Taking on the tiger and dragon
Outsourcing's reigning powers face fierce
new competition—though their upstart
rivals come with some very real risks.
BY SARAH FISTER GALE ILLUSTRATION BY STEPHANIE WUNDERLICH
The iron grip that China and India have held over outsourcing projects is loosening—and fast.
For one thing, neither the tiger nor the dragon is as cheap as they once were. In India, the brutal competition for talent helped send the cost of labor soaring over 100 percent in 2008, says Don Jones, international tax partner at global accounting firm BDO, San Jose, California, USA.
Rising costs combined with political discord in both India and China have given vendors in more obscure locations their big shot at luring in budget-conscious clients. With still-high unemployment rates, even the United States is emerging as an option for some North American companies looking to keep projects close to home.
“Since the economic drop in 2008, many companies are rethinking their outsourcing strategies,” Mr. Jones says.
Vietnam, Mexico, Egypt and Ukraine are just a few of the more promising upstarts. Yet Mr. Jones has heard many cautionary tales of companies that have moved all their outsourcing projects to one of the up-and-comers, only to watch them flounder due to poor project management and a lack of experienced talent.
“They eventually gave up and went back to the traditional outsourcing locations like India,” he says.
Such failures are why many of the outsourcing companies in India and China aren't worried about these new global players, says Lalit Dhingra, the Atlanta, Georgia, USA-based president of NIIT Technologies, a global IT services firm. “Everyone has technology, but it's the companies that bring deeper knowledge of an industry that add value,” he says. “Because at the end of the day, even if you get a lower price from a new vendor, if you're not getting the work done right, it still costs you more. Smart CIOs know that.”
That's not to say companies should patently reject new outsourcing destinations. Rather, they have to proceed with caution, says J. LeRoy Ward, PMP, PgMP, executive vice president at ESI International, a consultancy in New York, New York, USA.
“Most companies outsource projects to save money,” he says. “However, outsourcing can carry hidden costs, and those must be included in any analysis. It is therefore important to define your overall business objectives first and identify what you expect to save or achieve in outsourcing. You are then in a much better position to assess the benefits and risks of each destination.”
The first step is to evaluate the organization's risk tolerance around issues such as political instability, inexperienced talent pools or less-developed infrastructure.
“You have to balance your need for cost savings against your willingness for risk to the investment,” says Peter Ryan, Montreal, Quebec-based lead analyst for business process outsourcing at Ovum, a global research firm headquartered in London, England.
In many emerging markets, company employees may be facing physical danger, for example. “Executives are a target for kidnapping,” Mr. Ward notes. “If you are going to send your people back and forth to such high-risk locations, you have to be extremely careful and provide the necessary security and protective measures to ensure their safety.”
RIDING ON BRAZIL'S COATTAILS
With Brazil ensconced as a major player in IT outsourcing, other parts of Latin America are looking to make their mark.
“The people are well-educated, there are strong technology-focused colleges and universities, and the time differences often aren't as great as in other outsourcing destinations such as Eastern Europe, India or China. This makes it much easier to do business for certain types of outsourced projects,” Mr. Ward says. All of those factors are helping IT vendors pull in more complex projects.
Choosing an outsourcing vendor should involve individuals far beyond just the project team, says Kurt Kohorst, Seattle, Washington, USA-based director of business process management at insurance company Liberty Mutual Agency Markets. “The goal is to find an organization you can build a relationship with. The cornerstone of this should be the ability to structure the relationship so there are common goals around outcomes, even though the motivation behind attaining the outcomes may be different.”
When Liberty Mutual chooses key outsourcing vendors, Mr. Kohorst brings in the troops:
IT security addresses data-access policies.
IT operations ensures the necessary systems are available when the project team needs to work.
Audit and corporate risk-management teams make sure the provider sites meet standards.
Human resources assesses the vendor's hiring practices.
“Nearly the entire organization is touched by decisions to outsource, especially if you are offshoring,” he says.
By involving key people up front, companies can mitigate risks as well as ensure their outsourcing choices align with the organization's larger strategic goals.
Mr. Kohorst saw first-hand the dramatic effect a shift in corporate vision can have on outsourcing projects.
He also managed business outsourcing programs for Safeco Insurance before Liberty Mutual purchased the company in 2008. Safeco's primary goals for outsourcing reflected the organization's desire to be nimble and to leverage third-party vendors to assist its journey to be faster and cheaper than the competition. Focusing on those objectives, Mr. Kohorst had his team outsource a number of projects to India, where they could tap into low-cost talent and build relationships with mature vendors.
