Outsourcing is reaching a new level of maturity as Indian wages begin to edge upwards towards European levels and new offshore outsourcing destinations appear as far afield as China and Latin America. So how can businesses, particularly in the financial services sector, take advantage of these developments and avoid outsourcing pitfalls? Are there lessons which apply across all industries?
The tectonic plates of the outsourcing market are shifting again; Indian outsourcer Tata has recently announced it is moving jobs to Mexico where labour costs are cheaper. Recent IDC research reveals the level of investment that is going into promoting China as an offshore outsourcing destination and predicts it will surpass India by 2011. Certainly China, far from being a passive recipient of outsourcing work, is actively pursuing the business, adding technical infrastructure, and even whole cities, to accommodate demand. Similarly to India, it has a well-educated workforce and English is widely spoken.
On the other hand, the past few years have also seen companies such as JP Morgan and Sainsbury’s move outsourcing projects back in house from offshore locations. So what is happening to outsourcing? Why the state of flux?
Quality, not quantity
After nearly ten years since the first outsourcing phase to far-flung destinations, the industry in western Europe is beginning to come round to the opinion that best practice in outsourcing is not about hunting down the cheapest person, but analysing the needs of the project before deciding where the work should go. This consideration gives a full understanding of the scope of work and the true cost of outsourcing it. Successful outsourcing is not just about the lowest day rate, wherever in the world that may be, it must also take into account the management time involved in working with multiple locations, the economic and political risks and the geographic and cultural differences which may arise.
Thus, in this ever-changing industry, it is important to consider the ‘four Ps’: project, people, price, and only then, place. The needs of the project must come first, followed by a calculated assessment of the type of people the project will need over its lifespan. The answers to these first two Ps will determine the outcomes of the third and fourth. When all the costs have been considered, a decision can be made about where to send the work. Rather than a component of the decision, the location is in reality the output of the equation.
Like many successful decisions in business, outsourcing needs time spent considering the needs of the project rather than simply plumping for unconsidered wholesale change to the lowest cost supplier.
Rather than starting with the question “where is the cheapest place I can send the work?”, first ask about the nature of the project: how complex is it? How likely is it that the scope will change? What is the timescale? How much risk am I prepared to accept and do I need a supplier or a partner? In the financial sector in particular, companies are beginning to ask what happens to the difficult, fast-moving parts of the project, or projects where the software is continually adapting in response to changes in financial instruments, and even what happens when distance makes the management overhead high, or the technical ability is not matched by cultural and sector understanding?
A project is rarely static, particularly in the financial services sector. The development phase of an IT project may need to be kept close to home as the project is fine-tuned and adapted in line with changing needs. Then, once this phase is complete, the testing and running of the solution could be done somewhere else, involving different levels of management attention. Thus a project that starts as an onshore or nearshore implementation could move to an offshore location.
Increasingly, consideration of the project needs is leading not to wholesale outsourcing to a far-flung destination with the lowest labour costs, but to a three-tier solution. For a UK company, this may mean having people based onshore (for example, London), at a nearshore location (Spain) and farshore (Brazil, Mexico or India) to provide a combination of the management, development and processing elements of the project.
Any business looking to outsource must consider the type of people the project needs, their experience and how many of them will be needed. Who will manage the project? How and where will they be based? This is where European workers can often have the edge; businesses are beginning to take advantage of the comparatively low cost of living in southern and eastern Europe. Spain, for example, enables a UK business to keep the project close to home, reducing management time and allowing the scope to be more easily adapted. It also allows for some cost benefits while retaining highly trained staff with European cultural understanding.
Thus the first two Ps are intertwined and the answers to these questions will determine the outcomes of the final two Ps, price and place.
An ever-important discussion, but only if all things are equal. At this point, businesses should ask themselves, how does the budget compare to the timescale? How important is the labour cost and have we properly considered the management time? Do I need a three-tier solution and is the project likely to need different destinations at different stages? Am I prepared to accept the increased complexity and risk of using multiple locations? This is the moment to think about up-and-coming offshore destinations such as China and Brazil.
However, the story does not stop there. The exact costs of the savings are often not clear; increased travel and transport costs, communications strategies and additional staff on-site all need to be costed and taken into account.
Finally a decision can be made about where to send the work, but rather than a component of the decision, it is in reality the output of the equation. If the project requires lots of people doing the same, relatively simple task, then maybe India or China are the best options. South America is rapidly becoming a preferred location as its time zone makes it efficient for both North American and European projects and indeed could be considered to be a lower risk of terrorist attack than either London or New York. But, as many banks are already finding out, with anything remotely complicated it is more effective to nearshore the project.
The Indian model for outsourcing evidently works and provides significant savings for the large, standard infrastructural IT components in banks, and China may yet prove to be the next big thing in IT outsourcing with its very low costs and educated workforce, but the flipside is increased risk. Political and geographical considerations must be taken into consideration. China is up and coming, but it has severe political issues, particularly with freedom of information, as Google recently discovered.
This new phase in the ever-changing outsourcing market indicates that increasingly, it is no longer merely about cheap day rates, but is much more complex. The global financial services sector will always need to balance cost, location, culture and risk to gain competitive advantage with its IT outsourcing projects. With careful consideration of the four Ps businesses can ensure that outsourcing is not merely a question of expensive Europe or cheap India, but a smart combination of all the options that will create a successful outsourcing strategy.
Graham Underwood is managing director of GFT UK Ltd, part of German-based IT solutions provider GFT Technologies.
DOS AND DONT'S
- Spend time thinking about the scope of the project.
- Consider having an outsourcing team in house.
- Decide on the cheapest day rate and then send everything out expecting no further contact.
- Forget the so-called hidden costs – time spent travelling to and from offshore destinations, management distraction and tiredness.
- Ignore economic, cultural and political risks.