Monday, December 31, 2007

Outsoursing next stage: Solution accelerators to retain clients

Chasing the mouse is an eternal quest for Tom. In Designs on Jerry, the scheming cat decides he has had enough. He tries to automate the process of trapping a mouse. He builds an elaborate system with cheese as bait. When pulled, it would cause a chain reaction crushing the mouse under a heavy weight. Tom calls his invention the Better Mouse Trap. Business consultants would have called it a solution accelerator.

Today’s globalised businesses are caught in a similar cat-and-mouse game between value and cost. Nowhere is the need for a better mousetrap felt more than among software companies and their customers. Indian outsourcing companies have just come out of a glorious decade in which they chaperoned offshoring to the mainstream. But things aren’t going to remain static.

On the one hand, increasing costs, staff turnover and the gradual loss of foreign exchange arbitrage are eating into the profit margins of Indian companies. On the other hand, global companies are looking to automate more of their business functions, especially those performed iteratively by a large number of people. The combination of these factors is extracting innovative answers from the industry and the age of automation may have just begun.

After years of using low-cost labour to produce software, companies are moving to the next stage: more and more software coding and business process functions will now be put on auto-pilot, leaving employees free to pursue higher value tasks. Software firms are adopting solution accelerators to execute more work with the same people and deliver results faster to clients. Increasingly, this strategy is also becoming essential to retain clients.

“Within two to three years, as clients become accustomed to the cost savings, they begin to look for productivity benefits and service delivery innovations,” a Nasscom-McKinsey survey of business process offshoring in India says.
If you want to get a sense of how software applications will be developed in the future, try Scratch.

You can download the program free from MIT Media Labs Web site ( By dragging and dropping blocks from one part of your computer screen to another using a mouse, you can, within minutes make an animation, create a video game or tell an interactive story — without writing a single line of code.

Earlier, it would have taken some knowledge of computing, a lot of patience and time to do something similar. Now, all you need is a mouse. Admittedly, in the complex world of enterprise computing, developing a solution will never become this easy.

The Lego blocks approach

Scratch is aimed at children — not professionals. But its working can help in understanding why some of the biggest software makers such as IBM, Accenture, TCS, Infosys and Cognizant are upbeat about doing something similar in software development and business processes. Now, take MIT Media Lab’s product. When you drag and drop these building blocks in Scratch, you are in fact adding ‘lines of codes’ that had been written earlier and tested thoroughly.

Sunday, December 30, 2007

2007: How was it for outsourcing?

2007 saw government shun colossal outsourcing contracts, while businesses displayed growing confidence in software-as-a-service -- however, sustained skills shortages have plagued deployments, sparking interest in offshoring.

So just how important was IT outsourcing to Australian business? According to analyst group, Gartner, AU$22 billion was spent on IT outsourcing and services this year, including infrastructure, product support and professional services.

As a destination for outsourcing from overseas businesses, Gartner holds high hopes for the Australian outsourcing market next year, recently ranking Australia as the number one destination for offshore work.

The end of the monolith
But 2007 will be remembered for marking the end of mega-outsourcing deals, as some of the largest contracts in Australia came to an end, and the beginning of multi- or selective-sourcing strategies.

A new generation of decision makers, hired long after initial contracts were signed, came out swinging cleavers at decade-long deals made by CIOs and bureaucrats of yesteryear.

The Australian Tax Office, Australian Customs Services and the South Australian government commenced "selective" sourcing strategies -- using multiple vendors to get a depth of expertise, rather than a single vendor to achieve economies of scale -- few of which include significant involvement from the company that controversially dominated Australian outsourcing for the past decade, EDS.

The South Australian government was the first to carve up its outsourcing contract which has been monopolised by EDS since 1995. By 2005, its then CIO, Grantly Mailes, said the nine-year, half billion dollar contract left the government "materially deskilled" and "at the mercy of the market".

In April Mailes decided to reduce contract durations to three years and excluded EDS from much of the work.

Customs followed a similar tack this year when in June it selected IBM for its mainframe and datacentre work, leaving EDS only application and development work, for which it now competes with the Telstra-owned outsourcing outfit, KAZ.

According to its CIO, Murray Harrison, the changed model will bring new vendor management challenges. He warned peers in November to not fall for "innovative" suggestions made by vendors, and to not rely on Service Level Agreements -- they simply don't work, he said.

But the mother of all contracts to go under the knife in 2007 was the Australian Tax Office's IT infrastructure outsourcing work.

