Archive for the ‘outsource’ Category

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What CIOs Need To Know About Doing Offshoring In 2010

Wednesday, March 24th, 2010
Image Credit Offshoring Decisions Are A Lot More Complicated These Days…

Offshoring Decisions Are A Lot More Complicated These Days…

The Way That It Used To Be

Remember when using offshored resources as a part of an IT department was such a big deal? These days it’s hard to find an IT department that doesn’t have at least some portion of its work done off shore. When you become CIO, offshoring is something that you’re going to have to deal with. It turns out that things aren’t as simple as they used to be…

When IT departments first started using offshoring there was really only one reason why they were doing it: it provided staffing cost reductions of 40% or more. It all seemed to be so easy: an IT department could move lots of low-value IT work to low-cost locations such as India and the Philippines. Let’s be honest about this: outsourcing was really cost cutting by a different name.

When you become CIO you’re going to be inheriting a different world. The favorite site of IT outsourcing has been India; however, India is changing. One of the biggest changes is that salaries have been going up rapidly. In India, annual raises of 15% have become common. On top of this, in the last year India has suffered from currency fluctuations, terrorist attacks, and financial fraud. When you become CIO you are going to have to be looking beyond India for locations to house your outsourcing.

The New World Of Outsourcing

You’re going to have to do some serious thinking when it comes time to determine how best to use outsourcing with your IT department. Just before the recent global recession the #1 reason that IT departments were using offshored resources was to accomplish cost cutting objectives.

The global recession is going to be your friend in the short term when it comes to offshoring. Over at the consulting firm Gartner, they are predicting that outsourcing prices will drop an average of 10% this upcoming year. However, as CIO you are going to need to be careful here.

It turns out that agreeing to specific IT cost cutting goals isn’t the hard part, maintaining them is. What many IT departments have discovered is that low hourly rates won’t save much money if the total hours needed to accomplish a given task are higher than you estimate.

Another issue for a CIO to consider will be how long your contract with the offshoring firm should last for. The first generation of outsourcing contacts tended to be last for lengthy time periods: 10 years was common. This was being done in order to “lock-in” the cost savings. However, the need to have the ability to adjust to changing market conditions has changed this – CIOs now want shorter-term contracts.

Of course, nothing is ever that simple. It turns out that for certain IT professional services that require a higher percentage of highly skilled workers, the offshore staffing providers will insist on longer-term contacts because the suppliers say that they can’t attract the workers that they need unless you are willing to sign contracts that cover longer time periods.

On the positive side, although with a bit more complexity, you will now have more options for where you can do your offshore work. Some of the most popular outsourcing destinations in a recent survey of firms that were considering it included: United States (22%), China (16%), India (13%). Also on their list was the Philippines, Mexico, Costa Rica, and Jamaica.

What All Of This Means For You

When you become CIO, you will be offshoring some of your IT work. What used to be a relatively simple decision to send some of your low-value IT grunt work over to India has become much more complicated.

India is still an attractive destination for a number of reasons. However, it has become less attractive than it once was and a number of competitive alternatives have now shown up.

It will take time and effort on your part in order to properly evaluate your options and decide what is correct for your IT department. You can’t go wrong with the decision to offshore some of your IT workload, it’s just making the right decisions on where the do the work that will require all of your CIO skills…

What country do you think would be the best place for a firm to offshore it’s IT work today?

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What We’ll Be Talking About Next Time

When you become CIO you will have a number of tools available to you that CIOs never had in the past. #1 on this list is, of course, Twitter. However, wait a minute, is this a good thing or a bad thing? Sounds like you need to figure this out before you become CIO and make a mistake…

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Satyam Scandal: CIOs Need To Talk With Their CFOs

Monday, June 29th, 2009
Fraud At Satyam Means That How CIOs Do Outsourcing Needs To Be Rethought

Fraud At Satyam Means That How CIOs Do Outsourcing Needs To Be Rethought

Didn’t we solve that whole outsourcing thing years ago? Specifically aren’t the IT and the Finance departments on the same page when it comes to not only IF we should outsource some of the IT work, but also HOW it should be outsourced? If this is true, than what does the Satyam scandal mean for your IT / Finance relationship?

