Business outsourcing has been a topic of interest ever since the first merchant ran out of floor space, but of course, much has changed. Today, every sort of e-business rationale is associated with handing off duties to second and third parties: cost, scalability, fast-changing industries, core-process focus, the economic downturn, et cetera. In its heyday though, the e-business boom proved proved that outsourced efficiency wasn't found only in places like North America and Europe. The years surrounding Y2K pushed borders and gave offshore service providers the chance to prove their mettle, which they did. India-based developers who, by estimates, hold 85-90 percent of the offshore outsourcing market today are still growing between 20 and 24 percent annually, (according to NASSCOM, which speaks for the Indian software industry). "Two years ago, we would have been talking about resources and the lack thereof," says Stephen Lane, research director at Aberdeen Group. "Now, companies are making [outsourcing] choices. The growth rate has slowed, but the greatest amount of activity today is offshore."

A casual observer might miss it, but offshore outsourcing is 'in' more than ever, with more mature models and impressive talent on tap in India and elsewhere. While the main purpose of offshore outsourcing appears to be cost management through wage arbitrage, there's more to it than that.

Avoiding a Collision

Jim Beattie is chief technology officer at CCC Information Services, a Chicago company that sells packaged software to 350 insurance companies to connect them with field agents and 15,000 body shops. "We're the auto claims equivalent of what SAP does with the B2B supply chain," Beattie says. CCC provides the backbone to manage claim assignments and estimates, especially between repair shops and insurers, and offers pricing and location for OEM, recycled and aftermarket parts.

Beattie joined CCC to deliver a Web platform to connect clients and deliver existing and new products. "CCC is a typical company, very competent in what we knew, client/server, mainframe and Windows, but little Web development." Beattie's own background was strong in Web architecture, but he needed a cutting-edge platform beyond the scope of his resources. Onshore/offshore service provider Cognizant was already providing some application maintenance to CCC, and Beattie expanded the relationship address his new project.

It's very much like a traditional consulting engagement with an Accenture or BearingPoint, he says. "You contract, they bring people onsite." In this case only a small group of people would be at CCC, acting as liason to the offshore component and rotating developers in and out throughout the process.

"Part of the success of using offshore is to treat them as partners," Beattie says. "They're very excited about being assigned to the project, unlike a BearingPoint implementation where you almost engage people on a run rate, project after project. Offshore, you have a team that's quite loyal and connected to the company."

Overall, Beattie sees a number of advantages to doing onshore/offshore development, and interestingly, he ranks cost third behind flexibility (the ability to ramp up and down with skilled and responsive people); and quality (independently audited capability maturity model (CMM) measurement). "These [Cognizant] folks are CMM level five, they bring tremendous best practice and quality, they're probably better than we are, so there's a development upgrade," Beattie says.

As for cost, it is important to Beattie but, "if you go after it from the cost perspective and disregard the rest, you won't be happy," he warns.

AMR Research VP Coleen Niven agrees with this assessment. The business case for offshore outsourcing will include cost per development, she says, but it's important to consider augmenting existing skill sets, time to market and opportunity cost, and around-the-clock development capability. "If your IT organization can't do all the projects you want to do, and all you want to do is cut cost out of development, then it's probably not the right thing for you," she says. "If it's one objective along with a couple of others, you can probably reach your goal."

On the downside, Beattie says there's always risk when sharing knowledge, (you're not building your own knowledge base, some aspect of your business is owned by someone else). CCC, being a technology provider and not a business unit, is able to provide the architecture and have Cognizant build to its spec. "We're fortunate for that, it's more consistent," Beattie says.

Roles and Models

CCC is an example of a good partnership for application maintenance services, a fast-growing sector of offshore. Separately, application development outsourcing still holds the greatest share of offshore services. Some, but not all offshore service enablers are also moving into business process outsourcing (BPO) for human needs like call center and help desk, and into infrastructure management for data center and network management. Most claim vertical expertise in hot areas like financial services and healthcare.

Large-scale infrastructure outsourcing may still the province of big global service firms like IBM, EDS, CSC, BearingPoint and Accenture. But these companies have their own joint ventures or wholly-owned offshore resources built into their service delivery models, says Aberdeen's Lane. "That's very much a play for them, you can deal with IBM or Keane and know their project manager is having work done offshore, but it's pretty much invisible to you." These same companies are getting into application management with separate organizations at lower rates, says Niven.

The incorporation of offshore resources into a variety of service models has made the overall process less transparent to many businesses. While many Fortune 500 companies may have their own development centers overseas or a subsidiary dedicated to such relationships, the typical company can look to one of the following models for offshore needs: direct; brokered; wholly-owned offshore/onshore; and hybrid partnerships.

