Offshore Outsourcing The Challenge and the Prize Lyn Elliott Dellinger 001-757-565-5152 LDellinger@pia-1.com Agenda Introduction to outsourcing The good news growth and The bad news cautions The competitive edge and how to get it December 2003 Outsourcing Page 1 December 2003 Outsourcing Page 2 What Is Outsourcing? Outsourcing generally refers to the practice of farming out jobs from their home base to other countries to cut costs. But it is much more than that It is a long-term relationship for a business activity over which the provider has significant control and managerial discretion. Outsourcing is using outside business resources to perform activities and processes instead of internal capabilities. December 2003 Outsourcing Page 3 What do Outsourcing Customers Want? Highest quality work products Lowest possible cost On-time delivery Reliability Organizational stability This is what all buyers expect from their Suppliers! December 2003 Outsourcing Page 4 Why companies Outsource Foster innovation Conserve Capital 2% 5% Improve Quality 5% Increase Speed to Market 5% Create a Variable Cost Structure 13% Grow Revenue 2% Focus on the Core of the Business 32% Reduce Operating Cost 36% Agenda Introduction to outsourcing The good news growth and The bad news cautions The competitive edge and how to get it From: Information Week December 2003 Outsourcing Page 5 December 2003 Outsourcing Page 6
New product or technology purchases IT consulting or outsourcing Research and development Salaries and benefits Applications Everything else 02=356.6m 03=353m December 2003 Outsourcing Page 7 How the Average IT Budget is Spent 19.5% 14.7% 2.5% 32.1% 20% 11.2% 2002 17.0% 18.0% 3.3% 27.9% 21% 2003 12.8% Data Source: InformationWeek Outsourcing as Part of Overall Budgets 40 35 30 25 20 15 10 5 0 1998 1999 2000 2001 2002 2003* 2004 December 2003 Outsourcing Page 8 IT Budget Data Source: META Group US IT Outsourcing Survey US IT Outsourcing Survey-2 The US has 70% of outsourcing global US corporations spent more than $30 billion on IT outsourcing in 2002 ($60 billon budgeted) 73% of US executives said their companies outsource one or more business processes 84% of large company CEOs are satisfied with their outsourcing experience Data Source: Price WaterHouse Coopers Survey December 2003 Outsourcing Page 9 Almost all (95%) CEOs who outsource will increase spending next year Market perception has shifted from outsourcing as a way for companies to meet short term financial objectives to a technique for strong companies to improve competitive positions. Business Process outsourcing is growing estimated at a compound annual rate of 21.1% from now through 2004. Data Source: Price WaterHouse Coopers Survey December 2003 Outsourcing Page 10 New Trends in Offshore Outsourcing IT outsourcing successes have caused companies to look further for other opportunities There are significant gains in outsourcing new industries New Trends in Offshore Outsourcing Other Retail Manufacturing Telecom IT Financial services 0 5 10 15 20 25 30 December 2003 Outsourcing Page 11 Data Source: Gartner Group Industry December 2003 Outsourcing Page 12
The China Outsourcing Market Share China expected to catch up with India by 2006 Big domestic market plus offshore customers Improving infrastructures Shanghai strategically placing itself to be the world leader in R&D by 2010 Multi-nationals are shifting orders to Shanghai Last year the city s SW exports were up 2.4 times from 2000 (Valued at US $175 million) Low cost, rich talent pool, and good quality of life Stable political & social environments Agenda Introduction to outsourcing The good news growth and The bad news cautions The competitive edge and how to get it Data from articles printed in the China Daily (Oct 15) and Business Weekly (Oct 28) December 2003 Outsourcing Page 13 December 2003 Outsourcing Page 14 Concerns Outsourcing Worries What concerns were part of your company analysis of outsourcing? Quality of work High or unexpected costs Security of data or physical assets Negative impact morale Foreign countries' laws Backlash and political issues Shareholder criticism Media criticism Picketing or boycotts Union walkout Other In a Nutshell Quality, unexpected costs, and project delays are the top concerns of managers considering offshore outsourcing. To head off quality problems, managers need to focus on project management discipline and communication and cultural barriers that can send efforts off track. 0 10 20 30 40 50 60 70 % of respondents From Information Week 10/02/03 December 2003 Outsourcing Page 15 December 2003 Outsourcing Page 16 Taken from an article by Mary Hayes published in Information Week Failure to Manage Half of all outsourcing contracts fail due to the client's inability to manage their service provider or because the client's requirements have changed. Outsourcing failures abound, experts say Business Week, November 20 2003 by Ciaran Buckley If an IT manager thinks he can hand a project to a third party and be done with it, he's wrong. Outsourcing Management: Mistakes to Avoid IT Management April 8, 2003, By Sharon Gaudin December 2003 Outsourcing Page 17 December 2003 Outsourcing Page 18 Failure to Communicate Successful outsourcing is dependent on not only how well you define your customer requirements but how well you can measure how they're being met. Delivery and quality aren't always used in the same sentence, but they should be. Be very specific and deliberate when documenting your expectations on delivery and quality. Harris Kern Enterprise Computing Institute The The root root cause cause [of [of failure] is is the the missing link link between the the customer's expectations and and the the perceived results. This This is is due due to to the the lack lack of of understanding between the the service provider and and the the customer. Source: Source: Software Software Outsourcing Outsourcing India India
