Many organisations are moving their IT services – including HR software – abroad in a bid to cut costs. Simon Kent examines the business case for switching to the sub-continent, south-east Asia and other popular destinations…
Software Source, 03 Dec 2002
As competition in the provision of IT services increases, more and more UK companies are outsourcing work offshore – particularly to India and south-east Asia. For suppliers and clients alike, the shift abroad offers the opportunity to cut costs without compromising quality.
"When it comes to profit margins, we are already operating in the ‘one per cent world’," says Sudip Nandy, a vice-president of software supplier Wipro Technologies. "You’d give your right arm to make that one and half per cent."
Around 2-3 per cent of global GDP is invested in IT and in some areas offshore outsourcing can cut these costs by up to 40 per cent. India produces around 200,000 highly qualified software engineers every year and they are much cheaper to employ that their equivalents in the UK.
As a result the IT industry is retracing the route followed by the manufacturing sector 15 to 20 years ago: individual operations are being detached from the core business and relocated in the least expensive parts of the world.
The UK utilities sector is a good example. Offshore outsourcing of IT services in this area has grown by 150 per cent in the past year, according to a recent survey by investment bank JP Morgan. Thames Water, Southwestern Electricity and the National Grid have all looked to India to resource IT infrastructure improvements and maintenance.
Same aim, different approaches
Kevin Tomlinson, UK head of outsourcing for Cap Gemini Ernst & Young, estimates that an organisation can harness the efforts of 25 software engineers in India for the cost of employing a single engineer in the UK.
Different organisations exploit this cost differential in different ways. Each arrangement reflects the level of involvement that the onshore business wants to have with the offshore component, the type of work required from the offshore workers, and the level of risk considered acceptable by the onshore organisation.
At one extreme, a UK company with sufficient resources and a long-term requirement may establish an offshore subsidiary. At the other end of the scale, an organisation with a specific, short-term requirement may draw up project specifications and find an offshore company that can deliver.
More often, offshore outsourcing falls between these two points, with the onshore organisation establishing a relationship with its offshore counterpart that relies upon a flexible approach and the careful management of ongoing work.
Do it yourself
IT companies, which that have most to gain from a cheaper supply of workers, are most likely to take advantage of the subsidiary route. Kevin Jones, chief executive of eXant Software, has established operations in both India and Sri Lanka, combining the work of these operations to develop an ERP solution.
"You can’t walk into these countries and get instant success," Jones says. "You have to be pro-active and constructive and make sure your communications are right. We regularly consult across the company on details of every piece of work. Our operating style and company culture matches that approach and consequently there’s a sense of ‘we’re all in this together’."
Standard Chartered is another organisation that has also gone down this route. The bank has used its significant presence in Asia to establish dedicated shared services centres in Chennai and Kuala Lumpur. These include 200 IT and systems staff who provide services to the bank’s global operations.
"We’re offshoring work rather than outsourcing it," says Mike Grime, group head of operations and technology. "The programme has run for two years so far and will grow substantially over the next 18 months."
"The subsidiary route is practical because you can fill vacancies very quickly," says Mark Kobayashi-Hillary, who set up an offshore operation in India for Societe Generale (SG) in 2001. "When SG started, a combination of rumour and the number of engineers available meant that we received a high number of applications before we’d even advertised."
Ask the experts
An alternative to creating a subsidiary company is outsourcing. Again, there are both advantages and disadvantages.
"Outsourcing might decrease some development costs by 15 to 20 per cent," says Peter Truman, enterprise integration architect at Glue, an independent consultancy. "But that needs to be balanced with the additional management cost."
Glue frequently outsources development work to selected engineers in India. "You need to set a number of checks and balances for monitoring purposes," Truman says. "We have established our own delivery processes and tweak that according to the requirements of an individual project."
Although companies not specialising in IT may lack the confidence to build a direct relationship with offshore operations, they can – as Kobayashi-Hillary points out - reap many of the benefits by employing global IT companies with operations in these locations.
Infosys and Wipro Technologies are two such suppliers. They operate an outsourcing structure whereby 80 per cent of their engineers work offshore yet have close links to the remaining 20 per cent who work onshore - shoulder to shoulder with the client’s own personnel.
"You need to integrate these workers," Kobayashi-Hillary says. "Allowing a third party to work from your premises while linked to offshore operations can be a real challenge."
"The development team who work alongside the client have to understand the implications of managing complex projects over a distance of 4,000 miles," says Nandy of Wipro. "These people will interface multiple times a week - even multiple times a day - with project leaders at the back end of the operation in India, ensuring everyone knows what is expected and if there are any changes."