Again, EDS has dominated its work for the past decade, including multiple contract extensions. However in September the ATO's hired guns, the Boston Consulting Group, released its advice for the ATO: split the services into three bundles and make the tenders competitive.

The value of its decade-long deal with EDS stood at AU$1.8 billion, however, the ATO has only committed to budgets of AU$1 billion for new tenders, which are set to last for periods of five to seven years.

The ATO, now under the guidance of CIO Bill Gibson -- after the departure of ex-second commissioner of the ATO, Greg Farr -- this week fired the starter's gun for over 60 vendors that are keen to take a chunk of its managed network services contract, currently worth around AU$55 million per year -- a figure which Gibson is hoping to reduce under the new regime.

Managing its new multi-sourcing selection process will be a challenge for the tax department. It plans on establishing isolation chambers to prevent EDS or other competitors from sabotaging trial and development exercises the ATO wants to conduct before it issues requests for tender.

The Department of Immigration's Systems for People half a billion dollar systems overhaul, like the ATO's Change Program, has also faced outsourcing challenges in 2007. In March the department brought back CSC after Unisys snatched a AU$140 million deal with Immigration in January for desktop operations, business support services, applications support and Internet and e-mail security.

Unisys is just one of the tier-two outsourcing players to have enjoyed increasing success as the trend towards selective sourcing took hold at Australia's largest organisations this year.

Unisys also won new work with the Department of Defence in January to supply IT services to its 460 regional centres.

However, EDS continued to make its mark on outsourcing. In July it secured a further five years with the Commonwealth Bank of Australia, albeit on a shorter contract than previously. CBA had signed a 10-year, AU$5 billion outsourcing agreement with EDS in 1997, and even bought a stake in the company, but it has since insourced its identity management systems, divested its stake in EDS and has slashed AU$80 million from its IT spend.

Software-as-a-service feathers a nest in the enterprise
On-demand software or Software-as-a-Service (SaaS) -- where organisations pay a vendor a monthly fee to deliver software over the Web and host information externally -- captured the imagination of IT buyers in 2007. Rather than fork out big bucks to install software on servers within the business, SaaS has allowed many businesses to outsource application management and hosting to third parties.

More than simply application hosting, SaaS vendors promote the delivery model on grounds of lower capital-expenditure requirements, better managed software upgrades and monthly payments rather than one-off purchasing.

SaaS deployments remain limited to SMBs or business units within larger organisations, and still focus on single business functions, such as CRM, e-mail security, and document management, while organisations still need to determine where it fits within overall strategies.

Analyst firm Gartner predicted this year that by 2011, SaaS will account for 25 percent of the world software market, a prize worth $US55 billion. But today, SaaS accounts for just five percent of the global software spend.

While the cheerleaders of Software-as-a-Service -- Google and -- have vigorously promoted this new "outsourcing" option, traditional vendors such as Oracle, Adobe, SAP, Microsoft and IBM have also jumped on the SaaS bandwagon, hoping to appeal to SMBs or business units within larger organisations, with Microsoft in February announcing it will spend US$6 billion developing SaaS products.

In September, SAP launched Business ByDemand, distinguishing itself from by promoting its ability to integrate CRM with ERP.

By December, Oracle's CEO, Larry Ellison, decided to hit the bitumen raising money for the company's on-demand division, NetSuite through an IPO.

Attempting to loosen Microsoft's stranglehold over the desktop, Google announced a partnership with Capgemini in September to offer desktop support and installation services to large corporations that use Google Apps Premier Edition.

Google also acquired hosted messaging security and archiving vendor Postini in July, adding to Google's compliance capabilities.

However, if research firm Frost and Sullivan is correct in its 2007 assessment of the hosted messaging security market, many more companies will be opting for hosted messaging security services in the coming years. Worth US$9.9 million in 2007, it estimates the Australian market will triple in size by 2011 to US$31.1 million.

SaaS backup and disaster recovery offerings for the enterprise have emerged in 2007 also. Thanks to deduplication technologies, Parks Victoria this year outsourced this function to Global Storage, which bought a bunch of EMC's storage units and its deduplication product, Avamar, to overcome throughput limitations that once made this offering unfeasible.

Offshoring: Can it beat Australia's skills crisis?
Skills shortages have prevailed as a key business and political issue in this election year, prompting speculation that next year more businesses will turn to offshore outsourcing to meet the lack of skilled personnel.

Although analyst firm Gartner has pegged Australia as the number one offshoring destination for organisations seeking outsourced options for sensitive business information -- thanks to Australia's mature legal and financial systems, high standard of education and stable economy -- the question remains: can Australia's outsourcers maintain current productivity levels when companies are already struggling to deliver local projects on time and under budget?