The direct model may be the most cost-effective, and useful where a specific project meets a specialized offshore developer or host. But this is the model most fraught with risk and headaches. CCC's Beattie recalls "past lives" where the direct route failed him. "We were onshore and they were offshore, language and culture got in the way. I spent more time than I wanted on the phone at 4 a.m. or worrying on my own time."

Brokers take various roles, from vetting suppliers, to contracting the deal, to setting up infrastructure, and may manage none or a good part of the relationship on the client's behalf. "There are certainly a lot of them," says Lane, "but I can't tell you how successful they are at it." This not meant to dismiss them, for they are a part of the mainstreaming of offshore delivery, as Lane expresses it.

Niven says the successful Indian operations have learned they need permanent offices in the U.S., where upfront business development, sales and crucially, face-to-face support can be delivered. "The person responsible for the engagement is mostly onshore," Niven says. "If I'm a big company, I own it, I don't throw it over a wall to India."

So the most visible offshore service providers are now U.S.-based, NYSE-traded companies with owned and operated overseas resources. These include Cognizant (spun off from D&B in 1998), Satyam and Wipro.

Satyam started out in the 80s under the resource demand model. To attract the attention of client John Deere, the company went as far as to erect a "Little India" in Moline, Illinois, where Deere is located. "We did a six-month simulation ... didn't allow face-to-face meetings, lost the mail occasionally as might happen in an offshore relationship," recalls Rakesh Bhatia, SVP of IT outsourcing at Satyam. The experiment was a success, and led to new customers. Satyam ran up a satellite network to work with Deere, reinvested in its development centers and now has 9,000 employees and a new subsidiary dedicated to BPO.

Whatever the undertaking, Bhatia says Satyam sticks to the concept of "right-sourcing." That is, certain things need to be done offshore for value, other things need to remain close to the customer. Satyam opened U.S. development centers in 1998 and brought architects and other professionals onshore. "We have taken a lot of the perceived risk of offshore as far away as possible."

Boston-based Keane, on the other hand has long operated a development center in Halifax, Nova Scotia, and recently purchased Signaltree Solutions, giving it two high-level development facilities in India. "We have delivery to support customers onsite, offsite, near-shore and far-shore," says Larry Vale, VP of external communications at Keane. "Other companies bring folks in on a temp basis, we have 20-year relationships with clients."

Keane recently began offering a service called "application rationalization," which Vale says dovetails with offshore decision making. "Companies invest billions in applications, but they're invisible assets compared to plant and equipment," he says. The rationalization is meant to address the application lifecycle, from new application failure considerations, to mid-life enhancements where the greatest returns lie, to end of life when costs outweigh benefits.

Finally, a hybrid model offered by Tennessee-based consultancy Brooke Nicole provides services through an offshore partner network, but unlike a broker, Brooke Nicole takes full legal, financial, management and logistic responsibility for on-time, on-budget project completion. A variety of partners, each with specific domain expertise gives clients a choice, a range of application development/management, BPO and infrastructure offerings, and the opportunity for bidding. "We're really a client advocate," says Alan Katz, VP of business development at Brooke Nicole.

Despite the downturn, Katz sees pent-up demand for application development. "The thing that favors offshore is that companies are not in a position to hire," Katz says. "The best time in the consulting business is always at the bottom of the economic cycle, and that's where we are now, though it will shift again."

Is Offshore Right for You?

First, consider what fits the offshore model and what doesn't. "If you're doing change management, if you have requirements that are not stable, if you're at that stage of a project where IT and business interests are standing around a whiteboard in a heated discussion, you don't outsource that," says Aberdeen's Lane.

On the other hand, where requirements are stable or talk turns to maintenance, you might find yourself standing at the whiteboard with a valuable offshore expert. But watch for consolidation, Lane warns, not every company will be able to compete at that level.

A recent report written by Niven and two colleagues at AMR Research includes a list of recommendations for companies considering the offshore route. Severely abbreviated here, the high points include:

Consider existing applications first. If the decision to build is made, then offshore should be considered.
Take a lifecycle approach to offshore initiatives. Identify end-deliverables and work backwards. Identify times of key executions and contingency plans. If a requirements document comes back with a lot of changes, it may be necessary to rethink the relationship.
Institute governance, ownership and accountability. As the key person, the project manager needs to be a good fit.
IT requirements and RFIs should be handled separately from legal negotiations. Terms should allow some flexibility for readjustment
Consider any special legal issues arising from offshore projects. Specify rules based on events beyond the control of parties, and cash arbitrage variations.

"The one thing we heard loud and clear was that these companies deliver high quality and high productivity, and they're very reliable," Niven says. "The biggest issue I see is that they will tend to say 'yes' to anything," so references from similar projects are a must-have, she says.

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