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As a growing number of companies choose to save money by moving parts of their business offshore, Joia Shillingford examines the issues - and the pitfalls - for IT managers
25 September 2003
 As companies rush to outsource their business processes to lower cost locations such as India, what does it mean for British IT managers and corporate information officers (CIOs)? Ariadne Capital, a venture capital business, is hoping to enlighten some of them. It is taking a group of interested CIOs to India later this year. Even with the additional costs of setting up an offshore subsidiary, it can pay off. For example, salaries can be up to Dollars 90,000 a year for an onshore programmer but only Dollars 15,000 for one with the same skills offshore. Bundeep Singh Rangar, chief operating officer of Ariadne Capital, says: "There are all sorts of ways of managing work carried out in offshore sites. You can outsource it to a third-party like Wipro of India, you can insource it by creating a wholly owned Indian subsidiary, or you can get involved in a joint venture with a local company that has expertise, but where you have the option of taking over the company eventually. Or you can buy a local company that meets your needs. "We will be taking the CIOs round to meet mainly US companies that have already outsourced or insourced in India. India is a big country, and computer-chip companies are not going to need to visit the same areas or existing businesses as those interested in financial services or those interested in general manufacturing." Rangar says different options will suit different companies and that the obvious outsourcing locations like Bangalore are no longer the best places to get cost savings: growing demand has already caused labour costs to rise. Rangar got involved in helping to put work offshore when he was brought in as interim chief executive at a start-up, MeMediaGroup, by venture capitalists backed by Lord Jacob Rothschild and Lord Maurice Saatchi. While there, he got involved in launching Clickwalla.com. "We got the website developed in India by Pugmarks, including content and functionality, because of the huge cost saving," he says. "It cost one tenth of what it would have cost to develop in the UK." Typical savings for outsourcing are 30 to 60% - probably slightly less for insourcing. This has attracted multinational giants such as GE, American Express, Dell, British Airways and Proctor & Gamble. According to Rebecca Scholl, principal analyst at the Gartner Group and author of Offshore Insourcing versus Offshore Outsourcing: "All these companies use a mix of outsourcing processes to third parties, and insourcing, where they run their own offshore centres." Services outsourced include basic financial services such as accounts, issuing of invoices, payroll, administration of human resources benefits and call centres. BA has even hived off its Indian centre - called WNS, for World Network Services - into a separate company, selling a majority stake to a private equity firm, Warburg Pincus. Now it does work, such as seat allocation, for other airlines, too. Another British travel company that has got the outsourcing bug is eBookers, founded by Indian-born Dinesh Dhamija. It has a strategy of buying up bricks-and-mortar businesses and cutting costs by putting much of their transaction work offshore. Dhamija is planning more acquisitions and wants his company's sales to increase to Dollars 1bn next year. "I can book hotels, car hire, flights - all by calling an eBookers number where I will be served by Indian staff," says Rangar. Lastminute.com, the online travel booking company, also keeps the cost of some transactions down by using India-based staff. But whatever the application, IT managers will have to get involved. Richard Lister, a partner specialising in global outsourcing at international law firm Freshfields Bruckhaus Deringer, says: "As well as being clear about what the business objective of going offshore is, IT managers will have to identify what systems used onshore will be needed to underpin the business process that is moving. "They will also need to look carefully at any existing onshore outsourcing contracts to see what base-line assumptions about the level of use will be affected." Contracts, such as software licences, may be affected by a change in the number of users. Other issues include data protection and customer confidentiality. "If an organisation is planning to have data accessed from India or China, where the transfer of data is outside the EU," says Lister, "they will need to have the right contractual arrangements in place, and this will vary according to whether the offshore entity is acting as a data controller or a data processor." Rangar points out that it is possible to set up systems in a client-server fashion, so that although data may be processed offshore, it is stored onshore. "For example," he says, "Russian programmers working for one of our Silicon Valley start-ups can develop applications and send them to California to check that they run correctly. But they cannot access the US-based source code." Ensuring business continuity and creating a foolproof disaster recovery plan could be a big headache for IT managers with no offshore experience. Nagendra Bandaru, head of telecoms service providers in Europe for Wipro Technologies, says: "If you outsource to an experienced third-party service provider, the IT implications of an offshore move are fairly simple and not particularly expensive." He says that "if you want to set up any kind of operation in India, you will have to have a huge communications pipe costing around euros 100,000 (pounds 69,510) a year. You will also need firewalls and virus protection software to avoid cross-infection and security breaches between on and offshore sites". Bandaru believes most companies will need the same IT infrastructure offshore as they have onshore, but if they outsource to a third party, the cost will be spread across its customer base. A thorough audit of security plans should be carried out too, he says. But Scholl says: "IT managers often consider issues like the quality and cost of offshore labour and security. What they overlook is the human dimension. After the fact, what disappoints companies most is projects that aren't on time and on budget, poor project management and lack of good governance rules. They usually blame management skills at the offshore location, but it takes two parties to have a misunderstanding." Bandaru warns: "If companies choose the wrong supplier, particularly one with insufficient knowledge of the IT skills so vital to getting a big offshore business project right, the cost of reassignment to another supplier will be very high." Nor is offshore outsourcing always the cheapest option. Transversal, a Cambridge-based software company, argues - based on cost-benefit studies for companies such as Sony Computer Entertainment Europe and Direct Line - that up to 80% of inbound customer contact could be handled using web self-service. It says the average call handled in India costs pounds 1.30 compared to less than 30p for web self-service. Nevertheless, offshore outsourcing and insourcing is likely to continue for some time. Forrester Research predicts that during the next 15 years, 3.3m US services-industry jobs and Dollars 136bn in wages will move offshore and the Communications Workers of America, which organised a protest outside a Silicon Valley offshore outsourcing conference recently, says 400,000 US jobs have already gone offshore. Links Out-sourcing offshore: www.ariadnecapital.com www.freshfields.com www.forrester.com www.gartner.com www.wipro.com |
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