Consultants this year complained that Australia's tertiary sector is letting business down by failing to produce capable students in high-end technology areas such as business intelligence -- a field which, according to Gartner, is expected to grow, in terms of spend, at about 16 percent per annum over the next five years. With fewer skilled graduates, both outsourcers and end users are prompted to look abroad for recruits.

While Australia might look to India to fill demand for skilled labour, some analysts reckon that the India's middle class offspring aren't interested in IT -- they want sexy jobs and nice cars rather than suffer the rigours of the engineering and science degrees their parents laboured through.

Meanwhile, Satyam in September announced it will partner with the Australian Computer Society to help fight the skills crisis locally by training local graduates.

Despite discovering in August that Australians prefer speaking with robots to foreign people, Australians may have no choice in the matter if the skills crisis continues through next year.

In October JP Morgan Chase admitted concerns over security: the bank revealed it had acquired previously outsourced call centre operations to achieve greater control over security practices after finding employees using mobile phones to take screenshots of banking details they were privy to.

Changes to Australia's 20-year-old Privacy Act were proposed in September by the Australian Law Reform Commission (ALRC). If its suggestions are enacted, it will bring information held on behalf of Australian government agencies or companies, by companies outside the country, under local privacy legislation, affecting how information is managed under offshore outsourcing contracts.

If the ALRC's recommendations are approved next year, organisations seeking to outsource back-office functions to offshore locations may face tighter regulations around the handling of customer information.

With the popularity of offshoring set to grow next year, ANZ Bank is already reporting some success with this model, and currently owns its Bangalore operations which do most of the bank's application development and testing work. This year it boosted its operations in the city, where it has an estimated 1,600 staff developing the bank's software.

The bank in March reported a AU$20 million year on year increase in IT costs associated with its Indian operations, as it continues to divert application development resources away from Australia and the UK.

However the Indian development centre is also driving the bank's thirst for labour in its UK, US, European and South East Asian centres, causing it to take on an extra 623 new staff since March 2006.

NAB this month confirmed it will pursue a similar strategy by exploring options to offshore information management, SAP software development and the testing of banking operations.

While it is unclear to what extent the credit crisis in the US financial markets will affect the Australian economy, the outlook is considered by most to be strong in the coming year. Australia will continue being hampered by skilled labour shortages, which analysts believe will negatively impact the productivity of all projects next year, one that will force business to seek offshore options.

IT sector boom: Skills and local growth shift IT balance


The most recent figures available from the government suggest that the volume of this market grew by 20pc in the last year, reaching a capitalisation of some 1,162 trillion roubles (approximately $48bn).

Indeed, Russoft, the software industry’s representative , suggest that software export alone accounts for some $1,5m, a 54pc increase on last year.

No less significantly, there has been movement to resolve many of the issues that previously hindered foreign collaboration – eg weak infrastructure, lack of knowledge of English , management and intellectual property rights. Just last year, the number of companies with international ISO or CMM/CMMI standard management systems increased from 18pc to 28pc.

According to Alexis Sukharev, founder of Auriga , a software R&D outfit incorporated in the US, what this has meant is an exponential growth in the demand for Russian IT skills abroad. “The Russian engineering labour pool now has a lot to offer to companies who need specific R&D skills and comprehensive approaches to complex projects,” he said. One of the main areas of growth has been outsourcing, with Russian companies increasingly able to become reliable strategic partners for Western high-tech and software companies.

In terms of the outsourcing market, India naturally remains the undisputed leader in the field. But its superiority at the top end of this sector is no longer quite as assured as it once was.

Steve Chase, president of Intel Russia, believes global leaders are increasingly turning to Russia with the most complex problems: “The policy we have at Intel is simple. If we can, we commit difficult problems to engineers in the USA. If the task is very labour-intensive , we assign it to the Indian specialists. If the problem cannot be solved, we offer it to Russians.”
Almost uniquely, Russia is not only experiencing accelerated growth in the export of IT products, but also a consolidated growth in the local market.

Indeed, global IT conglomerates are finding that a focus on the Russian consumer is now as profitable commercially as their export dimensions.

Valentin Makarov, presided of Russoft, is particularly enthusiastic about the combination of strong export and import potential, allowing as it does foreign clients to approach Russian companies “not only as outsourcing partners, but also as local promotion and marketing partners” .

