The new face of outsourcing

While growth in offshore call centres slows, companies are moving more of their day-to-day operations such as HR and accounting to India and elsewhere, writes Dan Roberts

Milind Kharosekar is looking for recruits who can empathise with someone who has had their home burgled 5,000 miles away. Role-playing games, psychometric tests, "accent neutralisation" lessons - anything is worth trying if it helps bridge the cultural gap between his Indian call centre, where insurance claims are handled, and the house in Britain with the break-in.

Only there are constant reminders that this is Bangalore, not Birmingham. Lights flicker on and off as the electricity grid betrays a city groaning under the strain of breakneck economic growth. Cows amble through streets that are gridlocked for much of the day with commuter traffic ferrying workers to the big foreign outsourcing companies.

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"Obviously there are examples where there are cultural misunderstandings or miscommunication, but that is rare," insists Kharosekar, a local manager for one such company, Accenture. "When we carry out surveys, Indian employees stand out for their diligence, process and compliance. What we still need to work on is listening, patience and empathy."

Inside "Bang 3" - the largest of several Accenture offices in Bangalore - there is a growing range of British business for its employees to learn from. The 10,000 Indians working there provide outsourced services for companies such as Royal & Sun Alliance, Thomas Cook and BP.

Back home, the patchy experience of offshore call centres has given outsourcing a bad name of late. Several British companies such as Lloyds TSB have recently brought customer services back "onshore". Many British consumers will by now have experienced the sometimes teeth-grinding frustration of communicating with those that remain offshore such as National Rail Enquiries or BT's broadband support centre.

But it would be a mistake to think this was the end of the story. Though growth in offshore customer call centres appears to be slowing, a far bigger revolution in back office outsourcing is only just beginning.

The majority of the people working in the sprawling Bang 3 facility are not answering phones to customers but dealing with each other - accountants, computer technicians and personnel officers working on the often mundane administrative tasks that make any large organisation tick.

The 200-odd Accenture employees running Thomas Cook's accounts department, for example, rely on a computer system maintained by an 80-strong IT department one floor below. Here, practically everything possible has been moved offshore. Only critical financial reporting is left in the UK. Even PWC's annual audit of the Thomas Cook accounts is carried out in India.

The basics of business process outsourcing, or BPO as it has become known, are nothing new. Many of the pioneering early deals were signed in 2001 or 2002 when a slowing economy forced companies to cut back after the 1990s technology bubble. Five years on these contracts are coming up for renewal and some companies are on to their second wave or third wave with much more confidence.

Insurance companies and banks were early adopters, but have redoubled their efforts to find more efficient ways of operating their day-to-day business functions. Prudential, for example, announced just last week it was considering outsourcing a further 2,000 UK jobs.

"Companies are now buying bundled products - not just one or two specific tasks," says Accenture's Kharosekar. "We are providing claims processing, customer relations, back office, accounting, HR, training, you name it."

Traditionally only a small number of big technology companies have competed for IT outsourcing deals - such as IBM and home-grown Indian rivals Wipro and Infosys. But more focused BPO players are emerging rapidly. Xchanging, a rival London-based outsourcing provider founded by former Accenture partner David Andrew, is shortly planning to test growing investor appetite with a stock market flotation [see box].

Today's BPO industry is worth $55bn (£28bn) globally and is growing at 30-35pc annually. Independent industry researchers IDC forecast it will hit $100bn by 2010. But the sales and general administrative costs of just the top 500 US companies alone add up to $2 trillion, so the scope for further growth is potentially enormous.

How far they will be prepared to go is another matter. Sceptics fear it will not be as easy to move the guts of a company as it might be just to hive off a discrete function.

"This industry is very young," says Xchanging's founder. "It's still forming and that's because it is very complex: taking something that has been welded into a company's organisation for many years and putting it on a free-standing basis is difficult."

But the principle is slowly catching on in services in much the same way as globalisation transformed the manufacturing industry. Just as companies discovered that cheap labour and raw material costs meant it made sense to source physical components from around the world rather than make them all on one expensive site at home, so the standardisation of business processes and ubiquitious internet connections are allowing managers to break up white-collar work and shop around for the cheapest accountants and administrators.

Except many jobs are ending up in the same place - reassembling the large integrated head offices they left behind at home. Accenture, for example, has one client in Bangalore for which it provides around 1,000 staff.

With wages for graduates five or six times what companies might pay for school-leavers back home, total cost savings from moving a back office to India can amount to between 30 and 50 per cent. This implies, of course, that labour is considerably less productive than before: requiring several Indians to do what was handled by a seasoned old hand working for the client.

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Neverthless, the sales pitch is relentless and outsourcing companies are keen to boast that you get better quality too. There are not many fully trained accountants in London willing to sit and process invoices all day long. So the next stage is to try to use the new-found expertise to do clever things with the way companies are run.

"The industry began with call centres and then moved to non-call centres, but much of the work was still what we call 'lift and drop' or 'we do your mess for less' which means it was iust about exploiting the difference in labour rates,'' says Pankaj Vaish, Accenture's BPO managing director. "Now we see ourselves as offering much more than that. Labour arbitrage is table stakes. We want to increase quality too with non direct benefits such as increased time-to-market for new products."

How far can this go? For the industry's cheerleaders, the limit is only in the minds of client chief executives who must decide what they want to cling on to as core competencies. Insurance outsourcing providers, for example, have their eye on almost every part of the insurance process bar marketing new policies and investing the surplus capital.

It is not just British and American companies who are taking note either. Despite initial scepticism, European businesses are catching up fast, developing their own clusters of outsourcing activity according to available local language skills: Mauritius and Bucharest for France; Riga for Scandinavia, Prague for German companies.

The next frontiers are Russia and South Africa. And within India, where the industry vies with the Philippines for English-speaking work, companies are spreading far beyond Bangalore and Delhi to other cities such as Chenai and Mumbai.

Now the creative brainpower is starting to follow the back-offices.

Companies such as General Electric, which pioneered outsourcing in India during the 1990s, recently opened a major new research facility for its scientists in Bangalore.

On a smaller scale, Accenture last year opened its fourth global R&D headquarters in the southern Indian city. Lin Chase, who heads it up, says: "For most of our clients, the biggest and most complex projects are happening here now, so it makes sense to study them here."

This means, for example, that new software to monitor how banks keep their computer systems from crashing was developed in Bangalore, since many of the systems are managed there already. In the case of Thomas Cook, Indian computer engineers were able to find cost savings in mundane but valuable areas such as more efficient use of bandwidth, or new software to back up files.

It all may be great for the Indian economy, but the extent of today's business process outsourcing can leave companies looking hollowed out - sucked of all the people who actually know how they work.

It is not all high-tech in India either. Some 8,000 of the people at Accenture's Bang 3 office are on strict rotating shifts, sharing only 2,000 seats in a giant game of round-the-clock musical chairs. Rice is stockpiled in the event of civil unrest or flooding. No personal possessions are allowed and the rows of artificially lit cubicles have a soulless feel.

Although Indians will soon account for the majority of Accenture's global workforce, they represent around just 5 per cent of its senior management. Unions are non-existent and long hours are encouraged.

n many respects what has been exported to India as a result of this new variety of business process outsourcing are all the very boring administrative jobs that appear unattractive in the UK.

"In many countries, some graduate from business school may not be happy processing accounts receivable," says Accenture manager Javier Vergara.

"There is a cost arbitrage but also a motivation arbitrage."

