Offshore Outsourcing Models

The term "offshoring" conjures a vision of work flowing from large corporations to technology vendors halfway across the globe. Perhaps the burgeoning Indian IT and BPO industry that is notching upwards of $15 billion to $18 billion a year makes it sound like the work "just flows." The facts of outsourcing, however, are a bit different. Behind each program, initiative or project that is offshored lie complex decisions involving selecting the right models to suit a particular business need or scenario. I dedicated a section to the topic of offshoring models in my recently published book, Offshoring IT Services: A Framework for Managing Outsourced Projects. In this article, I abstract some of the key ideas from the book and my research regarding offshoring models.

Selecting an appropriate offshoring model is a crucial aspect of developing your company's outsourcing plan. The process involves several factors, including aspects of international business strategy, selecting the country, scanning the landscape and deciding on the outsourcing strategy. The three models most popular currently among business leaders are joint ventures, subsidiaries and outsourcing to a service provider.

Joint Venture Offshoring

In a joint venture (JV), an organization ties up with a local firm or company either by taking an equity stake or forming an independent company in which each company contributes resources. The goal is generally to work towards a "win-win" deal where both organizations hope to benefit from the other's strengths. By capitalizing on the strengths of a local player, the client organization can mitigate some of the risks of internalization; similarly, the local player can benefit from partnering with a strong player and the opportunity to scale up the value chain.

A joint venture contract may sometimes include build-operate-transfer (BOT) clauses to motivate both parties to work towards a clearly defined exit strategy. The BOT or its variation, build-own-operate-transfer (BOOT), may involve an option for the domestic company to sell its stake to the foreign company after a stipulated period or after agreed-upon milestones.

There are several advantages to a JV model, especially if the company is also looking to "learn" the intricacies of managing local business customs and mores from the domestic partner, which will pave the way for a subsidiary down the road. An excellent example of this strategic evolution from a joint venture to a fully owned subsidiary is that of EDS' entry into India. Though a few articles in the media portray EDS' strategy as a dramatic step, it is, in fact, the culmination of a gradual evolution that began with a joint venture-like relationship with vendors in India a decade ago.

Subsidiary/Captive Development Center Offshoring

Companies may decide to bypass the JV model altogether and go directly in for a subsidiary or local office if the management is comfortable in dealing with the nitty-gritty of internationalization and local market operations. Some of the popular terms used to describe the model include offshore development center (ODC), captive development center or in some cases simply branch or local office.

Subsidiaries operate as independent business units or branches, executing programs and projects for onsite teams. From this perspective, the mode of managing a subsidiary is similar to managing projects and programs in a global delivery center (GDC) model promoted by software service delivery and offshoring companies.

The key challenge in a subsidiary model, apart from internationalization and localization of business management, pertains to management of expatriate staff, line workers, technical experts and line managers from multicultural backgrounds.

The local office model is extremely popular among high-tech organizations that are comfortable in management of technology development and innovation and look to offshoring as an extension of their diversification strategies. Large software development companies including IBM, Microsoft and Oracle are already comfortable doing business in a global marketplace. Moving development or maintenance of some of the projects and work is a way to extend their geographic footprint. Similarly, software giants like Accenture, EDS and Deloitte Consulting, among others, have been at the forefront of bundling newer services for their clients; offshoring being the latest in their suite of services.

Service Provider Offshoring

The JV and subsidiary models of outsourcing may involve deep commitment on the part of a client organization, a move that management at traditional companies may sometimes be averse to. To counter the perceived risks of these models and to capitalize on the benefits of offshoring, companies resort to outsourcing projects, programs and individual work orders to offshore vendors. Interestingly, outsourcing to service providers is also the most visible offshore outsourcing model, and it encompasses a wide range of work, from small projects to multi-year contracts amounting to millions of dollars. Here are the most popular forms of outsourcing to offshore vendors.

Onsite Subcontracting with Offshoring

This is perhaps the simplest outsourcing model, where a firm places its skilled people "on site" at the client's location. The people thus placed become a virtual part of the client's team. The model is also called staff augmentation. Most offshore outsourcing firms trace their history back to their software services model and continue to offer onsite project support along with some staff augmentation. This model of outsourcing is typically adopted by smaller firms that have a relationship with the client organization and the means to hire and staff people.

Pure Offshore Projects

A pure-offshore project involves instances where the scope is well defined and the work is discrete enough to be done remotely with little supervision. Examples of this model include work farmed out by smaller organizations and individuals to freelancers around the world using online tools provided by vendors like Guru and RentACoder. This model of offshoring is less prevalent and generally seen only in a small scale development of software component or modules. The model is also being adopted by innovative organizations looking to capitalize on foreign talent that isn't very mobile. An example is the drug-research consortium that runs innocentive.com.