Makarov was also keen to emphasise the rapidly improving economic situation in Russia. In broad terms, the volume of direct investment in Russia is now growing by 100pc annually. Specifically in the area of IT, there have been radical changes in federal government policy, including the provision of tax breaks and investment capital to hightech companies. The Russoft survey showed 76pc of market-leading companies consider government support to have improved significantly over the last two years.

Thursday, December 27, 2007

Neusoft Group's Overall Listing Plan Approved by China Securities Regulatory Commission

SHENYANG, China, Dec. 26 /Xinhua-PRNewswire/ -- Shenyang Neusoft Co.,
Ltd. (600718.SS), a subsidiary company of Neusoft Group Ltd. that is well
recognized as a leading IT solutions & services provider in China, made an
announcement today that its share-swap merger plan with Neusoft Group Ltd.
was approved by the Restructuring Committee under the China Securities
Regulatory Commission (CSRC), which indicates that the Neusoft Group's
overall listing plan brewed up over the past year was finally approved by
the CSRC for an immediate implementation. Such a promising overall listing
is an explicit indication that Neusoft has made quite a significant move in
its global expansion, which further helps lay a solid foundation for
accomplishing its objective to become an outstanding global IT solutions &
services company.

Dr. Liu Jiren, Chairman of Neusoft Co., Ltd. and Chairman & CEO of
Neusoft Group Ltd., states that the upcoming overall listing will be a
shining milestone in Neusoft's history and have a far-reaching influence on
its growth. The overall listing will help Neusoft further enhance its
company-wide governance. By leveraging the respective resources,
technologies, products, and management strength from Neusoft Group and
Neusoft Co., Ltd., the overall listing will also improve comprehensive
operational efficiency, and enable a fruitful interaction in global
operations between them. As a result, Neusoft may not only create more
customer value, but also deliver more returns to its investors. In the
meantime, Neusoft will be dedicated to becoming an outstanding, respectable
global IT solutions and services provider with worldwide strength.

It is reported that Neusoft Co., Ltd. has currently a capital stock of
RMB 280 million Yuan, among which, 50.30% is held by the holding
shareholder, Neusoft Group Ltd. Based on the merger plan, Neusoft Co., Ltd.
is to exchange its shares with Neusoft Group Ltd. at a ratio of 1:3.5 to
complete the merger. Neusoft's total capital stock will rise up to RMB 520
million Yuan after such a merger.

As shown in the up-to-date statistics, Neusoft Co., Ltd. is a leading
IT solutions & services provider in China with operations both in and
outside the Chinese market. The Company now has a high market coverage in
the fields of e- government, public facilities, and business solutions, and
has maintained a leading status in the sectors of telecom, electric power,
social security and finance for years. International software outsourcing
is another strength of the Company, which has, particularly, experienced a
high-speed growth in embedded car audio and navigation systems for its
years of development knowledge and expertise. In addition, it is the only
one in China as well as one of the several in the world that has the
capacity to develop and manufacture high-end digital medical systems such
as CT scanner, MRI, and digital X-ray systems. In its fiscal year 2006, the
Company created an annual operating income of approximately RMB 2.7 billion
Yuan. Meanwhile, as the holding shareholder of Neusoft Co., Ltd., Neusoft
Group Ltd. has maintained a No. 1 position in global software and service
outsourcing in China, witnessing a high growth for years. It has a strong
competitive edge in outsourcing from Japan, Europe, and America,
especially, in terms of embedded software, industry solutions and BPO.
That's the exact reason why the Group has been listed No. 1 in China's
offshore software outsourcing industry for years by CCID, a leading
professional market research and management consultancy in China. In 2007,
the Group ranked No.1 in Top 10 to Watch in Emerging Asian Markets by the
US-based Global Services and neoIT, and ranked top 25 among the Global
Outsourcing 100 by the International Association of Outsourcing
Professionals (IAOP).

Now companies outsource sacking of staff

Source :
December 27, 2007

Several months ago, Rebecca Heyman oversaw the firing of 20 software engineers whose jobs were being moved to China. She met with the erstwhile employees, described their severance, helped them gather their personal effects, and politely ushered them out of the building.

On the surface it sounds like a typical downsizing--hardly uncommon in an era of offshoring and mergers and acquisitions. What made this situation somewhat odd, however, is that prior to the fateful day, Heyman had never met these workers.

That's because she's a consultant with TriNet, a Bay Area firm that serves as a de facto human resources department for some 1,500 small companies.

Although the bulk of Heyman's firing work consists of helping companies structure severance and document information in order to limit their legal liability, she often goes further, coaching managers on how to steel themselves, and, in some circumstances, firing employees herself.