Just in case they need any more encouragement, there are the posters on the wall: "Bite your v's and kiss your w's, this is an accent neutralised area."

utsourcing Leader Luxoft to Speak at, Sponsor Gartner Outsourcing Summit and SD West Conferences

New York - Luxoft, Russia’s largest provider of high-end IT outsourcing services to clients such as Boeing, Deutsche Bank, IBM, UBS, T-Mobile and Dell, today announced that it will speak and sponsor at two upcoming key industry forums, the Gartner Outsourcing Summit 2007 and SD West. Luxoft previously announced its presence at this month’s CeBIT, the world’s largest trade fair showcasing digital IT and telecommunications solutions for businesses and consumers. Luxoft’s participation in these events is designed to reach key decision-makers and to showcase the company’s growing industry expertise level The Gartner Outsourcing Summit, to be held in Dallas on March 19-21, is an important forum for business management on best practices for successful nearshore and offshore sourcing. Financial industry expert and CEO of Luxoft USA, Lev Saks will host a boardroom session focusing on Russian developers’ unique ability to successfully manage complex development projects in sourced-team environments. He will demonstrate Luxoft’s strong track record in high-end outsourcing services and program management by sharing how Luxoft and Deutsche Bank have worked together closely to create Client First, the award-winning global CRM solution. As a sponsor of the show, Luxoft will also participate in the Gartner Outsourcing Summit exhibition at Booth #K. At a previous Gartner Global Sourcing Summit, Luxoft was selected as a finalist for three out of four “Best of Global Sourcing Summit Awards” in Innovation, Vendor/Client Collaboration and Solutions Delivery. Meanwhile, at SD West, to be held March 19-23 in Santa Clara, Stephen Michaud, head of development for Luxoft’s recently established Canadian office, will discuss how to work successfully in distributed environments and mitigate risk using sound Agile development practices. Issues covered will include building team communication and trust, establishing and tracking metrics, creating solid project management, and anticipating, creating and maintaining documentation. Now celebrating its 20th anniversary, SD West is considered to be the “must-attend event” for Silicon Valley's leading developers. Luxoft has been a leader in driving the use of Agile in distributed development environments, a departure from Agile’s traditional use within in-house development teams. As part of his remarks, Michaud will also speak to the successful collaboration between Luxoft and security client Ping Identity. “With Russia continuing to grow its strong presence in the global outsourcing arena, we feel the Gartner Outsourcing Summit and SD West are ideal opportunities to furthering the discussion on how the expertise and approach of Russian developers truly differentiates them from other global resources," said Lev Saks, CEO, Luxoft USA. "We believe that Russia is uniquely equipped to deliver high-end IT outsourcing engagements that bring exceptional business results and deliver one of the global sourcing industry's highest return on investment.” About Luxoft Luxoft, founded in 2000, is Russia’s largest provider of high-end IT out¬sourcing services with operations in the US, Canada, UK, Ukraine and the world’s largest delivery capabilities in Russia and CIS. Luxoft works with global enterprises and independent software vendors (ISVs) enjoying long-term relationships with industry leaders such as Boeing, Deutsche Bank, IBM, UBS, T-Mobile and Dell. Luxoft's software development processes meet the highest quality standards, and the company was the first in Europe to achieve Level 5 CMMI quality certification. Luxoft runs research and development centers in Moscow, St. Petersburg, Dubna and Omsk in Russia as well as centers in Kiev and Odessa, Ukraine and Vancouver, Canada. Luxoft was named the world's #1 IT Outsourcing Product Engineering vendor in the 2006 Black Book of Outsourcing and won the National Outsourcing Association's "Financial Outsourcing Project of the Year 2006" award. The company has also been recently recognized by BusinessWeek as the top emerging outsourcing provider in Russia and Eastern Europe and was the only IT Company to be recognized with a Russia's Best Employer 2006 awards given by the Russian Chamber of Commerce and other leading Russian employment and business agencies.

Companies wake up to sharing services

Last Updated: 6:20am GMT 19/03/2007

It's not just offshore outsourcing that can produce unusual juxtapositions. The outsourcing of back-office operations within the UK can also lead to some unlikely pairings.

University Hospital Birmingham and BAE Systems are not natural bedfellows, but both organisations have been sharing the same payroll services under an unusual joint venture that could serve as a model for many other large companies.

BAE first contracted out its back-office functions in 2001 as part of a deal with a then unknown start-up called Xchanging. Its founder, David Andrews, had made a name for himself in outsourcing while at Andersen Consulting (later Accenture) where he struck the industry's first large deal to take over BP's back office team in Aberdeen.

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Branching out on his own, he decided to offer BAE a slightly different deal that would leave the defence group with a half-share in a company they set up to manage the contract. BAE employees involved transferred over - so Xchanging won itself a ready-made human resources and procurement team - but the new joint venture would also be free to tender for other outsourcing contracts.

Six years later, the partnership has attracted some 20 other customers, including a deal to handle about 15 per cent of the NHS payroll for big employers such as University Hospital Birmingham. Several of the original BAE human resources managers are still in senior positions, but the feel of the company is very much part of Xchanging, and BAE last week finally sold its stake for £57m.

By any standard, it's a healthy profit from a part of the company that was previously regarded as a cost centre. Including dividends, BAE has made around £100m since the partnership began in 2001.

Xchanging, which was backed by private equity investor General Atlantic, is also rumoured to be looking at a stock market flotation later this spring.

The question many will ask though is what sense it makes to be handling such diverse employers side-by-side. Surely managing nurses is a world away from building aircraft carriers?

Andrews is quick to point out that many procedures such as dealing with new employees joining or pensions are similar. "This is all about standardisation and systems," he says. It is fair to say that business process outsourcing attracts personalities keen on the business of process. Performance across the company is tracked in meticulous detail over colourful charts that define and measure every possible aspect of the contract. It may not suit everyone's tastes, but at least employees know what level of service they can expect when they ring up with an HR request.

Xchanging also makes use of some offshore facilities in Delhi to bring down the overall cost of the services provided. While this makes sense for private sector employers such as BAE, the true test of political will may come if a future government is asked whether chunks of the NHS work can be offshored too.

Offshore Outsourcing Cost Advantages To Disappear By 2027, Study Says

Despite increasing wages, for now India is still an offshore hot spot for U.S. technology companies.

By Paul McDougall
InformationWeek

March 15, 2007 02:00 PM

Rising salaries and other cost increases in emerging markets such as India and China mean the financial advantages of outsourcing to such destinations will dry up in the next 20 years, according to a study released Thursday.

The study, by consulting firm A.T. Kearney, says wage and price inflation in offshore locations is already eating into the savings enjoyed by American companies that outsource technology and back-office work and will continue to do so in the coming years.

Average wages for programmers in India, China, and Eastern Europe rose between 20% and 40% on average in 2006, compared with U.S. increases of between 5% and 10%, according to the study.

The findings show that "corporations making global location decisions should focus less on short-term cost considerations and more on long-term projections of talent supply and operating conditions," says A.T. Kearney chairman Paul Laudicina.

That message may be lost on a number of CEOs as they rush to build out operations in thriving offshore markets such as in India, where tech salaries are still anywhere from 40% to 60% less than in the United States, despite the study's findings. IBM recently surpassed the 50,000-employee mark in the country, while Accenture earlier this year revealed that it will soon have more employees in India than it has in the United States.

Significant offshore cost increases could also impact the fortunes of indigenous Indian services providers such as Wipro Technologies, Infosys, and Tata Consultancy Services, all of which have enjoyed robust double-digit growth in recent years on the strength of selling low-rate contracting services to Western companies.

For the time being, however, A.T. Kearney still ranks India as the top offshore outsourcing destination in terms of value and quality of service. It's followed by China, Malaysia, Thailand, and Brazil.

Ireland, once an offshore hot spot until it suffered considerable inflation of its own, ranked last on the list at 50th place, trailing barely developed countries such as Senegal and Sri Lanka.

The Hard Realities of IT Outsourcing

The Hard Realities of IT Outsourcing

February 27th, 2007
By Stephen Northcutt
Version 1.1

Summary: Outsourcing is driven by five principal concerns: to lower cost, increase speed of growth, focus on core competency, stay compliant with government regulations, and compensate for the difficulty of recruiting and maintaining specialized hot skills talent in a world of increasing IT compensation.

Outsourcing is such a cyclical thing: one year it's all the fad, and the next year, people start pulling work back in-house. At the same time, however, the more we become globally connected, the more the pressure to outsource grows in strength. In addition, each major technical evolution creates an opportunity for offshoring and outsourcing to increase. As we go from one primary programming language, operating system, or network federated architecture to its successor, organizations realize they have an expensive workforce that lacks the new hot skills in information technology and information security. What level of IT compensation is appropriate, and what criteria determine that level? Any lower cost labor market with the ability to catch dominant new trends and educate a work force in them can then offer the needed hot skills services. While this can be disruptive, 80% of executives surveyed at a Gartner outsourcing summit[1] said they would not let a potential backlash on the part of the current workforce affect their decision to outsource. Organizations like Gartner and SANS offer meetings where expert analysts discuss coming technical trends and the management decisions leaders will have to make in response to them.

What can be outsourced? Just about everything, but common IT and IT Security tasks include:

• Code development
• Data center operations
• Log management and review
• Web page development/maintenance
• Documentation and policy
• Vulnerability Scans
• Penetration testing

Let's examine each of the five concerns that drive outsourcing: lowering cost, increasing speed of growth and reducing time to market, focusing on core competency, staying compliant with government regulations, and compensating for the difficulty of recruiting and maintaining specialized hot skills talent. . Because they are interrelated, we will cover some of these in more detail than others to avoid repetition.

