The phrase “offshore outsourcing” has become ubiquitous in theInformation Technology (IT) industry. It is spread all over intrade publications, and you can hear it in many places rangingfrom the company boardroom to the water cooler. If you areinvolved with any facet of the IT industry, it is important tolearn more about this latest development in evolution of theindustry.
In this article, I will present an overview of the offshoreoutsourcing scene and the various ways in which companies areinvolved in offshore outsourcing. At the end, a set ofrecommendations is listed for business owners, managers, andother stakeholders who are considering offshore outsourcing fortheir organization. Please be advised this article onlyaddresses IT offshore outsourcing. It does not cover outsourcingin other industries.
Let’s start by defining the term “offshore.” Offshore in thephrase “offshore outsourcing” refers to any country where wagesfor IT professionals are substantially lower than in the US, UK,Western Europe, and Japan. The major destination countries foroffshore work are India, Russia, and Ireland. Other places tonote include countries in Eastern Europe, such as Ukraine andBulgaria, Brazil, South Africa, Israel, and China. Low wages inthese countries are a result of the low cost of living. Thewages in these countries can be anywhere from one-third toone-tenth of the wages for similar skills in Western markets. Itis worth mentioning that IT skills in these nations translateinto 20-50% higher salaries than their respective nationalaverage salaries for all professions.
Next, let’s define the term “outsourcing.” From a business pointof view, outsourcing is a situation in which a defined piece ofwork is performed by an external third party provider. At timesthe line of authority of an external provider can be blurry - aglobal company may pass around work among different departmentsspanning the company’s own offices in multiple countries.Generally speaking, however, outsourcing involves two or moreindependent companies working together. For example, AmericanCompany A prepares the specifications for a softwareapplication, and then passes it to Ukrainian Company B foractual design and development. After the work is completed,Company A receives the finished product from Company B. Softwaredevelopment is one type of IT work that can be outsourced.Remote system administration and product maintenance are someother types of work that are routinely outsourced by IT firms.
Putting our definitions of offshore and outsourcing together, wecan now effectively define IT offshore outsourcing – it is theoutsourcing of IT work to offshore countries. Offshoreoutsourcing is actually not a recent phenomenon. IT offshoreoutsourcing has been occurring as early as the 1970’s. Therewere several Indian companies that provided services to Americanfirms at that time. IT offshore outsourcing started to take offin the early 1990’s and gained further popularity during theInternet Boom of late 1990’s. Then, with the crash of theInternet Boom, offshore outsourcing came into center stage – thebiggest driver was the fact that businesses were scrambling tocut costs and offshore outsourcing provided a viable means oflowering cost of operations and new development.
Below are the different categories that can be used to groupcompanies working in the offshore outsourcing space -
Type I: Fully offshore. These are small companies operating inthe offshore countries. They can have anywhere from 1 to 50employees. A major feature that distinguishes these companies isthat they spend very little, if anything, on external marketing.Their business mostly comes from word of mouth promotion andreferral from existing clients. Rarely do they have offices incountries where their clients come from. Also, freelancers andinformal teams of friends and associates working together arepart of the Type I category.
Type II: Fully offshore with own representative office (formarketing, requirements engineering, etc.) in the clientcountries. Given the representative office in the clientcountries, Type II companies can more effectively get clientleads and market their services. Companies operating in thisspace are medium to large sized, with an employee pool rangingfrom 50 to several hundred. On the top rung in this category area handful of companies like Indian Satyam and Wipro, employingthousands and generating revenues in millions of US dollars.
Type III: Western companies with their own dedicated developmentcenters located in offshore countries. This arrangement iscommonly referred to as the hybrid model. Using their offshorecenters, Western companies can leverage their local talent inthe respective country and use it for a variety of tasks. Mostmajor global IT companies have a presence offshore, and nowseveral medium sized companies are also turning to thisalternative.
Type IV: Western companies acting as middlemen for offshorecompanies. Also known as service brokers, they maintain theirown network of offshore firms (mostly Type I). Type IV firms mayoffer end to end management of projects, including project andfinancial risk management, or simply introduce a Western companyto an offshore provider and charge a commission on the workperformed.
Following is a set of recommendations for using offshoreresources -
- Identify potential companies by inquiring in your circle ofassociates and checking online offshore provider directories.Unless your organization is fairly large, it would be ideal toapproach only Type I and III companies. Type II companies mostlywork with Fortune 1000 caliber clients.
- After identifying some prospects, learn as much as you canabout the company. Carefully look through their online casestudies and portfolios. If a company looks like a good candidatefor partnership, contact them for names, email addresses and, ifpossible, phone numbers of their existing clients. If theirexisting clients are established companies themselves, it is agood sign that the company you are considering is reliable.
- Once you have made a decision on partnering with an offshoreprovider, start by giving them small, non-essential projects orpieces of a project. This will allow you to assess therelationship without jeopardizing any of your own business incase the arrangement does not work the way you had envisioned.In which case, try to resolve the issues. Any reasonablebusiness owner will endeavor to work with his or her clientstowards a mutual resolution of any differences ormisconceptions.
- Be sure to have risk management mechanisms in place and signservice level (SLAs) agreements with your offshore partners. Asthe situation requires, non-compete and non-disclosureagreements may also be signed. Before sending off work to anoffshore provider, it is well worth the time to lay out formalprocedures to respond to events like network crashes (at yoursite or the provider’s site) and deadline extensions.
Offshore outsourcing has become an integral part of the ITindustry. In the next few years, its role will only become moreimportant. Gartner Research predicts that 25% of IT jobs will be“offshored” by year 2010. The question organizations will ask isnot whether they should outsource, but which offshoreoutsourcing strategy best fits their needs.
About the author:Dep Deol (dep@route55.com). Dep is an offshore project managerand strategy consultant. He has worked onsite with offshorepartners and consulted on projects for using offshore strategiesand setting up offshore development centers.
No part of this article should be copied, reprinted orrepublished without the author’s permission. Please contact theauthor with any questions regarding the article.