Table of Contents
The IT Offshore Outsourcing
Phenomenon – Some Background
State of IT Offshore Outsourcing
Activities
IT Offshore Outsourcing At BEBOP
Preferable Outsourcing Methods And
Justification
Risks Associated With Outsourcing
The IT Function
Benefits Associated With An
Outsourcing Effort
Determining Factors For And Against
Offshore Outsourcing
Outsourcing Agreements: Costs And
ROI
Abstract
This paper covers several aspects about the phenomenon of IT offshore outsourcing, and explores some IT offshore outsourcing impacts. This assignment is submitted in partial fulfillment of the requirements of CMGT 585 – CIS Risk Management and Planning, the 13th class in the MS CIS online program at the University of Phoenix.
Introduction
This paper addresses the phenomenon of IT offshore outsourcing, as well as its implications and impacts at BEBOP. BEBOP utilizes Amazing-IT, an experienced IT services company, to do outsourced IT infrastructure support services. Worldwide, Amazing-IT routinely works on IT outsourcing deals with many different customers.
The IT Offshore Outsourcing Phenomenon – Some Background
Since 2000, the phenomenon of IT offshore outsourcing has become a major trend in getting IT work done at a far smaller price, often as much as 80% less, than it can be accomplished here in the U.S. Indeed, IT offshore outsourcing has gained so much momentum that many companies who initially resisted it are forced to adopt offshore outsourcing as a method of getting IT work done, in order to remain competitive in the marketplace. In fact, the entire phenomenon of offshore outsourcing has spawned several organizations, in the U.S., in India, and even governmental posts and organization, each whose chief purpose in life is to enable greater and greater amounts of offshore outsourcing business.
It may be surprising for many that the origin of this offshore outsourcing occurred in 1980, when Prime Minister Indira Ghandi ordered IBM to pack up and leave India (Schmetzer, 2000). The result was a situation in which the technical minds of India had to sink or swim. No longer did they have IBM to help them with their IT issues, so they had to quickly rise to the cause by acquiring the necessary skills and then developing an educational infrastructure in India that would sustain them with highly trained IT graduates particularly in the areas of software engineering, and technical management. And since a lingering “gift” of the British was English, which has been a unifying, indispensable business language, Indian IT professionals were strategically positioned over time to become competitive on a global basis. Add to this the phenomenon of globalization, the rapid rise of use of the Internet, and severe cost pressures in a sluggish American IT economy, one which is still reeling from the “dot-com bust” as well as the aftershocks of September 11, 2001, and you can easily see how everything fell into place to make India the premier choice for IT offshore outsourcing.
Since 2002, the annual growth rate of outsourced IT jobs to Indian companies has grown at a staggering 70% (Goolsby and Parrino, 2004). Clearly, this loss of American IT jobs to India is not a fad, but a dominant trend in the U.S. IT job market. But in fact, many Americans are furious about the continued loss of jobs to India, and as recently as July 2004 one software engineer in Colorado, is among the many in the U.S. who have sought legislative support for a ban on the practice of offshore outsourcing of American IT jobs (Associated Press, 2004).
In March 2004 Secretary of State Colin Powell went to India on a diplomatic trip. The purpose of his visit: “Secretary of State Colin Powell rediscovered this eternal truth on a trip to India where he tried to calm an increasingly emotional debate surrounding the outsourcing of U.S. jobs. He ‘sought to assure Indians on Tuesday that the Bush administration would not try to halt the outsourcing of high-technology jobs to their country,’ The New York Times reported. He then told India's government that it should return the favor by importing American goods and services, according to the paper (Webb, 2004).” Personally, I see efforts like this as an unethical and even immoral use of our U.S. taxpayer revenues.
In addition to Secretary Powell’s visit to India, it has also been revealed that the Indian national government recently created a new cabinet level position in the prime minister’s cabinet, for the sole purpose of helping facilitate the outsourcing of U.S. jobs to India, through whatever diplomatic and business negotiations necessary. With such streamlined efficiencies, working in the U.S. and in India, there can be no doubt that India is serious about getting these jobs and keeping them in India – permanently.
