death of point SaaS solutions in favor of those who can offer complete solutions and back it up with infrastructure that the enterprise respects. If this is the case, Google’s brand, positioning, and perception of reliability -- real or imagined -- means that Google will soon pose a significant commercial threat to all traditional ISVs.

In this, Google represents the changing of the guard, one that heralds a new wave of upstarts who know how to exploit the Internet. As I said up top, strategy and technology are and always have been interconnected. But companies like Google understand better than most how to leverage the emerging Web 2.0 technology in order to give companies a competitive edge.

Yes, Salesforce opened the door. But it may be Google and its kin who will be the ones to boldly step through.

In the short term, Pring advises enterprises to review their application portfolios to ascertain where SaaS can deliver advantages and then go about making the best use of it. But remember, there are not that many areas where SaaS is part of the equation today. CRM, HR -- but beyond that, there is not a lot out there, yet.

For the long term, Pring suggests keeping your eyes on the SaaS and Web 2.0 vendors but also watch how the old-guard likes of Oracle, SAP, and Microsoft respond.

My advice? Outsourcing, in all of its forms, sounds good in theory, but as outsourcing initiatives have proved over time, it takes solid analytical thinking to understand where it makes sense and where it doesn't.

Posted by Ephraim Schwartz on April 8, 2008 03:00 AM

March 11, 2008 | Comments: (0)

Outsourcing to the Middle East

TAGS: Outsourcing

The business park phenomenon proliferates, as cheap IT labor communities keep cropping up in emerging markets

As globalization continues to blanket the world and companies continue to look for geographies where they can get IT work done for less, the latest find appears to be the Middle East.

In a small suburb of Cairo, a company called Smart Villages launched Smart Village Cairo, where you will find the likes of Dell, IBM, Microsoft, Alcatel, and Eriksson, each with its own building, about 100 companies in all.

[ For more on recent trends in outsourcing and offshoring, see "The ins and outs of outsourcing and offshoring" ]

I spoke with Virender Aggarwal, director and senior vice president of Satyam Computer Services' RoW (Rest of World) territories, which include Asia Pacific, Middle East, India, and Africa. Satyam, an Indian company, just opened up its Global Solution Center in Smart Village Cairo for software implementation and maintenance, as well as other IT services.

"Egypt has a large population with a lower income and good-quality manpower," Aggarwal told me.

What more could you ask for?

Someday soon, there will be a book that chronicles the mad search by corporations for the very last place on earth where they can find cheap labor -- a comedy or drama, I'm not sure.

Meanwhile, I suppose Smart Villages are nothing more than glorified business parks, but to be honest, the whole idea of a Smart Village is somewhat creepy. It is sort of like putting all the worker bees in one spot, but in this case, you won't find the queen hiding in the center. Instead, she sits in a far-off place exceedingly more luxurious than Smart Village Cairo or Smart Village Damietta or Smart Village Alexandria.

I touched on this offshore phenomenon back in May 2007. The concept of a putting all your worker bees in one spot where they not only work but live is all the rage in China.

The Chinese government built a million-apartment complex as part of a business park. The government pays the mortgage for workers, giving them a 70- or 99-year lease, and it pays for their commute to and from work.

And so last week, Satyam opened its solution center in Smart Village Cairo serving mainly the European market, especially those with operations in the Middle East.

Egypt, which has a population of 80 million, graduates a lot of software engineers who speak French as well as English.

As Aggarwal puts it, oil is more than $100 a barrel, meaning a lot of money is flowing into the Middle East. Satyam has offices in eight oil-producing countries in the region, including Saudi Arabia, Dubai, and Oman.

Global companies, Fortune 1000 especially, with operations in the Middle East are looking to mitigate risk. Rather than getting all the work done in India with a single outsourcing provider, many companies prefer to have the work located in multiple countries even if it is all contracted with the same vendor. Keep in mind the geopolitical risks and the needs of business continuity as well as keeping work close to its customers' Middle East centers.

I'm of two minds about the creation of a place like Smart Village Cairo.

Yes, to an American, it is creepy to have fabricated villages designed just to serve the needs of giant international companies -- not that we haven't been doing something similar with migrant workers for years.

On the other hand, it creates jobs where there were none, and that could mean a better life for millions of people -- with the caveat that the workers are treated well and paid fairly. This, in turn, can bring life to local economies. Perhaps if the workers don't like the food at the corporate lunchroom, a small falafel stand inside an RV will motor up to the employee entrance every day at noon -- that kind of thing.

