Expert articles
Offshore - roll on the second wave
Companies have discovered new locations and service providers offering more than just cost benefits.
Good examples show the way: for a long time now India has no longer been the only or even the best choice for offshoring IT projects. Other countries and locations are making the running for outsourcing budgets. Rather than just low labour costs, they also offer extras that increase the productivity and profitability of their clients longterm.
Names like Infosys, Wipro and Tata have quickly become famous in the last ten years. As IT service providers based in India they have undertaken a variety of projects, mainly for clients from English-speaking Europe and North America, making an essential contribution to the ongoing revolutionary and increasingly flexible division of labour and cost efficiency of the IT industry. Costs have always been one of the key driving factors when a company decides to outsource overseas. This was confirmed at the beginning of the year by a study carried out by the US strategy and technology consultancy Booz Allen Hamilton according to which nearly 80% of decision makers choose an offshore option because of cost. But in the last three years other motives have become more important, according to the study. While in 2004 less than 40% of those surveyed about offshoring were seeking access to qualified personnel, last year the figure was nearly 70%. The study highlights another trend: outsourcing deals with increasingly complex projects rather than just simple processes.
A one-stop shop?
All this puts increasing amounts of pressure on Indian all-rounders because the more complex the outsourced projects, the more ‘soft success factors’ like communication and cultural proximity count. And the more companies aim to meet their specialist know-how requirements through their outsourcing partners, the more difficult it is for big Indian allround service providers to fill these gaps.
Added to this is the fact that traditional offshore countries are increasingly losing their cost advantage. Pay rises for IT specialists are still at around 20% a year on the Indian subcontinent. In addition to the growing shortage of experts there are also labour fluctuations of up to 30% a year. An additional factor is the recent ongoing rise of the Indian rupee against Western currencies. In the last two years it has gained around 7.5% against the euro. At least in the medium and long-term this will neutralise the subcontinent’s success.
Many managers are already changing course. After the first generation of mainly cost-driven outsourcing, current challenges have ushered in offshoring phase 2.0. This is characterised by the facts that independent specialist service providers are increasingly becoming the first choice, that IT and business integration are the main considerations, that the service providers themselves know the business of their clients and that economic added value is measured in terms of delivered results. Furthermore, direct, simple communication is celebrating a comeback, whether on the basis of shared cultural values or quite simply by using the same language.
Other sectors, other languages
In European countries like Germany and France, the exclusive focus on English has often turned out to be a hurdle that even good translators cannot remove. This problem is less about the inability or unwillingness of the client’s workforce to switch to the current lingua franca. The documentation language of many projects is often German, French or Spanish. This is more the rule than the exception with insurance or public administration but less the case with globalised sectors like banks or manufacturers of IT solutions.
With ever more complex IT projects being outsourced, the mother tongue factor has become increasingly important. These projects require a more intensive kind of communication, in which subtleties of expression count much more than ever. An example is software testing where the interface between defined requirements and their implementation in test cases is one of the most important success factors. A tiny semantic haziness is enough to cause costly errors and after-effects. So the client’s most important contact people at the service provider should have mastered the client’s mother tongue.
Similar mentality, same time zone
The example of software quality assurance also highlights the fact that even a common language does not always guarantee success. Transparency amongst staff members to deal with errors is a necessary precondition for the success of software testing. If in this case different cultural attitudes collide, misunderstandings are inevitable. This is where countries like South Africa or eastern European countries come in. They offer the right cost benefits and at the same time a European mentality, a compareable work ethos and a similar time zone, which also greatly simplifies communication. Added to this is the fact that while labour costs are higher than in Asia, they have a comparable stability.
All these ‘soft success factors’ are less crucial when managing system development with standardised processes, such as, product development with SAP. But many company projects are implemented in a less stable environment. Cooperation is made more difficult if the project coincides with the usually low IT process maturity of the client. This is because many service providers usually work with the highest maturity level according to process standards like CMMI® (Capability Maturity Model Integration). The consequence: a variety of ways to tackle problems and an intensive shuttle diplomacy between client and offshore partners, which is increasingly difficult because many offshore experts are no longer willing to accept extended overseas postings. Their career in the domestic market no longer requires as many international obligations.
Specialists marching on
In addition to these shifts in individual offshore regions and countries, another trend has become apparent in offshore cooperation: it’s out with large system houses with full-service offers and in with specialist service providers. Because European IT system integrators have systematically installed and optimised control capabilities in recent years, they are now in a position to integrate a variety of suppliers into their network. This will increasingly help them to access the best practices of a variety of specialists instead of receiving second- or third-best solutions from a single supplier.
In order to remain price-competitive, medium-sized service providers are meanwhile setting up offshore capacities themselves. SQS Software Quality Systems, based in Durban/South Africa, was established two years ago to offer flexible and, if needed, mixed onsite-offshore solutions. At the end of 2007, around 100 quality experts will be working in Durban on the Indian Ocean, albeit for the moment still mainly on projects for British and Irish clients. At the same time the number of clients from Germany, Austria and Switzerland continues to grow, because SQS is hiring more and more staff with German language proficiency in South Africa.
In the medium and long term, specialists like SQS hold another trump card up their sleeve. Their specialist know-how has taught them how work processes can be optimised to make them productive and profitable. This makes their clients largely independent of pay fluctuations and the vagaries of labour markets in specific offshore locations. SQS has ensured long-term cost-beneficial quality assurance using consistent test automation.
This strong strategically oriented thinking makes up the new generation of IT offshoring. The consequence is, that large system houses on their own initiative are bringing small, specialist providers on board on their own initiative to increase the productivity of their processes. This sustainability is important because many projects have progressed on to a maintenance phase, or are waiting to do so. They require solutions that keep costs low over a long period of time.
David Cotterell … … joined Cresta as group CEO in 2002, before becoming CEO of SQS UKISA in June 2006 when Cresta was acquired by SQS AG, having spent close to 20 years in the IT software and services sector with responsibility for sales, marketing, services, support and development. He has held senior management roles with firms such as Misys, DSTi, Customer Analytics and Advent.
René Gawron …… has been chief financial officer (CFO) at SQS AG since 2001, responsible mainly for administration, accounting, finance, mergers & acquisitions, investor relations and personnel.