"I work with some folks who have never fired someone before," says Heyman, who at 31 is one of TriNet's younger consultants. "They look to me to pull the trigger."

Welcome to the final frontier of human resources: the outsourced termination. The popularity of HR outsourcing and consulting, which was in its infancy only a decade ago, has exploded in recent years.

Worldwide, the industry now accounts for $88.7 billion in spending, according to IDC, a research firm in Framingham, Massachusetts.

Big companies are responsible for much of that spending, but small companies that have traditionally relied on professional employer organizations, or PEOs, to manage payroll are increasingly outsourcing more complex tasks such as recruiting, performance reviews, and, yes, terminations.

Rebecca Heyman's boss, TriNet founder Martin Babinec, says that demand for these services is growing so fast that he now does as much revenue in a given quarter as he did in all of 2002, when he booked $22 million.

Outsourced terminations come at a time when a host of employers have been experimenting with new ways to fire people. When Oracle purchased PeopleSoft in 2005, for example, Oracle sent notices to some 5,000 employees by overnight mail.

Packages were delivered to workers' homes on a Saturday; inside the envelopes, employees found either a job offer or a severance package. Radio Shack tried a different approach last year when it laid off roughly 400 employees by e-mail.

"These stories are perverse," acknowledges Kevin Grauman, founder of Emportal, an HR-related software company in Walnut Creek, California. But companies are so fearful of wrongful termination lawsuits that they conclude they can't afford to be personal. Cold seems careful.

In an outsourced firing, a consultant typically meets with a CEO to script and rehearse the big conversation. On the day the ax falls, the consultant sits in on the meeting, taking notes and making sure the manager stays on message.

"We're sitting right there," says JP Magill, co-founder of the Achilles Group, a Houston company that provides termination and other HR services. "And our client has exactly what they need to say written out verbatim."

In cases where the entrepreneur needs to fire an early employee or a co-founder--a circumstance common among fast-growing companies that are moving to professional management--Magill says it's best if Achilles handles the firing alone, with the boss in another room.

"There can be an emotional barrier that neither person can get past," Magill explains. "At that point, you need to isolate the organization from the termination."

Recently, an Achilles consultant named Stephanie Van Lue was asked by a company president to fire his own sister-in-law. In breaking the news, Van Lue stressed that the decision had nothing to do with the family relationship and that the company was obligated to treat her the same way as it treated other nonperforming employees.

When the woman complained to her brother-in-law, he referred her back to Van Lue. "That was his way of separating himself from [the decision]," she says. After three phone calls with Van Lue, the employee accepted a severance package.

Not everyone is a fan of this new approach. "Outsourcing firing is a bad idea," says Dan Weinfurter, co-founder and CEO of Capital H Group, a recruiting firm based in Chicago. People who are fired talk, he warns, and increasingly, they blog. If you're perceived as being cold-hearted or simply clueless, you'll find it harder to recruit new employees.

For their part, firing specialists say a manager should never defer entirely to them, but that it doesn't hurt to have a consultant in the room in case the manager starts to get into trouble.

That happened recently in the Houston offices of Energy Alloys, a $264 million metals company, as CFO Barry Smotherman prepared to fire the receptionist. The situation quickly got out of control. "I tried to put it in the best of terms, but she didn't get it," Smotherman recalls.

"She wanted to debate." As Smotherman became flustered, and the receptionist pressed her case, Magill stepped in. "You don't understand," he told the woman, whom he'd never before met. "You don't work here anymore." And that settled the matter.

Monday, December 17, 2007

Outsourcing can save companies big bucks, report says

IT shops that outsource infrastructure management and application services can expect to save 12% to 17% annually on average, which means US companies are sitting on about US$10 billion in potential savings, according to a new Forrester Research report
Forrester concluded that US companies, which spent close to US$150 billion for all IT services and outsourcing in 2006, could reap more rewards by crafting better contracts.Motivated by previous survey results showing that about 70% of 615 technology decision-makers are hoping to reduce their budget spend on IT services, Forrester teamed with IT outsourcing advisory firm TPI to calculate potential savings. TPI provided data from more then 50 IT outsourcing transactions between 2003 and 2006, and all of the deals used in Forrester's study included infrastructure management services, with 22 of the contracts also featuring application services.Forrester says companies seeking large outsourcing engagements should target the "sweet spot deal," which runs about seven years in duration and has a total contract value of between US$200 million and US$1 billion, with between US$50 million and US$120 million in annual spend. Forrester's savings calculations — determined by comparing the projected internal costs without outsourcing to the total planned costs with outsourcing — show that companies landing such sweet spot deals could save 17% at the high end and 12% in more conservative deals."The few dozen TPI clients analysed here have unlocked at least US$3.3 billion of total commercial value," Forrester reports.-->

Sunday, December 16, 2007

Seven Myths About Outsourcing

Source: Seven Myths About Outsourcing

In recent years, there's been a seemingly endless boom in offshore outsourcing. But companies that think handing off an operation to an overseas provider is easy can get a rude awakening.
The transition often proves to be much more costly and complicated than expected. And companies often find that their high hopes about cost savings and greater efficiency don't pan out.

