Expert Opinion

Competing Globally

There are a number of benefits to outsourcing, including cutting costs, achieving greater efficiencies, freeing up resources to focus on core business matters, and tapping into new expertise. Jeff Lebowitz [1], the founder of Mortech LLC in the United States, cites Friedman‘s [2] observation that “the 21st century opened with a world-shaping confluence of factors: the Internet, global fibre-optic networks, trade deregulation and an explosion of software.“ Friedman concluded that the combination of these elements created a platform for delivering intellectual capital from anywhere in the world at any time. This has led to a real “level playing field,” in which organisations and individuals are enabled to compete globally. In this environment, certain types of work have a tendency to migrate to a country that possesses a comparative advantage for performing that work. To succeed, “offshoring” operations must be able to carry out required work as competently—and more economically—than in any other competing country. Global broadband communication capabilities have enabled organisations to become “virtual“ corporations, in which businesses are now defined by a mesh of interdependent relationships. Such systems can create strategic advantages that were not possible within conventional organisational structures.

Alex Blyth [3], of the UK’s Director magazine, writes that the enlargement of the European Union has opened up new labour markets. Organisations are now able to use both “far-shore“ and “near-shore“ labour pools to fulfil their differing outsourcing requirements. While distant locations such as India or China have certain attractions, many UK firms have found it advantageous to outsource closer to home. Near-shoring can reduce risks, enable easier face-to-face contact and significantly reduce business travel costs. Blyth cites the Hackett Group as stating that near-shoring can cut manufacturing costs by up to 90%, and although labour costs may be less using far-shore operations, the shorter near-shore supply chains can reduce constraints and management costs. Peter Molleris, a partner at Deloitte, is also cited as stating that “near-shoring and offshoring are increasingly seen not as alternatives, but as components of a firm’s sourcing strategy.” An emerging business strategy involves locating high value front-office processes in near-shore locations, and lower value back-office processes in far-shore locations. A novel—and somewhat controversial—solution to the near-shore and far-shore balance was recently considered by US entrepreneurs David Cook and Roger Green, who proposed housing some 600 foreign technology engineers on a cruise ship anchored three miles off the California coast. The on-board employees would be legally classified as ship‘s crew and would therefore not be subject to US labour laws. This arrangement would allow organisations to enjoy the benefits of international outsourcing, but would have lower risks than those associated with long-distance offshoring projects.
 
Maria Trombly and Bill Marcus, freelance business and technology writers based in Shanghai, state [4] that most of China‘s software outsourcing is carried out for internal markets. Foreign clients account for just 10% of the total revenue, compared with around 70% in India. Even work carried out for multinational companies is commonly focused on Asia, with outsourcers translating Web sites and applications into Asian languages, and re-writing business applications for local currencies. The huge Asian market continues to attract outside investment; for example, Hewlett Packard (HP) currently employs more than 1,500 people in China. Analysys International, a Beijing-based market research firm, estimates that HP‘s share of the Chinese market is 4.4%, second only to IBM‘s 5.2%. Analysys also reports that, in the first quarter of 2006, Japanese clients accounted for about 60% of the non-domestic IT outsourcing work carried out in China. Hong Kong accounted for 10%, while the US and Europe combined accounted for just over 22%.

Managed IT Services and Security Concerns

As IT outsourcing continues to grow in popularity, particularly as a mechanism for cutting costs and reducing internal management requirements, more organisations are trusting vendors with the security of their critical data and software processes. However, although IT provisioning can be outsourced to other organisations, the responsibility and accountability for the security of information must always remain with the owner. Galen Gruman [5], principal of the Zango Group in the United States, writes that Chief Information Officers (CIOs) are ultimately responsible for ensuring that their organisations are protected, regardless of where the work resides. He suggests that a strategy is required for building in-house competence for security needs, and that security should continue to be monitored in collaboration with the outsourcer. When choosing a vendor to manage IT services, it is important to contact the vendor’s customers, and to conduct Web and other searches to check for publicised security failures, financial concerns or other indicators that may reveal deficiencies in the vendor’s services. Once this has been done, it is important to then (a) codify expectations, (b) establish monitoring mechanisms and (c) determine liability in the event of failure.

Gruman suggests the following process for monitoring the security of outsourced IT operations:

• Assess the risks involved and define the owner’s organisational security needs;
• Validate the vendor’s abilities through due diligence procedures;
• Clarify all requirements contractually;
• Continue to monitor the performance of the outsourcer.

Government Regulations

IT systems have become ubiquitous within modern business practices, which has brought with it a growing need for government oversight and regulation. H.A. Marquis [6], managing partner and chief technology officer of itSM Solutions, based in Lexington, North Carolina, writes that, like many other commodities, information technology is governed by the resource dependency theory, which states that “when a resource becomes so ubiquitous that it becomes essential to survival, the risks imposed by its absence outweigh the burdens of maintaining its availability.”

Increasingly, therefore, regulations are applied to IT services: calls to emergency services must be carried across digital telephone lines, regulations govern the use of electronic records and signatures, financial institutions are required to establish administrative, technological and physical safeguards to ensure the confidentiality and integrity of customer records and information. Regulations such as the Health Insurance Portability and Accountability Act and the Sarbanes-Oxley Act force companies to control, archive and report data in specific ways, making an organisation’s relationship with outsourcers more complicated.

