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IT-Director.Com, June 26, 2002

Global Outsourcing Strategies to India - the path to business enlightenment?

By Paul Pickup

One of the latest business fashions has been to outsource troublesome IT to Indian companies full of Far Eastern promise. This little sung activity has now become a $6b business with potentially huge consequences for the IT industry. Paul Pickup has been looking into some real experiences and examines whether it is business nirvana to enter into an GOS, or whether it could result in a Bollywood farce. Alarmingly, is this unfair competition going to spell the end of the IT contractor and many good IT services in the UK?

Global Outsourcing
With GOS activity expected to rise by 23% and firms using offshore IT outsourcing expected to double in 2002, this seems to be a fashion bandwagon that everyone is jumping onto. However there seems to be very little real experience of a lengthy outsourcing arrangement and more worryingly fewer examples of real business benefits.

All to frequently IT is seen as being a cost rather than a revenue earner, and as every IT manager knows that while businesses talk about "how IT is close to its core strategy", they choose to hide it away like a mad aunt. Citicorp, who "are an economic enterprise with...a focus on technical innovation, seamlessly delivering value to customers across multiple platforms", have moved into a plush new tower in Canary Wharf whist "seamlessly" ditching its IT department down in not-so-pleasant Lewisham. But if you are going to put your IT in Lewisham, why not stop there?

While IT is generally in the doldrums, outsourcing is steaming ahead. India is by far the leader. This is due to a great many factors, mainly the availability of highly educated people who are prepared to work for a fraction of the price of their western counterparts.

What is being outsourced and to whom
In the early days, pure IT development work was being won by Indian companies, due to their high SEI accreditation. Latterly, services have been outsourced, in particular support, administration and recently back office processing in it's entirety. John McKinley, CTO of Merrill Lynch global solutions, has outsourced 600 IT jobs and promises to double that in 2003.

Advantages of GOS
Primarily it is cost. The cost of resources are up to 30% of an IT resource in the US or Europe, and probably better qualified. The salary of a developer is a mere $9000 per year. The resources that you are using are likely to incur lower expenses and promise to be more flexible. There are no employment issues. Most Indian employees will be happy to fly economy class and do not demand business hotels.

Resourcing is not a problem with 70,000 IT professionals graduating in 2001. Tata Consulting boasts 5,000 projects and has 18,000 consultants on hand. Many of these development businesses bond their employees by funding their education through university. They consequently get lock-in for five years after graduation, meaning a significantly lower staff turnover rate than any software house in the UK.

Many outsourcing business cases are drawn up on the understanding that the development will be done off site, maximising cost savings. However, those that have done it in practice have ended up onsite. This is due to business understanding, it becomes important to be in the same room as your users. This is particularly the case with web development, where some western businesses have found the Indian view of colour co-ordination somewhat lurid.

There are also significant cultural differences that have to be appreciated. In Indian culture, there is a great deal of respect shown to your manager and their word is rarely questioned, certainly not in public. Communication is much more formal, people call each other by their surnames and call their managers "sir". Many managers have also witnessed an unwillingness to admit mistakes or a lack of understanding amongst Indian workers. All managers interviewed have also found the hard way that Indians will follow written instructions to the letter rather than seeking clarification or by using common sense. An example where a specification asked for too many buttons to fit on one screen - rather than reduce the size of the buttons, the developers created a second menu screen with a solitary button on it.

Risks in outsourcing

Unproven on large scales:
It is apparent that the industry is still young and largely unproven. There are, however, many success stories which are fuelling the fire. It is important for business managers to realise that there will not be any perceivable benefit for at least two years. Overall costs will increase during this time as you simultaneously retain local staff while the Indian resources come up-to-speed.

Work Permits
Part of the outsourcing arrangements are to have some of the team come and work in the customer's premises for a few months, most arrangements stipulate that there are resources stationed onsite liasing with colleagues abroad. This is only possible as the UK and US government currently waive working visas for IT jobs as qualified nationals were in short supply. However, this is no longer the case. When IT jobs are eventually removed from the waiver list, it will be difficult for outsourcing companies to offer onsite resources and retain savings. This could severely disrupt the outsourcing arrangements. Check your contracts!

Stability of the offshore countries
Many of my work colleagues are predicting the worsening of relationships between India and Pakistan. Fearing the worst, a nuclear war would have a severe impact on any economic activity in India, in spite of the centres being far away from the disputed Kashmir region. While it is hoped that conflicts such as this will never arise, India is still relatively unstable. The riots in Chennai two years ago caused many lost days of development time and forced several firms to up and move from the region.

Companies must ensure that the outsourcing companies have disaster recovery and business continuity plans in place, or in the worst case should prepare for the eventuality of non-availability of their outsourcing partners.

Infrastructure and other problems
India has notoriously bad infrastructure, roads, transport, electricity and water are sporadic. The promised video links for meetings do not function, people arrive late for work through no fault of their own and network failures are commonplace.

The lessons to be learned from outsourcing to India are:

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