Tag: Offshoring

Moving from Offshoring to Global Shared Service Centers

    Jim D
My apologies for the delay in my post. It has been a busy few months and it has taken an extended time since there is quite a bit I wish to cover in the global shared service center model. Since my NCAA bracket has completely tanked, I am out of excuses to not complete the writing, so here is the first post with at least one to follow. 

Since the mid-90s, companies have used offshoring to achieve cost and capacity advantages in IT. Offshoring was a favored option to address Y2K issues and has continued to expand at a steady rate throughout the past twenty years. But many companies still approach offshoring as  ‘out-tasking’ and fail to leverage the many advantages of a truly global and high performance work force.

With out-tasking, companies take a limited set of functions or ‘tasks’ and move these to the offshore team. They often achieve initial economic advantage through labor arbitrage and perhaps some improvement in quality as the tasks are documented and  standardized in order to make it easier to transition the work to the new location. This constitutes the first level of a global team: offshore service provider. But larger benefits around are often lost and typically include:

  • further ongoing process improvement,
  • better time to market,
  • wider service times or ‘follow the sun’,
  • and leverage of critical innovation or leadership capabilities of the offshore team.

In fact, the work often stagnates at whatever state it was in when it was transitioned with little impetus for further improvement. And because lower level tasks are often the work that is shifted offshore and higher level design work remains in the home country, key decisions on design or direction can often take an extended period – actually lengthening time to market. In fact, design or direction decisions often become arbitrary or disconnected because the groups – one in home office, the other in the offshore location – retain significant divides (time of day, perspective, knowledge of the work, understanding of the corporate strategy, etc). At its extreme, the home office becomes the ivory tower and the offshore teams become serf task executors and administrators. Ownership, engagement, initiative and improvement energies are usually lost in these arrangements. And it can be further exacerbated by having contractors at the offshore location, who have a commercial interest in maintaining the status quo (and thus revenue) and who are viewed as with less regard by the home country staff. Any changes required are used to increase contractor revenues and margins. These shortcomings erase many of the economic advantages of offshoring over time and further impact the competitiveness of the company in areas such as agility, quality, and leadership development.

A far better way to approach your workforce is to leverage a ‘global footprint and a global team’. And this approach is absolutely key for competitive advantage and essential for competitive parity if you are an international company. There are multiple elements of the ‘global footprint and team’ approach, that when effectively orchestrated by IT leadership, can achieve far better results than any other structure. By leveraging high performance global approach, you can move from an offshore service provider to a shared service excellence center and, ultimately to a global service leadership center.

The key elements of a global team approach can be grouped into two areas: high performance global footprint and high performance team. The global footprint elements are:

  • well-selected strategic sites, each with adequate critical mass, strong labor pools and higher education sources
  • proper positioning to meet time-of-day and improved skill and cost mix
  • knowledge and leverage of distinct regional advantages to obtain better customer interface, diverse inputs and designs, or unique skills
  • proper consolidation and segmentation of functions across sites to achieve optimum cost and capability mixes

Global team elements include:

  • consistent global goals and vision across global sites with commensurate rewards and recognition by site
  • a team structure that enables both integrated processes and local and global controls
  • the opportunity for growth globally from a junior position to a senior leader
  • close partnership with local universities and key suppliers at each strategic location
  • opportunity for leadership at all locations

Let’s tackle global footprint today and in a follow on post I will cover global team. First and foremost is selecting the right sites for your company. Your current staff total size and locations will obviously factor heavily into your ultimate site mix. Assess your current sites using the following criteria:

  • Do they have critical mass (typically at least 300 engineers or operations personnel, preferably 500+) that will make the site efficient, productive and enable staff growth?
  • Is the site located where IT talent can be easily sourced? Are there good universities nearby to partner with? Is there a reasonable Are there business units co-located or customers nearby?
  • Is the site in a low, medium, or high cost location?
  • What is the shift (time zone) of the location?

