Offshore Application Offshore Application OutsourcingOutsourcing

Rick HerbstRick Herbst

Historical BackgroundHistorical Background

• Offshore Application Outsourcing (AO) Offshore Application Outsourcing (AO) began to take shape in early 1990’s.began to take shape in early 1990’s.

• India was and still is the predominant India was and still is the predominant offshore provider.offshore provider.

• Offshore model began by bringing Offshore model began by bringing contractors to U.S. on H1-B visa’scontractors to U.S. on H1-B visa’s

• By mid-late 90’s, the .com boom and Y2K By mid-late 90’s, the .com boom and Y2K efforts had companies shipping work efforts had companies shipping work overseasoverseas

OverviewOverview

• Offshore AO providers have made significant Offshore AO providers have made significant improvements through their adoption of the improvements through their adoption of the CMM.CMM.

• Approximately 70 publicly traded companies Approximately 70 publicly traded companies have achieved CMM Level 5, 50 are located in have achieved CMM Level 5, 50 are located in India.India.

• Majority of U.S. companies are estimated to be Majority of U.S. companies are estimated to be within Level 1-2 of CMM.within Level 1-2 of CMM.

Components:Components:Capability Maturing ModelCapability Maturing Model

Repeatable(2)

Repeatable(2)

Defined(3)

Defined(3)

Managed(4)

Managed(4)

Optimized(5)

Optimized(5)

Initial(1)

Initial(1)

ComponentsComponents

• CMM disparities must be dealt withCMM disparities must be dealt with– Offshore is Level 5 and U.S. is Level 2Offshore is Level 5 and U.S. is Level 2– Offshore is Level 5 and U.S. is Level 5Offshore is Level 5 and U.S. is Level 5

• Pricing modelPricing model– Fixed monthly feeFixed monthly fee– Fixed bidFixed bid– Time and Material (T&M)Time and Material (T&M)– HybridHybrid

BenefitsBenefits

• Cost is often considered the driving factor and benefit, but there Cost is often considered the driving factor and benefit, but there are many other benefits:are many other benefits:– Cost reductionCost reduction– Improve service levels to customersImprove service levels to customers– Focus on core businessFocus on core business– Scalability and flexibility in application resources / capacityScalability and flexibility in application resources / capacity– Upgrade application quality, processes, methodologiesUpgrade application quality, processes, methodologies– Access to critical technical skills and resourcesAccess to critical technical skills and resources– Optimize performance of application staffOptimize performance of application staff– Reduce application staff headcountReduce application staff headcount– Technology transformation (re-host, re-platform)Technology transformation (re-host, re-platform)– Enhance e-business applicationsEnhance e-business applications

When to Use / When to When to Use / When to AvoidAvoidUseUse• Begin small. Many companies start with legacy Begin small. Many companies start with legacy

support of mainframe apps, then move client/server, support of mainframe apps, then move client/server, then web-based appsthen web-based apps

• Conversion / migration projectsConversion / migration projects– The “old” systems typically have reams of The “old” systems typically have reams of

supporting documentation as well as the code itself supporting documentation as well as the code itself provides documentation. provides documentation.

– Divest from obsolete, unsupported technologyDivest from obsolete, unsupported technology

• New application development projectsNew application development projects

AvoidAvoid• Applications that provide strategic or competitive Applications that provide strategic or competitive

advantageadvantage

When to Use / When to When to Use / When to AvoidAvoid

Source: Gartner Research (August 2003)

High

IndiaIndia RussiRussiaa

IrelanIrelandd

ChinaChina PhilippinePhilippiness

Government Government SupportSupport

Labor PoolLabor Pool

InfrastructureInfrastructure

Educational Educational SystemSystem

Cost AdvantageCost Advantage

QualityQuality

Cultural Cultural CompatibilityCompatibility

English English ProficiencyProficiency

MediumLow

Success Factors:Success Factors:Country Evaluation CriteriaCountry Evaluation Criteria

General Technical

Cultural compatibility (similarity of values) Connectivity

Adherence to RFP and presentation guidelines Proven expertise in existing or proposed system

Individuals and collective team presented Proven expertise in existing or proposed infrastructure

Level time frame guarantee for use of resources Ability to define all layers of security