State of IT Offshore
Outsourcing Activities
The IT offshore outsourcing trends diagram below graphically illustrates this growing trend.
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Figure 1 – 2002 and 2004 IT Outsourcing Trends by Job Category (Rogers, 2004)
IT Offshore Outsourcing At BEBOP
In October 2002, the mandate came down from BEBOP executive leadership to require that IT technical services venders to re-bid existing technical services contracts. Before the contract bidding was opened to five vendors, and they were told that the target goal was to cut the overall annual cost for BEBOP’s IT services by more than 50%. This re-bid notice was issued with an additional admonition by BEBOP looked very favorably on the use of IT offshore outsourcing to accomplish this cost-cutting goal. The result was that the technical services contract for desktop and infrastructure support was awarded to Amazing-IT, a leading provider of such services.
Preferable Outsourcing Methods And Justification
Amazing-IT’s experience in IT offshore outsourcing made it confident that it could identify the necessary system engineers to perform backoffice technical work, and that it could successfully manage these people remotely. Amazing-IT immediately acted to hire and train 40 Kracovian Microsoft Certified System Engineers (MCSEs) to provide remote technical services from Kracovia across BEBOP’s secure network, for trouble tickets involving problems on servers throughout North America and South America. This is known as the “near-shore” support model. These engineers are paid about 30% of what a comparable systems engineer is paid in the U.S. Their success, despite their substandard English skills, is guaranteed by bilingual support and leadership and by the fact that approximately 25 impeccably written templates that are written in English. Since these team members communicate strictly through e-mail with its constituents, these templates give the impression that these support engineers have better than average English capabilities. This, in large part, has contributed greatly to the success of this team. In addition, the friendly, helpful attitudes of our Kracovian colleagues, as well as their high degree of technical knowledge and skills quickly endeared them to their American colleagues, as well as their management. In fact, there has been zero turnover.
Risks Associated With Outsourcing The IT Function
On the other hand, things have not gone as smoothly for the Zongovian software engineers, working from Zongovia, who are involved with remote application development support, and managed by yet another vendor. Despite their highly rated English skills and development skills, these Zongovian software engineers have run into great difficulties in following change management procedures, as well as basic security procedures, such as having the presence of mind to lock an unattended server console. While much of this can be blamed on ignorance of processes and procedures, it appears that more often than not, it is a symptom of arrogance, not unlike some people who disregard the speed limit in the U.S. and think that the rules of the road do not apply to them.
So the primary risks involved in IT offshore outsourcing are typically 1) cost overruns due to miscommunication; 2) problems in the digital business infrastructure caused by inattention to procedural details in change management processes and procedures; and security problems that stem from unwillingness to be disciplined about adherence to standard security processes and procedures.
Though BEBOP’s IT offshore outsourcing efforts have been quite active in both the systems technical support area and the application development area, it is obvious that the infrastructure systems support area has been much more successful than the application development area.
Benefits Associated With An Outsourcing Effort
Generally speaking, the IT offshore outsourcing has given BEBOP the ability to spend only 50% of what it spent in 2000 on its present IT services, while growing its 200,000 seat network by an additional 20,000 seats in four years and continuing to meet the needs of its users with the same high quality services. With the money BEBOP saved, it has launched two major strategic projects, each with the intent of making its infrastructure more robust and secure, and to increase its competitiveness on a global scale. The first major project is the mega data center project, in which all data centers worldwide will be consolidated into one of three mega data centers, which will reside in either the U.K, the U.S. (likely Omaha), and in Kuala Lumpur. The second major project is a complete network infrastructure, which will leverage newer hardware and software technologies to take advantage of high performance, secure networking at very competitive prices.
These two projects together will cost BEBOP over $500 million, yet without the savings gained by IT offshore outsourcing, though both are critical to the future of BEBOP’s globally competitive position, neither project would have been possible.