Lowering cost by outsourcing and offshoring

Lowering cost is by far the biggest driver in outsourcing and offshoring: a lower labor rate is a massive advantage. Of course non-in-house labor brings its own surprises, and companies without experience often fail to achieve the IT compensation savings they hope for. Managers deliberating whether it makes economic sense to outsource one or more IT functions usually begin their analysis by looking at what the outsourcing itself will cost, and comparing that with what the company is currently spending to perform the same functions in-house. This analysis can bring up more complex factors, however, that are often overlooked. What is the real cost to your company if in-house security monitoring fails, allowing a crippling attack that an outsourced monitor, watching your network 24/7, would have prevented? Are there significant gains in productivity when outsourcing allows in-house employees to get back to focusing full-time on what they do best? What if your company's security functions are so critical that you simply can't outsource them? Cost data is important, but useful only if it's data on the real cost, and calculating that can involve consideration of variables such as these. Another factor to consider is that costs are rising so the costs you pay today may be much higher next year.[2]

Increasing the speed of growth and reducing time to market

The can be one of the most intelligent decisions for an organization to make. If your people lack either the skills or the disposition to focus on a particular aspect of the business, it might make sense to consider outsourcing. Here is a case study typical of many.

A growing business with 65 employees and annual revenue of 16M realized that a key to faster and sustained growth was marketing. Up to this point, the company's owner had written most of the advertising copy herself, but doing so took time away from her other important management responsibilities. She had received a copywriting proposal from a PR company knowledgeable in her industry, but the proposal came with a price tag of $6K - $7.5K per month. It seemed too expensive, yet to pass it up would be expensive too - quite possibly more expensive. From code testing to logistics, if your people do not have the skills and the desire to focus on a given task, outsourcing is something you should consider.

Brian Varine, author of the Outsource Monitoring section of the SANS IDS FAQ, points out three further advantages to outsourcing, as well as some disadvantages.

The first advantage applies to Managed Security Monitoring, MSM. Intrusion Detection requires a skilled person to analyze what is happening on the network. For most security administrators, however, their job description includes a variety of responsibilities in addition to being the "IDS guy". If they are lucky, they may get an hour or so of "quality" time per week with the IDS. With an outsourced MSM, in contrast, the network is monitored 24 hours a day/7 days a week. This means that at 2AM, your network is being monitored.

Second, an outsourced MSM has the personnel to figure out what is an alert and what is a false positive. With such an MSM, that 2AM call isn't going to take place unless a skilled person at the MSM thinks it's worth waking you up for.

Third, outsourced MSM gives you access to higher skill levels. With outsourcing, MSM analysts monitor your networks day and night for signs of intrusion. Over time, this gives you an enormous advantage, as these people develop the hot skills that you would otherwise have to pay a premium for. Because outsourced MSM analysts aren't limited to one network, they see attacks from a variety of sources. This allows them to recognize attack patterns much better than a person who scans logs from one network for an hour each day.

However, Brian Varine points out, there are disadvantages as well. The most obvious disadvantage is cost: MSM's are not cheap. Looking at two industry examples, Brinks Internet Security charges in excess of $8000 per month; Counterpane's monthly charge is $12,000. While this might represent a considerable cost for a large business, it is clearly not a feasible option for a small company with limited IT compensation resources. Counterpane argues that its price is competitive with having your own in-house monitoring. Looking at what a semi-skilled administrator costs, they make a valid point, especially when you consider that they provide 24/7 monitoring. Still, for most companies, a recurring monthly cost at the $12,000 level is a hard sell, especially since you still need to purchase an IDS (they monitor your IDS, but do not supply it).

Another caveat in selecting an outsourced MSM is who the company is. There are services out there that claim to be an MSM, but consist merely of a box they put on your network that sends out pages if something is detected (http://www.securityhome.com). This isn't any better than putting in your own IDS and having it send a page. The MSM you select needs to be a trusted partner. They will be the guardians of your network, and you will trust them to protect you. You can't be thinking about who is the cheapest solution; instead, think about who is the partner that you trust the most. For some organizations, no company will fit.

Inability to recruit and maintain specialized hot skills talent

We have touched on this before, but if you need specialized skills you have to be successful in both recruiting and retention. On a cross-country flight my seatmate was the HR director for Intuit on his way to a recruitment conference. "Is finding and keeping talent really that big a deal?" I asked. He said, "Imagine trying to hire programmers who are also experts in tax law." That was the moment the light went on and I really started to understand.

There is one alternative to hiring the talent you need, of course, and that is to grow it yourself. Take smart, loyal employees and get them trained. Use training from top market leaders who have instructors with actual field experience. That way, your people can start applying what they learned in class the minute they get back to the office. And don't forget assessments: there should be some sort of testing to demonstrate employee mastery of the material. This is why many organizations offer a salary premium when employees get certified, thus demonstrating they have mastered hot technical skills. One source of hot skills training for IT Security, Audit and Operations with assessment is the SANS, Stay Sharp, STAR and GIAC family of courses and assessments:

http://www.sans.org/training/courses.php
http://www.sans.org/staysharp/about.php
http://www.giac.org

Regulations are driving organizations to outsource

One effect of regulatory guidance is that people look to Managed Security Service Providers (MSSPs) for help in meeting the increasingly burdensome interpretations of government regulation. With the widespread high-profile losses of customer and employee privacy information, this trend can only increase.

According to Bruce Schneier, CTO Counterpane, compliance requires organizations to actively monitor the security of their networks in realtime, and maintain a robust audit trail of events that can be used to investigate an intrusion after the fact. Organizations simply don't have the manpower or expertise to do this kind of sophisticated monitoring in-house; outsourcing to a company like Counterpane is the only cost-effective way to maintain compliance with these regulations.

Kevin Behr, CTO of IP Services, points out that many executives mistakenly believe that when they outsource the management of their infrastructure, they are also outsourcing their regulatory obligations. The hard truth is that management, not the outsourcer, is responsible for compliance. Outsourcing is not a license to abdicate management's responsibility for compliance with all applicable state, federal and international laws.

Sidebar: Outsourcing has it's own risks

When California Senator Liz Figueroa was authoring Senate Bill 1451, a measure to ensure that medical privacy is protected under outsourcing, her fact sheet related the following story. "In October of 2003, the San Francisco Chronicle first reported the story of a medical transcriptionist in Pakistan who had subcontracted with a Florida firm that had a contract with a Texas company that did business with the Medical Center at UC San Francisco. The woman claimed she was not being paid for her work and threatened to publicly release some of the information she possessed if she was not paid immediately. The UCSF Medical Center was not even aware this information had left the country, though it appears no laws had been broken until the Pakistani transcriptionist threatened to reveal the highly confidential medical information. While the woman was eventually paid and no records were actually released, the incident exposed a dangerous problem."

http://democrats.sen.ca.gov/senator/figueroa/

According to Susan Orr, Vice President of Regulatory Compliance for Catbird Networks, the following specifics should be evaluated when considering outsourcing IT security tasks to achieve regulatory compliance:

• Review of third party audits
• Review of tests/test results performed on service provider's controls
• Review results of security configuration tests such as Center for Internet Security metrics on the service provider's servers and routers
• Review of vulnerability assessments, how they are performed, how often, remediation, what is the patch management process following identification of a vulnerability
• Performance monitoring
• Service Level Agreement compliance
• Antivirus protection
• Firewall port scans
• Website monitoring including defacements and web linking
• Rogue LAN and wireless devices
• Evidence IDS/IPS are used effectively

The medical transcriptionist story exposes a significant problem with outsourcing. What if your service provider is also outsourcing? Contracts may not be enough to achieve oversight, but they can be used to your organization's advantage. The contract is your opportunity to specify your security requirements for your service provider. Elements to consider include:

• Every employee of the service provider with any possibility of access to your data signs a confidentiality agreement, with severe penalties for intentional or accidental disclosure.
• The provider agrees to the strict principle of least privilege and separation of duties, and any access is granted only with the need to know.
• The provider agrees to notify you of any outsourcing to additional providers they currently use, and to notify your organization of any outsourcing they begin to use in the future. If your organization does not approve the new service provider, that should be grounds for terminating the contract.