Project Specific Factors Organizational Profile

Cost Financial stability of Provider

Time to Market Vision

Local presence in your market Core competencies

Revenue / profitability

Industry and Business Process Expertise Attrition rates

Industry expertise Client portfolio

Specific business process expertise Management team

Number of years in business

Application Specific

Overall ability to develop applications architecture Reference checks

Relative experience with software packages

Relative experience with languages and tools

Ability to integrate packages

Understanding of legacy applications

Formal partnerships & alliances with applic. vendors

Number of trained (certified resources) available

Success Factors:Success Factors:Provider CriteriaProvider Criteria

• A solid SLA will help both organizations A solid SLA will help both organizations improve their relationship as it objectively improve their relationship as it objectively quantifies expected results and reduces quantifies expected results and reduces ambiguity. ambiguity.

• Take time to develop:Take time to develop:– Meaningful measurements Meaningful measurements – Frequency of report distribution and reviewsFrequency of report distribution and reviews– Accountability for gathering the information Accountability for gathering the information – Source of the data Source of the data – Targets expected to be achievedTargets expected to be achieved– Escalation proceduresEscalation procedures

Success Factors:Success Factors:Service Level Agreements Service Level Agreements (SLA)(SLA)

Success Factors:Success Factors:Sample SLASample SLA

Performance Ranges

Acceptable (Green Zone)

Marginal (Yellow Zone)

Unsatisfactory (Red Zone)

Performance Metrics Meeting Project Schedules 90% 85% 80% First-Day Failures 3% 7% 10% Bug Fix on Time (by priority schedule) 95% 92% 88% Requests for Estimates (one week) 90% 85% 80%

Quality of Service Teamwork of IT Personnel 4.5/5.0 4.2/5.0 4.0/5.0 Version Currency (by schedule) 98% 95% 93% Post-Project Reviews 4.5/5.0 4.2/5.0 4.0/5.0 Customer Satisfaction Customer Satisfaction Survey 4.8/5.0 4.5/5.0 4.3/5.0 Source: Meta “Group, Service-Level Agreements: A Framework, Template, and Implementation Toolkit”, 2001.

Risk management is the process of Risk management is the process of identifying, analyzing, and mitigating identifying, analyzing, and mitigating potential risks while balancing the potential risks while balancing the cost of protecting the company cost of protecting the company against the risk versus the cost of against the risk versus the cost of exposure to the risk. exposure to the risk.

Success Factors:Success Factors:Risk ManagementRisk Management

Success Factors:Success Factors:Categories of RiskCategories of Risk• Technical. Outsourcer builds applications on

different hardware, applications are developed using bleeding edge technologies, quality suffers as a result of unclear understanding of business requirements

• Organizational. Declines in employee morale, communication and coordination between parties become more difficult due to time zone difference and language, managers must deal with distrust factor team members may experience when they are isolated from one another, resentment as a result of pay disparities.

• Legal. Exposure to lawsuits against the vendor and data privacy concerns. Lawsuits against the vendor may decrease the vendor’s ability to fulfill the terms of the contract.

• Geopolitical. Threats of war and/or terrorism, international politics.

MetricsMetrics

If you don’t know where you’re going, If you don’t know where you’re going, a roadmap won’t help.a roadmap won’t help.

Establish targets, then monitor and Establish targets, then monitor and measure your progress.measure your progress.

Metric – sampleMetric – sampleConsultant usage by Area & CategoryConsultant usage by Area & Category

Total SM&D Serv. Parts Mfg Purchasing Engrg Finance Proj. Office

Offshore Cons. Hours 69,778 5,801 7,731 24,932 0 30,084 0 1,230$'s $1,770,367 $117,905 $83,200 $603,838 $0 $928,524 $0 $36,900Average Rate $25.37 $20.32 $10.76 $24.22 $30.86 $30.00% of Cons Hrs 23.0% 6.2% 17.1% 24.9% 0.0% 72.6% 0.0% 9.2%% of Cons $'s 9.8% 1.8% 3.0% 11.3% 0.0% 50.0% 0.0% 3.5%% of Total Hrs 8.7% 3.3% 5.6% 7.6% 0.0% 44.1% 0.0% 3.4%

