Finding Success Offshore: An Interview with Mary Lacity

FindingSuccessOffshore:AnInterviewwithMaryLacity-'ShyingAwayFromOffshore'

Well,there'smoreriskgoingoffshorethanonshore.Ittakesatremendousamountofinternalmanagementtomakethiswork.Andbecausevisarequirementsaresuchaheadachenow,it'sverydifficulttobringyourIndiansupplierson-andoffshore.Alotofbusinesspeopleareafraidtogooffshorebecauseofprivacyandintellectual-propertyrights.Also,someofthepeoplethatwe'vetalkedtoareworriedthatthelaborarbitragewon'tbeasfavorableanymore,becauseIndiansalariesaregoingup.

Youmentionedthatinternalmanagementissuescouldbeholdingpeopleback.Whatarethemainones?

Ittakesalotofcoordination.Softwaredevelopmentishardenoughwhenyoudoitin-house.It'shardwhenyououtsourceittoadomesticsupplier,andit'sevenharderwhenyououtsourceittoanoffshoresupplier.Thedifferencesintimezones,culture,travelandcommunicationcanbeconquered,butitrequiresinternalmanagementcoordinationtomakeallthiswork.

Despitetheserisksanddifficulties,doyoustillthinkmorecompaniesshouldbetryingtooutsourceoffshore?

Ithinkit'saviableoption,andcertainly,ifIwereinaFortune500company,itwouldbeanoptionthatIwouldwanttoexplore.Thisisstillaveryimmaturemarket.Ifyoulookback15years,wehadthesameissueswhencompaniesstartedoutsourcingtodomesticsuppliers.There'salottolearnatthebeginningofanemergingmarket.Thenicethingisthatearlyadoptersconquerthatlearningcurveprettyquickly.

Ifyou'reinterestedingoingoffshore,howdoyouselectanapproachthatprovidesthevalueyourcompanyisseeking,whilealsobalancingcostsandrisks?

Thereareacoupleofdecisionsyouhavetomakeupfront.Firstofall,whatdoyouwant?Whereareyougoingtogo?Whichsupplierareyougoingtopick?Buttherearefourmainapproachesforprovidingvalue:captivecenters,jointventures,build-operate-transferandfee-for-service.

Whatarethesefourapproaches,andhowdotheydiffer?

ThefirstmodelthatU.S.customersusuallytryisthefee-for-servicemodel,becauseithasthelowestrisk,anditdoesn'trequiremuchup-frontinvestment.In"feeforservice,"thecustomerpaysafeetoasupplierinexchangeforservices.Thefeemaybebasedonafixedprice,timeandmaterials,orevenaretainermodel.It'salow-riskapproach;you'rejusttestingthewaterswiththatkindofamodel.It'seasytodisengageifitdoesn'tworkout.Thedisadvantageisthatinordertogetthecost-saving,youhavetogetenoughvolumeofwork.

ClickheretoreadasurveyonhowwellCIOshandleoutsourcingarrangements. Socompaniesseekingtosavemoneybyusingthemostcommonmodelmightnotactuallyfindit.

Notunlesstheyconquertheirlearningcurveandgettheirvolumesup.

Canyougivemeexamplesofcompaniesthathavepursuedthefee-for-servicemodel?

Weknowalotofcustomersthataresatisfiedwiththefee-for-servicemodel,buttheymighttryoutdifferentsuppliersbeforetheyfindtherightsupplier.OneFortune500companywestudiedengagedfourIndiansuppliers,andhad17pilotprojects,inordertotestproof-of-conceptandwhotheyreallywantedasapartner.Attheendoftheday,theyendedupselectingonelargeIndiansupplierforacertaintypeofworkandonesmallIndiansupplierforanother,andthey'refinallyatthepointnowwherethey'reachievingthecost-savingsatthelevelofqualitythattheywant.

Howmucharetheysaving,andhowmuchhasqualityimproved?

