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| Offshoring
Do's and Don't's |
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| By Bundeep
Singh Rangar
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Do pay for talent... Don't bet
the house...
Offshoring may be the right option for your company, but for the
project to be a success you've got to do it right. Bundeep Singh
Rangar, COO at venture capital firm Ariadne Capital, offers some
words to get wise.
The SWOT analysis of my first major project involving offshore
software development in early 2000 can be summed up like this:
strength - I saved my company £500,000 by spending 30 per cent of
what the project would have cost in the UK; weakness - the system
delivered didn't quite look like what I had envisioned; opportunity
- the learning experience made the next several projects easier;
threat - I had more grey hair at the end than when I started.
My position was interim CEO for a Yellow Pages business. I was
responsible for transforming it to an online business and keeping IT
costs down during the transition was a big consideration. There was
simply no other way to do so than by having software developed and
our data entry done at a low-cost offshore centre.
The trick was to ensure that nothing was 'lost in the translation'.
Tell a programmer in Europe the software he's constructing should
look like a fine building - and he'll come back with the equivalent
of the Eiffel Tower. Tell the same thing to an Indian programmer -
and he'll come back with the Taj Mahal. Both are beautiful buildings
- just very different.
At Ariadne Capital, we consider offshoring a good option for
companies with at least 15 per cent of their cost base dependent
upon IT services. That's usually enough of a critical mass to
justify the increase in capital expenditure for setting up an
offshore partnership and the additional operating costs for
logistics and communications.
Given my experience managing offshore development as well as
advising FTSE 100 companies and high-growth start-ups on their
offshore development strategies, here are a few tips to help prevent
offshoring from becoming an insurmountable mountain.
Cover your Achilles heel
The biggest reason for an IT offshore development project to fail is
the Western company not being sufficiently prepared for it. Choose
projects and departments that are not going to threaten existing
staff. The offshore facility should be a way to scale operations,
not politicise them. Get project managers who are accomplished at
delegating tasks, monitoring workflow and policing and communicating
with external suppliers. Start with a small project that is low-risk
before betting the house. Actually, don't bet the house - your core
competence and mission critical elements are almost always best kept
onsite.
Talent is king
Tata Consulting Services and Infosys Technologies Ltd, among India's
largest IT services companies, had one million job applicants each
in 2003 - and offered jobs to fewer than one percent of them. That's
a Darwinian filtering of talent if you've ever seen one. The people
working in top IT services companies in India and China aren't just
smart - they're super-smart. Your desire to access this superior
talent across the world should be a big motivation to offshore. The
fact that you'll experience lower churn than in the UK is a bonus.
The fact that you'll pay less for the work is an additional bonus.
Peanuts attracts monkeys
Since you're paying less than what you'd pay for a comparable skill
set in Europe, don't be a tightwad. If you only go for low cost
(i.e. less experienced and lower skilled workers), you'll end up
paying a high price in the end. Choose a partner company and
personnel for their quality, not just their price. Offshore
companies come in all shapes and sizes. If you pay peanuts, know
what to expect.
Real goods differ
Offshore outsourcing is not the cost reduction panacea for all types
of manufacturing. Take, for instance, businesses which create 'real'
parts or products as opposed to software or services. As you plan
for the transfer of parts and products currently manufactured in the
UK to offshore facilities, they will often be estimated to have
lower unit costs. However, the total cost of ownership (TCO) may
actually be higher than manufacturing them in the UK since the goods
have to be physically packaged, transported and delivered. TCO will
have to include capital expenditure as well as the 'landed costs',
such as freight, duties and insurance.
It's the people, stupid
The best protection against failure is not an airtight service-level
agreement or the latest remote workflow management product. Neither
will help when you find out your software isn't ready just a day
before expected delivery. Build a relationship with your supplier so
that open and frequent communication is de rigeur. If you can,
eventually build your own subsidiary. Find someone who understands
the local milieu to advise you on choosing the best local supplier
or partner with whom to build a lasting business relationship.
There's a reason why Edmund Hillary partnered with Tenzing Norgay.
You need help finding your way to the top of the mountain - and your
way back too.
Bundeep Singh Rangar is COO of Ariadne Capital. Ariadne
Capital advises FT-SE 100 and 250 companies on offshore
and outsourcing strategies and partner selection. It
also arranges financing for setting up Indian subsidiaries.
Please contact Bundeep@AriadneCapital.com
for further details. |
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Ariadne Capital Journal - Through the Maze Volume
4, Edition 2