The most important thing to consider is outsourcing and offshoring does not eliminate risk, it changes risk. New risk is introduced and threat models change, certainly the threat surface changes[3]. This was well illustrated by the fiber optic outage in China December 28, 2006 and took over two months to repair. That must have seriously interrupted some outsourcing/offshoring operations[4]. While there are certainly risk issues and intellectual property may be lost or compromised some information warfare claims may be overblown. In 2003 predictions of major problems by 2006 do not appear to have been realized[5]. Of course what we do not know . . .[6]

Focus on core competency

This may be the best reason of all to outsource. No organization can be the best in the world at everything. A good management practice is to review all business operations and units every year. If a part of the business is underperforming or has a high error rate, that part is certainly a candidate for remediation, and it might also be a candidate to outsource or divest.

What is the right decision for your organization? Globalization is an increasingly dominant trend and you should be considering outsourcing anything you know you can never be the best in the world at. So, it really is not a question of if, but when. Set up a tickler calendar entry at least every six months to reconsider the question. Start with something that isn't too critical to your operations so you can build your outsourcing skills at minimum risk. And know why you are deciding to outsource, in this article we have shared five logical reasons: to lower cost, increase speed of growth, focus on core competency, stay compliant with government regulations, and compensate for the difficulty of recruiting and maintaining specialized hot skills talent in a world of increasing IT compensation.

[1] http://www.gartner.com/DisplayDocument?doc_cd=116614
[2] http://money.cnn.com/2004/07/13/technology/techinvestor/lamonica/
[3] http://infosysblogs.com/managing-offshore-it/2006/11/yes_james_offshoring_is_fraugh.html
[4] http://www.app.com.pk/en/index2.php?option=com_content&do_pdf=1&id=1201
[5] http://www.computerworld.com/careertopics/careers/story/0,10801,80935,00.html
[6] http://www.computerworld.com/managementtopics/outsourcing/story/0,10801,84723,00.html

NOTE: some of this information is based on an article by Stephen Northcutt for Cyber Defense Magazine 2004

Russia To Become Third Largest Outsourcing Destination by 2010

DUBLIN, Ireland - Research and Markets has announced the addition of Frost & Sullivan’s new report "Social and Infrastructure & Labor Analysis for the Russian Information and Communication Technologies Industry" to their offering.

The global information and communications technology industry has provided the supporting infrastructure for economic growth across the world in the last decade. Despite the setbacks following the failure of dot com enterprises, the ICT industry continues to show enormous growth potential. ICT is a vital component of the infrastructural support needed for the development of any economy. Global trends in telecommunications indicate a shift toward open access, creation of a healthy competitive environment, and a consequent drop in prices. Although companies are likely to continue outsourcing IT services mainly to India, they are also expected to increasingly witness lucrative bids from Russia, the Philippines, Ireland, Israel, and China.

ICT spending is likely to grow impressively, with emerging markets in eastern Europe and Asia Pacific leading the way. Shares of IT and telecommunications sectors are almost equally important in the total ICT spending, with governments and businesses accounting for more than three quarters of the spending. The growing affluence of the population and the globalization of enterprises also improve ICT consumption. It is vital for ICT enterprises to have a high-performance networking infrastructure, as their enterprise applications and operations depend on it.

Russia has been the biggest spender on IT among the central and eastern European (CEE) countries and its spending has been higher than the global average since 2002. This industry’s growth is high and stable, considering it witnessed double-digit growth for the last five years and is poised for further growth until 2010, although consumption trends in telecommunication vary across regions as well as segments.

Russia’s vast human resources and low labor costs hold it in good stead in the ICT industry and have set it on course to becoming the third largest outsourcing destination in the world by 2010. Its competent education system provides its citizens with high levels of skills, excellent training, as well as intensive scientific and engineering expertise. However, the industry is impaired by a shortage of IT specialists but this is set to change, with the present government strongly focusing on the development of the IT industry, since the telecommunications industry is already well covered. Also, a series of high-profile industry reports changed the general perception that the ICT infrastructure in Russia is inadequate by publishing positive articles.

Frost & Sullivan’s Information and Communication Technology Country Industry Forecast service provides vital inputs for evaluating the attractiveness of a country and its ICT industry. Besides enabling decision makers to assess the impact of non-market forces, it also helps in identifying new market opportunities. This service provides a strong base for preparing contingency plans. In addition, investors can assess industry-specific risk factors as well as conduct a more in-depth micro research.

The Benefits of Outsourcing In Small Businesses

Before we can begin discussing the benefits of outsourcing especially in small businesses we must fully understand what outsourcing is and what outsourcing is not (as many people often confuse it with off-shoring, a similar but different thing).

So what is outsourcing? A fairly recent addition to business terminology, outsourcing in a business is the delegation of certain non-core operations to other separate entities that specialize in those operations. Put very simply, outsourcing means giving away certain tasks which though imperative to the actual business, can be better managed by another industry which specializes in that task.

Outsourcing entails transferring management control and decision making power to the other industry as well. This means that there is a lot more interaction, and information exchange, coordination and trust between the outsourcer and its client, making it different from the established buyer-seller relationship.

Now that we have established what outsourcing is, let’s focus on what it is not. Outsourcing is commonly confused to off shoring, which is the relocation of an entire or part of a functional unit of the business to another nation, whether it remain in that business’s control or not. Outsourcing is usually limited domestically. In many cases, such as telemarketing, the company wishes to employ the service of overseas call centers. Thus when outsourcing crosses national borders it is called offshore outsourcing.

So why should companies outsource? There are plenty of benefits of outsourcing, especially for small businesses. The main reason for outsourcing is the cut in costs, as they don't have to provide benefits to their workers, and have fewer overhead expenses to worry about. Many businesses prefer offshore outsourcing, as it allows them to utilize the low labor costs of countries such as India and China. Not only that, the relatively high exchange rates in these countries makes offshore outsourcing more advantageous. In India, the dollar exchange rate is 45 rupees per every American dollar. Thus the average American worker who would take (for e.g) $5 per hour can be replaced by an Indian worker employed at $2/hour.

Outsourcing also allows smaller businesses to focus on core competencies, and relieve themselves of the peripheral ones. Thus they can concentrate on providing better quality products and service. Even if the quality does not improve, the cut in cost allows for greater productivity. This increases the overall economy in total. Not just that, the business can produce good quality products without having to employ a large amount of people. Thus lowering their overall labor charges and employee benefit.

The best facet of outsourcing though is the ability to employ professionals to get the work done. In areas such as advertising and telemarketing, it is usually more cost effective, and productive to hand over the task to a separate company and pay them accordingly. Thus instead of handling their own affairs in a substandard manner, they can employ professionals to carry out the process efficiently and effectively. And once the outsourcing company is assured that its client is managing perfectly, it can focus on creating better products and services.

For small businesses, outsourcing allows them to work with the minimum of labor and equipment expenditure. For example, a small firm outside city limits can outsource its transport, thus making it unnecessary for it to acquire buses, cutting the cost of fuel and saving its resources. Another prime example is telemarketing and advertising. Many companies prefer to outsource this facet of marketing to professional call centers and advertising agencies, thus eliminating the need to form an entire unit devoted to this task. Not only that, but because the outsourcing client has a fully established infrastructure devoted especially to the service provided, there is no necessity for a small business to invest in developing its own internal infrastructure to accommodate that service.

In small businesses there’s only a limited access to resources and ideas. Outsourcing allows the business to garner new ideas and innovations. It could also result possible cash influx due to the transfer of assets to the new provider.

Outsourcing 2.0: The business rationale for exporting your job

March 12, 2007 (Computerworld) -- The word offshoring still causes some IT professionals to break out in a cold sweat and others to reach a low boil. Debates continue to rage on the merits and morality of getting technology work done by non-Americans for wages lower than those of their U.S. counterparts. But meanwhile, the practice of offshoring has not only become more prevalent, it has also begun to mature.

Call it Offshoring 2.0. The corporate view of this practice is evolving from the relatively simple idea of moving commodity work from the U.S. to (usually) India with the hope of reaping cost savings, to much more complex, multishore arrangements with more nuanced and strategic goals. These include achieving variable staffing capacity, freeing internal resources, finding the best talent, increasing speed to market and enabling follow-the-sun support.

In effect, offshoring has grown up. In its infancy, just a handful of adventurous companies sent highly codified work overseas. During its rebellious adolescence, it stirred a furious national debate, and the practice’s previously unrecognized management challenges and hidden costs came to light. Now it’s poised to enter a less tumultuous young-adulthood. At this stage, there is less mystery, and the benefits and pain points are better known. This enables companies with some experience to approach offshoring as part of a broader strategic sourcing strategy rather than in a tactical, one-off way.

