In-Depth

Outsourcing: An IT fact of life

• By Colleen Frye
• May 31, 2003

Outsourcing is a fact of life for many IT groups, which are under ever-increasing pressure to do more with less. But savvy organizations are focusing not only on what they can save -- time and money -- but on what they can gain -- higher-level skills, process and quality improvements, strategic partners and competitive advantage

Heads-up IT executives recognize that as the outsourcing industry evolves, particularly the capabilities of offshore and nearshore services organizations, it is profoundly changing the nature of IT. Roles and responsibilities are changing, and IT must become more process-oriented to manage outsourced projects.

“We’re going through a major transition in IT,” said John McCarthy, group director at Forrester Research, Cambridge, Mass. “Part of what is coming is that it’s no longer the Wild West; it’s much more a disciplined, repeatable process. It’s the same way that we went from handcrafted cars to assembly lines.”

And in the same way that much of U.S. manufacturing has moved offshore, more development work is moving offshore as well. “It’s a dynamic of globalization that is reaching the IT services professional marketplace,” said Allie Young, research vice president, outsourcing at Stamford, Conn.-based Gartner Inc. “We’ve seen, systematically, how various industry sectors have been impacted by globalization. These offshore [IT services] companies have been slowly building their value proposition and capabilities. It hasn’t happened overnight, but it’s hit big-time with the convergence of tough economic times and a slowdown all around, [as well as] enterprises so focused on cost.”

The result will be a changed IT profession, said Marc Hebert, executive vice president, marketing and partner alliances at Sierra Atlantic, an outsourcing provider with headquarters in Fremont, Calif., and development facilities in India. “Much of the work exported today in IT is not temporary; these are permanently lost jobs,” he said. “This will restructure the labor market, especially in places like Silicon Valley; but I don’t think we understand the implications yet.”

One implication, said McCarthy, “is that there will be a need for high-level programming skills here [in the U.S.], but project management will be the sweet spot in the future.”

For outsourced service providers, the sweet spot for the near-term looks to be application services. According to a recent Gartner survey, “offshore application management was ranked as the highest growth service opportunity in 2003, followed by nearshore application management.” Other growth areas include infrastructure management and business process outsourcing (BPO).

Gartner’s Young said application management is projected to grow 11.6% through 2007. In 2001, application management was a $14.6 billion market worldwide; Gartner projects the market to grow to $25.4 billion by 2007.

Application management (of legacy and now, frequently, of ERP applications) typically encompasses longer-term, multi-year agreements, and has evolved to include more than maintenance and support.

“Application outsourcing, which heretofore was very synonymous with the ongoing management aspect, is now a pull-through for the whole life cycle of application services -- design, development, management, optimization and sunset,” said Young. “It’s a factor of companies being more comfortable going to external providers; they don’t want to invest in staff, training, etc. Application outsourcing has become much more robust.”

For offshore outsourcing in particular, companies see more benefits over time, according to a Forrester report authored by McCarthy. In addition to increased savings in labor costs, companies with multi-year agreements can leverage their provider’s process expertise and best practices, attach BPO to the engagement, and add project management as a core competence.

Do the due diligence

Guardian Life Insurance Co. of America, New York, N.Y., has “never been shy about outsourcing,” said Shelley McIntyre, vice president and senior business systems officer, Information Technology, Equity, Investments and Finance. When selecting an outsourcing provider, she stresses that it is important to be rigorous during the due diligence process.

When Guardian decided to minimize the number of high-priced consultants it was working with in its life and annuities business units, the company sought an offshore provider in India. “The goal was to maximize the IT value we deliver to business partners. We wanted to get economies of scale, and we wanted the flexibility and access to resource pools that could come and go as needed,” said McIntyre. “We were focused on quality, cost and the flexibility the Indian market brings.”

As part of its due diligence, said McIntyre, Guardian joined the U.S.–India Business Council; leveraged industry connections to get information; used knowledge gained through prior experiences with outsourcing; performed a pre-terms and conditions exercise; and had its senior executives visit India.