Once you have classified your current sites with these criteria, you can then assess the gaps. Do you have sites in low-cost locations with strong engineering talent (e.g. India, Eastern Europe)? Do you have medium cost locations (e.g., Ireland or 2nd tier cities in the US midwest)? Do you have too many small sites (e.g., under 100 personnel)? Do you have sites close to key business units or customers? Are no sites located in 3rd shift zones? Remember that your sites are more about the cities they are located in than the countries. A second tier city in India or a first or second tier city in Eastern Europe can often be your best site location because of improved talent acquisition and lower attrition than 1st tier locations in your country or in India.

It is often best to locate your service center where there are strong engineering and business universities nearby that will provide an influx of entry level staff eager to learn and develop. Given staff will be the primary cost factor in your service, ensure you locate in lower cost areas that have good language skills, access to the engineering universities, and appropriate time zones. For example, if you are in Europe, you should look to have one or two consolidated sites located just outside 2nd tier cities with strong universities. For example, do not locate in Paris or London, instead base your service desk either in or just outside Manchester or Budapest or Vilnius. This will enable you to tap into a lower cost yet high quality labor market that also is likely to provide more part-time workers that will help you solve peak call periods. You can use a similar approach in the US or Asia.

A highly competitive site structure enables you to meet a global optimal cost and capability mix as well. At the most mature global teams in very large companies, we drove for a 20/40/40 cost mix (20% high cost, 40% medium and 40% low cost) where each site is in a strong engineering location. Where possible, we also co-located with key business units. Drive to the optimal mix by selecting 3, 4, or 5 strategic sites that meet the mix target and that will also give you the greatest spread of shift coverage.  Once you have located your sites correctly, you must then of course drive to have effective recruiting, training, and management of the site to achieve outstanding service. Remember also that you must properly consolidate functions to these strategic sites.  Your key functions must be consolidated to 2 or 3 of the sites – you cannot run a successful function where there are multiple small units scattered around your corporate footprint. You will be unable to invest in the needed technology and provide an adequate career path to attract the right staff if it is highly dispersed.

You can easily construct a matrix and assess your current sites against these criteria. Remember these sites are likely the most important investments your company will make. If you have poor portfolio of sites, with inadequate labor resources or effective talent pipelines or other issues, it will impact your company’s ability to attract and retain it’s most important asset to achieve competitive success. It may take substantial investment and an extended period of time, but achieving an optimal global site and global team will provide lasting competitive advantage.

I will cover the global team aspects in my next post along with the key factors in moving from a offshore service provider to shared service excellence to shared service leadership.

It would be great to hear of your perspectives and any feedback on how you or your company been either successful (or unsuccessful) at achieving a global team.

Best, Jim Ditmore

Outsourcing and Out-tasking Best Practices

    Jim D

I recently published this post first at InformationWeek and it generated quite a few comments, both published and several sent directly via e-mail.  I would note that a strong theme is the frustration of talented staff dealing with senior leadership that does not understand how IT works well or do not appear to be focused on the long term interests of the company. It is a key responsibility of leadership to ensure they keep these interests at the core of their approach, especially when executing complex efforts like outsourcing or offshoring so that they do achieve benefits and do not harm their company. I think the national debate that is occurring at this time as well with Romney and Obama only serves to show how complex executing these efforts are. As part of a team, we were able to adjust and resolve effectively many different situations and I have extracted much of that knowledge here. If you are looking to outsource or are dealing with an inherited situation, this post should assist you in improving your approach and execution.

While the general trend of more IT outsourcing but via smaller, more focused deals continues, it remains an area that is difficult for IT management to navigate successfully.  In my experience, every large shop that I have turned around had significant problems caused or made worse by the outsourcing arrangement, particularly large deals. While understanding that these shops performed poorly for primarily other reasons (leadership, process failures, talent issues), achieving better performance in these situations required substantial revamp or reversal of the outsourcing arrangements. And various industries continue to be littered with examples of failed outsourcing, many with leading outsource firms (IBM, Accenture, etc) and reputable clients. While formal statistics are hard to come by (in part because companies are loathe to report failure publicly), my estimate is that at least 25% and possibly more than 50% fail or perform very poorly. Why do the failures occur? And what should you do when engaging in outsourcing to improve the probability of success?