The Satyam Scandal

Just in case there is anyone out there who doesn’t know what happened at Satyam, perhaps a quick review is in order. Satyam Computer Services is based in India, has a work force of 53,000 and operations in 66 countries. They were very successful and served more than a third of the U.S. Fortune 500 companies.

Back in January the then CEO of Satyam, Ramalinga Raju, revealed that he and his CFO had been conducting a massive fraud – they significantly inflated its earnings and assets for years. Basically they were losing money hand over foot. In January they revealed that 50.4 billion rupees, or $1.04 billion, of the 53.6 billion rupees in cash and bank loans the company listed as assets for its second quarter, which ended in September, were nonexistent. Poof!

Impact Of The Fraud

What this means for firms that do outsourcing business with Satyam is that the firm might fold any day (perhaps you are one of these firms!). All of a sudden, outsourcing contracts that had appeared to be solid now seem to be not so solid. Most firms that outsource their work don’t necessarily have a good contingency plan for what to do if their outsourcing partner is suddenly unable to perform the work.

What Needs To Be Done

The Satyma scandal should serve as a wake-up call to CIOs everywhere. Oursourcing can never be done the same as it’s been done in the past. Here’s what needs to change:

  • Finance Needs To Play A Role: the IT department is responsible for making sure that the outsourcing company has the needed technical skills, but the Finance department needs to play a bigger role to make sure that the outsourcing firm can stay in business over time.
  • More Baskets For Your Eggs: it’s time to start to diversify your outsourcing activities in order to lower your risk profile. Detailed technical work needs to be moved around every so often so that not just one vendor knows how to do the work.
  • Update Your Contracts: create shorter contracts that are more flexible. Make sure that you are not tied to a given outsourcer for too long just in case things start to go wrong – you might want to move your work to another outsourcer quickly.

Final Thoughts

India has now had their version of Enron / Worldcom. Hopefully it will serve as a wakeup call for all CIOs who outsource their work that greater due diligence needs to be done even as the world continues to move faster. By working more closely with Finance, CIOs can apply IT to enable the rest of the company to grow quicker, move faster, and do more.

Questions For You

When you selected an outsourcer, did you do a detailed financial due diligence on them? Was your finance department involved? Has your finance department remained involved in evaluating the health of your outsourcer(s)? Do you have a contingency plan in place that you could us if your outsourcer went out of business? Leave me a comment and let me know what you are thinking.

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What We’ll Be Talking About Next Time

Data Security. There I said it. It sorta lays there like a big lump of coal and everyone in the company stands around looking at it wondering who’s responsibility it is to do something about it.

Nobody, including CIOs really wants to touch it for one very simple reason: it’s a losing proposition…

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7 Wrong Ways To Outsource Your IT Department

Monday, December 1st, 2008
There Are Many More Ways To Do Outsourcing The Wrong Way...

There Are Many More Ways To Do Outsourcing The Wrong Way...

Outsourcing, off-shoring, call it what you will, it’s been with us long enough that you’d think that the rules for how to do it correctly would be well known, right? It turns out that this isn’t always the case.

The current down economy is probably going to have most IT shops looking for ways to further trim costs and, of course, outsourcing MORE will be an attractive option. Geraldine Fox and Nigel Hughes work over at Compass and they’ve got a few words of caution for the rest of us when it comes time to consider IT outsourcing.

It’s all too easy to do this stuff the wrong way…

Skip The Planning, Dive Right In:

This is how all to many firms approach the outsourcing of their IT operations. All too often, firms view outsourcing as an opportunity to simply replace their expensive onshore headcount with less expensive offshore staff.

This view is not only short sighted, but just flat out wrong as lots and lots of firms discovered during the first wave of outsourcing in the 1990′s. It takes time and lots of planning in order to move IT functions from inside the firm to an outsourcing shop. Once they are there, you’re going to need more management resources than you have right now in order to stay on top of how the work is going.

“Lift & Shift”:

Many firms attempt to just pick up their existing IT operations and move them over to the outsourcing operation hoping that lower salaries there will automatically deliver the savings that they are looking for. What’s missing from this thinking is the simple fact that it will always take MORE people at the outsourcer to do the same job.