As more and more important business practices are tied to IT solutions, outsourcing is becoming viewed as increasingly dangerous. Kurt Potter, research director at Gartner Inc., is cited as reporting that “end-user organisations are having tough experiences from their first-generation outsourcing deals and are learning how quickly their outsourcing contract becomes outdated. Declining asset lifecycles, constant business changes, cost, innovation, and cultural/business fit are affecting contract lengths.“

Marquis also cites a 2005 Deloitte Consulting study, which reviewed 25 organisations with a combined US$50-billion annual investment in outsourcing. The Deloitte study recorded that 70% of these organisations had negative experiences with outsourcing. A key finding was that outsourcing generated new risks, and that compliance with regulations was complex. 64% of the organisations had taken at least some of their IT functions back in-house as a result of their negative experiences. 17% of the respondents mentioned Sarbanes-Oxley regulations as being a specific difficulty in governing outsourcing relationships.

It is important to note that penalties for failing to meet standards imposed by regulations did not fall upon the outsourcing partner, but rather upon senior leadership within the hiring organisation.

Selecting an Outsourcing Partner

Regulations and laws increasing the penalties for security breaches have led organisations to become increasingly concerned about an outsourcer’s capability of keeping company systems and data safe. Robert Scheier [7], citing a Booz Allen Hamilton report, provides typical organisational responses to the following questions:

1. When selecting an outsourcing partner, what are the most important evaluation factors?

• Capabilities and quality of services
• Pricing of service and cost savings
• Provider’s security policies, capabilities and track record
• Financial strength and business stability
• Reputation, brand, and references
• Provider’s regulatory and compliance history
• Geographic factors.

2. Which factors present the biggest management challenges in evaluating and managing security in outsourcing relationships?

• Establishing effective security management requirements in contracts
• Monitoring, auditing, and evaluating vendor compliance with established security policies
• Evaluating and implementing security technology and process integration
• Acquiring and maintaining appropriate skills/capabilities to manage security
• Determining how much to invest in security in an outsourcing relationship
• Delivering effective training in policies and procedures for outsourcing providers.

IT Workers and IT Outsourcing

Nita Brooks, of the University of Arkansas, writes that IT outsourcing is defined as [8] “the significant contribution by external vendors in the physical and/or human resources associated with the entire or specific components of the IT infrastructure in the user organisation.“ The table below, which has been adapted from Brooks [9], provides a comparison of various types of IT outsourcing used in practice:

Brooks cites the IT Outsourcing Institute, which reported in 2001 that approximately 50% of organisations engaged in outsourcing did so to reduce and control operating costs. Outsourcing strategic IT functions to third-party vendors was seen as dramatically changing the nature of IT work, which has a potential impact on individual workers and their work environment. Factors related to this include occupational stress, job security concerns, job satisfaction issues and motivation. Outsourcing is believed to be a permanent part of the IT industry; therefore, it is desirable that the management and understanding of virtual teams should be enhanced. The following diagram, adapted from Brooks [9], depicts various challenges associated with IT outsourcing.

Fig 1: Workforce Challenges in IT Outsourcing

• Quadrant One represents the lowest level of challenge. The vendor is onshore and the contracts are selective.
• Quadrant Two represents outsourcing arrangements with a higher level of employee impact.
• Quadrant Three  involves the engagement of selective outsourcing to offshore vendors.
• Quadrant Four encompasses outsourcing arrangements that are likely to have the most significant impact on the individual and the environment in which he/she works.

Ralph Welborn and Vince Kasten [10], Unisys managers and authors, provide the following key points towards improving outsourcing performance:

Service Level Agreements

Outsourcing arrangements usually operate over multiple years, with a Service Level Agreement (SLA) being established to document the agreed performance levels and measures. Ian Hayes [11], of Clarity Consulting in the US, writes that SLAs are an essential part of outsourcing engagements, as they set boundaries in terms of the functions and services to be delivered, the volumes expected, acceptance criteria, and the desired quality of deliverables. A well-designed and crafted SLA can correctly define the expectations of both the client and supplier, and provide guidelines for the accurate measurement of performance objectives.

It is important to begin considering the nature of anticipated ongoing relationships with a vendor approximately 18 months before a multi-year outsourcing contract is due for renewal. Glen Wedel and Yvon Audette of KPMG believe that [12] the renewal of an outsourcing agreement requires at least as much effort from organisations as was put into finalizing the original agreement. Organisations should carry out a thorough performance review of the current contract term. This review should include both quantitative and qualitative assessments, along with other considerations such as:

1. Strategic Analysis: Is outsourcing still appropriate, i.e., should the outsourced services be core-competencies? Should a shared services arrangement be used or should portions of the services be repatriated? Is it time to consider offshoring all, or portions of, the outsourced services? Is a joint venture for sharing services among several organisations a suitable option or is it time to re-tender current services?

2. Tactical Analysis: Assuming that the current outsourcing arrangements are to continue, this is an appropriate time to envision (a) the ideal outsourcing arrangement for the organisation, and (b) how this is expected to develop over the renewal term. The following items should be considered for inclusion in new outsourcing arrangements:

• Scope of Services: Renewal is an ideal time to refine this.
• Service Levels: Are they still relevant? Have there been changes in technology, processes or in the importance of a particular service?
• Cost Drivers: Have there been changes? Should they be reflected in increased/decreased fees? 
• Compliance Considerations: The requirements of legislation and privacy provisions need to be factored into outsourcing arrangements.
• Change Control: Contractual arrangements should give user organisations the flexibility to make changes, particularly where essential issues such as risk and compliance are concerned.
• Governance: Eliminate problematic areas associated with former agreements.
• Request for Out-of-scope Services: This is an often under-estimated area of negotiations. Contract renewal offers an opportunity to seek better hourly rates for out-of-scope services based on historical volumes.
• Value for Money: It is important to evaluate costs before renewal. Besides re-tendering to test the market, benchmarking studies of comparable services can be a helpful exercise.

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