April 22, 2013, 4:41 PM — Last week, CIO.com offered seven lessons of the IT offshoring pioneers who have navigated a changing IT offshoring terrain and learned what works--and what doesn't. This week we offer seven more bits of wisdom accrued over nearly 20 years.
1. Expand Your Horizons
Once upon a time, India was the only destination for offshore IT work. And it remained the premier location--in terms of maturity, skills, and scale--for years. But, as the offshore pioneers learned the hard way, geographic diversity is important. And today's CIOs have more viable options than ever before.
"Philippines and nearshore destinations in Latin America and Eastern Europe witnessing growth across IT and business process outsourcing," says says Jimit Arora, vice president of IT services research for Everest Group. "Within India, clients are getting comfortable with a combination of locations including tier two and tier three cities. Concentration, risk diversification, and access to talent are the primary drivers for this."
[ IT Outsourcing in Latin America: 9 Things Your Vendor Won't Tell You ]
Smaller customer may find it difficult to diversify geographically, points out Esteban Herrera, partner with outsourcing consultancy Information Services Group (ISG). "But if you look at the large companies that have been successful, almost all of them will have multiple service providers across multiple geographies. Putting all your eggs in one basket is bad investment advice--and it its bad offshoring advice, too."
2. Focus on People First
Many offshore providers are tier one providers in their own right, but experienced offshore customers know your deal is only as good as the people the provider puts on your account. "The offshore market remains a primarily talent game, and a client's offshore experience will depend significantly on the people the provider brings to the table," says Arora of Everest Group.
"Getting a 'C team' from a brand-name leading tier one provider is not necessarily a better option if you can get the 'A team' from a tier two." Similarly , those establishing their own captive operations may find their ability to attract talent in Manila is more difficult than in Cebu. "Making portfolio choices that are correct for your situation is critical," Arora says.
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3. Maintain a Healthy Onshore Presence
"Companies are more selective and reserved about what they send out, particularly offshore, and they have pulled some of it back in house," says Adam Strichman.
"I know many companies who use large offshore shops for work but require significant 'landed resources' here at home to ensure they have lots of butts in seats at their offices," Strichman says. "This is very different from the original models we did in the late 90s."
Mature users of offshoring might be comfortable having simple application maintenance tasks done entirely offshore, but staff more strategic projects with a mix of local in-house and outsourced professionals.
4. Managed Services is the Future
Offhsoring customers have moved through various offshoring models over the years--from simple pay-by-the-hour contracting to skills-based captives, which they then sold off. Today they're entering what can best be described as a managed services phase, says Michael Engel, partner with outsourcing consultancy Sylvan Advisory.
"They've built up enough trust with their providers and competence in their management teams to move to an outcomes-based relationship." Such deals make costs more predictable and shift cost management to the suppliers. "Suppliers like this type of arrangement because it allows them to be more flexible in their staffing, and it encourages them to be more innovative with their tools and techniques," Engel says.
Mature customers are looking to managed services for data center and storage services. "This outcome-based method of outsourcing leverages not just the labor arbitrage of an offshore model but also the standardization, process optimization, expertise and economies of scale that offshore providers have been able to achieve," says Craig Wright, principal with outsourcing consultancy Pace Harmon.
5. Portfolio Management Isn't Just for Projects
Offshoring veterans have begun to apply the practice of portfolio management to their outsourcing relationships. "The portfolio based approach affords the buyer of IT services an algorithmic means of determining the best placement of services," says Engel of Sylvan Advisory.
"By inputting the key project requirements around timing, language, complexity, proximity, etc. project assignment suggestions are generated. This allows buyers to procure services up and down the stack from the right providers in the right locations," Sylvan says.
The portfolio management approach enables offshore buyers to make more informed decisions about the true costs of rural sourcing and captive centers, for example. It has also given rise to an emerging delivery model around rural sourcing and captive centers.
6. Reinvest Your Savings
Offshoring still saves money, but forward thinking customers set aside some of that savings to increase internal strength. "Reinvest some of those savings in improving the value and relevance of your IT leadership," advises Phil Fersht, CEO of outsourcing analyst firm HfS Research. "Surround yourself with a great team of technology innovators and use IT outsourcing to create flexibility and execute on the vision."
7. A Good Offshore Deal is Never Done
The offshore pioneers have grown adept at regular evaluation and adjustment of their offshore relationships. "Seldom does anyone get it exactly right the first time," says Brown of Mayer Brown. "Adjustments in procedures, people, and perhaps even parts of functions chosen for offshoring are inevitable."
As the market for offshore services has grown and changed over the years, so have the strategies of the most successful customers.
"Many of the offshoring pioneers have recognized the significance of the changes in offshore value drivers over time, acknowledging outsourcing as an indispensable part of their organizational capabilities, and have been prepared to adjust the outsourcing model to improve the overall value proposition for an outsourced service based on the current market state," says Wright of Pace Harmon. Service-level agreements--and the behaviors and performance trends they drive, will require regular tune-ups.
"Stop viewing outsourcing as 'done' once you've done a deal," says Fersht of HfS Research. "You don't want to judge your current engagements on goals and metrics set three, four or five years ago. You need to keep your metrics and goals far more fluid and work more closely with your providers to ensure these are relevant to your overall business objectives."
Read more about outsourcing in CIO's Outsourcing Drilldown.