Offshoring Individual Projects

Organizations that have a well defined outsourcing program mitigate their risks of outsourcing by dividing the work into small, more manageable projects that they outsource to vendor organizations. Managers at client organizations who have well defined deliverables, programs or modules to be developed outsource them to vendors with whom they may have relationships.

Global Delivery Onsite/Offshore Model

This is the classic offshoring propagated by most software service providers, where they take on the project, module or program from a client organization, deploy a small team onsite that works with the client managers and teams and coordinates work with the offshore team that does the bulk of the work. This is a more mature stage of the "offshoring individual projects" approach.

In this model, multiple projects, and programs at the client organizations are outsourced to a vendor, which also takes on the end-to-end program management and delivery on behalf of the client. For the outsourcing vendor organization, it's a step up the value chain; for the client organization, it's a value-added service since their employees don't have to manage the nitty-gritty of individual projects. Rather, the outsourcing organization's employees focus on managing the relationship and program and ensure that the vendor delivers as agreed.

Multi-vendor Offshoring (Multisourcing)

In the discussion on offshoring models, we've assumed that the relationship is between a client and a single vendor. However, in reality, a client may have multiple vendors working on a project or initiative. Organizations attempt to de-risk their outsourcing strategies by empanelling a selected list of vendors ("preferred vendors") from which individual projects and managers opt to select and source work.

Offshoring can be a complex strategic decision. Since it's hard and expensive to change course midstream, organizations and business leaders need to spend considerable time strategizing and planning the model suitable for their specific business needs. The models highlighted in the discussion are some of the most common ones encountered. Clients in the west are learning about the pros and cons of the different models offered by players in the marketplace, in some cases specifying a hybrid model tailored to their businesses. Many large service providers also offer a mix-and-match portfolio of options to clients and sometimes draw a roadmap to migrate from one model to another as the client's understanding of the offshoring business matures.

from http://www.sourcingmag.com/content/c060913a.asp by Mohan Babu

Culture Matters: 6 Tips for Improving the Cross-Cultural Competency of Offshore Teams

When I present seminars on Indian business culture to American managers and technical professionals involved in offshoring or offshore outsourcing to India, someone inevitably asks, "So what are our offshore teams and counterparts in India being taught about American business culture?"

The answer is, "More than they used to, but seldom at a level deep enough to inculcate the attitudes, thought patterns and behavior norms that would ensure optimal effectiveness in working with Americans."

Training in "soft skills" is no longer as undervalued in India as it used to be. Growing numbers of Indian companies are coming to realize that the ability of their employees to communicate and interact more effectively is an important competitive factor. American companies in India are also showing more keenness to develop the business and leadership skills of their Indian employees and to move gradually from the cheap labor or staff augmentation model to one where the Indian operation is a value-adding center of excellence.

But how are offshore teams in India being trained to improve their cross-cultural competency?

Currently, the approach tends to be in-house programs developed by a local human resources staff that has often spent little if any time in the United States work environment or engaging local training providers who offer generic programs on a wide range of "soft skills" topics. According to a recent report from Bangalore, local cultural awareness program providers are often entrepreneurs with a background in the hospitality industry.

While these may be worthwhile first steps, their impact is often superficial. The content of such cultural training will tend to be weighted towards form more than substance -- more concerned with handshakes, business cards, dining etiquette and accent neutralization than the deeper core value differences that affect business culture and work relationships.

For American companies that want their offshoring or offshore outsourcing strategy in India to have the best chance of success, and Indian service providers that want to differentiate themselves from the competition through employees who are able to work well with American counterparts, I recommend the following six best-practice strategies for assuring that offshore teams will develop the required cross-cultural competency in American business culture:

--> Tip# 1. Get executives to value cross-cultural training.

Build commitment from the highest level possible in the company that training offshore teams in American business culture is a valued (and funded) strategy in support of productivity, and assign clear ownership and accountability for the execution of this strategy.

--> Tip# 2. Make the training a team effort.

Get involvement of specialized high-level outside expertise, the business units involved in the offshore relationship, and internal training and HR functions in developing the best possible model for delivering the training.

--> Tip# 3. Bring in outside experts.

For best results, use training content and delivery by specialists with direct experience and in-depth knowledge of both American and Indian culture, as well as expertise in the field of cross-cultural communication.

--> Tip# 4. Train on both shores.