After the buy-out, however, the corporate vision changed.
“Rather than outsourcing to offshore vendors, Liberty Mutual wanted to create jobs in the communities where we do business,” Mr. Kohorst says. In addition, “in many cases the ongoing expense wasn't justifiable, and the decision to fix a process or a system was a better choice.”
That led Mr. Kohorst to move several business process outsourced projects back in-house and onshore, and focus other outsourcing initiatives on regions where Liberty Mutual operates.
In making the shift, Mr. Kohorst benefited from the relationships he had forged with his vendors.
“If we had just been about cost savings and not about building partnerships, they might not have been as inclined to help us,” he says.
Instead, his Indian vendors provided access to their development teams, offered to help with training and resource transition, and supported frequent site visits. Mr. Kohorst's team is currently two-thirds of the way through the transition of a major back-office support development project to Liberty Mutual internal operations at several locations in the United States—and has had no service disruptions to date.
“Some vendor relationships are more like going on a date—they are limited in duration and relatively low-risk,” he says. “Outsourcing is a partnership more like a marriage. It's a long-term relationship, and you need to work on that relationship or it won't last.”
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Brazil remains the powerhouse because of its size and talent supply, but Mexico is gaining appeal with its highly trained work force and large English-speaking population. Colombia also shows potential as more vendors open up shop and keep prices relatively low.
One downside is that project leaders have to worry about safety, particularly in Mexico, which has seen a jump in killings and kidnappings.
“Many of these new outsourcing destinations, including Mexico and Colombia, are doing little in terms of government initiatives or social change to allay fears about their safety as an outsourcing destination,” says Doug Brown, principal of outsourcing research firm Brown-Wilson Group Inc., Clearwater, Florida, USA.
Outsourcing is a change process, and you can't neglect the people side of things. If you have cultural differences, issues are more difficult to resolve.
—Brigitte Cobb, BMI Healthcare, London, England
ASIA'S UNTAPPED MARKETS
Amidst Asia's next generation of economic power players, Vietnam is worth checking out for sheer cost savings. Outsourced projects cost from 30 to 50 percent less than in India or Russia, says Roman Trakhtenberg, managing director of Luxoft, an IT outsourcing company in New York, New York, USA.
“The talent pool is growing, and there is huge potential for this destination in the future,” he says. “Vietnam's an untapped market.”
It's also one that's trying to make a name for itself in the global outsourcing community. After several years honing their skills on basic projects, along with investing in infrastructure and talent development, Vietnam's tech companies are looking to take on higher-value projects.
“The vendors are interested in more challenging projects, which creates some interesting opportunities for cost-conscious companies,” says Crowe Mead, PMP, vice president of technical operations for Calico Energy Services, an energy management consultancy in Seattle, Washington, USA.
For all those pluses, though, Vietnam still has a relatively inexperienced talent pool. Approximately 40 percent of the population is 23 or under, according to Oxford Analytica, which limits the kind of projects a company may be willing to send there.
“You wouldn't hire a 22-year-old to lead a multimillion-dollar project,” says Pedro Serrador, PMP, president of Serrador Project Management, Toronto, Ontario, Canada. “If it's a simple project and you don't need the most senior people, then it may be worth trying a new lower-cost destination. But if you are outsourcing a complex system, you need people with experience.”
When Luxoft first considered moving projects to Vietnam, it began with small internal pilot projects around applications development and maintenance to see if the outsourcing team could handle the work.
“We started slowly with projects that weren't customer-facing,” Mr. Trakhtenberg says. “Gradually, we increased the complexity of the projects we sent to make sure the quality of the deliverables was the same as other locations'.”
Outsourcing projects to Africa often means accepting high risks. Organizations must be prepared for the possibility of graft, internal strife and safety issues—although government and business leaders in many of the nations are fueling change. Kenya and Nigeria, for instance, have both invested heavily in education and building broad-based telecom infrastructure while staying competitive on price, Mr. Mead says.
However, there are some locations that offer enticing benefits to offset risk.
South Africa is clearly the continent's economic star, making it an attractive spot for outsourced projects.
“Project management is well-embedded in the South African business community, and English is widely spoken,” Mr. Ward says. “From a European standpoint, it's within roughly the same time zone,” easing communications.
In northern Africa, Morocco has become a low-cost hotspot for French-speaking companies. Egypt, meanwhile, has been aggressively building its reputation as a global presence with major backing from the government. In late September, Egypt's IT minister, Tarek Kamel, said the North African country is looking to grow its burgeoning outsourcing industry to US$10 billion by 2020.