It is hard to say where this all leads. If we look back far enough, we see that all businesses started locally, and as technology advanced –- trains, planes, and refrigerated container trucks-- it allowed companies to expand their markets.

Some say no one country can be self-sufficient. We all need to import and export goods in order to survive. But I suppose as technology advances, more and more of our manufacturing, farming, and production will be automated, so services will become the backbone of what the workers of the world will supply. In that case, what we are witnessing with the outsourcing phenomenon is the next evolutionary stage in commerce: the importing and exporting of services.

That's fine, I guess, as long as we don't forget that services are not a commodity product that can be packed up on a pallet with an RFID tag stuck to its side and loaded on a truck. Services require people, and they must be treated with respect. I still hold out hope.

One last odd thought: As the world's natural resources become depleted, someday the earth may not be self-sufficient, and we may have to find new worlds to trade with.

Related articles
• The ins and outs of outsourcing and offshoring
• Outsourcing moves to the core
• The truth about China

Posted by Ephraim Schwartz on March 11, 2008 03:00 AM

March 04, 2008 | Comments: (0)

Outsourcing moves to the core

TAGS: Outsourcing

The next generation of outsourcing will include porting knowledge-based business functions offshore

For those who thought that outsourcing would remain the domain of heads-down coders and customer service representatives, guess again.

A new form of outsourcing is suddenly sweeping across the U.S. and European enterprise landscape. No, I'm not first discovering BPO (business process outsourcing) or ITO (information technology outsourcing). What I am talking about is called KPO, aka knowledge process outsourcing.

[ For more on recent trends in outsourcing and offshoring, see The ins and outs of outsourcing and offshoring ]

Don't misunderstand; cost savings remains the key driver of outsourcing, according to Peter Brudenall, partner at Hunton & Williams, an international law firm with global technology, outsourcing, and privacy practice groups.

However, Brudenall backed up a report published only last month by KPMG's global sourcing division titled "KPO: unlocking top-line growth by outsourcing 'the core,' " pointing to KPO as the next generation of outsourcing, focusing on knowledge-based skills.

We're talking about financial services companies going outside their borders for company valuations, feasibility analysis, fraud analytics; health care facilities having doctors in India read x-rays -- you name it. No one is immune.

If I can sit in my home office in snowy Vermont writing about high-tech trends, I see no reason why a wordsmith sitting at his desk in Bangalore can't do the same.

But until they come for me, let me tell you a bit more about KPO and what industries are opting in and why.

First off, let's face it. Outsourcing has gained credibility among most all the organizations that have employed the staffing strategy for so-called commodity skills, begging the question: How much longer before outsourcing providers gain the respectability necessary to take on core business functionality?

According to the KPMG report, led by Egidio Zarella, global partner-in-charge of KPMG's IT advisory group, and Pradeep Udhas, global partner-in-charge of KPMG's sourcing advisory group, insurance companies are already outsourcing product design and profit testing. And in the U.K., legal firms are outsourcing due diligence research to India, Brudenall adds.

Legal research, financial modeling -- what can be more "core" than that?

For due diligence, Indian lawyers have access to an extranet through which they review all the documentation. Whereas that would be done by a junior lawyer in Great Britain for 150 to 200 pounds per hour, says Brudenall, in India you would get a senior lawyer charging out at 50 pounds an hour.

Of course, the Indian legal system is based on the British system of law, so Indian attorneys are familiar with the concepts and legal frameworks.

Years ago, a SAP executive told me one of the rationales for opening research and development labs worldwide was because talent is worldwide. Doing so also takes SAP out of its comfort zone, giving it a new way of solving problems.

As for the first wave of KPO, the financial services sector appears the most intent on moving beyond the bounds of the organization. Insurance and actuarial, equity research and investment banking, corporate credit, structured and project finance, and retail banking and marketing are buying in to the new knowledge-based outsourcing paradigm.

KPMG identifies seven countries -- India, Canada, Australia, Singapore, South Africa, Ireland, and Wales -- as places with abundant talent, cost savings, and low political risk, where KPO can be done efficiently.

As opposed to being spurred exclusively by cost-consciousness, the KPMG report states in a 32-point pull quote, that "decisions about outsourcing will be accelerated to preserve and increase competitive advantage."

The first time my eyes scanned the quote my brain read:

Decisions about outsourcing will be accelerated to preserve and increase "cognitive" advantage.

At the end of the day, I think that's what it is all about.

Posted by Ephraim Schwartz on March 4, 2008 03:00 AM

February 19, 2008 | Comments: (0)

Can't get no outsourcing satisfaction?

