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The Outsourcing Revolution

The politics and peculiarities of outsourcing and offshoring are everywhere in the news. Here's what experts at Cyberposium 2004 had to say.

Ask any four people what they think about outsourcing and you'll likely get four different answers. At the Cyberposium 2004 panel "The Outsourcing Revolution," however, the views of three seasoned managers and one MIT professor fell into general alignment: They like it. They believe it is a powerful force for good in the future of business. Each of them also shared their own experiences with the increasingly hotter phenomenon and explored the nuances that other managers should keep in mind.

"Cost is always mentioned as a possible benefit. But also important are quality and flexibility," said Tony Scott, chief technology officer for General Motors' Information Systems and Services organization.

Though outsourcing and offshoring are slightly different concepts—outsourcing can be domestic while offshoring is understood as outsourcing moved overseas—the two are increasingly blended in discussions these days and were usually approached as one entity in the panel conversation.

First: some hard facts. According to statistics for information technology cited by moderator Andy Efstathiou, technology program manager for The Yankee Group research and consulting firm, the outsourcing market is estimated at 11 percent of IT—or about $150 billion globally. Fortune 1000 enterprises spend, on average, about 3 percent of their revenues on IT, he said. The 3 percent estimate of revenues varies: In financial services, companies spend closer to 7 to 9 percent of revenues on IT, while in "some of the more rust-bucket type industries" the expenditure is closer to 1 percent.

India is in the newspapers as the largest offshore destination, he continued. According to Nascom, the Indian software and services industry organization, India has an estimated 650,000 IT workers who provide about 1.8 percent of worldwide IT revenues and workforce. In contrast, there are about 5 million IT workers in the U.S. Of course, India is not the only supplier of IT talent, he added.

Early in the game
The whole phenomenon of offshoring IT is still in its "early infancy stages," observed Sheeroy Desai, executive vice president and chief operating officer for Sapient. A lot can happen in the future, positive and negative, he said.

Desai said Sapient has been "aggressively pursuing" offshoring for five years. They save 30 to 40 percent on costs, but the move has also forced Sapient to invest "a vast amount" in training and methodology.

Most IT organizations tend to underestimate the costs of management overhead, costs related to communications overhead, and travel.
— Sheeroy Desai, Sapient

Citing Forrester Research statistics, Desai said that fifty of the Fortune 1000 firms are ardent users and advocates of offshore development. "The vast majority of the revenues that are driven and generated by the Indian developers really come from these fifty companies," he said. In his anecdotal experience, he suggested that most other users of offshoring are "dabblers."

"They've experimented; they've done a couple things here and there, but have not truly made a strategic decision to move their IT there. Then there is probably 25 percent that have never touched the offshore space" because they remain skeptical that it is the right move for them.

While many managers talk about cost savings, Desai said that the numbers commonly discussed—anywhere from 20 to 80 percent—constitute a wide range. "My actual experience talking to CIOs is closer to 20 percent," he said. "What I have seen is that most IT organizations tend to underestimate the costs of management overhead, costs related to communications overhead, and travel. A lot of times, just trying to get the people in India productive requires you to bring some people over from the U.S. When you do that, the cost savings shrink. ... So unless you deeply understand how the mechanics of offshore work, the cost benefits are less."

Outsourcing among friends
Speaking for EDS, Kevin Walsh, client delivery executive for Massachusetts government contracts at EDS, suggested that managers consider some lessons learned in the health care sphere, his specialty. Outsourcing IT, as well as business processes, to the same organization could be a good idea because the organization would have a vested interest in increased productivity and efficiency, he said. This has been the model in health care, particularly with governmental programs like Medicare.

"The way EDS has chosen to look at outsourcing and offshoring is a little different than what it might be for most companies because we're global: We have offices in forty countries. The whole notion of offshore is almost meaningless," said Walsh. "What's offshore to us in Boston is onshore to somebody in our Indian or our Australian operation."

The best criteria for moving to an outsource or offshore system, he said, should be whether it serves the customers, functions logically, contains cost benefits, and provides resource support for a given project. EDS see it all as a way to "supplement institutional knowledge" in a way that is transparent to end users, he said.

100 percent outsourced
At the extreme end of outsourcing was Tony Scott, chief technology officer for General Motors' Information Systems and Services organization. His group is "100 percent outsourced," he told the audience. There are no people at GM who develop code, operate computers, run call centers, "nor do any sort of traditional activity that you would imagine goes on in an IT department," he said.

Nevertheless, his group engages about 1,5000 employees around the world for the $187 billion-a-year company. All of them are managed through EDS or other companies. (EDS and GM split in 1996 into separate companies. In the separation agreement, GM retains EDS as its primary, though not exclusive, outsourcer for ten years.)

Despite initial skepticism about whether outsourcing could work for GM's information technology needs, Scott said, "We are absolute converts. But the reasons we've become converts are maybe not so obvious."

There is cost, of course, but outsourcing also brings quality and flexibility. The time period and pending expiration of contracts are "an event-driven method" of improving service and constantly raising the bar in terms of requirements and capabilities, he said. The end of a contract is always a new opportunity to make improvements, demand more, and reprice.

What's offshore to us in Boston is onshore to somebody in our Indian or our Australian operation.
— Kevin Walsh, EDS

His management experiences with insource settings prior to working at GM made those types of changes difficult or nearly impossible, said Scott. In those days, he contended with the problems of rooting out the most appropriate skill sets within the organization for whatever project was required at the time.

"Now we know exactly what IT costs at GM in such a precise way. I was never able to know that in an insource model," he observed.

Managers should also distinguish between short- and long-term advantages, suggested Amar Gupta, professor at the Massachusetts Institute of Technology and co-director of MIT's Productivity from Information Technology (PROFIT) Initiative.

As the final panelist to share his observations, Gupta described his dream: a twenty-four-hour knowledge factory. During the Industrial Revolution, factories ran production in shifts. Why not borrow a lesson from the Industrial Revolution for the IT revolution, he asked. People in the U.S. could work on a major IT problem for eight hours; at the end of the day, they'd go home and transfer the development work to a center in China, where people could start up from the point American workers finished. When the Chinese reached the end of their workday, the development would be passed to someone in Poland or Romania.

"Then when you come in to work the next morning," he said, speaking of American workers, "the challenge is to understand what others have done in sixteen hours. If you are able to do that from a technological, managerial, and organizational point of view, that will be a new paradigm," said Gupta.