In-Depth

IT still looks for offshore help

As the sagging economy continues to hammer corporate America, CIOs are increasingly outsourcing work offshore in a bid to cut costs.

The lion's share of offshore work currently goes to India. But is this a safe practice in these troubled times, with reports of friction between India and Pakistan? If it is safe, what kinds of work can be outsourced and what preparations should corporations make before outsourcing offshore?

In addition, how can a corporation control the quality of outsourced work? Should it demand Software Engineering Institute Capability Maturity Model (SEI-CMM) certification to a particular level? Is it better to deal with countries where the population is fluent in English, or are other issues more important than language fluency?

Stephen Lane, research director, IT services at the Boston-based Aberdeen Group, said it is ''silly'' to consider where a company is located more important than what it can do. ''You use the same set of criteria that you would use in selecting any service provider: Do these people have the skills to get the job done? Are they financially viable?'' he said.

Shirish Nadkarni is CEO at Edison, N.J.-based Horizon Companies Inc., a software developer and systems integrator with a fully owned subsidiary -- Trans Horizon Consulting Pvt. Ltd. -- in India. According to Nadkarni, media reports about unrest between India and Pakistan are exaggerated. Back in July, when the media was saying war between the two countries was imminent, ''We were in Mumbai and you couldn't even make out that something like this was going on,'' he said.

However, Dan Nelson, national practice director at system integrator RCG IT, Edison, N.J., said he has been ''seeing a lot of activity around that uncertainty [about friction between India and Pakistan]. A lot of clients currently working with either Pakistani or Indian companies want to explore other options to diversify their risk,'' he said.

Essentially, there are two ways a corporation can outsource work offshore, Aberdeen's Lane said. One is to work with a mainstream U.S. company like IBM, which subcontracts part of the work to an offshore partner or does some of the work in an offshore office. The second option is to work with an offshore company that has a U.S. office. In the first case, the client interacts with the mainstream U.S. firm, but gets the price benefits of offshore development. In the second, the client contracts with a company that has a legal presence in the U.S. so, as a point of law, it is also a U.S. company and can be sued in a U.S. court, Lane said.

Lane recently conducted a study on offshore software outsourcing in September. During his research, many of the 64 reference accounts Lane polled told him ''that the offshore part [of outsourcing] was invisible to them'' -- they interacted only with the offshore outsource service provider's staff in the U.S. office.

Other methods of outsourcing are for a U.S. company to set up a development center overseas and hire local staff, or to set up the center overseas and then outsource the staffing to a service provider in that country.

Horizon's Nadkarni classes outsourced software development work into two types: mundane development, which is maintenance work, and the development of new software ''where cutting-edge talent is required.'' Maintenance work ''will continue forever'' and constitutes the bulk of software work outsourced over the past 10 years, Nadkarni said. Horizon focuses on new software development, having, among other things, developed Lucent SoftSwitch switching software in 1998.

According to Nadkarni, over the past few months, firms have begun to outsource their business processes. ''HR, admin, all the non-technology processes -- you break them up into critical, non-critical, core and non-core,'' he said. Non-core processes -- ''everything for which you don't need someone here to talk to customers -- can be sent offshore,'' Nadkarni said. In addition, companies can cut costs ''by one-fifth to one-eighth, if you can get people of the same quality as here or better,'' he added. Horizon practices what it preaches, having itself outsourced its back-office work offshore. For business-process outsourcing, Horizon uses ''people with MBAs and excellent written and spoken English,'' Nadkarni said.

What can you outsource?
Miljenko Horvat, CEO at Newspaper- Direct Inc., New York, said corporations should outsource tasks that are not mission-critical; that would be too expensive or time-consuming to learn to perform in-house; and where the knowledge gained cannot be reused. Projects a company should perform in-house have ''reusable knowledge within the company that's great to have and will contribute to further development,'' Horvat said.

NewspaperDirect used those criteria when outsourcing parts of its software development. The firm receives the content of newspapers from 150 publishers worldwide over the Internet daily, reformats it to make sure it can print out properly on laser printers, and sends the content over the Internet to stations at locations worldwide for readers to print out for a fee. These stations consist of a PC linked to the Internet and a laser printer. When NewspaperDirect decided to create a 3-D customer assistance module on its stations using virtual reality (VR) technology, it turned to Moscow-based outsourcers Luxoft ''because they're good in 3-D development and they did a lot of work in the VR world and could do it easily,'' Horvat said. NewspaperDirect ''didn't have those skills nor did we want to spend time trying to figure it out ourselves,'' he added.

Luxoft is a member of the Russian IT group IBS, which has more than 2,000 specialists. It implements complex software development projects for Fortune 1,000 corporations and offers a variety of software-related services.

A corporation should retain development of core applications and functions in-house because ''you have to understand your own business and be able to spell that out for the outsource company,'' said Frank Corlett, senior manager of network and application development at international humanitarian organization World Vision International, Monrovia, Calif. He recommends that firms have someone knowledgeable about their business processes work closely with the outsource service provider.

For example, World Vision outsourced the development work for redesigning a donor management database to separate the application and business logic and data to RCG's Manila office. This was ''a purely technical job,'' said Corlett, and one of its senior developers worked closely with RCG, acting as a project coordinator.

Aristotle's admonition to know thyself applies when outsourcing work. Before outsourcing any work, a corporation must conduct an internal readiness assessment, said Aberdeen's Lane, a long-time outsourcing consultant to Fortune 500 companies. This is not easy: ''One of the hardest things to do is to figure out what type of project or initiative to outsource; how to manage that relationship; and whether you as the client are ready and able to manage the relationship,'' he said.

