Offshore Outsourcing:
Making the Best Business Decision

Offshore outsourcing is one of the hottest topics in IT today, from the political issues it raises to the perceived savings it promises. But regardless of the publicity (bad and good), businesses are arriving at a simple conclusion: To remain competitive, they need to strike agreements with offshore vendors and service providers.
In other words, the decision to outsource has less to do with politics and perception than basic business necessity. Our research indicates that leading IT organizations (ITOs) are establishing enterprise-wide offshore strategies. They’re being created, evaluated, and endorsed at the CIO/CFO level with the intention of motivating project managers to seriously consider offshore outsourcing—and to drive its consistent, systematic adoption.
Ensuring a successful offshore strategy means creating guidelines on what kind of work is most appropriate to send offshore. It means establishing a consistent contracting structure for various types of engagements— and easing the fear of outsourcing inside the organization. And it means uncovering the hidden costs, so that offshore outsourcing delivers on its promises and doesn’t derail business plans.
Which Work Goes Offshore?

Although 45 percent of ITOs have engaged in some form of offshore outsourcing, only 4 percent have outsourced more than 30 percent of their application work. Indeed, 88 percent of ITOs have sent less than 10 percent of their application and development work offshore.
Although approximately 30 percent of overall application work is not appropriate to send offshore (for privacy, national security, regulatory, or similar reasons), we estimate that, by 2010, approximately 40 percent of all application work will be performed offshore. This estimate allows for tremendous market growth within the IT sector.
But just what kind of application work should be outsourced? Few IT managers have developed models or conducted analyses that give a clear picture of success rates. Until that picture emerges, the decision will vary from organization to organization.
However, we find that the offshore S-curve model furnishes a general guide (see Graphic 1). Shown at the bottom right are those functions that are increasingly moving offshore. Traditionally, functions like systems management and monitoring were addressed internally, but the offshore monitoring/management market is growing quickly. At the top left are functions involving business process outsourcing (BPO).



The best candidates for offshore work are low-value-add functions. This has nothing to do with their perceived importance—but rather with the fact that the processes are commonly known and can be easily measured. Also, this kind of work is generally thought to be less desirable by internal employees. Indeed, many CIOs have found that giving documentation projects to offshore vendors is quick and cost-effective.

Optimizing Outsourcing.

Ram Mynampati President, Healthcare & Commercial Business Satyam Computer Services

“Offshoring offers significant benefits—from cost reductions and capacity augmentation to shortened delivery times and accelerated time to market. But every organization is driven by a different business objective. That’s why it’s important to focus on the specific reasons to offshore, the investment it requires, and the payback it delivers. Companies also need to build awareness inside the organization on the reasons for offshoring— and its business benefits”.

Similarly, many ITOs are outsourcing testing and quality assurance functions, even if the application work remains in-house. This dramatically speeds up the development cycle, since testing can be conducted overnight offshore, and errors corrected immediately the following day. In fact, some ITOs report project-cycle improvements of more than 30 percent.
Of course, the offshore market is best known for maintenance of legacy applications. Application services are also maturing, and our research indicates that packaged application configuration and implementation is an increasingly viable alternative to expensive systems integrators. Indeed, a recent review of financial reporting by offshore vendors shows that more than 25 percent of their application work is in packaged applications, a significant shift from just a few years ago.
ITOs must continue to take leadership in the business analysis and overall technology or application architecture into which the offshore project fits. Vendor personnel can be effective members of the team, but they should be led by internal personnel who are familiar with the business objectives and experienced in making key decisions. As offshore vendors expand their
consulting organizations, they’ll become more adept in these areas—and perhaps even superior to internal staff. In these situations, the offshore vendor will be acting as a change agent and likely delivering a transformational or a re-engineering project that changes both business and IT.

In BPO engagements, it is still critical to align the infrastructure and operations with the vendor. Security policies and procedures, compliance requirements, change management, and problem management cannot be left to chance. Increasingly, we observe that leading ITOs document the vendor and the client processes and, in some cases, put metrics in place to continuously monitor the touch points between the two organizations. Although the offshore industry has been primarily focused on applications, such operational alignments are less common and will require both clients and vendors to mature in methods and processes of integration.

META Group believes that offshore outsourcing will become a common delivery model over the next five years, encompassing various technology functions and business services. We advise all ITOs and businesses generally to prepare for offshore outsourcing—and to make working with global resources a core competency.

Think Strategically

Lakshmi Narayanan President and CEO Cognizant Technology Solutions

Companies that have already experienced
success with offshore outsourcing need more than
programmers. They’re looking for strategic partners.