Outsourcing vendors who focus on adapting to their clients' strategies are winning out over those who apply a cookie-cutter approach, a new survey finds.
• See a list of the 50 best-managed global outsourcing vendors in the Black Book of Outsourcing survey. Plus, see the top ranked outsourcing advisors, the most desirable locations for outsourcing, and more.
• See the complete Business Insight report.
To get a better understanding of the problems and solutions, we conducted a survey of senior executives at 62 of the 100 largest financial-services firms in the U.S. and Europe. Arguably, this industry is the deepest repository of leading-edge practices in outsourcing and offshoring. We also conducted approximately 100 interviews with outsourcing clients and vendors from financial services as well as other sectors such as pharmaceuticals and the media.
We found seven common myths that vendors and clients cling to about offshore outsourcing -- false assumptions about how the process should work. They range from unrealistic expectations to poor ideas about how to structure contracts to mistaken views of risk. These ideas can prove deadly to the success of outsourcing projects and even to an organization's overall services-sourcing strategy.
Here's a look at those destructive myths, and how to overcome them.
1. We Can Have It All

Phanish Puranam, a London Business School assistant professor and a scholar at the Advanced Institute of Management in London, discusses what it takes to outsource effectively.
In our survey, the executives told us their top criteria for judging the success of an outsourcing project were efficiency, or cost reductions; effectiveness, or improvement in service; and flexibility, or the ability to increase and decrease production rapidly.
Each in itself is a perfectly valid objective. The problem is that many clients expect -- and, indeed, many vendors promise -- all three in the same outsourcing project. The fact is, achieving one objective means making a trade-off in another area.
Let's say a company wants to boost effectiveness by adding more features to its outsourced products or services. Even under the most efficient conditions, costs will increase. For instance, a company with an outsourced call center might set a new goal for effectiveness -- answering 99% of calls within a minute rather than 95%. In most cases, that means the call center must have more employees on hand, especially at peak periods.
There's also a very prosaic reason why mixed motives are dangerous: If people inside the client company have different expectations about the outsourcing project, it's in political trouble before it begins. It is important to prioritize outsourcing objectives and communicate them widely within the organization.
2. Outsourcing Services is Like Buying Commodities
Many companies think outsourcing is a "frictionless market," with no transaction costs or other restraints. A senior operations manager at one of Europe's largest financial-services companies told us, "You'll be surprised at how many of our people thought that outsourcing back-office operations is fundamentally like procuring stationery!"
On the contrary, outsourcing carries significant transaction costs, starting with finding a vendor and negotiating a contract. Then there's the expense of moving the operation from one location to another and subsequently keeping it in sync with the rest of the company.
An offshoring manager from a large financial-services company said, "We still have a significant number of key people on our outsourcing partner's sites in India, but we are very reluctant to bring them home, as we still lack confidence in our partner's ability to deliver if they are not there. This was not envisioned at the start and has caused numerous issues and unexpected costs -- when we went into the deal to reduce cost."