McIntyre said the pre-terms and conditions exercise is important to ensure a successful relationship: “It’s definitely a best practice for anyone entering into an outsourcing relationship.” She said the pre-terms and conditions detail what is important from the contractual side, such as: Does the outsourcer have multiple facilities? Will they provide for disaster recovery and business continuity in India? And is the rate structure you want agreeable with the outsourcer?

Guardian eventually chose two outsourcers and aligned them with its business units. For additional, enterprise-level development projects that arise, the two vendors compete for the business, McIntyre explained.

Splitting outsourced work between two vendors is a recommendation Forrester’s McCarthy makes in his study, which states “... this division results in greater flexibility in terms, skills, and manpower scheduling as well as a broader set of quality processes.”

One of Guardian’s outsourcers is Mumbai, India-based Patni Computer Systems Ltd. The company provides maintenance and support for Guardian’s life and annuities products, as well as new development. One development project Patni worked on was a strategic solution for variable annuitization payouts, said McIntyre, which cost just a quarter of the price Guardian was able to find in the market.

Other factors to consider when outsourcing: Does the outsourcer know your business? And are they familiar with the products you use?

That was important to Guardian, said McIntyre. “Patni had deep industry experience, and very specific technology experience with what we had in-house. It just made good business sense to align Patni with those groups.”

Is the price right?

Deciding on a pricing scheme, and establishing service-level agreements (SLAs) and metrics to measure performance are also critical to success.

There are a variety of pricing models for outsourced work -- fixed price, time and materials, value-based pricing and risk sharing. Most organizations use some combination of plans. “There are lots of ways to structure deals,” said Tim Barry, vice president of application outsourcing at Keane Inc., Boston. “There are finite development projects vs. true outsourced projects. With true outsourcing, the client says ‘Here’s my portfolio. You take complete responsibility, and I want a predictable invoice every month, as well as significant proof that the service levels you’ll provide are good or better than what I have.’ So they’re looking for increased performance/efficiency, decreased cost and most of the risk transferred to the supplier.”

In a true outsourced arrangement, Barry said the goal is to set up an SLA, which may encompass modules or lines of code produced, online availability, uptime and response time for production support.

With an SLA, he said, both parties win. “If we can set up an SLA, I can look at a five-year agreement and estimate how much productivity I can drive into that agreement. If the client has 100 people, I’m going to estimate that I can reduce that. If I can’t, I eat the additional cost; if I do better than that, it’s increased profit for me.”

Doug Souza, vice president of Development, Process Manufacturing and Configurator at Oracle Corp., Redwood Shores, Calif., agrees that the pricing and contract have to be fair to both parties. “You can’t expect to take advantage of an outsourcing company and not treat them fairly and properly, because there are going to be problems and issues like with any software project. You have to work through them as a team.”

Souza’s group at Oracle uses Sierra Atlantic as an outsourcing partner, a relationship that began about six years ago when Oracle bought DataLogix. Oracle needed to rewrite the front end of the acquired process-manufacturing product in Oracle technology. Sierra was hired for the project, doing most of the engineering and conversion work in India.

Sierra Atlantic now provides support for the process-manufacturing product, which is a fixed-price contract. For that contract, “we do maintain metrics and review them monthly to make sure they’re fixing the appropriate number of bugs and working on the appropriate number of issues,” said Souza. Other development projects have been done on a time and materials basis, he said, “because we were looking for additional members of the team, and we were not sure of the scope of the project, but we knew we needed bodies.”

Clopay Corp. is an Ohio-based building products manufacturer that outsources its Oracle application management to Sierra Atlantic. Clopay has a fixed-price plan with “rollover” hours, and utilizes time and materials pricing for additional work, said Jim Honerkamp, the firm’s CIO and vice president.

Know what you want

Another key to a successful outsourcing engagement is to clearly define the scope and requirements of the work.

“If you have a good outsourcing organization, they will do exactly what you want,” said Oracle’s Souza. “The problem is defining exactly what you want.”

In outsourced development projects, some organizations keep the design and requirements work in-house and outsource the engineering; others involve the outsourcer in the design phase. Souza said Oracle takes lead responsibility for design, although Sierra Atlantic is involved. “We’re the primary drivers of functionality. That’s where our expertise comes in,” he said.

