April 22, 2013, 10:00 AM — It's been almost 20 years since the first CIOs began sending work offshore--at that time to a nascent IT services industry in India.
Companies in the financial services, manufacturing, high-tech, and telecom industries led the way, but none made a more public splash that GE. So when the poster child for offshoring pioneers announced it would bring some of those IT tasks back home, one might have wondered if it was a sign that IT offshoring was on its way out.
Less than five percent of companies say they are bringing work back onshore, according a recent survey of 400 enterprises by HfS Research and KPMG. In many cases, companies are sending more--and more complex--IT tasks offshore, says Jimit Arora, vice president of IT services research for Everest Group.
"I can't think of a single company that has less offshore work today than it did 10 years ago," says Esteban Herrera, partner with outsourcing consultancy Information Services Group (ISG), "with the possible exception of GM, which has undertaken a large and publicly visible program to bring IT jobs back to the U.S."
"Economic imperative and the need to remain competitive have made offshoring an essential part of nearly every company's sourcing strategy," says Paul Brown, partner with law firm Mayer.
The only questions are what to offshore and how to offshore it.
For answers, we can look to those offshore pioneers who have navigated a changing IT offshoring terrain and amassed more than a decade's worth of lessons about what works--and what doesn't--that often get overlooked.
"Unlike, say technology adoption, where newer adopters are able to bypass previous technology cycles and get to a newer model quickly, in the offshoring market we see the relative newcomers not benefiting adequately from the lessons learned," says Arora. "Outsourcing is a journey but it is not necessary for IT leaders to retrace the path followed by the pioneers."
CIO.com has identified 14 of the most important lessons from the earliest adopters of offshoring. In part 1, we look at the first seven.
1. Captive Centers May Not Be Worth It
Many early proponents of offshoring IT set up their own IT delivery centers offshore. Even those that didn't saw that as a goal in the early years of offshoring. Since then, many of those so-called captive centers have been sold or spun off. "There are very, very few new captives being built today," says Herrera, "and many of the ones that are do not sit in India, but rather in Latin America, Eastern Europe, and South Africa."
There are still some situations where captives make sense, says Brown, such as development centers for technology companies or facilities that handle sensitive data for regulated industries. But those experienced with offshoring are more likely to pursue a hybrid model, working with a service provider that sets up a dedicated center with operating procedures and controls established by the customer. "In one of the deals we handled, the service provider was used to migrate various functions offshore where some of the functions remained with the service provider and other functions, along with the service provider employees performing them, subsequently transferring to the customer's captive facility which the service provider helped establish and manage."
2. A Single Provider Is Not Enough...
In the 1990s, many of the first offshore outsourcing customers who signed deals with Indian companies to handle application development, maintenance, or Y2K issues expanded their offshoring footprint to include service desk, end user computing, server and storage management, network and voice management, remote infrastructure monitoring and support, and IT service management. But they did it all with a single provider. "Today many of those organizations have revisited the mega-deal structures, selectively pulling services and functions into an onshore or even insourced delivery model," says Craig Wright, principal with outsourcing consultancy Pace Harmon.
3. ... But Too Many Vendors Spoil the Model
Those offshore IT service providers who swung too far in the other direction--inking deals with a multitude of providers for increased competition, redundancy, risk management, or access to skills--also lived to regret it.
"Don't go too crazy on the multi-vendor model," advises Phil Fersht, CEO of outsourcing analyst firm HfS Research. "Too many clients are stuck in complex and slow-moving situations where they are trying to manage too many vested parties and losing site of the broader goals."
4. Invest in Good Governance
Early adopters have developed sophisticated centers of excellence to manage their complex offshore portfolios. "Governance is key to the success of the program, and most organizations tend to under estimate the importance of this dimension," says Everest Group's Arora. "In an outsourcing relationship, the majority of value captured is from execution, not contract design, pricing, or other upstream activities."
The most successful offshore arrangements give careful attention to management personnel who move from offshore to onshore and vice versa, regular meetings between onshore and offshore teams, and tools and procedures for effective communication and collaboration, says Brown.
5. Nobody Saves 70 Percent Offshore
The most successful users of offshoring may not even save 30%. "Offshore savings are universally exaggerated," says Adam Strichman, founder of outsourcing consultancy Sanda Partners. "Many retained functions actually increase in cost. Offshoring will save your budget line that involves the labor in IT, but it will increase costs for other budget lines, such as security, communications, travel, and hardware."
"The promised cost savings can be elusive if you look at just wage differentials," says Everest Group's Arora. "Recognizing this upfront is important to avoid surprises later on when the planned savings don't materialize From a pricing perspective it is important to realize that you get what you pay for.
6. Be Kind to Your Offshore Partners
The lure of early offshoring was the promise of lower costs. But, "the lowest cost solution at times is often lowest quality, too," says Arora.
Not only do mature offshore buyers look beyond cost when setting up their offshore partnerships, they realize that beating up their providers--on cost or anything else--will come back to hurt them.
"IT budgets are under pressure year-on-year and if a client beats the provider down on price every year, quality will suffer," says Arora. "The larger clients are learning this the hard way, and hence being fair in pricing will be important to retaining quality."
"You must be invested in your service provider's success," adds Herrera. "Offshore pioneers recognized working remotely would have some challenges--culture being perhaps the most significant--and definitely made extra efforts to ensure mutual success. Relationships that turn adversarial tend to have one or both parties unconcerned about the others' results."
7. Some Things Weren't Meant to Go Offshore
Premium-level customer service. Graphical user interface design. Highly collaborative development work or business processes. Lots of early offshore users learned the hard way that not everything is suitable for offshore deliver.
"The industry has grown immensely because so much is indeed suitable for offshore, but there are some niche services that seem to be best left onshore or nearshore," says Herrera. "Strategic development projects are best left to people who have deep experience with the business, which generally does not include people on the other side of the globe who you have never met," says Strichman.
On Monday, we'll look at seven more lessons of IT offshoring pioneers.
Read more about it organization in CIO's IT Organization Drilldown.