Fifteen years of research, five books and countless articles have earned Mary Lacity, a professor of information systems at the University of Missouri-St. Louis, a reputation as one of the world's foremost experts on IT outsourcing.
"Mary Lacity has a historian's view of IT outsourcing," says Jeanne Ross, the chief research scientist at MIT's Center for Information Systems Research. "She has carefully tracked the costs and benefits, the best practices and the pitfalls, the strategic partnerships and the failed contracts-all of which has given her extraordinary insight into how companies can generate value from their outsourcing arrangements." Lacity is also a research affiliate at Oxford University's Templeton College, and a faculty advisor at Washington University, in St. Louis.
Together with her colleague, Assistant Professor Joseph Rottman, Lacity recently studied over 25 companies that have outsourced IT to India, the Philippines, Malaysia, China and other countries. Lacity is also co-author, along with Professor Leslie Willcocks of the University of Warwick, of Global Information Technology Outsourcing: In Search of Business Advantage (Wiley, 2001). CIO Insight executive editor Allan Alter spoke with Lacity to discuss the value these companies are finding in offshoring, and the strategies they have followed.
What is the value of offshore outsourcing?
I think most customers initially get excited about going offshore because of the favorable labor arbitrage. The Fortune 500 customers we interviewed were using offshore outsourcing for two main areas: developing new applications, and re-platforming old ones, such as changing from PeopleSoft to SAP. They primarily go offshore to save on costs. Then they discover there are a lot of challenges in managing offshore teams-your transaction costs are very high in the beginning, while you're conquering your learning curve-and they tend to shift their focus from just cost-saving to the quality of the code they get, and how fast the work can be done. It's not until they have some significant experience with offshoring that we see some more strategic uses of it.
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How many companies make this transition from focusing on costs to focusing on quality and strategy?
Almost all of them. Most of them were primarily using offshoring not to replace their existing IT staff, but to address backlog and new projects that they wouldn't be able to handle with their existing head count. Rather than adding IT professionals to their internal staff, they were looking at ways that they could ramp up a big, perhaps one-time project, and then ramp down again once the project was completed.
Can you provide examples from your research?
A Fortune 500 financial services company originally went offshore because of Y2K. At that time, the IT executives there said, "Oh my goodness, I'm going to need X number of programmers for this one-time big task. How can I do this cheap and fast? How can I ramp down when I'm done?"
So they went offshore and developed a relationship with a large Tier 1 Indian supplier. Then the U.S. company decided not to cut the supplier loose, because, as they delivered on the Y2K project, the Indian firm started to establish a better relationship, and came to understand their client's main expectations. That same financial services company continues to have a lot of work done with this offshore supplier, and it has started looking at sourcing more strategically.
They now have relationships with 16 suppliers in Asia for IT and other functions. Because they started offshoring early on, they were able to ramp up very quickly when the mortgage-refinancing boom came, and then ramp down when refinancing diminished, without affecting their internal head count very much. So they went into offshoring to save on Y2K costs, and they saved money later because it enabled them to keep their flexibility. Another good Fortune 500 example that we came across is an industrial equipment manufacturing company that is using offshore suppliers to build embedded software for their equipment. That software is now part of the product, and the manufacturer continues to have a relationship with that supplier.
We also had some smaller companies in our study. One had the idea to develop a software package to help respond to a biological attack. They hired a small Indian supplier to develop the application for them. The contract entails having the supplier develop the software on their dime, in exchange for intellectual-property rights. Once the product is finished, the customer will market the software through their channels and share in the revenues from the software license fees. It's an interesting use of offshoring, but the outcome is still unproven.
This article was originally published on 03-17-2005