In the case of American companies, provide coordinated training of the offshore Indian teams in American business culture and training of the onshore American teams in Indian business culture.

--> Tip# 5. Integrate training into new employee orientation.

For both American companies with operations in India and Indian providers of outsourcing services, integrate training in American business culture as part of the regular induction processes for new employees. This applies not only to those who may be going to the United States, but all those who will be working with American counterparts, whether face-to-face or virtually.

--> Tip# 6. Reinforce the training with mentoring.

Engage onshore and offshore business unit heads and project leaders in reinforcing the content of the training. This involves ongoing mentoring of the offshore teams in the elements of American business culture that need to be practiced for success in working with Americans.

According to Goran Strangmark, MphasiS senior VP and head of sales for North America, cross-cultural competency in American business culture may become an important quality differentiator for offshore global IT and BPO services working with or for American companies, justifying the investment in the development of this skill set.

"Market forces will tend to make Indian professionals and companies who adopt the practices of American business culture more successful, and they will outcompete their non-adopting competitors. But while we have seen successful examples of people doing it with very little guidance, this process can be a long struggle, and good training programs can certainly speed up progress and alleviate the pain."

from: http://www.sourcingmag.com/content/c060911a.asp by Karine Schomer

2010 07 07 14 02 Agile Development From Argentina Lessons Learned In Nearshore Outsourcing

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China’s Software Outsourcing Industry In Urgent Need Of Creating The Brand

With the rapid development of China’s IT industry, China’s software outsourcing industry has also all the way into the disease. But the industry has noted that, unlike India, software outsourcing country, the Chinese software outsourcing there are still many aspects need to work, one of the most critical is the urgent need to establish a well-known brand of China’s software outsourcing.

Recently by Microsoft at its headquarters in China’s “2008 China Business Exchange Day” activities, many domestic software outsourcing business representatives to face with the participants on the exchanges and discussions, and discussions with Microsoft for more in-depth cooperation in matters related to outsourcing. Soft international, senior vice president of Fanny Chan said that many multinational companies choose to outsource when the first thought was India, not China, one important reason for this is because there is no outsourcing of the brand. “In fact, we have done a lot of things, we do not know, as a nation in terms of China’s own brand of efficiency is not outsourcing. Chinese companies enter the international market, if you really want, then it will not work.”

CCID Consulting’s research data shows that in 2007 global software outsourcing market reached 56 billion U.S. dollars, an increase of 16.7%; in 2007 China’s software outsourcing market reached 2.01 billion U.S. dollars, an increase of 40.6%, indicating that China’s software outsourcing is higher than the rate of global software outsourcing development, software outsourcing has become China’s software companies achieve economies of scale and internationalization of the impetus and source of profits.

However, “China’s software industry, more scattered, the top 10 software companies accounted for only about 20% of the market share, while the U.S. the corresponding figure was 70%.” Microsoft China R & D Group, senior director of strategic cooperation, said Shen Yuan-qing. Meanwhile, India, the Chinese software outsourcing enterprises are still relatively small, the largest number of enterprises until the number of thousands of people, while the number of India’s leading companies have reached 7-8 million people.

However, China’s rapidly growing up in a number of software outsourcing by multinational enterprises are the trust and attention. Jin, vice president of the wave of the World Section small state said the company in 2004 signed a global strategic partnership with Microsoft. “We have received 25 million dollars in Microsoft’s investment, this investment is already 400% return on investment for Microsoft, which testifies to the strength of China’s outsourcing companies.”

However, the brand is increasingly becoming China outsourcing enterprises to further expand the size of the bottleneck. In the United States Worksoft New York Stock Exchange-listed company from 2005 started to accept orders for Microsoft’s headquarters in contracting, “but along the way, feeling very hard. Because it can only rely on the successful delivery of a month to win customer acceptance, not the brand effects. “Evans said the company responsible.

“At present, the Government has vigorously promoting outsourcing, has done a lot of infrastructure. From the whole industry perspective, the next step necessary to create a China outsourcing ecosystem, in order to promote further growth in the industry.” Fanny Chan said.

Meanwhile, Jin small states that China should make full use of its mobile, Internet users worldwide the industry’s leading edge in the domestic industry to learn from good experiences. “We should not only meet all to learn from others, while we may sum up some outstanding experiences, as well overseas. For example, if you want to put the data service center in India, it may be some multinational companies fear that if released in China, then perhaps it is our advantage.

From: http://www.topchinasuppliers.com/chinas-software-outsourcing-industry-in-urgent-need-of-creating-the-brand.html

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Under The Economic Crisis, China’s Software Outsourcing Industry, Where To Go From Here?