TAGS: Outsourcing

Cost-conscious outsourcing could cripple your business for years if you don't hammer out innovation expectations up front

An important survey of major companies using outsourcing services shows a deep dissatisfaction with the outsourcing experience despite the fact that these same companies say they achieved as much as a 25 percent ROI.

The survey, "Why Settle for Less," put together by Deloitte Consulting, has what many similar surveys lack: a convincing substructure.

Rather than talking to a dozen top executives at Fortune 500 companies, as lesser surveys do, Deloitte talked to 300 CEOs, CIOs, CTOs, and directors at companies that spend a minimum of $50 million on outsourcing or $30 million annually on BPO, as well as organizations that invest more than $1 billion in what is typically called Very Large Scale IT Outsourcing Services.

Also included in the survey were conversations with senior executives at 31 outsourcing service providers.

Thirty-nine percent of the 300 respondents said they had terminated an outsourcing deal and went to another vendor or brought the function back in-house. In addition, 61 percent of those who said they were dissatisfied said they had to escalate the problem to senior management in the first year of a contract, with 53 percent of those escalating yet again in the second year.

The key reasons for dissatisfaction? Underestimated project scopes; "higher-than-expected" costs; and poor communication, service, and reporting on the part of the service provider.

Deloitte partner Peter Lowes, who headed up the report, admits to being surprised by the results, which included the firing of suppliers on a wholesale basis, more than you would think appropriate for a typical business arrangement.

"There’s a great deal of tension," between the two sides, says Lowes, who is the national service line leader for Deloitte's outsourcing advisory services group.

Cost savings remain the motivation behind these outsourcing deals, and the savings are real. But the problem is that there are other expectations, such as innovation, process improvement, time to market, and customer service, where the outsource providers fall down.

"In most cases, expectations exist and are discussed, but it is swept under the carpet so the plan on how this will be achieved is being overlooked," Lowes says.

Companies are too often overly hungry for cost savings, and because sales is motivated to get the deal signed, everyone decides they will sort out the details later. And guess what? There's no real follow through.

But dissatisfaction is more than just a thorn in the company's side. These long-term relationships -- typically three to seven years, with the bigger deals extended out to 10 years -- can put a company at a competitive disadvantage, according to Lowes.

Over the length of the contract, the service provider is expected to continually innovate. Respondents, however, were consistently disappointed in this aspect of the outsourcing arrangement. They felt that, at the conclusion of the outsourcing deal, they had fallen behind in their respective market. This was identified as a chronic problem.

And here is the real danger.

"The longer you outsource something, the more you fall behind," Lowes says.

The solution seems obvious, but let's put it down on screen, so to speak.

Services should be broken up into smaller pieces for shorter durations. Rather than a single $1 billion deal, sign smaller deals focused on smaller services. Outsource your desktops to one provider, servers to another, and your network to a third.

"Do a three-year deal instead of five years, or a seven-year deal instead of 10," advises Lowes.

Also, by breaking up the scope into more discretely defined pieces, you will find service providers who have deeper expertise.

It is also important to define an innovation plan going in and agree on how it will be delivered.

Be prepared, however, to drive that innovation with additional capital every couple of years. You can't just go to the lowest bidder. You have to make it worthwhile for the service provider.

Lowes says that past Deloitte surveys indicate the more profitable the relationship for the outsourcer, the happier the customer is, because the service provider has an incentive to do a better job.

Although it sounds like a no-brainer, many companies never think to align their outsourcing strategy with their business strategy. Blinded perhaps by the allure of cutting IT overhead by 25 percent or more, companies fail to do their homework, thinking all it takes is a financial business case to justify jumping into an outsourcing deal.

Posted by Ephraim Schwartz on February 19, 2008 03:00 AM

December 21, 2007 | Comments: (0)

The ins and outs of outsourcing and offshoring

TAGS: Outsourcing

If we look back in order to understand what lies ahead, all signposts point to the continued expansion of outsourcing and its hand-in-glove partner, offshoring. Not only will outsourcing and offshoring continue to expand in the enterprise, they'll find their way into midsized and even small companies as well. Outsourcing, in all of its forms, will absorb more and more tactical operational IT services.

But that's not all: As IT and business align more closely, over the next several years outsourcing service providers will also be chosen for their ability to become strategic business partners.

With all the individual moves and debates over outsourcing and offshoring, it's easy to lose sight of the context. As the year draws to a close, I decided to bring together the best of Reality Check's coverage of outsourcing and offshoring. So here goes.

My Oct. 9 Reality Check, "Globalization takes on a new look," and my May 1 entry, "The truth about China," both explained the key shift now under way from a merely operational focus to a strategic one.

