Global delivery
- Article 1 of 3
- Global IT Delivery, October 2006
Businesses are getting much more sophisticated in their choice of outsourcing locations, looking to create an optimal balance of both local and offshore capabilities
Hypes come and go, but outsourcing is likely only to increase in popularity. The cost-savings and access to otherwise unavailable skills and resources are making it ever more attractive. Indeed, on the face of it, “outsourcing to India” should be a ‘no brainer’ because of the cost savings available: although, as analyst Rachael Stormonth of Nelson Hall points out, “There’s no such thing as one easy number”, a figure often given is a 40% saving by outsourcing services to India. So persuasive are these savings that many services companies have had to open their own ‘farshore’ offices to compete.
Yet farshoring is frequently not an option for certain organisations because of compliance requirements, legislation that forbids it such as the EU’s data protection laws, their own desire to have someone accountable close by, security considerations, or simply the difficulties of working with people in significantly different time zones.
To overcome these problems, farshorers have started to provide outsourced services through offices either in or near the client’s home country (“onshoring” or “nearshoring”), but in significantly cheaper locations. While nearshoring is not itself a new phenomenon, the improvements to communications infrastructures in Europe over the last decade have made inter-office communication far easier. Breaking a job into parts that can be serviced in different countries while still providing cost savings is now a far more viable prospect.
This “blended” model, also known as “right shoring” or “best shoring”, is being adopted by global services companies, as well as by companies traditionally associated only with farshoring. The India-based Infosys, for example, has opened offices in locations such as Brno in the Czech Republic, and Swindon and Milton Keynes in the UK.
Says Sudhir Chaturvedi, associate VP, EMEA, for Infosys, “It enables us to be close to key clients, clients that require things to be done at high speed or who are new to offshoring and are looking to see if a job can be done outside the office.”
Wipro, which began life purely as an Indian farshoring company, has opened offices in the UK and around the world to provide nearshoring facilities to global clients. Kees Ten Nijenhuis, head of Europe for Wipro, says client demand has been the key motivator for this change. He highlights other softer benefits to nearshoring, such as face-to-face contact, which some customers require. “You don’t have to speak face-to-face: if the contract is worth $2 million, the CIO doesn’t care if he speaks to you on the phone or not. But if it’s worth $100 million, he’ll want to see you on a daily basis.”
This blended approach seems to be persuading potential clients that outsourcing of services could be viable options after all. Euan Davis, a Forrester Research analyst, says that a recent survey conducted among organisations showed that while half the companies surveyed were still unwilling to outsource, half were now considering the possibility or already doing it.
Picking nearshoring locations is often both a matter of client location and cost savings, with services companies frequently picking sites that are close to existing clients or to service a new contract. They will often pick regions that prove to have a smaller cost base because of low property prices or salaries and government or EU subsidies, but which have access to good transport and communications infrastructures. These cost savings can then be passed on to clients: EDS director Ian Poree says “a good rule of thumb is to expect 20% savings from nearshoring”.
In the UK, Northern Ireland and Wales have both put considerable effort into attracting and retaining new business through their respective business development agencies. EDS, Fujitsu and LogicaCMG, for example, all have South Wales nearshoring offices.
Regions of England also compete for nearshoring centres. Nelson Hall’s Stormonth highlights Liberator’s Barrow-in-Furness offices, which provide document processing services to London boroughs. “There’s both a cost advantage and skills,” she says. “The London boroughs find it very hard to get people in London because of the nature of the work.” Barrow-in-Furness has the people and the skills.
Skills are one of the main reasons for hiring an outsourcer, so is frequently one of the main determinants in the location of a nearshoring office. Access to universities that produce high-quality graduates is one of the reasons why EDS, Fujitsu and LogicaCMG continue to develop their South Wales locations.
Jules Collett, head of consumer helpdesks at Fujitsu Services, says that universities in Newport, Swansea and Cardiff give the company a fresh range of graduates to recruit from each year. But he also cites the advantages offered by another Welsh phenomenon: “One of the other areas we benefit from is that frequently, people will go away to university but return back to South Wales once they graduate.” This provides an even greater pool of resources from which to recruit. The company also finds it easier to retain staff than elsewhere: employees are able to progress their careers more easily, since they can readily move between the company’s offices in Cardiff, Swansea and Bristol thanks to the local transportation links.
Tony Lewis, LogicaCMG’s senior director for Wales, says that his company is equally fortunate: it faces only a 3% attrition rate per annum in its South Wales offices and, like other firms, sees a short-term sickness rate of only 2.9%. “We’re not having to chase recruitment. We don’t have to carry a lot of excess staff to cover sickness.”
Equally, he adds, it would be a mistake to think of nearshore or offshore locations as simply a cheaper option that doesn’t have the skills or facilities of a premium location like London. The company’s Swansea office, for example, is regarded as a centre of excellence and has various accreditations, including ISO14001 and ISO17001. “We’re audited every six months to demonstrate we continue to have the skills.”
To benefit from these near-shore locations, however, requires considerable investment in management structures and processes. While few companies have actually altered their structures to reflect blended delivery, they have, however, gone to considerable lengths to get these geographically separate resources working together.
Explains Infosys’s Chaturvedi, “It’s easy to say I can work in India, the Czech Republic and the UK. But to do the same piece of work in three different locations requires a lot of business skills. It requires the ability to actually be able to break down a project into its parts. Not everybody can do that. It requires process efficiencies and process maturity. We put tools and frameworks around that, of course, but without that intellectual property, you can have all these locations, but you’ll never be able to deliver end-to-end across those locations.” Infosys, Wipro, EDS, Fujitsu, LogicaCMG and others all lay claim to their own particular methods for optimising the blending between offices, the exact methodologies used being their own unique selling points. Forrester Research, which has analysed these different approaches, says that all are unique, with varying metrics and processes with few commonalities.
Determining the right locations for execution also requires more than simple cost calculations. “It depends on very careful evaluation of the client’s needs,” says EDS’ Poree. “In most cases, how we deliver it is at our discretion, but a large number of clients get more involved in the choices and decisions over how we deliver and where we deliver from.” Often, clients may will be unaware exactly how or from where the project is being delivered, only that it is delivered – assuming everything goes according to plan.
Infosys’s Chaturvedi says that the blend will often change over time, with onshoring being prevalent at the earlier stages of an application development contract, for example, but as the application matures, application maintenance is passed to offshore locations where greater cost savings can be made.
A change in the blend may also occur as clients become accustomed to the concept of outsourcing and become less fearful about farshoring. But frequently, the nature of the work will determine fairly readily the optimum location. Says Wipro’s Ten Nijenhuis, “If you’re talking about non-mission critical COBOL work, send it to India. You don’t even have to think about it. But if you’re talking about customisation of SAP, with user involvement and pilots, you keep it in Europe.”
The blended model of delivery is likely only to become more common and sophisticated as outsourcing becomes more mature. Companies will continue look for additional nearshore and farshore locations that will give them greater capacity to meet client needs as well as cost savings. And clients will continue to get more of the best of both worlds from their services providers.