On/Off Shore Cons. Hours 20,911 8,301 1,681 8,428 1,661 0 0 840$'s $1,073,432 $445,687 $36,000 $462,015 $83,050 $0 $0 $46,680Average Rate $51.33 $53.69 $21.42 $54.82 $50.00 $55.57% of Cons Hrs 6.9% 8.8% 3.7% 8.4% 20.8% 0.0% 0.0% 6.3%% of Cons $'s 5.9% 6.9% 1.3% 8.7% 18.5% 0.0% 0.0% 4.4%% of Total Hrs 2.6% 4.7% 1.2% 2.6% 12.7% 0.0% 0.0% 2.3%

U.S. Based Cons. Hours 212,396 79,903 35,850 66,965 6,317 11,367 642 11,352$'s $15,220,966 $5,935,917 $2,688,454 $4,269,732 $365,946 $927,520 $67,410 $965,987Average Rate $71.66 $74.29 $74.99 $63.76 $57.93 $81.60 $105.00 $85.09% of Cons Hrs 70.1% 85.0% 79.2% 66.7% 79.2% 27.4% 100.0% 84.6%% of Cons $'s 84.3% 91.3% 95.8% 80.0% 81.5% 50.0% 100.0% 92.0%% of Total Hrs 26.4% 44.8% 26.1% 20.3% 48.5% 16.7% 1.5% 31.4%

Total Consultants Hours 303,085 94,005 45,262 100,325 7,978 41,451 642 13,422$'s $18,064,765 $6,499,509 $2,807,654 $5,335,585 $448,996 $1,856,044 $67,410 $1,049,567Average Rate $59.60 $69.14 $62.03 $53.18 $56.28 $44.78 $105.00 $78.20% of Total Hrs 37.7% 52.7% 32.9% 30.5% 61.2% 60.8% 1.5% 37.1%

All Groups SM&D Serv. Parts Mfg Purchasing Engrg Finance Proj. Office

New Development U.S. Based Hours 178,106 55,824 20,644 45,083 4,525 9,004 642 9,905%age 41.6% 60.6% 38.4% 38.2% 59.2% 18.5% 4.3% 46.4%

On/Off Shore Cons.Hours 30,727 7,139 1,681 8,429 1,259 0 0 840%age 7.2% 7.7% 3.1% 7.1% 16.5% 0.0% 0.0% 3.9%

Offshore Cons. Hours 90,629 5,801 7,731 24,263 0 30,084 0 1,230%age 21.2% 6.3% 14.4% 20.6% 0.0% 61.7% 0.0% 5.8%

Sub-Total Hours 428,171 92,133 53,818 118,058 7,644 48,748 14,869 21,366

Enhancement U.S. Based Hours 10,725 336 9,187 0 315 834 0 0%age 15.3% 100.0% 29.3% 0.0% 41.0% 11.4% 0.0%

On/Off Shore Cons.Hours 877 0 0 0 207 0 0 0%age 1.3% 0.0% 0.0% 0.0% 27.0% 0.0% 0.0%

Offshore Cons. Hours 302 0 0 302 0 0 0 0%age 0.4% 0.0% 0.0% 1.3% 0.0% 0.0% 0.0%

Sub-Total Hours 70,060 336 31,307 23,733 768 7,311 4,726 0

Support U.S. Based Hours 54,764 19,897 6,020 21,881 1,478 1,530 0 1,448%age 14.6% 25.1% 12.7% 11.7% 31.9% 12.6% 0.0% 48.1%

On/Off Shore Cons.Hours 2,939 1,162 0 0 196 0 0 0%age 0.8% 1.5% 0.0% 0.0% 4.2% 0.0% 0.0% 0.0%

Offshore Cons. Hours 368 0 0 368 0 0 0 0%age 0.1% 0.0% 0.0% 0.2% 0.0% 0.0% 0.0% 0.0%

Sub-Total Hours 375,472 79,373 47,306 187,308 4,626 12,158 22,820 3,013

Metric – sampleMetric – sampleConsultant usage by Area, Category & Consultant usage by Area, Category & Type of WorkType of Work