Determining Factors For And Against Offshore Outsourcing
Like any good business decision, when determining the factors of that make IT offshore outsourcing attractive, it helps to use a method like the force field analysis technique to help list the factors, both for and against the decision, assign weighting, and then graphically demonstrate the results (Mind Tools, 2003). In this way, some degree of objectivity can be obtained in the decision making process. The dramatic results that BEBOP came up with are shown below in Figure 2. Under these circumstances, it appears that any profit-minded business would take a serious look at IT offshore outsourcing and come to the same objective conclusions.
Figure 2 – Force Field Analysis Diagram for Evaluating IT Offshore Outsourcing Decisions (Mind Tools, 2003)
Outsourcing Agreements: Costs And ROI
As demonstrated above, the savings from IT offshore outsourcing projects at BEBOP have been significant. The costs for developers has been 20% or what a comparable American developer would cost, and the costs of the system engineers is 30% or what a comparable American system engineer would costs. Naturally, all functions cannot be outsourced at such bargain discount prices. Examples of these services include: management onsite, services that require hands on activities, and those services that require providing customer-interfacing activities. However, to BEBOP, the return on investment was significant enough to save over $500 million, which is presently be used upgrade its infrastructure and therefore its globally competitiveness. In these terms, BEBOP sees the ROI in a way that will pay dividends for many years to come. Typically, in the energy industry, companies expect 100% return on investment within 36 months.
Implications Of Outsourcing to The Business Organizational
Structure Issues As Well As Potential Personnel Issues
As previously stated above, for the system engineers supporting servers from Mexico, issues such as language can be worked around if bilingual people and some creativity is involved. In fact, having a bilingual person help manage from the U.S. and a bilingual manager in Kracovia served to provide all the necessary structure to ensure a well-managed, high performance team of Kracovian system engineers.
However, on the development side, the Zondovian software engineers were met with silent resentment and jealousy as their American predecessors were required to train them with “knowledge transfer” and “skills transfer”. This not only created animosity, the American programmers had the bittersweet satisfaction of telling management that they were headed for problems with the Zondovian developers, and later, working just long enough to see it in action. Now, in many cases, those same American developers have left for other companies where they feel there is more employer loyalty toward them and hence greater job security, if there is such a thing any more.
Conclusion
In conclusion, IT offshore outsourcing, though it can often be justified from the business ROI perspective, is not the panacea it may seem. The troubling thing for the U.S. Economy is that for every dollar spent in India, it represents approximately five dollars that will not be spent here in the U.S. This fact, coupled with the apparent exponential growth in demand for IT offshore outsourced services, makes it interesting times for the U.S. As Charles Dickins wrote in his landmark 19th century novel, A Tale of Two Cities, “It was the best of times, it was the worst of times.” Indeed, many an American IT worker, who has lost their job to this IT offshore outsourcing trend, feels that it is indeed, “the worst of times.” Yet, ultimately, American IT workers will have to face these realities and adapt. And the sooner the better, because every day out of work is a day away from solid IT experience, not to mention lost wages. But for many American IT workers, this IT offshore outsourcing phenomenon will mean career changes into non-IT related career fields, perhaps never again earning the kind of salaries that were possible at the end of the 20th century.
Nevertheless, it is also obvious that an Indian nuclear cataclysm notwithstanding, the sheer economics and present business realties dictate that IT offshore outsourcing will be a fact of life in American companies, whether we like it or not, for the foreseeable future.
In the meantime, successful companies will increasingly want more and more low-priced IT services they can purchase aboard, because from the present ROI perspective, IT offshore outsourcing makes good business sense, even if it unfortunately costs some American IT workers their jobs.
References
Associated Press. (2004). Software Engineer Wants Outsourcing Ban. [Electronic version]. July 19, 2004. Retrieved from the web at http://www.yahoo.com on July 19, 2004.
Mind Tools. (2003). Force Field Analysis. [Electronic version]. Retrieved on August 22, 2003 at http://www.mindtools.com/forcefld.html.
Rogers, E. R. (2004). IT Offshore Outsourcing Trends. [Electronic version]. Retrieved from the TCM 538 – Networks and Data Communications II electronic classroom at the University of Phoenix online, August 19, 2004.
Schmetzer, U. (2000). Indians finding that software translates into hard currency. An article in the Chicago Tribune, March 25, 2000.