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Outsourcing renewals: Where do I source services?

With thousands of IT services contracts coming up for renewal, CIOs should take a careful look at where they source services from

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Offshore

With billions of pounds worth of IT outsourcing agreements coming to the end of their contracted period over the next few years IT services work will inevitably move – and this might not just mean between suppliers but continents.

Finding the best location or mix of them for IT services has become a more complicated task in recent years because CIOs have more options. Suppliers around the world offer IT and business process delivery, all of which have their own advantages.

In the past CIOs might have made a choice between keeping work onshore or shipping it to India, but today there is a move to multi-shoring models.

There are suppliers in eastern Europe, south-east Asia, South America and even Africa providing IT services. Meanwhile India itself has changed and many CIOs have to ignore preconceived notions about its advantages and disadvantages and start looking at it afresh.

No one place fits all

Offshore services have become so mainstream in the private sector, that canny marketing executives and media-savvy CIOs do not refer to their offshore strategies but their "rightshore" strategies. This is the belief that the best IT services will be delivered onshore, offshore, nearshore or all of them.

Today it is possible for a UK business to have call centre services delivered from a low-cost region in the UK, have its digital software development done in Ukraine and the application development in India. Then you have large global companies that might have a different mix of delivery locations for businesses units in different geographies. For example, an Asia-Pacific (Apac) arm of a global business might choose a combination of India, the Philippines and China, while the North American arm might use Brazil, Costa Rica and Mexico.

And it is not just a case of finding a supplier in these locations that fits your needs and packing it off to them, but actually setting up operations or partnerships offshore. This can be a joint venture with a supplier, a captive centre or fully fledged operations unit.

Large companies such as AstraZeneca are pioneering these models. Last year the pharmaceutical giant opened an IT service centre in Chennai which kicked off an insourcing strategy focused on a global delivery model.

The Chennai operation is focused on SAP, infrastructure operations, application development and maintenance, as well as cloud and mobile. AstraZeneca will also open delivery centres in eastern Europe and California as part of the global delivery strategy. Last year, David Smoley, CIO at Astrazeneca, told Computer Weekly one of the advantages of the company’s decision to use offshore IT, but bring it in house through an Indian global delivery centre, was motivating staff. “We are able to create a team that feels it is part of a company that is saving lives and creating drugs. We also see it as being important in career paths to give staff exposure to other parts of the company across the world,” he said.

Read more about what to consider at contract renewal time

In 2013 Daimler announced plans to make savings of €150m a year by bringing IT services in-house and expanding its IT operations in India and Turkey.

These types of developments have given places like Bangalore some of the most in demand real estate in the world, with some of the world's biggest companies across all sectors establishing deep roots there.

Peter Schumacher, director at business consultancy The Value Leadership Group, said businesses use offshore centres to help them differentiate, rather than just cutting costs. “You have to use offshore centres today to do things that you can’t do elsewhere and not just cut costs.” He said because companies – not suppliers – own the offshore resources, the savings made are being invested in further offshore work. He said this is as much about creating business opportunity as cutting costs.

These locations are becoming deep talent pools. Places in India, for example, have staff with years of experience that can support businesses with strategic plans such as digital developments. Years of offshoring to India have matured it as a service delivery location and, while lower costs are still an attraction, it is the transformative opportunities developed over the years that are attracting many businesses.

India changed and it needed to

The model where Indian service providers offered lower-cost equivalents could not work forever. Automation is providing a cheaper alternative for many IT and business process tasks, software as a service is eating into the enterprise software market and shareholders of the now huge Indian players want non-linear business growth.

The Indian outsourcing experience of US manufacturing giant GE depicts the evolution of India as an IT services destination. GE is regarded as the first large corporation to harness India as a delivery centre when it first arrived there 20 years ago. GE’s annual IT services spend has topped $1.6bn in recent years. But today the company is reducing the proportion of IT it outsources from about 75% to under 50%, according to Tony Zupa, former executive vice-president of global IT sourcing, vendor management & outsourcing operations at GE Capital.

Now an independent consultant he said that, despite this reduction, companies such as India’s Tata Consultancy Services  and Cognizant have great opportunities because, over the years tehy have built strong relationships with GE and understands its business. He said it can help GE with its industrial internet and contribute to its growth as a business, which includes becoming a top 10 global software supplier by 2020, rather than just reducing its costs. “Outsourcing to India by GE is not going to go away,” said Zupa. “There is a balance needed and an important part of the global footprint in GE’s strategy.