Outsourcing Risks Cultural Differences Language Barriers Different Business Practices Different Time Zones Hidden Costs Contracted go betweens Travel Change needed in internal procedures Agenda Introduction to outsourcing The good news growth and The bad news cautions The competitive edge and how to get it Most data taken from Business Week article Hidden Costs of IT Outsourcing December 2003 Outsourcing Page 19 December 2003 Outsourcing Page 20 Elements of A Successful Offshore Partnership Partnership Quality culture fit Maturity and stability of offshore operations Bridge culture and process gaps Flexibility in provision of service Compatibility between the hiring IT organization and offshore outsourcing firm s quality standards Offshore outsourcing firm s ability to mitigate risk Offshore sourcing firm s ability to manage diverse teams and understand cultural nuances Offshore sourcing firm demonstrates the ability to scale and shift resources when necessary Offshore outsourcing firm is Process and metrics committed to process, driven methodologies, and metrics management From a Keane White Paper Offshore IT Outsourcing December 2003 Outsourcing Page 21 Shopping Offshore Development needs are identified that can t be readily met at home Identified willingness to work together to meet the needs Criteria considered for selection of offshore developers who can provide: Higher Quality Higher Reliability Lower Cost Process Centric Experience in Domain in Question December 2003 Outsourcing Page 22 Process Management Your process The organization with more mature processes is more competitive because it is generally able to provide better quality products at lower cost Client s process Is your client compliant with the models required of the suppliers? Quality & Process Control Models Six Sigma ISO9001 CMM (lots of options) CMMI (various disciplines) Continuous Representation Staged Representation December 2003 Outsourcing Page 23 December 2003 Outsourcing Page 24
Software CMM System Engineering CMM System Engineering Capability Model Software Acquisition CMM System Security Engineering CMM Personal Software Engineering CMM FAA-iCMM People CMM SPICE Model IPD-CMM Process Models staged continuous continuous staged continuous Staged Continuous Staged Continuous Hybrid Software development System engineering System engineering Software acquisition Security engineering Individual software development Software engineering, systems engineering, and acquisition workforce Software development Integrated product development CMMI to the Rescue Integrates systems and software disciplines into one process improvement framework. Provides a framework for introducing new disciplines as needs arise. Disciplines currently covered are: Software Systems Integrated Product and Process Development, and Supplier Sourcing Don t forget CMMI Does not directly address Six Sigma & ISO Compliance December 2003 Outsourcing Page 25 December 2003 Outsourcing Page 26 Quality Leverage Points People A Procedures B C Process December 2003 Outsourcing Page 27 D even our finest people can t perform at their best when the process is not understood or operating at its best. Mike Phillips, European SEPG Conf. Technology Major Major determinants of of project project cost, cost, schedule, and and quality quality December 2003 Outsourcing Page 28 Defined Processes Guide teams in knowing what to do, what they can expect from their co-workers, and what they are expected to provide. Provide organizations with a consistent working framework. Have the flexibility for individual adjustments allowing for coordination of the way people do their work. Improve communication and understanding of the processes in use. These are all prerequisites for all maturity levels. December 2003 Outsourcing Page 29 Process Standardization Reduces problems in training, review, and tool support. Contributes to overall process improvement through individual project experiences and lessons-learned. Provides the basis for process and quality measurements. It is impractical to create new processes for each project. CMMI works for Buyers and Suppliers Both parties know more about what to expect Easier to ensure that you have agreement Both are following similar rules It is easier to understand what is expected if we all follow processes December 2003 Outsourcing Page 30