The talent pool is growing, and there is huge potential for this destination in the future. Vietnam's an untapped market.
—Roman Trakhtenberg, Luxoft, New York, New York, USA
“Many people believe Egypt is unsafe and that it has a negative view of the West, but that couldn't be further from the truth,” Mr. Ryan says. “The vendors are eager to work with U.S. and European companies.”
The continent also offers great opportunities for investing in corporate social responsibility projects by supporting struggling communities, Mr. Mead adds.
Despite the outsourcing success stories, Africa is haunted—fairly or not— by lingering perception problems.
If it's a simple project and you don't need the most senior people, then it may be worth trying a new lower-cost destination. But if you are outsourcing a complex system, you need people with experience.
—Pedro Serrador, PMP, Serrador Project Management, Toronto, Ontario, Canada
“Africa is an extremely large untapped resource,” Mr. Ward notes. “Unfortunately, due to civil unrest and outright war in certain areas, low levels of education and pervasive corruption in many countries, it can be quite challenging to do business there.”
EASTERN EUROPE'S EXPERTISE
Although costs aren't as low as other emerging outsourcing hotspots, Eastern Europe offers competitive pricing, along with some of the most highly skilled project talent in the world.
Russia, for example, has a long history of investing in science and math education, and its universities produce more than 1 million programmers a year, notes Mr. Trakhtenberg. “Luxoft views Russia as a top destination for high-end complex outsourcing initiatives,” he says.
Ukraine offers similar benefits, with a strong educational system focused on IT, as well as tax incentives and visa-free travel for E.U. companies.
“The Ukrainian government is taking this industry very seriously,” says Mr. Trakhtenberg, who estimates the country's labor costs are 15 to 25 percent lower than Russia's.
Romania is another rising leader, particularly in telecom projects. Siemens, Alcatel, Microsoft and Oracle currently have captive outsourcing arrangements in Romania in which they use remote resources for the delivery of functions close to their core business while retaining operational control. The country offers a large number of professionals who speak German, Italian and French as well, Mr. Trakhtenberg says. “It's harder to find that level of diversity in Russia or Ukraine,” he says.
Poland has a less-developed market than Russia or Ukraine but is developing a niche by targeting its services to financial services companies. In September, IBM, for one, opened its second service delivery center. Located in Wroclaw, it focuses on providing IT and business process outsourcing services to its clients. Anna Sienko, general manager of IBM Poland, said that the company chose the site for its “highly educated and experienced professionals, language skills and a favorable business environment.”
Wherever the destination, project executives need to invest the same time and energy in choosing an outsourcing vendor as they would in putting together an in-house team, says Balazs Fejes, the Budapest, Hungary-based CTO of EPAM Systems, a software engineering services provider.
“Just looking at the bottom line is not the most productive way to make a decision,” he says. “You've got to look at outsourcing as a partnership and be open about what you hope to accomplish.”
Too often, companies enter outsourcing agreements with unrealistic expectations, such as assuming they'll find specific business domain expertise in a still-emerging market.
“In the beginning, both parties must discuss their goals, issues and concerns, and everyone has to be honest,” Mr. Fejes says.
Otherwise, delivery goals will never be met.
“You have to consider whether the vendor has worked in your industry, who will be on your team and whether that team is committed to the success of your project,” Mr. Dhingra says.
As organizations assess vendors, they shouldn't overlook cultural nuances, either, adds Brigitte Cobb, a London, England-based independent consultant currently working with BMI Healthcare.
“Outsourcing is a change process, and you can't neglect the people side of things,” she says. “If you have cultural differences, issues are more difficult to resolve.”
Once a vendor is chosen, Mr. Dhingra suggests a multilayered governance process:
- Senior leaders should perform quarterly reviews of major projects and vendor relationships.
- Project sponsors should participate in monthly progress evaluations.
- Project managers from both the client and vendor sides should have daily or at least weekly updates to ensure tasks are being accomplished and to identify issues that need to be escalated.
“That level of governance is so important,” he says. “It gives clients an objective tool to evaluate the project and the vendor relationship.”
Companies may also want to implement weekly or biweekly deliverables along with daily access to system data to track project progress from afar, Mr. Fejes suggests. “Frequent deliverables benefit both parties,” he says. “They build trust, create a rhythm and ensure everything is on track.”
No matter where an organization decides to outsource projects, it must be realistic about what it hopes to achieve.
“There are no magic formulas for choosing outsourcing vendors,” Mr. Ryan says. “But if you are precise about what you expect to gain, there will be fewer surprises down the road.” PM
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