“The ‘not built here’ mentality has really dissipated,” says Danny Siegel, director of data warehousing and business intelligence technologies at New York-based Pfizer Inc., which uses several outsourcing providers. “With budgets shrinking and requirements growing to improve quality and timeliness, there’s a lot of pressure on IT management to really rethink how they source for technology projects.”

It’s reached the point, Siegel says, “that I couldn’t care less if the people come from Chennai, Shanghai, Poland or the Ukraine — that’s irrelevant. As long as it’s a high-performance work team that gets the job done at a competitive price, great.”

Siegel considers it the job of the service provider — whether based in the U.S. or India — to provide him with the best and the brightest, whether onshore or offshore, “and that means global sourcing,” he says.

Changing the Name

Indeed, terms like global sourcing and strategic sourcing are starting to replace offshoring for companies striving to fit their use of overseas talent into their overall business strategies. And offshoring is no longer solely about cost. For instance, Siegel has occasionally requested that his outsourcer assign specific developers from other countries to a given project because he’s gotten to know and respect their work on other projects. “These are people who came up through the ranks and ended up being real stars with functional experience,” he says. “Seven years ago, that never would have happened. It took time for them to obtain the institutional knowledge and, based on that, move upstream.”

Tim McCabe, director of IT strategic sourcing at Delphi Corp., has also moved beyond cost-only goals when selecting a services provider. In fact, his title is a new one for Troy, Mich.-based Delphi. “It reflects a change of approach from sourcing as a tactical commodity to a much more leveraged global perspective,” he says. “It’s about the best way to get business done, whether it’s offshoring, outsourcing, resourcing or insourcing, as well as a broader view than just, ‘What’s the lowest price that I can pay for a service or commodity?’”

Delphi’s strategic sourcing approach does not explicitly require an offshore footprint, McCabe says. At times, he might contract with a domestic outsourcer that chooses to use offshore workers as part of its service. Other times, he explicitly chooses an offshore provider, but for reasons beyond cost.

For instance, Delphi has contracted with Tata Consultancy Services Ltd. (TCS) in Mumbai, India, to handle its global SAP development, deployment and support, but the goal wasn’t merely to tap into the SAP talent available there for a competitive price. It was also to optimize time-zone advantages, particularly when it came to supporting clients in the Asia-Pacific region.

But the TCS contract does not cover global application development and maintenance. In another strategic move, Delphi has moved away from multiyear agreements with single providers.

Instead, like other large companies, it’s adopting a more technology- driven sourcing strategy that takes advantage of the core competencies of several providers.

“We can do that more readily than five or six years ago because suppliers are getting the message that we want three or four and we want them to collaborate,” McCabe says.

Moreover, there are times when he wouldn’t want the outsourcing staff to be physically removed from his onshore client base. “When you have an application with high-touch requirements, physical presence becomes critical, and in that case we understand the price difference and are willing to pay for that,” he says.

If the old offshoring model could be represented as a one-way arrow pointing from the U.S. to a lower-cost overseas location, the new global sourcing model has arrows that form a complex web. In the new model, work can flow from a client in the U.S. to an Indian company that passes along a coding piece of the project to a Chinese subcontractor and the consultative piece to its employees in the U.S. Or a U.S. provider might divide the work among a team of U.S.-born workers, offshore coders and foreign employees with deep functional experience.

All this goes to show that the wrong way to start any project is by focusing on where the work will be done, says Lorrie Scardino, an analyst at Gartner Inc. “If you’re trying to figure out where to do things, that’s backwards,” she says. “Too many executives come at this by saying, ‘Let’s offshore.’”

A more strategic approach, Scardino says, is to move through a series of questions that begins not with “where” but with “why.” Why are you outsourcing in the first place? What results are you expecting to gain from it? Then it makes sense to define the scope of what you intend to outsource, Scardino suggests. For instance, are you going to outsource your entire ERP platform, or just upgrades and patches?

Next comes “who,” Scardino says. That requires looking at various delivery models, such as utility computing and on-site arrangements. Only when you know which providers are best at what you want done should you start exploring where the work should be done, she says. “Imagine if you decided, ‘We’re going to do all our application development in India,’” she says.

“What are you going to do in three years, when India is just as expensive as San Antonio, Texas, which is cropping up as low-cost location in the U.S.? If your whole strategy is just offshoring to India, that’s a very weak strategy.”

Another sign of offshoring’s growing maturity is the number of companies that claim they’re engaging in it not for savings but to find qualified personnel.

In fact, in a recent survey of 530 U.S. and European companies by Duke University and management consultancy Booz Allen Hamilton Inc., nearly three quarters of the companies that seek offshore talent for high-end functions such as product development or research and development reported that access to qualified personnel is the most important reason they do so.

“There simply aren’t enough high-skilled engineering and science graduates available in the U.S. to meet the demand for these resources,” says Vinay Couto, an analyst at Booz Allen. “Employers complain that the quality and skills of the available graduate pool within the U.S. is not sufficient to meet the high standards required for functions such as product development, engineering, design and other innovation-centered functions.”

Finding domestic talent isn’t so difficult on a “onesies-twosies” basis, according to McCabe, but “if you’re looking for a large concentration of skills to handle a lot of work, it’s not always here onshore.” Or at least you won’t find it without putting in some effort.

“If I need a lot of .Net programmers, it’s easier to call an offshore provider,” agrees David Baruch, CIO at Equity Office Properties Trust, one of the largest owners and managers of office buildings in the U.S.

Baruch also agrees with another of the study’s findings: Companies are moving past external factors such as political backlash to confront internal ones, such as the managerial and organizational changes they have to make to take advantage of offshoring.

Chicago-based Equity Office started outsourcing three years ago when Baruch needed to supplement his relatively small staff of 100 people to complete a big project. He signed on with a U.S.-based provider that used offshore staff for the project.

Baruch has continued to expand his use of overseas resources, albeit with a different provider. Today, offshore personnel account for about 20% of his staff’s peak work output, including maintenance and higher-level project work.

The first challenge of the transition was getting his own staffers to accept the offshore model. “While it was painful in the short term, they realized there were benefits in the long term because it was work they didn’t necessarily want to do,” Baruch says. The second part was getting IT staffers to pass along required knowledge to the offshore provider and “having them understand what we’re trying to do from thousands of miles away,” he says.

Today, Baruch sees the relationship more as co-sourcing than offshoring. “They have a certain set of responsibilities in the development process, we have a certain set, and we measure each other to be sure we’re each holding up our end of the bargain,” he explains.

Baruch says that low cost is just one benefit he gets from tapping overseas talent. It also gives him variable staffing capacity, which allows him to maintain a stable workforce with deep business skills. Outsourcing gives him scheduling flexibility, so he can ramp a project up or down as needed. In addition, it enables marginal projects to achieve returns on investment that they otherwise never would. “For projects that people would have historically passed on, there’s now value in doing them because it takes a third of the cost to do it,” he says.

Over time, Baruch can see other business processes that Equity Office currently outsources eventually moving to an offshore provider. “It’s all a question of what you want to outsource, how you want it to be done and the value derived from doing it,” he says. “Then you can talk about where the work lends itself to being performed — onshore or offshore, with high-priced or low-priced talent.”

As others with offshoring experience gain this type of understanding, Scardino predicts, “offshoring will be recognized pretty universally as a destination, not a strategy.”

Brandel is a Computerworld contributing writer in Newton, Mass. Contact her at marybrandel@verizon.net.

Infocrossing to Present at Gartner Outsourcing Summit

LEONIA, N.J., March 14 /PRNewswire-FirstCall/ -- Infocrossing, Inc. , a provider of selective IT infrastructure, enterprise application and business process outsourcing services, today announced it will participate in a solution provider session at the Gartner Outsourcing Summit being held March 19-21, 2007 in Dallas, Texas.

On Monday, March 19, 2007, Lee Fields, executive vice president of marketing and business development, will discuss IT outsourcing agreements. With a barrage of outsourcing advice that ranges from handbooks and summits on the outsourcing cycle to individual consultant's input, companies can be overwhelmed when it comes time to negotiate an outsourcing deal. Fields will explain how to navigate the stormy waters of outsourcing agreement negotiations and arrive safely at the harbor with a deal that works.

Presentation: "The Deal Zone: Getting Real About IT Outsourcing Agreements" Who: Lee Fields, Executive Vice President - Marketing & Business Development, Infocrossing, Inc. When: Monday, March 19, 2007; 2 to 3 p.m. Where: Gaylord Texan Resort & Conference Center, Dallas, Texas

In combination with the presentation, Infocrossing will also offer a white paper.