CMMI Supplier Agreement Management Main Activities: Determining the type of acquisition that will be used for the products (services) to be acquired. Selecting suppliers Establishing and maintaining agreements with suppliers Executing the supplier agreement Accepting delivery of acquired products Transitioning acquired products to the project Implementation adds predictability to the Buyer s processes, Suppliers also implement when they purchase hardware or services Buyers may tailor SAM to better fit outsourcing. December 2003 Outsourcing Page 31 Unfortunately, not all buyers are compliant! Offshore Partner Selection Criteria* Quality Recent quality assessments at offshore facilities Recognizes the importance of CMM within the client site Management Demonstrated experience in distributed team management Exhibits project management certifications at the individual level Generates effective engagement management tools Keane White Paper Process Improvement Management December 2003 Outsourcing Page 32 Offshore Partner Selection Criteria-2 Dedication Dedicated to deliver long-term competitive advantage Offers long-term client relationship references Invests in training and employee retention Security Formalized and documented contingency plans Insulation from risk, nuances and complexities Ability to seamlessly distribute work to local facilities Offshore Partner Selection Criteria-3 Infrastructure Illustrates telecommunications capabilities and technology equipment Demonstrates rapid and seamless migration abilities Delivery Demonstrates a commitment to metrics-based measurement Proves consistent delivery on-time and on-budget December 2003 Outsourcing Page 33 December 2003 Outsourcing Page 34 December 2003 Outsourcing Page 35 The Supplier Agreement The Supplier Agreement should documents the following: Statement of work, specification, terms and conditions, list of deliverables, schedule, budget, and acceptance process Who from the project and supplier are responsible and authorized to make changes to the supplier agreement How requirements changes and changes to the supplier agreement are to be determined, communicated, and addressed The Supplier Agreement (2) Standards and procedures that will be followed Critical dependencies between the project and the supplier The type and depth of project oversight of the supplier, procedures, and evaluation criteria to be used in monitoring supplier performance Type of reviews that will be conducted with the supplier December 2003 Outsourcing Page 36
The Supplier Agreement (3) The supplier s responsibilities for ongoing maintenance and support of products Warranty, ownership, and usage rights for the products Acceptance criteria Dealing with an Immature Buyer Ensure that requirements are understood by both parties Ensure that critical elements of the Supplier Agreement are present and understood. Ensure that the management process is understood by both buyer and supplier Follow processes regardless of what the buyer will pay for Build costs of following processes into the estimate provided to client Be ready to tell buyer no December 2003 Outsourcing Page 37 December 2003 Outsourcing Page 38 Contract Negotiation Allow time to ensure all bases are covered Be detail oriented Remain focused on the primary objectives Verify and understand the assumptions Consider the complexity Success Factors for Offshore Development Competent process improvement expertise is essential Lines of communication need to be well established Requirements Management process accepted by both parties and well practiced Program Management process must be proactive December 2003 Outsourcing Page 39 December 2003 Outsourcing Page 40 Summary Understand cultural, communications, and language differences between buyer and offshore supplier Focus on the Long-Term Establish strong relationships with buyers Establish repeatable, institutionalized processes to support the overall business objectives Improved processes are a prerequisite for competing in the global market CMMI implementation can help Questions? December 2003 Outsourcing Page 41 December 2003 Outsourcing Page 42
Presenter s Bio and Contact Information Lyn Dellinger has extensive experience in project management, software development management, acquisition, process engineering and education. She was an Acquisition Management Professor at Defense Systems Management College, and was a member of the Steering Group for developing the Software Acquisition Capability Maturity Model at the Software Engineering Institute (SEI) and was a reviewer of the CMMI SM. She was a consultant for Contact information: the US Congress for acquisition reform and PIERA Consulting information technology. Ms. Dellinger has published Rm 501, 309 Yu Yuan Road and presented papers on management, software Shanghai PRC 200040 acquisition, software engineering methodologies, Tel: 6249-3276 and process improvement. She is a Certified US Tel: 1(757)565-5152 Computer Professional, a Project Management E-mail:LDellinger@pia-1.com Institute certified Professional Project Manager, and is an authorized SW and SA CMM Lead Evaluator under the SEI Lead Appraiser program. December 2003 Outsourcing Page 43