We'veaskedthatquestionoverandoveragain,andthesavingsareverydifficulttocalculate.Mostofthetime,allyou'regoingtogetfromaprogrammanagementofficeristhedifferencesinhourlycosts.Ifyoustandbackandtrytosaywhatthetotalcost-savingsare-well,it'sverydifficulttosaythereareanytotalcost-savings.Theonlypeoplethatgiveusanykindofbenchmarkaretheresearchfirms.

Itsoundslikethere'sareasonthatsmallercompaniesarereluctanttogooffshore:Youneedalotofvolumetosaveanymoney.Howmuchworkdoyouneedtogivetotheoffshorefirms?

Ifyouwanttotalcost-savingsof20percent,andyou'retalkingaboutapplicationdevelopment,thenbetween50and100full-timeequivalentsinthelongrun.I'mtalkingonlyaboutsoftwaredevelopment.Savingsoncallcentersrequireamuchsmallervolumeofwork.Sometimesyougetsavingsalmostimmediately.Theeasiestonetogetsavingsoniscallcenters.Ifyoudoitdomestically,itcosts$25percall.Ifyoudoitoffshore,itcosts$15percall.

Let'stalkabouttheothermodels.

Theothermodelsarealsointeresting.Forexample,there'sthebuild-operate-transfermodel.Here,whatcompanieswanttodo,ultimately,istohavetheirowncaptivecenter,butthey'reafraidtodothisthemselves.Theymaynotunderstandthecultureorthepoliticsor,forexample,thegrafttheymighthavetopayto,say,thefireinspectors.Sotheyhirethesuppliertoerectthefacilities,wirethebuildingandhiretheemployees;later,thesuppliertransfersboththeownershipofthefacilityandtheemployeestothecustomer.Wedon'thaveanyexamplesinourdataofcompaniesthathaveactuallygonethroughthetransfer;theysaid,"Idon'tknowwhotocallwhenthelightsgoout,andtheIndiansupplierdoes."

Theothertwostrategiesarejointventuresandcaptivecenters.Wesawalotofjointventureactivityintheearlyninetieswithdomesticsuppliers.Theideahereistotakethecustomer'smainexpertiseandcombineitwiththesupplier'sITexpertiseandthenserviceaverticalmarket.Thosedidn'tdowellinthenineties,sowe'llseeifitworkswithIndiansuppliers.

ClickheretoreadaboutGoogleexperienceoutsourcingitsbilling.

What'sthedifficulty?

Ithinkthecustomerbecomesschizophrenicinthesekindsofjointventures.Let'ssayI'macustomer,andIcreateajointventurewithanIndiansupplier.Thefirstthingis,I'mtheirfirstcustomer.Ihaveengagedthesupplierbecausethey'regoingtodosomemassiveamountofworkforme.Butasajointventure,Ialsoexpectthesuppliertobeabletoturnaroundandgetmorecustomersoutsideofthisrelationship.Here'swhereitbecomesschizophrenic:Assoonasthesupplierturnsitsattentionoutside,I'mlikelytosay,"Hey!Whataboutus?You'vegottodelivertous."It'sveryhardtoplaythisgamewell.

Whataboutcaptivecenters,whereaU.S.companyownsthefacilityandalltheemployeesthereworkforthatcompany?Isthatsomethingthatonlyverybigcompaniescoulddo?

It'ssomethingwhereyouhavetohavealargecommitment,avolumeofworkoverthelonghaul.WeknowalotoflargeITsuppliersarecreatingcaptivecenters.WealsoseesomeorganizationscreatingcaptivecentersinplacessuchasChina,buttheirreasonforgoingtoChinaisthattheyultimatelywanttoselltheirendproducttotheChinesemarket.Weknowofanaerospacecompanythat'ssettingupacaptivecenterinKualaLumpurbecausetheywanttosellfighterplanestoMalaysia,andoneoftherequirementsoftheMalaysiangovernmentisthatyouhavetosourceinthatcountry.Sothat'sanexampleofselectingalocationbasedonabusinessreason.

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