These related articles from MIT Sloan Management Review can be accessed online
• Transformational Outsourcing
By Jane C. Linder (Winter 2004 issue)Outsourcing is no longer a matter of cost-cutting. Companies are outsourcing to achieve a rapid, substantial and sustainable improvement in enterprise-level performance.
• The Outsourcing Compulsion
Andrew R. Thomas and Timothy J. Wilkinson (Fall 2006)The authors make the case that the vast majority of U.S. companies are being pushed overseas by a dysfunctional domestic distribution system.
• Taking the Measure of Outsourcing Providers
By David Feeny, Mary Lacity and Leslie P. Willcocks (Spring 2005)How companies can identify providers whose capabilities and objectives are best aligned with their needs.
• Making the HR Outsourcing Decision
By Paul S. Adler (Fall 2003)The author synthesizes the strongest of the available research and identifies six key factors to consider when making outsourcing decisions.
3. We Need an Ironclad Contract
Outsourcing is not a one-time transaction, but an exchange that evolves over time, as competitive conditions and technology change. So, many executives try to write complex contracts that protect them in a host of possible circumstances.
But that's usually a waste of time, as many of our respondents discovered. It is impossible to take all contingencies into account. Instead, companies should write a contract that ensures that all parties understand their roles and responsibilities, and then put in place a process for negotiating changes.
The risks of writing an overly complex contract are significant. In some cases, we learned that a protracted and contentious contract-negotiation process can sour relations between vendor and client even before the beginning of the outsourcing project.
Moreover, sometimes deals are so inflexible that customers must sign a fresh contract to handle any unexpected changes, such as new industry regulations or a change in business strategy. The "simple" act of negotiating and writing a contract also brings high legal fees, and it may lead to productivity losses, as middle managers hold up a job until a new agreement is in place.
Sometimes contracts are so long and convoluted that nobody involved has the time or patience to read or understand them. Managers end up working off rules of thumb, making the contract provisions irrelevant.
Rory Graham, a partner in the technology and outsourcing practice of global law firm Morgan Lewis, related a revealing anecdote. A large U.K. government department that outsourced information-technology services thought it wasn't getting the best out of its contract. So it engaged Mr. Graham, who was then at another firm, to study the contract and other documentation to identify possible noncompliance or breach of contract that it could use as leverage in renegotiating the deal.
Mr. Graham walked into a meeting and was confronted with a document that was 1,200 pages long. Aghast, he asked why it was so long.
"So we can control the vendor," was the response.

The Problem: Companies see offshoring operations as an easy way to cut costs and increase efficiency. But those high hopes rarely pan out.
Looking Closer: Interviews with a host of executives show there are seven common myths about offshoring that can be damaging to a business.
The Prescription: Businesses can draw many lessons from these myths. They must have realistic expectations when they enter an outsourcing arrangement, for instance. They can't expect their outsourcing partners to shoulder unreasonable risk. And they must be ready to work closely with their partners to make the arrangement work.
"Well, clearly, that isn't happening now or I wouldn't be here," he countered.
4. Contracts Don't Matter
On the other hand, sometimes companies try to rush into an outsourcing deal without a contract. They draft a memorandum of understanding or letter of intent -- informal documents that set out grand visions of the client-vendor relationship rather than focus on nitty-gritty details, as a contract does.
These documents are useful in setting the joint vision of the relationship, but they are not substitutes for contracts. Since they are usually vague on critical operational details, they may be hard to enforce in court, lead to different interpretations by different managers and ultimately undermine trust in the client-vendor relationship.
Moreover, negotiating these agreements sometimes isn't as easy as it looks. In some lawyers' experience, managers negotiate and agonize over a memorandum of understanding for such a long time that they could have negotiated a contract instead. For instance, a large U.K.-based insurance company negotiated an outsourcing memorandum for over 40 days. It was in place for less than a month before the contract negotiations kicked in and changed the terms of the deal.
Another version of this myth holds that companies don't need a contract because the deal with the service provider is much more than a simple procurement relationship. The client would rather regard the vendor as a partner, or another division of the company.
This is a good goal for the relationship -- but not something that can be assumed on day one, since the client and the service provider will not always have identical interests and aspirations. For example, the vendor might want to bid for a contract with the client's competitor, but the client might object to the deal, fearing its trade secrets might be disclosed.
A contract can help head off those tensions. The process of negotiating a contract will enable the client and vendor to understand the risks, rewards and interests for both sides. That, in turn, will make it clear what should be on and off the table in the relationship.
5. Vendors Are Insurance Companies
The sharing of risk between clients and vendors is one of the most contentious issues in outsourcing, leading to acrimonious negotiations and poor relationships. There is a very common -- and reasonable -- perception that vendors should bear greater liability for failure than regular, in-house employees who do a job. However, client executives shouldn't take an exaggerated view of risk or believe that they can outsource risk entirely.
The client can specify standards that the vendor must meet, and penalties for falling short. However, it is unrealistic for the client to ask the vendor to take on unlimited liabilities or unlimited indemnities for failure.
Let's say an auto maker outsources the manufacture of its seat-belt system. It remains the auto maker's responsibility to ensure that the seat belts meet quality standards before selling the final product -- an automobile -- to customers. Outsourcing doesn't make the auto maker less responsible for the ultimate quality of its product.
For instance, Ford Motor Co. faced numerous lawsuits arising from the defects found in Firestone tires used in Ford vehicles. Similarly, when pharmaceutical companies outsource clinical research, the responsibility for the integrity of the research still rests with the pharmaceutical companies.
Rather than spending inordinate time negotiating unrealistic contractual clauses in case of failure, clients and vendors should concentrate on understanding the process as it operates. They should identify acceptable rates of error based on real data, and -- jointly -- invest in understanding and eliminating the problems.
6. It's Not Our Headache Anymore
Similarly, sometimes companies think once they outsource a process they can wash their hands of it. "The biggest obstacle to a satisfactory partnership is that one party sees itself as relieved of all responsibility and abdicates control to the other," in the words of one senior executive from a client firm. Outsourcing does not mean that the process is not your headache anymore -- though it is (one would hope) less of a headache!
Sean Egan, former head of offshoring for Aviva PLC, the U.K.'s largest insurance firm, holds that the key to Aviva's success in its offshoring efforts in India has been the high level of engagement of his senior management team. The team visits offshore locations two or three times a year, and when there they make a habit of giving informal talks to employees, in order to build a greater sense of identification with Aviva. The senior managers also work with offshore managers on process-improvement plans. And the senior managers ensure that the offshore managers are treated as part of their extended team, and conduct joint management-development and training activities.
Such efforts are "what makes this a partnership, and a very successful one at that," says P.V. Kannan, the CEO of 24/7 Customer Inc., one of Aviva's offshore partners.
Besides building a partnership, there are other strategic reasons why clients can't afford to "fire and forget." When outsourcing an operation, the client firm should retain the knowledge underlying the process and how it fits with the overall organization. If the client firm simply abandons the process to the vendor, it can compromise its ability to produce future innovations.
For example, auto makers still carry out R&D in parts they stopped making 10 years ago, and often collaborate with parts suppliers in these efforts. This allows the auto makers to keep up with changing market trends and technology; it also allows them to figure out how to integrate those new technologies into their existing processes.
Another problem with losing all knowledge related to a process is that the vendor holds all the cards and could easily take advantage of the client. It also puts the client in a difficult position if it wants to end the relationship. The client may no longer have the competence to evaluate other vendors, negotiate suitable contracts or even lay out how the job should be done.
7. Our First Failure Should Be Our Last Attempt
Very few companies report great success with their very first outsourcing project. But that doesn't mean they should give up. There is evidence of significant learning on the part of both the client and the vendor in such relationships.
With time, partners learn to communicate better, leading to more efficient coordination and fewer mistakes. Clients and vendors learn about each other's needs and are able to negotiate better contracts focusing on value creation. Our survey indicates that companies with greater experience have greater success implementing more-complicated models and face fewer problems in their outsourced and offshored activities.