Corporations must also assess their internal processes to prevent scope creep. ''The outsourcer comes in and says, 'We can do A, B and C and will charge you $30 a month' and [because] your internal organization spends twice that amount, you sign on. A few months later you realize your internal IT guys used to also do D and F, but they couldn't really quantify that or make it part of the service-level agreement,'' Lane said. If the firm goes back to the outsourcer, there will be extra charges.

That kind of internal process assessment will make it easier to outsource a project. ''A good candidate for outsourcing is one where you can deliver a set of requirements and specifications to the outsourcer that are understood by both parties, and where both sides understand the tasks, requirements and deadlines,'' said NewspaperDirect's Horvat. ''You need to say, 'These are the goals and requirements, and this is what I need from you.'''

World Vision International's Corlett recommends that corporations outsourcing projects make sure they understand how the finished product will fit into their overall system and application architecture. They must also get staff who understand their business processes to work with the outsourced service provider and ensure that products, materials and documentation meet requirements. ''You must have someone who understands the technical expertise that you're buying,'' Corlett said. ''You don't need 10 developers on your staff to understand it; [you] just [need] one good one who can do the evaluation, monitor the project and look at the code to make sure it's what you need.''

Quality and SEI-CMM
Quality control could be a problem with offshore outsourcing, so corporations that want to outsource ''must have ironclad processes,'' Horizon's Nadkarni said. Using modern communications technology helps cut development time and maintain quality control.

However, NewspaperDirect's Horvat said controlling quality is not as difficult as it sounds. ''By now, software development has become an industrial-strength activity; everything's pretty well standardized and there are software tools like the Rational development environment that have become a platform,'' he said.

That having been said, it is not necessarily a good thing to outsource to companies that have their own mature processes if your firm has processes of its own. ''Some people I spoke to told me they learned a lot working with an outsourced provider with mature processes; others told me they had mature processes and the outsource providers had mature processes, but the two weren't compatible,'' Aberdeen's Lane said.

Whether or not the offshore service provider has CMM certification is not really important, Lane said. ''I had people telling me their processes were very mature, so it didn't matter what kind of CMM certification the offshore company had, they just insisted [the company] use their processes,'' Lane said. ''At the end of the day, reference accounts are more important than CMM certification.''

ArrAy Inc., Westborough, Mass., is one example of a U.S. corporation that insists on its own methodologies and processes. A software engineering services firm that ''focuses on everything but new development,'' ArrAy has developed a process and methodology it adheres to ''very stringently,'' CEO Charlie Palmer said. The firm makes its money from the increased productivity its work generates because ''if we give you 100% more productivity at equal cost, it cuts your costs in half,'' Palmer said. But ArrAy is teaming up with an offshore service provider because ''the large outsourcing deals are based on cutting costs, and we didn't have a good answer when people said they weren't interested in more productivity but just wanted to cut their costs,'' Palmer said.

ArrAy's first criterion was that its offshore partner work to its methodology. Only four or five of the 20 potential partners it spoke with agreed. Ultimately, ArrAy selected a company from the Ukraine.

Even if an offshore company is SEI-CMM rated, that is not important. ''Most of my interviewees said ISO 9000 or CMM certification is not important because they assume the offshore companies have it; it's a check of the box, a notification like the 'Good Housekeeping Seal of Approval,' not a guarantee,'' Aberdeen's Lane said. Also, just because an offshore company has CMM certification does not mean it will continue to follow the repeatable processes the CMM methodology requires, he added.

According to RCG's Nelson, U.S. companies' insistence on cutting costs prevents offshore companies with CMM accreditation from using that methodology. ''You need to audit the projects, and [that] process has a lot of overhead and forces project costs higher, which clients are not always willing to pay for,'' Nelson said.

Other criteria
Language fluency is only one criterion when selecting an offshore outsourcer; culture is even more important. ''A critical piece of offshore outsourcing is that you need somebody who can bridge both cultures,'' Aberdeen's Lane said. Many of the people he interviewed for his report said cultural compatibility was their most important criterion. ''It wasn't necessarily that the offshore company only spoke fluent English, but that their working style and business culture and the way they interact was a good match,'' Lane said.

Take the Ukrainian company ArrAy selected, for instance. Apart from methodology and language, culture was critical. ArrAy picked the Ukrainian firm because it shares ArrAy's work culture. Its workforce ''speaks very good English; is very well organized and disciplined; the management [consists of] good business managers who established and managed to very strict and good metrics in terms of running a company''; and the company was willing to start work six hours later so it shared ArrAy's working hours.

Lesley Taufer, CEO at Boulder Corp., an onshore outsource services provider in Boulder, Colo., said cultural differences can make or break a project. ''Subtleties in language can be a big problem on a long scale,'' said Taufer, who used to do '' a lot of outsourcing to the Far East.'' Semantics is ''a real problem, because those little cultural nuances and the semantics on top of that can destroy a product plan,'' she said.

The cultural issues were played up by RCG's Nelson, who said the Philippines -- where RCG has had a wholly owned subsidiary since 1997 -- is a good choice because ''the Philippines was a colony of the U.S. for 45 years, is very Americanized and the legal structure has the same three branches as the U.S., so it's a very comfortable choice for people to make if they've not outsourced offshore. The fact that English is primarily the written language as well as the spoken language makes a big difference because of the importance of documentation,'' he noted.

When working with offshore partners, U.S. firms need to spend ''a lot of time doing knowledge transfer and establishing relationships,'' Aberdeen's Lane said. Relationships are critical so that if somebody in the offshore company has questions, ''they can pick up the phone and know whom to call and the offshore team becomes the virtual extension of your own IS group,'' he said. That takes a lot of work and is ''one of the hidden costs of offshore outsourcing,'' added Lane.

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