The global financial tsunami, so that the U.S. financial industry on Wall Street plunged into an unprecedented crisis, the five major investment banks collapse one after another, the financial sector have started layoffs and pay cuts. Is highly dependent on the U.S. and European financial services needs of the global offshore outsourcing industry, has also been a serious blow.

January 14, 2009, the world-renowned consulting firm McKinsey published data, the global offshore outsourcing of production in 2007 reached 60 billion U.S. dollars, while China accounted for only less than 10% of the overall market share.

In addition, in January 2008 to September, the financial sector for more than 20 million U.S. dollars worth of large outsourcing contracts increased from 130 down to about 100 copies, the total contract value fell from 18 billion U.S. dollars to 11 billion U.S. dollars.

As a global service outsourcing market participants, China’s software outsourcing industry has also suffered a serious blow. According to McKinsey, China’s 14 cities in 75 software and IT services company, as well as a number of Chinese government officials and China’s service outsourcing park manager interviews show that China’s service outsourcing industry growth rate is still not fast enough.

Impeding the development of China’s service outsourcing industry, the cause? In the context of the global financial crisis, the domestic service outsourcing industry, how should they respond? Under attack in the real economy, IT spending to reduce the software orders compression, yuan appreciation, software exports under pressure of the special period, give the plight of China’s software industry has brought about development opportunities and do?

At present, China’s service outsourcing industry, carriers formed a “three clusters” (the Bohai industrial clusters, industrial clusters Yangtze River Delta, Pearl River Delta industrial clusters), “East map” (the central and western areas and the eastern three clusters play their respective advantages and cooperate with ) pattern. As a key state-supported service outsourcing base cities, Chongqing, Chengdu, Xi’an, Wuhan has a strong policy support, a wealth of information technology professionals and competitive cost structure, is the development of service outsourcing industry, inland areas with the most potential and advantages lies. However, the global management consultant AT Kearney vice president Zhang heavenly view, the central and western development of software outsourcing software outsourcing business and the coastal cities compared to inland cities do not have the language advantage. Dalian has a large number of people proficient in Japanese, so you can focus on to the development of software outsourcing; Shenzhen Cantonese advantage because you can get from Hong Kong and Macao regions of secondary software outsourcing from Europe and the United States transfer of orders, while the central and western cities do not have these advantages. In this regard, the central and western cities on the one hand to strengthen the mastery of the 12 foreign language software, training of personnel and the introduction of work, while at the same external demand and domestic demand, orders will be combined to form a Midwestern characteristics of offshore outsourcing and onshore industrial structure of outsourcing go hand in hand.

In addition, there are also a number of key issues continue to hamper the industry and greater development. First of all, the industry remains highly fragmented pattern of submissions. China has not yet appeared to reach a certain scale (and service outsourcing revenues over one billion U.S. dollars) in business. The lack of industry with the world’s leading enterprise-scale comparable to large-scale enterprises can not effectively access to value, especially in large outsourcing and integration projects, or in need of scale in areas such as infrastructure outsourcing. This is exactly why China in the global service outsourcing areas of less well-known one of the main.

Second, compared to other, more well-known service outsourcing destinations, China is still a lack of a clear value proposition. IT decision-makers often referred to multinational companies in China do not understand the successful implementation of large-scale service outsourcing project successful precedent, and have always been more suitable for China as a global manufacturing center, rather than the emerging concept of service outsourcing powers. At the same time, for the potential risks of outsourcing in China there are also a considerable degree of misunderstanding, such as China’s IPR protection problems.

Third, the potential contracting companies do not generate enough demand to promote the growth of domestic service providers. McKinsey surveyed the software and service outsourcing enterprises, 51% pointed out that domestic customers would like to control the key business support functions within the enterprise the habit of thinking is that these companies do not outsource more business in the first place. As a result, the domestic market has not formed a strong domestic growth of service outsourcing enterprises pillar, or to international service providers, the great attraction.

Despite the financial crisis on the service outsourcing industry may be short-term negative impact, but China’s service outsourcing enterprises, the midst of the crisis bears more opportunities. It is understood that six major financial institutions in the United States in five intends to continue to maintain or expand within the next 6-12 months, service outsourcing and offshore programs.

The current financial crisis in many developed countries have a high-quality technology and client network information services company drop in asset prices, in order to have sufficient funds, while strategy can produce synergy of Chinese enterprises with more opportunities for potential acquisitions. Open global markets, as China’s software and service outsourcing enterprises is key to achieving growth targets, the Chinese market will expand and deepen the global business portfolio opportunities. China’s service providers with international service providers form a strategic alliance relationship to domestic customers by providing international partners to introduce new service capabilities.