A good rule of thumb is to expect a 15% increase in headcount. Sure, you can probably move your ineffective IT operations offshore and experience some immediate short-term savings. However, very quickly these will vanish as outsourcing salaries continue to go up and staff turnover rates range annually from 25%-80%.

Out Of Sight, Out Of Mind:

Just dropping the work off and then not paying any attention to the people who are now doing the work is a clear recipe for disaster. Your firm is going to have to take on a whole new set of responsibilities.

These will include retaining outsource staff, investing in outsourced resources (training, orientation, retention), and making sure that they have a clear career path. Oh, and by the way, you had better be doing all of these things for your onshore / in-house staff or else they will become very jealous very quickly!

More, More, More:

One well known reality of outsourcing is that that productivity will drop. This means that it’s going to take more bodies to accomplish the same task. When you couple this with a high rate of turnover, you can pretty much wave goodbye to any outsourcing cost savings that you were counting on.

Smart firms realize that the solution to low productivity is not to throw more bodies at the problem; instead, you need to work with the outsourcer to fix the productivity problem at its source.

Everyone Else Is Not Doing Better At This Than You Are

No matter what your competition may be telling the press, don’t worry. No firms are really seeing monster discounts because of their outsourcing efforts. Many firms claim that they are achieving 40% cost saving when the reality is that at best they really are seeing cost savings in the 20% range.

Hold Those Horses:

When you decide to outsource more of your IT operations, keep in mind that this will have a major impact on your firm. Companies don’t do a good job of dealing with change and outsourcing part of your internal processes most definitely is change. Take some time to create the right mix of in-house and outsourced operations and then use a measured approach to implement it.

It Takes Two To Tango:

There is always the possibility that an oursourcing effort won’t work out. If this happens, you need to realize that both your firm and the oursourcer are to blame.

Don’t waste everyone’s time pointing fingers at the oursourcer and expecting them to fix everything. Instead, acknowledge your part in creating the problem and then sit down with the outsourcer and get to work finding a way to fix it.

Has your firm already started to use outsourcing firms to perform IT operations? How has it gone so far? What is the most important thing that you know now that you didn’t know when you started outsourcing? Leave me a comment and let me know what you are thinking.

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IT Innovation Tips From GM’s CIO

Thursday, November 13th, 2008
GM Has A Massive IT Outsourcing Program - Has It Helped Or Hurt The Firm?

GM Has A Massive IT Outsourcing Program - Has It Helped Or Hurt The Firm?

Ok, so maybe this is not really the best time for this posting seeing as the desperate situation all three of the major U.S. manufactures are currently in due to the current recession. However, if you can put all of that aside for just a bit, then Ralph Szygenda who is the CIO at General Motors (GM) had a talk with the folks at eWeek and he has some suggestions on how IT departments can use outsourcing to drive innovation. Now there are two terms that you don’t often see together! Let’s see what Szygenda has to tell us…

Who Does GM Outsource Their Work To?: About 60% of it goes to EDS (now part of HP) for historical reasons (GM once owned EDS), the rest goes to AT&T, HP. IBM, Capgemini, Covisint, and Wipro. Whew – is there anyone who is not on that list?

What Kind Of Money Are We Talking About Here?: In 2006 GM spent $7.5B on outsourcing contracts and, assuming that they don’t fold during the current economic crisis, they plan on spending another $7.5B in 2011.

How Many GM Employees Are Needed To Mange All This Outsourcing?: 1,500 GM employees manage the combined outsourcing vendors.

How Does GM Keep Their Outsourcing Vendors In Line?: GM continues to outsource additional business every year to the tune of 100′s of millions of dollars. All of the outsourcing vendors want to win this additional business. GM uses a report card that gets updated every 6 months to let each vendor know exactly where they stand and then GM uses that report card to make decisions about who gets additional business.

Does GM Kick Out Under-performing Vendors?: So far – no. However, all development of new systems are done at a firm, fixed price. That means that they start to lose money if they are missing a due date. There aer some firms that have not been able to win new business because of how they have performed; however, nobody has been kicked off the team yet.