As an outsourcing relationship evolves and the outsourcer becomes more knowledgeable of the client’s business, responsibilities may shift. For Guardian Life Insurance Co. of America, Patni Computer Systems did not initially get involved on the design side, but that has changed. “The model started with Patni providing development resources, but now they’re involved with design and requirements gathering,” said the Guardian’s McIntyre.

Where in the world?

Outsourcing arrangements can be onsite (outsourcers work in the client’s offices), nearshore (for the U.S. market, that would mean the work gets done at the outsourcer’s facilities in Canada or Ireland, for example), and offshore (for the U.S. market, that would mean work gets done at the outsourcer’s facility in India or Eastern Europe, for example). More outsourcers are moving to offer all three options. Keane, for example, has nearshore facilities in Nova Scotia, and offshore facilities in Delhi and Hydrabad in India.

“Keane has a number of ways to deliver services,” said the firm’s Barry. “We can provide onsite local resources. We also have cases where the clients want us to be local but not physically resident on their site. With our nearshore development facility in Halifax, we’re leveraging labor costs plus the cost of living, proximity for clients and the language.”

Where the work gets done depends on the client and the project. “We look at the client’s tolerance and type of work. If it’s highly iterative with constant interaction, it may be more suited for onsite or nearshore,” said Barry. “If things are more project-related, like a conversion that happens over time, that lends itself more to nearshore or offshore. The majority of our projects now utilize a combination of all of the above to maximize advantages.”

Ellen Dulberger is director of strategy for Global Application Management Services at IBM. She said IBM does not “think about outsourcing as onsite or offshore. We have a global sourcing approach -- we harness the skills we have at the lowest price we can.”

However, she added, “Labor rates are not the whole story; there’s infrastructure required, a service delivery framework, etc.” Rather than picking a country first and then a vendor, Dulberger said “we think it’s more about the nature of the work you’re trying to get done, and the most appropriate way to get it done.”

Project management: Your place or mine?

Management structure varies, but the client typically sets up a project management or program management office (PMO). The outsourcer may as well. “Some clients feel the conceptual design and business analysis belongs on their side, then they hand it to our team who does the technology design development,” said Keane Inc.’s Barry. “We’d have a PMO to manage our team and to communicate with the client. The client may have their own PMO on the corporate level, say if they have multiple vendors in the environment.”

Tufts Health Plan, Waltham, Mass., has three managers who function as a PMO for its relationship with Keane, which was initially contracted to provide application outsourcing for Tufts’ legacy claims processing system -- a mission-critical system for the HP midrange platform. The business accounts manager is a Tufts employee from the IT group, “more a business analyst who understands the application and sells our services to the business units,” said Joseph Imbimbo, vice president of technology operations. “The job is to identify need and requirements, and to feed that back to Keane for system modification, education or clarification.” The vendor manager is also from the Tufts IT group and is responsible for “working with Keane day to day, at a high level so they know our priorities, as well as managing the relationship,” said Imbimbo. The third leg of the program office is a Keane employee, the service delivery manager, who “owns” the engagement.

Imbimbo also uses a number of management tools. “An application management arrangement is bigger than a project management tool. We have a number of tools that track change; a tool that records new business requirements; and project management tools we use when we have a subprogram or project that goes beyond the scope of the agreement. We use the Project Management Body of Knowledge [(PMBOK), an inclusive term that describes the sum of knowledge within the profession of project management. The Project Management Institute publishes a PMBOK guide that identifies generally accepted principles and practices.] as the guiding principles,” he said.

In terms of staff, Keane provides Tufts Health Plan with four people onsite and 27 in Canada for the application outsourcing arrangement.

Process begets quality

While lowering costs is often the primary driver of outsourcing, achieving more disciplined development processes and improving quality are also drivers for some organizations. For these IT groups, part of the selection criteria may be an outsourcer’s expertise in the Capability Maturity Model (CMM) processes, or with models such as ISO 9000 or Six Sigma.

