The European market for outsourcing overseas is set to grow by
40% this year, but there are issues IT chiefs should know about
before taking the plunge.
A growing number of UK blue chip companies, such as BT and
supermarket chain Somerfield, have recently outsourced IT projects
overseas.
The European market for offshore outsourcing is forecast to grow by
more than 40% this year, according to analyst firm Gartner, even
though unions have warned of strikes if the deals lead to
redundancies in the UK.
With IT decision makers at risk of being caught in the crossfire,
the need to understand the benefits and pitfalls of offshore
outsourcing is more important than ever.
Although the market in offshore outsourcing is becoming more
mature, it is still not a practical option for small companies or
small-scale projects.
"You have to be fairly big to justify the risk and expense," said
Bob Aylott, principal consultant at offshore outsourcing
consultancy Orbys. "Otherwise it is not worth it. The threshold for
the amount of people involved is around 40, and if it goes to over
100 people it makes sense to look at going offshore."
The main attraction of offshore outsourcing is the savings that can
be achieved through using highly skilled IT professionals who are
paid a vastly reduced salary. For example, Indian salaries are
about one-seventh of their equivalent London posts.
Savings from offshore deals typically range from 20% to 50% but
these can take five years to materialise. Savings have to be set
against up-front costs such as telecommunications links and staff
expenses.
"In due course you can save between 40% and 50%, which means you
can't afford to ignore offshore outsourcing," said Aylott. "But it
could take four or five years and the savings could be virtually
nothing to start with. However, you could save about 30% on a
one-off project."
Another problem is the likelihood of a hostile reaction by UK IT
staff when they hear a deal will be going offshore. All outsourcing
is a threat, but offshore outsourcing raises the added spectre that
the UK IT industry itself is being eroded. Even domestic
outsourcers are now using offshore skills to reduce their costs,
and major corporate users have set up offshore IT
departments.
Consultation costs, retraining programmes, redundancy, loss of
morale, disaffection and potential hostile strike action have to be
factored into the cost-benefit analysis of going offshore.
As with any outsourcing deal, it is absolutely critical to continue
to invest in the relationship after the contract has been set
up.
Phil Morris, director of outsourcing at consultancy Morgan
Chambers, said, "We recommend that 5% to 8% of the annual spend on
any contract should go on managing it. When it comes to offshore,
the complications of distance and culture mean that it is going to
be 8% rather than 5%, though some get away with less depending on
the sector and the complexity of the work."
Considerable effort is invested in selecting a supplier and setting
up a contract in any deal, but when the supplier is offshore that
effort has to be greater. Travel is an inevitable problem, as are
the cultural differences that will need to be understood and
allowed for.
Choosing what type of work to outsource is critical, said Ian
Marriott, research director at Gartner and author of Gartner's
report on offshore outsourcing. He advised companies do a pilot or
a self-contained application development, as such projects carry
the least up-front costs and will be more justifiable on a smaller
scale.
Offshore deals encompass a wide range of IT, including maintenance
and support work, business process outsourcing (BPO), such as
payroll or cheque processing and, most typically, call centres.
However, BPO offshore carries a caveat. "Your brand and image are
in the the hands of a third party who is thousands of miles away,"
warns Marriott. You have to be very sure, that those hands are
safe.
Keeping a close eye on your supplier is easier if they have a UK or
European office. However, regular visits to the offshore site are
essential.
"There will inevitably be some travel costs," Marriott said. "You
should go during the initial evaluation and when the contract is up
and running. Do not just rely on your local contact. You need to
connect at an executive level should things start to drift."
There is also the delicate question of cultural differences between
managing UK employees as opposed to, for example, Chinese or Indian
IT professionals.
"Cultural differences can be significant if you do not educate your
organisation to tackle them in the initial set-up," Morris
said.
Differences can include a reluctance by non-European cultures to
say no to or challenge customers; the user's directives never being
questioned - even if the supplier has a better way of approaching
the task in hand; or a supplier not having the kind of sector or
domain knowledge that is taken for granted in the UK, said
Aylott.
"You need cultural training and awareness on both sides to build
the relationship," he said. Moreover, if your own organisation has
staff familiar with the offshore country or if there are family
connections, it can be helpful to have them on the team.
The cultural differences could also be technical. UK users can
definitely find themselves as the "junior partner," which can come
as a shock.
When it comes to software development, Indian suppliers in
particular have a very high level of maturity; most are at level
five of the Capability Maturity Model of software
development.
In contrast, "No organisation in Western Europe has a higher score
than CMM level three," Morris said.
This can mean a UK user, familiar with a sloppier level of
application development can find themselves stretched to meet the
abilities of their offshore supplier.
The risks
- Up-front costs will be high because of travel costs and
cultural training. Expected savings may not appear for several
years, except on one-off projects
- Running costs will be higher than domestic outsourcing
- Telco costs could be higher, especially if the offshore site is
accessing your mainframe
- Telecoms outside main offshore centres may not be as
effective
- Outsourcing customer-facing processes offshore, such as call
centres, can jeopardise your brand image
- Unless handled well, in-house staff anxiety about job security
could lead to loss of morale and strike action. Even if this is
handled well, there could still be redundancy and retraining
costs.
The benefits
- Labour costs are reducedby about 20% on domestic
outsourcing
- The time difference can be advantageous; offshore suppliers can
work at "night"
- Many offshore suppliers have more efficient software
development process (some as high as CMM level five).