Redefining offshore outsourcing

WHEN SHELLEY MCINTYRE, vice president of technology services at New York-based Guardian Life Insurance Company of America, needed to outsource her company’s application development and maintenance projects, she began with a March 2001 pilot program with overseas outsourcers in India and Singapore to handle the projects. Cautious at first, McIntyre later expanded her use of outsourcers and contracted to a third offshore company.

McIntyre says using offshore vendors has been successful. “[The outsourcers] have enabled us to manage up and to manage down. They added to our skill set. And they saved us a lot of money.”

These benefits have IT leaders such as McIntyre duly impressed with the results of offshore outsourcing. But the practices of the offshore outsourcer are changing, often sparked by demands of U.S. CTOs, who are increasingly requiring their offshore outsourcers to maintain a strong stateside presence in an effort to improve project management. This, combined with spreading contracts among more than one offshore developer, serves to mitigate risk — both fiscal and geopolitical.

Close ties

Management practices related to outsourcing have changed, says Richard Jones, CTO of Calibas, Calif.-based mortgage lender Countrywide Financial. Jones first started working with offshore outsourcers, like many of his colleagues, to meet Y2K deadlines. “We quickly learned that if you do everything right, there are still lots of ways to do it wrong,” he adds.

The CTO says that poor communication is the most common reason work sent offshore fails to meet project specifications. “To make communications tight, you need to have an onshore element [of the outsourcer],” he says. For much of his outsourced application development, Jones turns to Boston-based Keane, which has offices offshore and near Countrywide’s main office.

The stateside relationships with an offshore vendor allow the vendor and Countrywide IT managers to communicate project requirements “very accurately to the offshore element. You need to have precise functional specifications and design specifications of exactly what you want [the outsourcer] to do. Otherwise they will deliver to inaccurate specifications and deliver inaccurate software. The vendor will be blamed, when the real issue is [lack of] clear communication on exactly what is needed,” Jones says.

To that end, the CTO has established an internal central project office at Countrywide that evaluates proposals, delivers detailed statements of work, and manages offshore projects. Overall, Jones says his company’s blended (combination of offshore and internal) average application development per hour rate is less than $55.

Communication and collaboration are key to success, says Jeff Campbell, vice president of technology services and CIO at Fort Worth, Texas-based Burlington Northern Santa Fe Railway (BNSF). In 2001, BNSF began contracting with Infosys Technologies in Bangalore, India, one of the largest offshore outsourcing companies.

“Infosys was world class in change control and methods of delivery,” Campbell says. “They have a program office at our headquarters. They have full-time people here that manage the flow through methodology and communications.”

Infosys’ work for BNSF includes as much as 40 percent of BNSF’s application development initiatives; however, Campbell says only about 25 percent of Infosys workload is actually done in the United States.

Guardian’s McIntyre also took pains to set up a particularly close relationship with outsourcers. After the success of its original pilot program, the insurance company contracted with Patni Computer Systems of Mumbai, India; NIIT Technologies of New Delhi, India with offices in Singapore; and with Covansys, in Farmington Hills, Mich., which has centers in India and elsewhere.

“When we started our pilot program, [managers from the outsourcing companies] came here with the goal of gathering information and knowledge, so as we ramped up offshore, resources could be shifted offshore,” McIntyre explains. “Now we have point people [from the outsourcing companies], management people who stay here and help us get resources engaged.”

John VanZandt, CTO of 10 month-old biometric security company Security First in Rancho Santa Magarita, Calif., says he selected two companies for offshore outsourcing — CEO Consulting in Irvine, Calif., with offices in Malaysia, and Luxoft in Moscow.

“They’ve got the technical manpower in the U.S. to [make it feasible] to keep the implementation team offshore. We found it was best to do it that way,” VanZandt says. “The arrangement gives you a group you can work with every day, which helps.”

Risk management

Bringing offshore outsourcers closer to them has also made some CTOs more conscious of geopolitical instabilities that might endanger offshore facilities. CTOs are also taking note of offshore outsourcers’ disaster recovery and backup plans. Infosys, for example, has facilities outside of India to use for storage backup, BNSF’s Campbell says.

Still, says Campbell, the railroad may add another offshore outsourcer to its vendor list, saying he has no exclusive commitment with Infosys. “We can move our application house around. A strategy is in place if something goes wrong. We are possibly looking at a two-horse race, in case one gets winded,” he says.

After Sept. 11, the Indian-based vendors responded very quickly to reassure customers about their continuity capabilities, says Sandip Patel, a partner at IBM Business Consulting Services in Boston. “Some Indian providers [opened call center and development facilities] in other places in Southeast Asia, especially the Philippines and China and in some cases even to Mexico — in part to [manage] risk.”

Guardian’s McIntyre “didn’t want to put all our eggs in one basket. We went to three [companies] to lessen [geopolitical] risk.” One of Guardian’s outsourcers, NIIT, has offices in India and Singapore which provides choices about where to run operations, McIntyre notes.

This dispersement strategy also allows the enterprise to shift work to lower cost areas, says Joe Kulak, vice president and consultant at New York-based Cap Gemini Ernst & Young involved in setting up offshore outsource operations. “Today, the lowest cost may be India, but tomorrow it could China,” he says. ” People are making investments now in Vietnam.”

Expanding services

Kulak says that as the offshore IT outsourcing success — both fiscal and performance-based — becomes apparent, CTOs will hand over more projects to third parties to manage the offshore outsourcer. “Now there is a whole new level of sophistication the client is looking to use, like CRM, which customers historically kept inside their four walls,” he says.

Indeed, because of the results he’s seen, BNSF’s Campbell is ready to expand the company’s outsourcing strategy. “The quality of the work is excellent,” he says. “[As much as] 40 percent of application development will be done [by outsourcers] in 2003, a 20 percent increase from 2002.”

McIntyre says Guardian may expand outsourcing to back-office applications. “There were challenges at the beginning” as Guardian tackled some of the cultural and business changes involved in offshore outsourcing, McIntyre adds. “But we knew we were committed and we knew the problems could be overcome.”

Loretta W. Prencipe contributed to this report.