CIOs renewing contracts need to think about India in a different way, according to Schumacher at The Value Leadership Group

He said scale is India’s biggest draw. It has the infrastructure and skills that can help companies start from zero and scale up to operations with thousands of staff. Labour attrition might be high, but it is easier to find replacements, he said. He said new recruits are available to fill gaps quickly. “India has the biggest and most diverse talent pool.” And it is not just new graduates seeking low-level work but highly skilled and experienced staff. “There are a lot of people available in India with 10 to 15 years’ experience.”

Many of these workers have been employed at other global businesses. There is former staff of technology giants such as Google based in India’s technology hubs and knowledge is the new resource being traded. The likes of Google employ thousands in India. When these people move on the knowledge and experience goes with them and other companies can tap into it, at a lower cost in many cases.

Not just for the corporate giants

And you don’t have to be a pharmaceutical or oil giant to tap into this. Mid-sized companies can benefit from the pioneering that large companies have done to establish offshore delivery locations.

For example Cambridge University Press, a company which publishes academic journals and books and has English language courses and education businesses across the world, has significant outsourced operations, many of which are in offshore locations. Following its success the company has increased its offshore operations over the last five years.

The company also has offshore captives. Its first was in Manila, Philippines, where it started around five years ago with 40 staff focused on software development and testing, supporting its online digital product. Currently, it has just over 250 people and expects over 300 by the end of 2015. The Manila centre now has 18 separate teams carrying out a wide range of internal services. 

Speaking at a recent CW500 event about outsourcing Mark Maddocks, CIO at Cambridge University Press, said it is cost-effective with low attrition and wage inflation is not as bad as people say.

Maddocks said it does however require management time and overhead. “They are my team and I still have to manage them.”

The company also has offshore software development in India, with development centres in Calcutta and Hyderabad. These are with two very large Indian IT services providers and both centres have about 50 people in them. It has just launched a hybrid of traditional offshoring to a supplier and a captive through a business process outsourcing operation, where it shares a building with the existing team in Hyderabad. 

What shore is right for you?

But offshore is not for everyone. Recent years has seen the rise of many of the nearshorer alternatives. The short travel distances, similar time zones, high education and good English skills of central and eastern Europe have made the region a major source of services for UK companies.

The former Soviet Union had a strong educational emphasis on engineering and the sciences. Many of the countries in this region today have a highly skilled workforce in areas such as computer science, but at much lower costs than the UK. Some companies believe that eastern Europe has a distinct advantage over places such as India when it comes to outsourcing, because employees tend to take a more collaborative, and less process-driven, approach to projects.

Eastern European countries in the EU could be a good choice for work which requires adherence to the Data Protection Act.

Where you can send your IT

Americas

Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Panama and Peru.

Asia/Pacific

Bangladesh, China, India, Indonesia, Malaysia, the Philippines, Sri Lanka, Thailand and Vietnam.

Europe, the Middle East and Africa

Bulgaria, the Czech Republic, Egypt, Hungary, Mauritius, Morocco, Poland, Romania, Russia, Slovakia, South Africa, Turkey and Ukraine.

But IT leaders should not forget onshore and even local opportunities. The DVLA is a case of a large organisation backing a UK location with investment and building a community of skilled staff around it. The organisation not only took the decision to insource its IT but also planned to invest in its home city of Swansea to create a base of skilled staff. This involved setting up startup hubs and working closely with educational establishments.

DVLA CEO Oliver Morley told Computer Weekly that, in the past, the DVLA could not attract the right IT talent itself – and even IT professionals in its home town of Swansea with the right skills would be overlooked. “There was a saying that, if you were an IT professional in Swansea and wanted a job at the DVLA, you would have to go to London and see Fujitsu," he said.

But this has now been turned on its head, he added. “If you live in Swansea and work in IT, this is a great place to work.”

According to figures from ISG, if you just take into account IT outsourcing contracts worth over $5m a year, globally there are nearly 3,000, worth over $270bn (£175bn), coming up for renewal around the world in the next three years. Whether you insource or outsource offshore, nearshore, onshore or even in the local community, at contract renewal time you should know your options.

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