Much of the success – or failure – depends on what you choose to outsource followed by effectively managing the vendor and service. You should be highly selective on both the extent and the activities you chose for outsourcing. A frequent mistake is the assumption that any activity that is not ‘core’ to a company can and should be outsourced to enable focus on the ‘core’ competencies. I think this perspective originates from principles first proposed in The Discipline of Market Leaders by Michael Treacy and Fred Wisrsema. In essence, Treacy and Wisrsema state that companies that are market leaders do not try to be all things to all customers. Instead, market leaders recognize their competency either in product and innovation leadership, customer service and intimacy, or operational excellence. Good corporate examples of each would be 3M for product, Nordstrom for service, and FedEx for operational excellence. Thus business strategy should not attempt to excel at all three areas but instead to leverage an area of strength and extend it further while maintaining acceptable performance elsewhere. And by focusing on corporate competency, the company can improve market position and success. But generally IT is absolutely critical to improving customer knowledge intimacy and thus customer service. Similarly, achieving outstanding operational competency requires highly reliable and effective IT systems backing your operational processes.  And even in product innovation, IT plays a larger and large role as products become more digital and smarter.

Because of this intrinsic linkage to company products and services, IT is not like a security guard force, nor like legal staff — two areas that are commonly fully or highly outsourced (and generally, quite successfully). And by outsourcing intrinsic capabilities, companies put their core competency at risk. In a recent University of Utah business school article, the authors found significantly higher rates of failure of firms who had outsourced. They concluded that  “companies need to retain adequate control over specialized components that differentiate their products or have unique interdependencies, or they are more likely to fail to survive.” My IT best practice rule is ‘ You must control your critical IP (intellectual property)’. If you use an outsourcer to develop and deliver the key features or services that differentiate your products and define your company’s success, then you likely have someone doing the work with different goals and interests than you, that can typically easily turn around and sell advances to your competitors. Why would you turn over your company’s fate to someone else? Be wary of approaches that recommend outsourcing because IT is not a ‘core’ competency when with every year that passes, there is greater IT content in products in nearly every industry. Chose instead to outsource those activities where you do not have scale (or cost advantage), or capacity or competence, but ensure that you either retain or build the key design, integration, and management capabilities in-house.

Another frequent reason for outsourcing is to achieve cost savings. And while most small and mid-sized companies do not have the scale to achieve cost parity with a large outsourcer, nearly all large companies, and many mid-sized do have the scale.  Further, nearly every outsourcing deal that I have reversed in the past 20 years yielded savings of at least 30% and often much more. Cost savings can only be accomplished by an outsourcer for a large firm for a broad set of services if the current shop is a mediocre shop. If you have a well-run shop, your all-in costs will be similar to the better outsource firms’ costs. If you are world-class, you can beat the outsourcer by 20-40%.

