|
July 08 2004
by Bundeep Singh Rangar
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. You can reach him at
bundeep@ariadnecapital.com. Ariadne Capital is a leading
investment and advisory group, which helps companies access capital, manage
M&A transactions, build management, secure customers and incorporate
innovation.
|