Outsourcing Myths and Secrets

I've been thinking about a recent Wall Street Journal article titled "Seven Myths About Outsourcing" (subscription may be required). Basically, it is a cautionary tale that's been told many times in outsourcing circles. Last year an outsourcing advisory firm also wrote a report along the lines of something like "the seven secrets of successful outsourcers". Five years ago the authors could have written the same article about CRM and before that ERP. We all know quite well that every business/IT trend follows the same path. Gartner hit the nail on the head when they came up with their Hype Cycle.
True, vendors sometimes over-promise, but the problems in many outsourcing cases are due to failure to properly plan by the outsourcer -- that and a lack of dedicated program management. Many first time outsourcers jump onto the bandwagon with visions of huge cost savings. What they fail to realize is that if they don't have a good sense of their internal operations, they won't know what they are outsourcing and can't manage it well enough to get the desired savings. The moral of the story is that outsourcing is a strategic activity, one that requires planning, partnering, and a strong sense of internal processes and costs. It also requires executive leadership, stakeholder buy-in, and dedicated ongoing management, which is the same for any strategic undertaking. In raising these points the article is actually quite positive. If anything, we and the other offshore vendors should be thanking the authors for pointing out what to most experienced outsourcing practitioners is obvious.
The main problem that I have with the WSJ article is that it follows the recent trend of using the terms outsourcing and offshore interchangably. The same myths have been and continue to be applied to domestic outsourcing, e.g., the old "your mess for less" approach that led to headlines a couple of years ago about dissatisfaction with outsourcing in general.
True, the offshore approach does include a cultural wrinkle, which is one reason, but not the only reason why some our most advanced sourcing clients travel to India and other sourcing locations between 3-5 times annually to meet with us. That kind of dedicated management and attention to relationships yields results. So does experience, which is another point the authors make.
by Stephen Lane