Even more, the outsourcer’s cost difference typically degrades over time. Note that the goals of the outsourcer are to increase revenue and margin (or increase your costs and spend less resources doing your work). Invariably, the outsourcer will find ways to charge you more, usually for changes to services and minimize work being done. And previously, when you had used your ‘run’ resources to complete minor fixes and upgrades, you could find you are charged for those very same resources for such efforts once outsourced. I have often seen that ‘run’ functions will be hollowed out and minimized and the customer will pay a premium for every change or increase in volume. And while the usual response to such a situation is that the customer can put terms in the contract to avoid this, I have yet to see such terms that ensure the outsourcer works in your best interest to do the ‘right’ thing throughout the life of the contract. One interesting example that I reversed a few years back was an outsourced desktop provisioning and field support function for a major bank (a $55M/year contract). When an initial (surprise) review of the function was done, there were warehouses full of both obsolete equipment that should have been disposed and new equipment that should have been deployed. Why? Because the outsourcer was paid to maintain all equipment whether in use in the offices or in a warehouse, and they had full control of the logisitics function (here, the critical IP). So, they had ordered up their own revenue in effect. Further, the service had degraded over the years as the initial workforce had been hollowed out and replaced with less qualified individuals. The solution? We immediately in-sourced back the logistics function to a rebuilt in-house team with cost and quality goals established. Then we split the field support geography and conducted a competitive auction to select two firms to handle the work. Every six months each firm’s performance would be evaluated for quality, timeliness and cost and the higher performing firm would gain further territory. The lower performing firm would lose territory or be at risk of replacement. And we maintained a small but important pool of field support experts to ensure training and capabilities were kept up to par and service routines were updated and chronic issues resolved. The end result was far better quality and service, and the cost of the services were slashed by over 40% (from $55M/year to less than $30M/year). And these results — better quality at lower costs — from effective management of the functions and having key IP and staff in-house are the typical results achieved with similar actions across a wide range of services, organizations and locales.

When I was at BankOne, working under Jamie Dimon and his COO Austin Adams, they provided the support for us to tackle bringing back in what had been the largest outsourcing deal ever consummated at its time in 1998. Three years after the outsource had started, it had become a millstone around BankOne’s neck. Costs had been going up every year, quality continued to erode to where systems availability and customer complaints became worst in the industry. In sum, it was a burning platform. In 2001 we cut the deal short (it was scheduled to run another 4 years). In the next 18 months, after hiring 2200 infrastructure staff (via best practice talent acquisition), revamping the processes and infrastructure, we reduced defects (and downtime) to 1/20th of the levels in 2001 and reduced our ongoing expenses by over $200M per year. This supported significantly the bank’s turnaround and enabled the merger with JP Morgan a few years later.  As for having in-house staff do critical work, Jamie Dimon said it best with ‘Who do you want doing your key work? Patriots or mercenaries?’

Delivering comparable cost to an outsourcer is not that difficult for mid to large IT shops. Note that the outsourcer must include a 20% margin in their long term costs (though they may opt to reduce profits in the first year or two of the contract) as well as an account team’s costs. And, if in Europe, they must add 15 to 20% VAT. Further, they will typically avoid making the small investments required for continuous improvement over time. Thus, three to five years out, nearly all outsourcing arrangements cost 25% to 50% more than a well-run in-house service (that will have the further benefit of higher quality). You should set the bar that your in-house services can deliver comparable or better value than typical out-sourced alternatives. But ensure you have the leadership in place and provide the support for them to reach such a capability.

But like any tool or management approach, used properly and in the right circumstances, outsourcing is a benefit to the company. As a leader you cannot focus on all company priorities at once, nor would you have the staff even if you could, to deliver. And in some areas such as field support there are natural economies of scale that benefit a third party doing the same work for many companies. So consider outsourcing in these areas but the extent of the outsource carefully. Ensure that you still retain critical IP and control. Or use it to augment and increase your capacity, or where you can leverage best-in-class specialized services to your company’s benefit. Then, once selected and effectively negotiated, manage the outsourcing vendor effectively. Since effective management of large deals is complex and nearly impossible, it is far better to do small outsourcing deals or selective out-tasking. The management of the outsourcing should be handled like any significant in-house function, where SLAs are established and proper operational metrics are gathered, performance is regularly reviewed with management and actions are noted and tracked to address issues or improve service. Properly constructed contracts that accommodate potential failure are key if things do not go well. Senior management should jointly review the service every 3 to 6 months, and consequences must be in place for performance (good or bad).

Well-selected and managed outsourcing will then complement your in-house team with more traditional approaches that leverage contractors for peak workloads or projects or the modern alternative to use cloud services and out-task some functions and applications. With these best practices in place and with a selective hand, your IT shop and company can benefit from outsourcing and avoid the failures.

What experiences have you had with outsourcing? Do you see improvement in how companies leverage such services? I look forward to your comments.

Best, Jim Ditmore