offshore IT The risks and benefits of five business models for
taking your IT offshore.
A growing number of UK companies are moving IT systems and business
functions overseas to lower-cost countries such as India in a bid
reduce costs.
However, there are various types of offshore outsourcing and it is
crucial for an IT director to make sure they choose the right one
for their organisation before negotiating a contract with a
supplier. There are five main models for offshore IT, each with
their advantages and potential risks.
Offshore outsourcing
This is when a company moves IT systems or business overseas and
the supplier runs the service. The main advantage with this model
is that the supplier will usually guarantee savings in IT-related
costs under detailed service level agreements in the contract. On
the downside, this option normally results in job losses for UK IT
staff and can often attract negative media coverage.
If the decision is taken to outsource, the natural reaction is to
find a credible "local" service provider and enter into an
outsourcing agreement with them.
Onshore outsourcing
A similar but alternative approach is to use a UK-based service
provider and enter into an outsourcing agreement. The service
provider then uses its overseas operations (sub-contractors) to
provide the services from the foreign destination. This means that
although the customer can use a known service provider, the overall
cost of the project will increase.
Do it yourself
The alternative to outsourcing is for an organisation to establish
its own operations overseas. This removes the need to pay a service
provider's margins and gives more flexibility as to how the
overseas operations are used.
Whether this is carried out by means of a branch, subsidiary, etc,
this will be influenced by many factors, particularly tax
rules.
Build, operate and transfer
The build, operate and transfer model is for those companies which
want to test the water before establishing their own operation. A
service provider is used to build and operate the business for a
period of time, after which the customer can, if they want, acquire
the operations.
For the commercial model to work, no infrastructure or set-up costs
should be paid up front. The service provider pays for building the
operation and if the customer decides to exit, the service provider
has to find a new customer to recover the costs.
Joint ventures
Apart from tax reasons, joint ventures should only be used for
outsourcing when there is genuine potential for collaborative
exploitation between companies.
Keeping the distinction of customer/supplier (rather than venture
partners) is very important. As an example, if you are a joint
venture partner which also receives outsourced services from the
joint venture, you are partly responsible if there are problems
with the outsourced service.
On the other hand, if your supplier does not fulfil the outsourcing
agreement, it is clear where the responsibility lies.
Tim Pullan is a senior lawyer in technology
and outsourcing at law firm Tite & Lewis