About Infocrossing (http://www.infocrossing.com/)

Infocrossing, Inc. is a provider of selective IT infrastructure, enterprise application and business process outsourcing services delivering the computing platforms and proprietary systems that enable companies, regardless of industry, to process data and share information within their business, and between their clients, suppliers and distribution channels. Leading companies leverage Infocrossing's robust computing infrastructure, skilled technical team, and process-driven operations to reduce costs and improve service delivery by outsourcing the operation of mainframes, mid-range, open system servers, networks and business processes to Infocrossing.

Safe Harbor Statement

This release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. As such, final results could differ from estimates or expectations due to risks and uncertainties, including, but not limited to: incomplete or preliminary information; changes in government regulations and policies; continued acceptance of the Company's products and services in the marketplace; competitive factors; closing contracts with new customers and renewing contracts with existing customers on favorable terms; expanding services to existing customers; new products; technological changes; the Company's dependence upon third-party suppliers; intellectual property rights; difficulties with the identification, completion, and integration of acquisitions; and other risks. For any of these factors, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended.

Contacts: Infocrossing, Inc. Kathleen Ulrich 402-965-5174 Kathleen.Ulrich@infocrossing.com Mike Schultz or Brant Caraberis Schwartz Communications, Inc. 781-684-0770 infocrossing@schwartz-pr.com

Infocrossing, Inc.

CONTACT: Kathleen Ulrich of Infocrossing, Inc., +1-402-965-5174, or
Kathleen.Ulrich@infocrossing.com; or Mike Schultz or Brant Caraberis, both of
Schwartz Communications, Inc., +1-781-684-0770, or
infocrossing@schwartz-pr.com

Web Site: http://www.infocrossing.com/

Call centre outsourcing is growing up

The ‘Quit India’ movement was a wave of civil disobedience that was itself a response to Mahatma Gandhi’s call for Indian independence from the UK. As we are now fast approaching the 60th anniversary of Indian independence, some might argue that we are now seeing a new form of ‘Quit India’ – only this time it is the call centres serving customers in the UK.

Last week, Lloyds TSB decided to move all their customer-facing call centre work being performed in India back home to the UK. They will continue work on some back-office processing work, but customer calls will no longer be answered in India.

This is just one more major UK company that has reviewed its offshore outsourcing policy. Recently, the insurance giant Norwich Union said they would not move any new work to India, and companies such as PowerGen and eSure have also turned their back on the Indian call centre.

I have been talking about this and predicting it at various industry conferences for some time now. Think about the reasons why Lloyds TSB might want to shift their customer phone calls back to the UK. There is the issue of corporate image to start with. It’s now really easy to switch bank in the UK, so retail banks can’t rely on the old sense of inertia – the horror of switching dozens of direct debits and standing orders – all the problems that used to keep people with a bank for life. Nowadays, rivals such as NatWest are actively promoting the fact that their phone calls are answered only in the UK – and even going further by localising customer service back to the local branch.

The comparison of being able to call your local branch to only being able to reach a call centre, especially one in another country, is quite a stark difference. It positions the point of customer contact as a potential profit centre for the bank and not the cost centre it has been considered to be – the call centre has become a key differentiator.

The other reason why companies such as Lloyds TSB might want to see a change is for quality of service. It’s hard to knock the Indian business process outsourcing companies, because they have actually written the book on quality in this space. Companies such as FirstSource (formerly ICICI oneSource) that have major operations in both the UK and India are exporting the quality controls of their call centres in India to the UK, not the other way.

However, the issue is that timeless problem of culture. In the early days of Indian call centres we used to hear western names and semi-scripted enquiries about the football last night. Things are a lot better than that now, but the business of banking has changed. Operating a current account is an expensive business and consumers in the UK are vehemently clinging onto to the idea that banking should be free.

Retail banks need to cross-sell products such as mortgages, personal loans, credit cards, insurance, and foreign exchange, anything that is in addition to the basic banking service. The best sales teams are going to have a cultural identification with the customer, because that cultural connection lets them identify when they need to be formal, when they can be casual, when they can joke about Red Nose Day, when they ask about insurance needs. The best cross-selling can’t be scripted and the best sales teams just can’t learn how to do it by reading a Dale Carnegie book.

So I do predict that we will see some more major companies following the example of Lloyds TSB. However, this is not the end of the road for outsourcing in India. In fact, this is the beginning of a new maturity in outsourcing. A lot of call centre business has been won in the past five years because of the reduced costs in India, but the role of the call centre itself is changing. Services are more complex and require more cross selling - the call centre has gradually become the only point of interaction between many companies and their end customers. It’s therefore absolutely critical that companies consider the best location for their voice-based customer interaction – for complex services that is most likely to be somewhere local to the customer.

Many forms of remote call centre can, and do, work well. Technical support can be performed from anywhere provided the agent has the required skills. I recently called Apple for help with my own Mac and was directed to an Indian agent who had a very pronounced accent, but knew his stuff – and that was all I was concerned about – he fixed my Mac and I thanked him profusely.

As Lloyds TSB has noted, they don’t intend to stop doing back office processing and other work that does not require direct interaction with their customers in India. So the anti-outsourcing lobby will crow that a major British bank is pulling out of India and hiring in the UK and the pro-outsourcing lobby will point out that the back office work remains in India. Both sides of the debate will argue that they are right, but what we are really seeing is the idea of globally sourced services - and voice-based services in particular - growing up.

iSoftStone Completes US$45 million Series-B Financing with Fidelity Asia Ventures as Lead Investor

BEIJING, March 16 /PRNewswire/ --

iSoftStone Information Service Corporation, a leading IT outsourcing service provider in China, today announced it has successfully raised US$45 million Series-B Financing with Fidelity Asia Ventures, joined by Mitsui Ventures Global Fund, as well as previous investors AsiaVest Partners and InfoTech Pacific Ventures. Bocom Capital Partners acted as financial advisor to iSoftStone.

(Logo: http://www.newscom.com/cgi-bin/prnh/20070316/CNF016LOGO )

"The new round of financing will help further strengthen iSoftStone's global reach and delivery capabilities, deepen and widen our vertical domain expertise, and accelerate our expansion into new business areas in ITO and BPO," said Mr. T.W. Liu, iSoftStone's Chairman and CEO. iSoftStone's rapid expansion was achieved primarily through organic growth as well as successful mergers and acquisitions. "What differentiate us from our competitors are our experienced leadership team, well-established resource management platform, keen focus on building vertical domains and end-to-end service capabilities," added Mr. Liu.

"We are very excited about China's software outsourcing industry and believe iSoftStone has the most attractive attributes to succeed in this market," added Mr. Daniel Auerbach, Managing Partner of Fidelity Asia Ventures. "We look forward to collaborating with management to build a world-class organization." AsiaVest's General Manager of its Beijing office Mr. Peter Hsieh also commented, "AsiaVest is very proud of the progress iSoftStone has made after we led its Series A round a little over a year ago. We also welcome new investors Fidelity Asia Ventures and Mitsui Ventures as we believe them to be true value adding partners."

About iSoftStone Information Service Corporation

iSoftStone Information Service Corporation (iSoftStone) is a leading IT outsourcing service provider in China. Headquartered in Beijing, iSoftStone has offices in the United States, Japan, Korea, as well as Chinese domestic presence in Wuhan, Shanghai, Dalian, Wuxi, Shenzhen and Tianjin. iSoftStone is a CMMI Level 5 company and has been certified with ISO9001 and ISO27001 (BS7799). iSoftStone has over 2,500 full-time employees.

For more information, please visit http://www.isoftstone.com .

About Fidelity Asia Ventures

Fidelity Asia Ventures (FAV) is the Asian venture capital arm of Fidelity International Ltd., part of the global Fidelity investment organization. FAV has offices in Hong Kong and Shanghai and invests in high-quality, high-growth companies in the Asian information technology and healthcare sectors, focusing primarily on opportunities in China. FAV has a successful track record of investing in leading companies in the region over the past 12 years, including Alibaba, Hurray, AsiaInfo, Dianji Technology, Wuxi Pharmatech, Xunlei, Zhongsou, and Asia Renal Care. Sister fund, Fidelity Ventures, manages over US$800 million in investments from offices in Boston and London. For more information visit http://www.fidelityasiaventures.com .