IT Consultant Trends Summary

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Months: May, Aug, Nov, Jan & April 04 represent 5 week Months

Billable Hours

$40

$45

$50

$55

$60

$65

$70

$75

$80

Avg Rate

Total Avg Hourly Rate $59.29 $60.52 $61.69 $59.52 $60.54 $58.80 $58.17 $58.11 $54.71 $52.27 $54.17 $53.93 $52.78 $55.99

Offshore Hours 7,467 7,270 6,934 7,133 6,711 8,270 7,671 7,890 9,642 8,903 8,794 8,174 8,074 7,971

Onshore/Offshore Hours 3,029 3,162 3,395 2,652 2,190 2,501 2,169 2,538 2,792 1,862 1,887 2,054 2,488 2,300

US Based Hours 18,489 18,637 21,120 17,580 17,036 22,345 19,193 20,005 21,773 15,278 18,141 18,228 16,604 20,005

Total Hours 28,984.9 29,068.8 31,448.6 27,365.0 25,937.0 33,116.0 29,033.0 30,433.0 34,207.0 26,043.0 28,822.0 28,455.5 27,165.3 30,275.5

Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04

Metric – sampleMetric – sampleMonthly Trends of Consultant UsageMonthly Trends of Consultant Usage

Marketplace Analysis:Marketplace Analysis:CountriesCountries

Ireland Russia

Philippines

China

India

Marketplace Analysis:Marketplace Analysis:Major ProvidersMajor Providers

Vendor

Corporate Viability

Application Development

Tata Consultancy Services Positive Strong Positive Wipro Technologies Positive Strong Positive Patni Computer Systems Ltd. Promising Positive Infosys Technolgies Positive Strong Positive HCL Technologies Positive Positive Covansys Corporation Promising Positive Conizant Technology Solutions Positive Strong Positive

o Strong Positive: Solid provider of strategic products, services or solutions. o Positive: Demonstrates strength in specific areas, but is largely opportunistic. o Promising: Shows potential in specific areas; however, initiative or vendor has not fully

evolved or matured

Trends in Offshore Application Trends in Offshore Application OutsourcingOutsourcing

Source: Gartner Group

“By 2005, 30 percent of global-2000 companies will have a sourcing strategy

encompassing near-shore or offshore solutions.”

Onshore contract workers

Onshore project teams

Onshore / Offshore projects

Offshore development centers

Time

Increasing

Stability and

Persistence

Typically results in

75% development being done offshore

Trends in Offshore Application Trends in Offshore Application OutsourcingOutsourcing

“Continued financial pressures at home and improved worker skills abroad will ultimately push 60 percent of large companies’ software development work offshore, according to a new report from META Group. “Application development and maintenance constitutes approximately 30 percent of total spending for the average IT organization,” said Dean Davison, a vice president with the IT researcher. “Offshore typically reduces that expense by 30 percent, but introduces additional risks and challenges.” Based on a survey of 13 companies using offshore facilities, META Group estimates the market will grow by more than 20 percent per year through 2005. Much of the work will go to India-based firms.”

“The study also concludes that most IT organization will have an offshore strategy by 2006.”1

Case Example – Truck Case Example – Truck Manufacturing CompanyManufacturing Company

Provider-1 selected to perform application development

Two pilot projects initially selected:

Project-1 involved migration from RAMIS to FOCUS

Project-2 involved development of a new web-based application

Provider-2 selected to perform ERP application support

Pilots allowed for evaluation of:

Technical capabilities of the Provider

Tele-communication integrity, effectiveness and reliability between the two companies

Internal process capability of the truck company

Effectiveness of communications amongst the teams

Background

Provider-1: Application development

Project-1 Successful all around.

Project-2: Several key problems

• VPN connection pipe was too small to support developers and testing to customer’s site

• Level of requirements documentation given to Provider was inadequate

• Change control process not properly defined upfront

• Time difference (11.5 hours) surfaced communication issues

Provider-2: Application support

Relatively successful. Main issue was inadequate requirements documentation given to Provider

Results

Lessons Learned

• Start out with small projects

• Improve internal processes before making huge commitments with offshore Provider’s.

Case Example – Truck Case Example – Truck Manufacturing CompanyManufacturing Company

Questions?Questions?