Moreover, with the development of the global financial crisis, there will be familiar with the international market, customers, possess a wealth of industry experience, professionals will be looking for further career development opportunities, in addition to emerging economies such as China powers the prospect of excellent enterprises, if the Enterprises can create a suitable working environment – including a competitive salary, can be promoted to senior positions in the career development path and inclusive diversity, corporate culture, you can attract more outsourcing in developed countries experienced professionals to join China’s enterprises.

China is in the development of service outsourcing industry, a key crossroads, despite many challenges, but as long to grasp the opportunity, there is still opportunity to create brilliant.

from: http://maxi-pulsa.com/under-the-economic-crisis-chinas-software-outsourcing-industry-where-to-go-from-here/

Outsourcing to China

Following 20 years of economic development, China’s transportation, telecommunications, and network infrastructure has grown and improved rapidly, some reaching the international standards of developed countries. Compared with that of developed countries, China’s transportation, telecommunications, and network infrastructure are more cost effective, providing a solid foundation for the outsourcing business. China also has obvious advantages over other service providers, including high speed Internet and broadband access, stable and uninterrupted dual power supply in main software sites, and around 150 airports that connect most of the primary and secondary cities. The low cost of IT infrastructure hardware further strengthens China’s cost advantages. In terms of China’s software environment, it has a good cultural environment, many outsourcing parks that are ideally located, as well as many comprehensive support facilities providing convenience to service providers, all of which significantly attract local and international service providers.

China’s software outsourcing industry has become increasingly dispersed regionally. Due to the cost increase in primary cities such as Beijing, Shanghai, Guangzhou, and Shenzhen, service providers are moving their operations to 2 tier cities. At present, all major offshore software outsourcing service providers in China have established themselves in cities such as Nanjing, Xi’an, Chengdu, Chongqing, and Wuhan, which has somewhat alleviated the pressure of rising salaries. This tendency is likely to grow in the years ahead. At the moment, China’s software outsourcing market is still centered in Beijing, Shanghai, and Guangzhou; bridged by the international ports of Dalian and Shenzhen; and supported by Nanjing, Xi’an, Chengdu, and Wuhan.

The project management level and process management capabilities of China’s software outsourcing companies have also come a long way. Most software outsourcing companies have obtained related certifications. In 2006, about 80 software companies in China had a workforce of more than 1,000 employees each. The number of companies with software sales revenue of over RMB 1 billion has increased from 12 in 2002 to 35 in 2006 and the number of companies with software sales revenue of over RMB 100 million reached 396. As of 2006, 69 of the 152 key software enterprises in the State Programming and Layout had revenue of over RMB 100 million. By the end of 2006, 38 software companies in China were Capability Maturity Model (CMM) 5 certified, 23 companies were CMM4 certified, and over 200 were CMM3 certified. In addition, 2,136 companies have obtained service integration qualifications. Large Joint Ventures organized by Indian BPO and ITO providers in China have also accelerated the development of China’s BPO and ITO capabilities. More and more buyers are recognizing China’s strengths in its growing number of software outsourcing service providers, improved quality and customer satisfaction with its software outsourcing projects. Software outsourcing service providers in China have also improved their competitive edge through mergers and acquisitions (M&A). Since 2006, the industry has seen rapid growth in M&A, indicated in its change in market share. In 2005, the 10 biggest software outsourcing service providers in China had market shares of about 24.2% each, which by 2006 increased to 30.7%.Some large high performance software outsourcing service providers have adopted the strategy of “going global” and managed to cultivate international markets. Others established R&D, marketing, and service institutions abroad, trying to get close to outsourcing buyers’ markets and work out solutions that can meet both the business standards of service providers and special requirements of service buyers. For example, UFIDA established a branch in Tokyo, Japan in 2006. Langchao expanded its share in the embedded software development outsourcing market in Japan by merging with Japanese software company, By “going global,” China’s outsourcing companies are cultivating markets on a global scale. Its software outsourcing service chain is extending far and beyond, catering to more and more customers. Outsourcing to China brings more opportunities in the fast growing Chinese market. Technology services companies must pay careful attention to China’s regulations and changing technology standards and adapt their strategies accordingly. China will become the largest software outsourcing player, and it will be to your own peril to ignore this powerful and important market.

From: http://www.unisoftchina.com/outsourcing-to-china/