About Mitsui Ventures

Mitsui Ventures ( http://www.mitsuiventures.com ) is the venture investment arm of Mitsui & Co., Ltd., an international trading and investment company headquartered in Tokyo, Japan ( http://www.mitsui.co.jp ). Independent of strategic objectives of Mitsui & Co.'s other business units, Mitsui Ventures acts as a financial investor and mainly provides early stage capital to entrepreneurial ventures in the world. Over the years, with a special expertise to accelerate business growth globally, Mitsui Ventures has invested in and contributed to the success of start-ups in the fields of communication, software, information services, life science, medical device, and retail services. Located in Tokyo, New York, Silicon Valley, Shanghai and Seoul, we currently manage over US$350 million in capital.

For more information, please contact: Sophie Yang iSoftStone Tel: +86-10-5874-9169 Email: jhyang@isoftstone.com Web site: http://www.isoftstone.com http://www.fidelityasiaventures.com http://www.mitsuiventures.com http://www.mitsui.co.jp

iSoftStone Information Service Corporation

Sophie Yang of iSoftStone, +86-10-5874-9169, or jhyang@isoftstone.com; Photo: NewsCom: http://www.newscom.com/cgi-bin/prnh/20070316/CNF016LOGO; PRN Photo Desk, 888-776-6555 or +1-212-782-2840

Published Mar. 16, 2007 — Reads 263

How To Buy A U.S. Outsourcing Company

Buying a U.S. company offers a quick and easy way for IT and IT enabled services (ITeS) firms to acquire a client base without having to undertake traditional sales and marketing efforts, efforts that can be expensive, time consuming and not always successful.

Buyers can take a modestly-performing U.S. company and shift some or all production and service operations to cheaper locations, cutting operations costs and increasing profit rates. This trend of buying and globalizing the operations of U.S. companies that have not made offshore tie ups or have made expensive ones is called the acquisition plus globalization (A+G) business model.

The A+G business model is particularly effective for firms such as call center or business process outsourcing companies that seek rapid growth without spending money on sales and advertising. For promoters of new ITeS and software services firms, the acquisition route to growth is the only way to quickly become a major player on a global level.

In this two series article, we begin by examining the advantages gained by both buyers and sellers. Next month's update will look at The role of investment banks in managing deal steps followed by a description of each principal deal step.

Advantages of Buying an Existing Firm

1. Instant sales force

The first advantage that an acquisition provides is an experienced U.S. sales force. Why do sales staff need to be localized? The answer is the same in all major markets.

In Japan, the Japanese prefer to buy from other Japanese. In Canada, Canadians prefer to buy from Canadians. The same is true in the U.S., where Americans like to buy from other Americans. Acquiring a U.S. firm and retaining the sales force and client relations managers (while moving production or service operations offshore) provides the best of both worlds: American sales expertise and cost-effective international talent.

2. Familiarity with market conditions

Familiarity with market conditions and client communities can be achieved by making a strategic acquisition. The advantages that non-U.S. firms bring to the global marketplace stem from access to highly-motivated, well educated labor forces that can outperform U.S.-based employees on a dollar-for-dollar basis. U.S. firms enjoy sales and marketing advantages bolstered by intimate familiarity with the U.S. economy and by long-standing client connections.

3. Instant client base

For most buyers from outside the U.S., the biggest advantage of buying an American firm comes from the acquisition of an established client base. This saves the buyer the time and money normally associated with having to build or expand their market presence from the ground up. The cost to operate a small U.S. sales and marketing office for outsourcing services can easily exceed half a million U.S. dollars per year. As many information-technology enabled services firms from outside the U.S. have discovered, even spending several times this amount every year can be insufficient to generate the type or amount of business that an ITeS firm is designed to be capable of handling.

4. Save time

It can save time buying an existing company versus attempting to win contracts through traditional means. Identifying outsourcing leads and beginning the sales cycle can easily take six months or more. The sales cycle for major inbound call center or business process outsourcing (BPO) contracts usually ranges from 6 to 18 months. At the end of this process, a firm can burn through more than a million dollars in sales and marketing expenses, spend two years in limbo—and still fail to gain any business. Meanwhile there is usually a professionally staffed outsourcing facility sitting idle somewhere, consuming additional funds.

Once a firm becomes established in the U.S. market, sales efforts can become self sustaining. But growth beyond a steady state can require incredible amounts of time and money. Strategic acquisitions of firms with established client bases offer a proven alternative that if properly conducted, is cheaper and less risky.

5. Avoid image problems

Buying an existing outsourcing services provider is a proven technique for avoiding the image problems that commonly handicap ITeS companies that are new or from emerging outsourcing destinations. Outsourcing service providers from outside the U.S. who have little or no U.S. experience are unlikely to reach high levels of growth and profitability in a market that is already staked out by well known Indian call centers and BPO service providers who are already well established in the U.S. Market entrants from emerging destinations outside India are finding that some potential clients are turning them down until those destinations have become more established and have proven themselves with major U.S. clients.

6. Gain an instant track record

An acquisition provides a buyer with an instant track record. New firms from established destinations are finding that without already having a strong track record with widely-respected clients, they are unable to establish themselves in the market. An acquisition of firm with a good client base can solve that problem.

7. Access capital

Buying an existing business can enable the new owners to borrow funds or raise additional capital. Additional capital can support moving production or service operations to more competitive locations. Buying a healthy public company in the U.S. enables more acquisitions to be made largely on the basis of stock trades, thereby allowing a company to generate its own expansion capital.

8. Improved process migration

In the ITeS field, attempts to ramp up customer service or BPO programs too fast can lead to outsourcing program failures. Buying an existing operation enables programs to be shifted gradually and for new staff offshore to be trained and coached in small batches, easing workloads for recruiters, trainers, and quality assurance staff. New programs can be tested and baselined in the U.S. before some or all of the work is shifted offshore. The U.S. facility can also provide quality assurance and an escalation path for offshore staff, or the offshore facility can serve in the same role for the U.S.-based operation.

9. Access to training and management staff

An acquired firm or business unit can help with process migration, training, and institution building. A constraint facing specialized operations offshore is the inability to find senior North American staff who are willing to spend long periods of time onsite. Buying an existing operation makes it easier to manage initial process migration and long-term program implementation. Managers from a purchased facility can be assigned to go overseas (possibly in month-long rotations) and managers and trainers from overseas can spend time at an acquired facility in the U.S.

The buyer's offshore managers and trainers should spend time at the newly acquired North American facility in order to gain the following:

* Domain expertise in the subject matter of the acquired firm
* Operations training
* Immersion in the corporate culture of both the acquired firm and its clients
* Personal contacts that unify business operations

In summary, growth through acquisitions may be the only feasible option for new entrants to Western markets. For existing offshore outsourcing service providers, growth through acquisitions can offer the cheapest, quickest route to expansion.

From here we turn to the advantages for sellers from selling their business, followed by a list of pitfalls facing buyers. The role of investment banks will then be outlined and the two principal types of investment banks will be distinguished. Last but not least, the process of completing an acquisition is described in eleven deal steps.

Advantages For Sellers

Owners can receive the following benefits from selling their business:

Exit strategy: Selling allows a seller to convert the equity built up in a firm to personal assets and to do so without damaging the firm. Going public and issuing stock as an exit strategy is now less feasible for mid-market firms in the U.S. because of the increased costs of maintaining a public company in compliance with the Sarbanes-Oxley Act of 2002.

Diversification: Business owners may have narrowly concentrated their personal assets in the company being sold. It is risky to concentrate assets in one or two companies, market sectors, or business models. Selling a business allows the seller to diversify their holdings, reducing risks and safeguarding their assets.

End liabilities: Owning a business entails major responsibilities and liabilities. Selling ends those responsibilities and liabilities. This is a principal motive for founders of small or mid-size Internet service providers and website hosting firms in the U.S., who are burned out and want an end to the responsibilities of running a high tech business.

Globalization: U.S. business owners may not have been able to develop their business through access to low-cost offshore production or service centers. The true value or potential of the business may not be realized until the business is sold. Selling a business to an international company that can globalize the business may be the best way to add value to a business and to make that business instantly more competitive. Even when an owner intends to step back from a business after it is sold, they may want their long-time colleagues to be able to profit from having the business globalized.

Pitfalls For Buyers

Buyers face the following pitfalls:

• Buying firms that are cheap but that face restrictions in their contracts with clients—restrictions that block processes from being shifted to any other location. These provisions may not be ‘stoppers’ but need to be carefully identified and considered.

• Approaching acquisitions randomly, entertaining offers from the first firms that present themselves for sale, and failing to contract for 75-125 prospects to be screened and vetted simultaneously. This often leads to overpaying for an acquisition.

