Archive for September, 2009

Which option is best for my organization: Offshore, Outsource, or Insource?

September 30, 2009

With the economy coming off of its lowest point since the great depression and CIOs being under extreme pressure to reduce cost and increase their return on investment for every project they undertake, many are asking the question of whether executing IT activities under a third party model makes sense for their organization. The answer to this question is quite complex especially when considering the third party’s experience in outsourcing, offshoring or insourcing. Allow me to first define the options that are available to most organizations.

1. Offshoring refers to sending both knowledge-based IT work (i.e. most often application development and maintenance) to third-party firms in other nations. The intent is to take advantage of lower wages and operating costs in such nations as China, India, Hungary, and the Philippines as examples. The choice of a nation for offshore work may be influenced by factors such as the language and education of the local workforce, transportation systems or natural resources. For example, China and India are graduating high numbers of skilled technicians, engineers and scientists from their universities. In addition, some nations are noted for large numbers of workers skilled in the English language, such as the Philippines and India.

2. Outsourcingcan be defined as the hiring of an outside company to perform a task that would otherwise be performed internally by a company (this can be done on an offshoring, local, or combined basis)–generally with the goal of lowering costs and/or streamlining workflow. Outsourcing contracts are often several years in length. Companies that hire outsourced services providers often do so because they prefer to focus on their core strengths while sending more routine tasks outside for others to perform. Typical outsourced services include the operation of human resources departments, telephone call centers, distribution centers, research needs, computer departments or services and design.

3. Insourcing refers to situations where an outsourced services provider moves into and sets up shop in or near a client company’s facility. It is common for major companies to sign agreements with IBM Global Services, HP, Perot Systems and other outsourcing firms whereby these firms take over and operate a client’s internal IT department. Coming up next (post): Discussion of the pro and cons of each option.

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Offshore Outsourcing Facts:

September 17, 2009
  • India is the global leader in IT outsourcing, but more companies are outsourcing to China to reduce overall IT spend. Inflationary pressures and the increase in wages have caused companies to look at other places for cost effective alternatives.
  • Most Global IT Outsourcers (e.g. IBM , Infosys, HP, Cognizant) are recognizing the importance of creating a development centers in China which will service non-Chinese companies. Roughly 30% of the capacities of these companies are dedicated to internal Chinese companies, the remaining 70% is dedicated to US and European companies.
  • It is becoming more common to see development work spread across geographic areas (i.e. China and India) as a way to increase productivity within the development groups.
  • India is about 10 years ahead of China in terms of cultural awareness as it pertains to IT Outsourcing, but China is closing the gap a pace that is far faster than the time frame that India took to reach the same place.
  • There are still some obstacles associated with the infrastructure within china but “technology zones”  and government sponsorship appear to be breaking down these barriers.
  • India still dominates in the area of Call Center outsourcing and has invested a significant amount of GDP on linguistic training for its population.

Keys to Outsourcing Success are Communication, Communication, and Communication! This is especially relevant in the areas of offshore outsourcing.