For budget-constrained IT directors, outsourcing software development projects to India has been regarded as a good way to save time and money.
Cost, however, should not be the only driver. "Most miss out on the benefits of outsourcing because they view it as an opportunity to cut costs in the short term, rather than as a long-term strategic move to improve productivity," says Jon Fuller, director at independent consultancy Centrix.
In Fuller's experience, "Such a narrow view has led to operational problems and threatened the viability of the company outsourcing.
"Today's decision-making behind outsourcing has to look at labour arbitrage, competitive advantage, increased service quality and speed of set-up."
So how do leading chief information officers and IT directors go about outsourcing to India?
Priority on new projects
Frederic Verger, group CIO of construction materials supplier Saint-Gobain's says, "We particularly consider outsourcing for well-defined projects, and avoid it for projects that require iterative finalisation. In terms of project life-cycle, we place the priority for outsourcing with new projects."
In Verger's experience it is more difficult to introduce offshoring at the end of a project when maintenance is an issue, than at the beginning of a project when there is less debate on the impact on internal resources.
"In terms of domains, we consider outsourcing in India both for application developments, tests or upgrades (mainly SAP and Java/J2EE developments) and infrastructure services (security operational centre, remote infrastructure management, etc)," says Verger.
There are two options: direct offshoring, where the business works directly with an Indian provider, or indirect offshoring, where the IT director has to deal with a European service provider who provides services partly from offshore.
"We prefer direct offshoring to indirect offshoring, when possible, for competitive reasons," says Verger.
How about making a selection among the growing number of services companies offering offshore work?
Define preferred suppliers
Saint-Gobain chose to define a panel of preferred Indian suppliers rather than having a single provider. The reason for this approach was that in India, as in Europe, no single supplier is perfect for delivering any type of service at any moment at the best price.
"So, one of the criteria for setting up our shortlist is to select providers who accept competition within the panel of providers we have selected," says Verger.
Another criterion is that the suppliers he invites need to have one recognised domain of excellence. "Our panel currently comprises Cognizant, HCL, MindTree, Satyam, and Wipro," says Verger.
When UK insurance and pensions company Friends Provident de-mutualised in 2001, its IT manager for resourcing, Chris Green, realised changes needed to be made to applications, and that he would experience demand for new projects.
Keeping up with demand
"The demand for IT resource is always greater than can be met from in-house teams - it runs between 55% to 60% in-house. No one has been made redundant because of our offshoring," says Green.
The company decided the best way to meet demand would be to outsource to Wipro.
"We selected to work with Wipro for various reasons - the cost per resource being an obvious part of the equation. But culture and style played key parts in the decision too we have a partnership with Wipro rather than it just being a supplier.
Friends Provident conducts quarterly reviews and team visits to and from India. "Over the past five years the key delivery has been that our relationship allows flexing up and down of offshore resource," says Green.
Friends Provident now has up to 100 Wipro staff engaged and a further pool of up to 30 to call on.
"We operate with a mix of Wipro being reactive and proactive, and are currently working on developing the next stage of our relationship," says Green.
Improved service, less resources
Until recently Burger King had never outsourced. But Burger King's CIO and senior vice-president Raj Rawal needed to improve services with less resources. The staff were worried. Would their jobs all disappear?
"No one has lost their job. Looking at projects, I had the usual consultancies in to pitch, with typical costs of £75, £85, £125 per hour for programmers, analysts, project managers respectively. This is not a longer-term path to follow to become profitable. I had experience of outsourcing and invited companies to tender," says Rawal.
MindTree won the deal, at a cost of "less than £25 per hour", a price that Wipro indicates is typical for India today. But for how long?
These examples show the benefit of offshoring. Experts are seeing increased demand among CIOs to consider alternatives to European outsourcing firms. Phil Morris, chief executive of sourcing advisory firm Morgan Chambers, says, "In new contracts the market has learnt the benefit of niche players to add specific value.
"In renewals the old 'monolithic empires' of single supply are being dismantled in favour of value-add from a range of smaller organisations. The advantages far exceed the increased governance cost and complexity."
As with any contract, governance is key. "Governance has long been ignored, under-invested in, or dismissed as 'fluffy'. The skills and disciplines around good governance are now being recognised as the key to sustainable relationships and the benefit they bring," says Morris.
He believes governance should be viewed as a key step in the maturity of both the discipline of sourcing and the way in which businesses manage important service relationships.