• Failure to be properly advised about market entry strategies, current prices, and proper deal structures.

• Buying a firm that is too small to globalize production or service operations. In the collection and accounts receivables outsourcing industry, for example, firms with under 25 employees should generally be avoided.

• Buying a troubled firm that is cheap, but requires more intervention than a buyer is immediately capable of providing. Buyers risk assuming excessive financial liabilities from buying a troubled company.

• Only looking at companies that are already on the market and are therefore more expensive. An outsourcing firm that has already been put up for sale will likely be overvalued and suffering from sales stagnation or even client flight, since clients will be hesitant to do business with an outsourcing company whose future is uncertain.

Outsourcing To Win: 4 Steps To An Effective Strategy

Here's what experts say CIOs and managers need to know to effectively manage a team of outsourcers and get the biggest bang for their IT dollars.

By Paul McDougall
InformationWeek

March 9, 2007 08:20 AM

Next month, the U.S. government is expected to dole out one of the largest public sector contracts on record -- a $20 billion deal to revamp the telecommunications infrastructure used by virtually all major federal agencies. The project is called Networx, and to fulfill the deal contracting officials in Washington will tap a team of outsourcers comprised of some of the biggest names in tech services.

Create A Winning Outsourcing Team

1. Pick a "head coach" 2. Use standards religiously 3. Select team-oriented vendors only 4. Put balance in your lineup

It's an approach that contrasts markedly with some previous federal mega-projects, such as the Navy's 10-year effort to create the world's largest, most secure intranet, where a single outsourcer is handed the bulk of the work. The Navy awarded that contract to Electronic Data Systems in 2000. Now, however, federal officials say a different approach is necessary in an age in which outsourcing technology work means more than just handing over the keys to the mainframes, servers, and desktops.

"The team arrangement will provide us with all the components we need," says John Johnson, assistant commissioner for integrated technology services in the General Services Administration's Federal Acquisition Service, noting that the breadth of the Networx project -- it encompasses everything from VoIP installations to network security management -- is beyond the capabilities of a single vendor.

That kind of thinking is catching on with Johnson's counterparts in the private sector, CIOs at multinationals such as ABN Amro, General Motors, and Kimberly Clark. Those technology chiefs all hold sway at companies that in recent months have awarded billions in outsourcing contracts to teams of vendors in the hope of accessing so-called best-of-breed skills. "There is no single vendor who can satisfy all of our requirements... one size doesn't fit all," said ABN Amro CIO Lars Gustavsson last year, after he handed off the bulk of his IT operations to a team that includes Accenture, IBM, Infosys, Patni Computer Systems, and TCS, under contracts totaling more than $2 billion.

A recent study of the strategies of 108 global companies that externally sourced more than $1 billion in IT work in the last 10 years found that 44% of them used one service provider, compared with 56% who used two or more. Few went as far as ABN Amro, though: Only 20% used four or more service providers, according to the study, which was authored by research firm Technology Partners International.

That's likely to change as companies hand more of their critical IT functions to outsourcers. A CIO now wants enough service providers familiar with his company and its business so that it's possible to shift work among them and keep all the vendors competing for more work. "Having more providers creates healthy competition," says Gartner outsourcing analyst Kurt Potter.

Choose A Head Coach

But while splitting an outsourcing contract among multiple vendors holds a number of advantages, it also brings with it increased management challenges as vendors multiply and the number of "throats to choke" multiplies. "There's no question that it can be a more challenging environment from a management perspective," says Liz Campbell, a consultant at outsourcing advisory firm EquaTerra.

Campbell says most companies lack the necessary management structure to effectively manage a team of outsourcers. With businesses spreading work around to more and more external contractors, they need to elevate vendor management to the executive level and hire the equivalent of a chief sourcing officer, she says. "There are not a lot of individuals within a company that have the multidisciplinary skills required for that sort of role."

The skills needed to effectively manage a team of vendors include familiarity with contract law and negotiations, a technical background, and a sound grounding in project management techniques and tools, according to Campbell and other experts.

Beyond effective management, successful teaming requires an almost religious adherence to standards by contractors and in-house IT departments so as to prevent a confusing proliferation of processes and methodologies for dealing with issues such as server configuration, help-desk resolutions, security procedures, and the like. "You have to know how these things are going to get passed between providers to ensure they're not working at cross purposes," says Shawn McCray, practice lead for service management and governance at Technology Partners International.

Raise Your Standards

Among the more significant sets of standards gaining wider adoption for just those reasons is the Information Technology Infrastructure Library, which is published by the United Kingdom's Office of Government Commerce and specifies best practices for a number of IT functions, including change management, incident management, and security. "With ITIL processes and standards now in place for service delivery, vendors are theoretically capable of plugging their offerings into that larger framework to ensure there's compatibility across the board," says Gartner's Potter.

Indeed, ITIL compliance was a basic requirement for vendors bidding on the ABN Amro contract.

Powerful CIOs are also forcing vendors to pay more than lip service to those standards. Prior to awarding $15 billion in tech services last year to a team of outsourcers that includes Cap Gemini, Electronic Data Systems, Hewlett-Packard, and IBM, GM technology chief Ralph Szygenda brought representatives from those companies and others to the table to discuss ways in which they could better cooperate and adopt common processes."It takes the kind of leadership like we've seen at GM to drive the adoption of the standards necessary for successful, team-based outsourcing," says Potter.

It's a message that's not lost on outsourcers. Rising offshore star Cognizant Technology Services in January signed a five-year, multimillion-dollar deal to provide application development services to pulp and paper giant Kimberly Clark. In fulfilling the contract, Cognizant staffers will at times be working alongside contractors from offshore rivals Tata Consultancy Services and Genpact and North American-based procurement specialist ICG Commerce -- all of which have themselves recently won major outsourcing contracts from the papermaker.

Cognizant chief financial and operating officer Gordon Coburn says working in such an environment requires a change of attitude on the part of vendors that will find themselves hand in hand with rivals. "They are competitors, but more often now the obligation is to work side by side with them," says Coburn.

Team Players Only

Team-based outsourcing projects are becoming more successful because customers are getting more sophisticated in general when it comes to managing third-party service providers. "We see more companies instituting a program management office that can oversee all these relationships," says Coburn. India-centric IT firms such as Cognizant are increasingly being invited to bid on contracts that are global in scope but designed to be parceled out. The trend toward teaming up "gives us a chance for a larger share of these deals," he says.

The good news for CIOs looking to create an outsourcing tag team is that most vendors are getting the message that the ability to work cooperatively with rivals is becoming increasingly important in the selection process. "There's a growing awareness among service providers that to gain business, this is what they need to do," says Technology Partners International's McCray.

As part of its program management efforts, the General Services Administration has created a customer council comprised of technology officials from major federal agencies. The council is tasked with weighing in on project methodologies, standards, and vendor selection. The GSA's Johnson says it's a crucial vehicle for ensuring the success of a multibillion-dollar outsourcing project that could involve a team of up to a dozen vendors. "It's a forum where they can participate in requirements development and review drafts. This very much has to be a collaborative approach with the major stakeholders," says Johnson.

Create A Balanced Offense

The extra management overhead that will come with dealing with such a large roster of vendors is a price the GSA is willing to pay in order to get the expertise necessary to deploy Networx, Johnson says. The program envisions a government-wide, fully integrated computing and communications architecture to create what Johnson calls "a more seamless and interoperable government."

The effort entails installing state-of-the-art digital voice and data networks that will run over fiber optic lines at T3 speeds or higher. The end result will be a convergence of the computing and communications networks used by the federal government into a unified digital environment. To get there, the GSA needs contractors with both telecom and enterprise IT expertise. "The new technologies blur the edges between the two, so the team arrangements are designed to include expertise in both those areas," says Johnson. What's more, security will be paramount given that the program will extend not just to civilian agencies, but to the Department of Defense.

As a result, the vendor teams bidding on the Networx contracts -- expected to be awarded by April's end -- include major technology, telecom, and security players. One team comprises no less than AT&T, Bechtel, Cingular Wireless, Electronic Data Systems, Global Crossing, and Northrop Grumman. Another includes Computer Sciences Corp., Hewlett-Packard, MCI, and Verizon Wireless. Still another is made up of Hughes, Lockheed Martin, Sprint Nextel, and their subcontractors. "They all represent what we need to move toward a converged environment," says Johnson.

Once a team is selected, the GSA hopes to have Networx fully rolled out within two years. "We're delighted with what we've seen so far," says Johnson. "This is going to be a team effort."