In the October entry, I said that the major Indian outsourcing companies were acquiring U.S.-based companies in order to "get deeper domain or industry expertise" — in other words, industry-specific business smarts.

On May 1, I pointed out that "the U.S. economy has survived at least three waves of globalization … we're now experiencing a fourth wave, with IT services and app development moving to India and China."

Application development and business process transformation, certainly two expanding strategic IT functions, will also continue to move offshore at an accelerated pace. (See "R &D sets sail for offshore," from my Sept. 11 Reality Check post.)

The fact is as outsourcers prove their worth, we will see U.S.-based companies look to outsource providers as a one-stop shop for product development that includes integrated IT operations, application infrastructure management, BPO, and applications development, rather than looking at outsourcers as discrete suppliers of services. (The April 18, 2006, Reality Check, "Is extreme outsourcing and consolidation worth it?" explores this trend further.)

Outsourcing and offshoring will grow in both depth and breadth over the next several years. To find out how, here are a few more links to outsourcing blog entries that show examples:
BPO battle heats up
The new outsourcing
Offshore attrition on the rise
Offshoring: Money talks, programmers walk
Outsourcing vs. shared services
Microsoft tech recruiter says hiring for Vancouver Development Center has worn her out
Tata's Mexico move tackles time zones

Posted by Ephraim Schwartz on December 21, 2007 03:00 AM

September 11, 2007 | Comments: (0)

R&D sets sail for offshore

TAGS: Outsourcing

A rising tide of software development service providers have more ISVs outsourcing core components

Outsourcing and offshoring are not just for IT services and business processes anymore. A small but growing niche of providers targeting R&D for application development is coming to the fore.

I'm not sure which came first, the demand for software development services or the service providers themselves, but my guess is that, like all trends, it is probably a case of the need for something new perfectly timed with the technology that makes it possible.

The concept itself has been around for a while. Companies such as General Motors were among the first to employ what the manufacturing industry calls contract manufacturers. As part of the model, GM enlists other companies to manufacture almost all of its cars' components, which are then delivered to GM for assembly. The major PC manufacturers do this as well. In fact, PC manufacturers even leave the assembly to OEMs.

The software industry, however, has been slow to adopt this model. But now, thanks in part to SOA outsourcers' ability to deliver components to ISVs, software companies are beginning to catch on to this development strategy -- one that engineering companies such as Ford, Boeing, and Nortel practice routinely.

Software development outsourcers work with the CTO rather than the CIO, says Peter Harrison, CEO of GlobalLogic, one such service provider.

Typically, an ODM (original design manufacturer) will work with a customer to create the design. As with hardware, software contract manufacturers then take on anywhere from 10 percent to 100 percent of product development. In many cases, especially with startups, says Harrison, a company comes to GlobalLogic with just an idea, and GlobalLogic helps give the idea shape and texture.

Within the past three years, the concept of code libraries and reusable code and processes has taken on a new meaning, says Bob Kramich, vice president of business development at DarwinSuzsoft, an outsource service provider based in the United States and China.

Reusable processes are key to contract software manufacturing. What an outsourcer has developed for one customer can now be repackaged for another, reducing development time and cost. For example, in mobile software development, memory utilization is a big issue that when solved can be used many times over. And then there is all the back-end synchronization with the hub. Such challenges are common to most mobile development endeavors, says Kramich, and they can be solved rather quickly by outsourcers who have done it for customers many times over.

Other recurring components include security and data encryption, plus the need for performance testing and optimization. All these things are consistent across every application.

Part of what is driving this trend is the nature of today's startups, which are more likely to be launched by business-oriented investors than technologists. To these individuals, the idea of outsourcing the design and development of software at a lower cost than building an in-house infrastructure is very appealing.

As this trend grows, development will accelerate, and the cost of software will go down. There will also be more competition, as the bar is lowered for buying into the creation of a new product.

GlobalLogic's Harrison believes the model will also result in more user-friendly applications tailored to business users. As opposed to SAP, for example, which built everything but the operating system, including the application server, the message queue, and the whole stack, these days there is a greater willingness among software vendors to adopt third-party processes and components. After all, it frees them to focus on the differentiating aspects of their solutions, rather than having to create every possible layer.

Harrison, however, believes that even companies' crown jewels will eventually go this route.

"The days of the three- to four-year Vista product lifecycles are coming to an end," Harrison says.

Of course, as predicted here numerous times, eventually these software service providers will create their own application solutions and sell them back to the enterprise, thus bringing the trend full circle.

Posted by Ephraim Schwartz on September 11, 2007 03:00 AM