Are IT Costs Going Down Because Of This Outsourcing?: GM reports that they are spending a lot less on support and maintenance. However, they’ve taken these savings and are plowing them back into the development of new IT systems. The overall cost of operating the GM environment has been going down for the past 12 years and they are forecasting it to continue to do so for at least the next three years.

Why Did GM Decide To Outsource So Much Of Their IT Operations?: GM did not get into the business of outsourcing their IT operations to cut costs; however, the results have been that costs are being cut. The reason that GM originally decided to outsource their IT operations was because they had started with autonomous business units – every branch had it’s own IT shop. Over the course of 10 years they’ve gotten rid of over 5,000 systems. In 2006 they decided to consolidate their IT operations. Outsourcing IT operations has allowed processes to be standardized across the organization.

What Is The Key To GM’s Innovation?: Szygenda says that it comes down to three things: standardization, simplification, and collaboration.

Do you think that GM’s massive use of outsourcing is a good thing or a bad thing? Do you think that distributing the work among so many different outsourcing firms makes managing the work harder or easier? What do you think that Szygend’s next steps need to be? Leave a comment and let me know what you are thinking.

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Cha-Cha Change Coming To IT In The Form Of Outsourcing?

Tuesday, October 7th, 2008
Shell Just Outsourced Most Of Its IT Department - Are You Next?

Shell Just Outsourced Most Of Its IT Department - Are You Next?

I just happened to run across an interesting article in Baseline magazine awhile back that pointed out a very interesting trend in IT that just might impact all of us. The good folks over at Royal Dutch Shell (the world’s 3rd biggest oil company) have just announced a massive outsourcing deal with EDS/HP. They appear to have gotten rid of just about all of their IT shop – lock, stock, and barrel. If they can outsource their entire IT shop, why can’t your shop be outsourced completely also?

We like to talk about how to go about aligning IT with the rest of the business so that IT can play a strategic role in the company’s success. Well, if you outsource all of IT that’s not going to be happening any time soon! Shell appears to have gotten rid of the parts of IT that have nothing to do with being an oil company. The following description of just exactly what is being outsourced comes from the press release about this deal:

The activities in scope of outsourcing include designing, building, maintaining and operating the IT infrastructure, and cover the desktop and laptop computers, the telephone and handheld devices, the shared servers for running the applications that support business processes, the storage for data, and the networks and bandwidth for data and voice transmission. The infrastructure services enable Shell companies to use applications that support their business processes and goals, and enable staff and contractors for teamwork across the enterprise, whatever their location, including offshore sites and some of the world’s most remote areas.

What this means for folks in IT is that all of the day-to-day IT effort of keeping the network up and running has been outsourced. No need for DBAs, help desks, or Cisco certified folks anymore.

The Shell CIO, Alan Matula, has told the press that the real objective of the outsourcing deal was to allow the company to focus on its core business operations. Hmm, that does not sound like good news for those who work in any part of IT that can be considered to not be part of the “core”!

Although this is just one deal, and it’s being done by a multinational firm so the impacts won’t be felt in just one country but rather in multiple countries, I still think that this is a big deal. In effect, Shell said “enough is enough” to increasing IT costs that sure didn’t seem to be providing any bottom line value back to the company. Oh oh, now that one big company has done this, what’s to stop everyone else from doing the same thing?

I think that we are seeing the natural progression of outsourcing. Companies have now become so comfortable with what it means to outsource a function and the firms that they outsource to that they are willing to outsource any IT function that is not a part of what makes them competitive in their market.

This is now and will always be a role for the part of IT that is developing the competitive tools that a firm needs to leap-frog its competition. Google’s search engine, Ebay’s auction platform, and Pixar’s design tools will always be developed by in-house IT staff because they define the company. However, all the rest can probably be done better by someone else.

This means that CIOs are going to have to get better at managing outsourced operations because they are still responsible for the results. Additionally, IT managers are going to have to learn how to work with outsourcing shops in order to complete the projects that they have been given. It’s a brave new world out there: get in, buckle up, and let’s go!

How much of your IT operations have been outsourced so far? Are you planning on outsourcing more of it? What parts of IT would you say are mission critical to the rest of the firm? Do you manage differently now that you realize that parts of your operation may be going away? Leave a comment and let me know what you are thinking.

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