That was the case for Tufts. “We wanted to change the way the IS team interacted with business and accelerate the implementation of process to our organization from a business perspective. We wanted to become SEI/CMM Level 3 compliant, moving toward being more process-driven on the technology side,” said Imbimbo.

For Guardian, the outsourcer had to be CMM Level 5 certified, which Patni Computer Systems is, said McIntyre at Guardian. “The outsourcer needed to bring quality, knowledge and tools to the table. They [Patni] collaborated with us as we rebuilt our system life cycle and methodology; they were real partners in that process.” As a result, she said, “we’ve improved our process.”

The human side of resources

Despite improvements in cost, process and efficiency, the impact outsourcing can have on IT employees and the business users that IT serves cannot be underestimated.

First, people may feel threatened. Mrinal Sattawala, Patni Computer Systems’ senior vice president, acknowledged that with Guardian, even though the strategy was not about downsizing, “given the economic conditions there was some internal hesitation; but they’ve done a remarkable job communicating,” said Sattawala. “Their CIO did some meetings and was clear on the objectives. He positioned it as something that would help the internal staff do bigger and better things, and most of the heavy lifting would be done outside of the organization.”

Guardian’s McIntyre said Patni played an important role in allaying fears as well. “Patni [employees] became just additional team members. They did some workshops and other cool things to educate the team about their culture. They opened up the door to India through presentations and visuals. And on an ongoing basis they send out little e-mails when there are different events or holidays in India that are unique to us. It’s a sharing in culture; we haven’t had any cultural issues where it got to be a problem.”

However, she added, “some people have more difficulty with change than others. Although there were no employees affected, long-term consultants were affected.”

If the outsourcing strategy does involve downsizing, the human resources issues are more difficult. Clopay Corp. originally hired Sierra Atlantic for Oracle ERP upgrade and conversion projects. As of April, the company was entering into an application management agreement with Sierra.

“We didn’t have the skill sets required to implement ERP and manage the environment,” said Clopay’s Honerkamp. “We had a lot of tech-type folks with very little experience with ERP systems and no experience with project management.”

Honerkamp said the business does not care how he gets the IT work done, but “the backlash has been within IT; that’s been the biggest challenge.” He said some staff members left because they did not agree with the philosophy of outsourcing.

“I don’t want people who are experts in managing a network or a data center, or to keep people trained on these tools, because as soon as you do they become re-marketable,” Honerkamp said. “Our purpose is to be a strategic partner to the business. As we’ve moved through time, we’ve outsourced all this stuff. Only in the past year have we started focusing on application support, where we can get more bang for the buck.”

Business users also feel the impact of outsourcing. For instance, said Tufts’ Imbimbo, a business user might be used to walking down the hall and talking to his friend Charlie in IT about a new feature or function he would like. With outsourcing, the business users have to be more disciplined, too. So Imbimbo recommends including them as early as possible in the outsourcing decision.

“When you’re moving from personalized attention to more of a process organization, there’s a sense of loss; but if we’re doing something for Charlie because he’s our best customer, we’re not necessarily working on the most important thing to the company,” explained Imbimbo. “Moving to a process organization and outsourcing in this way forced the business units to get together and prioritize so that we can work on a corporate level. That required change management. You can’t underestimate how hard that was for us; the business units took longer to adjust.”

Imbimbo added that the engagement has been successful, particularly in how the business side and IT side work together.

Own the responsibility

Everyone interviewed for this article agreed that while outsourcing removes certain work from the IT realm, it brings with it the oversight, responsibility, communications and project management tasks discussed.

Said Greg DuPertuis, president and CEO at Adrenaline Group Inc., Arlington, Va., which does all development projects on an outsourced basis, “If you write a spec, toss it over the fence and don’t plan to look under the lid again until six months later, that project will run amok. Protection for the buyer is to get a frequent opening of the box and look at what’s happening, and to make sure you’re in a position to know what it is you’re looking at.”

Added Oracle’s Souza, “I’ve never been in a situation when I’ve said, ‘Come back when it’s done.’ I understand I own the project.”

Summed up Tufts Health Plan’s Imbimbo: “You can’t outsource your responsibilities.”

Please read the related story “Should you hire an outsourcing advisor?” by Colleen Frye.