Crucially, the outsourcing organisation takes full responsibility for the work of all the engineers.
"You need physical networks in place and personal networks to make these projects work," says Tomlinson of Cap Gemini Ernst & Young, which has an operation in Mumbai, India. By insisting that procedures are identical across its global operation, the consultancy ensures that work and people can be located anywhere in the world.
"We document and monitor everything within the organisation," Tomlinson says. "Since that approach is shared worldwide we can take a global view and locate the best place to do each aspect of the work."
Take the middle way
Newell and Budge, a consultancy, takes an alternative approach to the provision of offshore IT services . Under its Pivotal Partner scheme, UK organisations bring their IT projects to the firm for it to manage. The consultancy then decides if it should outsource some - or all - of the work on their behalf.
Whether or not Newell and Budge’s solution includes an offshore supplier, the consultancy accepts responsibility for delivering the service. An Park, its business development director, says that some clients want to know whether or not their project will be outsourced offshore, whereas others are interested only in cost savings.
Whatever a client’s priorities, they will employ the consultancy in order to reduce the level of risk that surrounds offshore outsourcing arrangements. Gopalan Rajagopalan, head of the Pivotal Partner division at Newell and Budge, emphasises that that efficient communication is central to managing this risk.
"In any outsourcing project you need to be clear from the start what level of interaction there is to be between the outsourcing organisation and the client - an assessment of the type of work required and how that will be carried out," Rajagopalan says. "We have a number of specific criteria which offer an empirical way of measuring the risk for locating any work offshore."
Still on the move
Whichever route individual firms select, there is a recognition across the IT industry that some technology-based work will continue to shift around the world in search of the cheapest talent. Today India, tomorrow Vietnam and China.
Wipro is not complacent about such worldwide trends, Nandy insists. He does not rule out the possibility of opening operations in Vietnam or even Eastern Europe but maintains that such decisions would be based on strategic planning rather than a rush for cheap labour. "We open centres ourselves because we believe our ability and uniqueness lies not in low cost but in how we develop our systems," he says.
Nandy also highlights the importance of salaries that are competitive for that location - in order to prevent talented programmers leaving to find better pay. In particular, when a company deploys onshore workers it must ensure that there is no significant pay differential between two people working on the same project.
"If someone comes from India to work on a project, for up to three months they will receive their salary in India and a per diem suitable for the country in which they are staying," Nandy says. "If they go to that country for longer than 90 days they will receive the comparative local salary."
Kobayashi-Hillary believes that the ongoing movement of offshore outsourcing means the IT industry does not guarantee long-term prosperity for individual Asian countries. Sustained development will only occur if the skills of the local workforces offer long-term value for clients. He has seen some evidence of this in India.
"Originally the move to India was driven by cost but now you go there for a quality product," Kobayashi-Hillary says. "If you just want it cheap you go to the Philippines."
In extreme cases, outsourcing arrangements may appear to verge on "body shopping". While the technology companies in India pay enormous salaries compared to average local wage levels, they remain only a fraction of what comparative workers in the West would earn. UK organisations considering offshore outsourcing must ask themselves: is this exploitation?
The trend to outsourcing also raises issues for the UK’s own IT talent. If such work can be carried out in another part of the world - and by highly qualified English speakers - what will happen to home-grown programmers?
Case study: Thomas Cook Financial Services
Thomas Cook Financial Services (TCFS) runs the world’s largest network of retail foreign exchange bureaux and has a substantial slice of the international money transfer market. But further growth was being hampered by the 17 different legacy systems supporting its work.
The company decided to invest in a single Windows-based platform support functions across the organisation. Due to the scale of the task it decided to bring in an external provider to help with the project.
"Wipro Technologies was chosen as they fulfilled all of our selection criteria and were interested in a flexible working partnership with us, rather than trying to dictate procedure and assume total management control of the project," says Neil Hammon, head of development at TCFS. "We were slightly nervous about outsourcing our software development overseas but Wipro’s methodology for quality control in software development and project delivery reassured us."
Wipro recruited the extra staff required very quickly and assembled the usual onshore-offshore team split between TCFS headquarters in Peterborough and Wipro’s development centre in Bangalore. The team consisted of a project manager, five analysts, 33 programmers and nine quality-control personnel.
Design and development was completed in six months with full delivery eight months later. The new system processes up to 3,000 orders an hour - more than three times the previous maximum.
Measured response By dramatically reducing the time and money spent on managing human capital, the latest HR software systems are freeing up more time for strategic thinking
