Selecting the right offshore vehicle

Many CIOs are being told to move some of IT offshore

Many CIOs are being told to move some of IT offshore. According to Gartner, that number will reach 80 % by next year. Good preparation includes selecting which functions to send offshore and determining which countries have the expertise needed. In addition, be aware that there are several categories of offshore companies from which to choose. There are variations in how they're structured, where they're managed and where the work actually gets done. These factors result in significant differences in scope, cost, risk and operational aggravation. Selecting the right vehicle will have a significant effect on the success of your offshore efforts.

Most offshore providers fall into one of the following categories:

Full-service. Traditional, large services firms (such as IBM, EDS, Fujitsu, Hitachi and Cap Gemini Ernst & Young) offer a wide scope of services. They have a fluent understanding of the market in their home countries as well as many other major markets. They have a proven track record in both IT services and business process outsourcing (BPO). These companies have recently hired large numbers of technical staffers in lower-cost countries, providing a unique opportunity to go offshore without really leaving home.

Consider full-service firms if you're sending a major, multifaceted chunk of your portfolio to one offshore provider — for example, development, maintenance and server farms. The more complex your outsourced portfolio, the stronger your need for breadth, flexibility and reduced risk. Unfortunately, full-service firms have a high cost structure and may offer little savings over doing the work in-house.

Established offshore. Initially, this was the only offshore segment. The best known of these (Tata, Wipro and Infosys) are in India and have excellent delivery capabilities within certain niches. Many started as "body shops" and have evolved to now offer BPO. They try to minimise cultural differences by employing an international sales force and staffers who will shift their work hours to accommodate your time zone. But their top management may or may not have a good grasp of the business environment in your country. Since these firms are owned abroad, you may experience some difficulties with legal and intellectual property issues.

What began as a great niche industry is fast becoming a full-service marketplace. Watch for these established offshore companies to mature rapidly and expand their service offerings. They're beginning to compete directly with full-service firms, putting pressure on their rate structures. Use them to save money when their service offerings meet your needs.

Homeshore-anchored. This is a company that's owned and anchored by a management team in your country but is essentially an offshore company because the majority of staffers are located in low-cost countries. Examples include Cognizant and Syntel in the US and LogicaCMG in the U.K. These firms understand the markets of the countries where they do business and have excellent delivery capabilities in specific niches. They are cheaper than full-service providers but don't have their scope.

Emerging offshore. These smaller offshore firms have only recently entered global markets and are less familiar with business environments abroad. They offer cheap rates and are hungrier for business than better-known firms. Unfortunately, their delivery capabilities vary widely, and it may be difficult to evaluate their financial viability or expertise. Use such providers to reduce costs on targeted, controlled projects. They shouldn't be entrusted with large-scale projects because their pockets aren't yet deep enough.

Experimental offshore. These very small firms are generally body shops competing almost exclusively on price. They serve primarily as subcontractors to larger providers. Unless you have deep ties in their home countries, it's difficult to get accurate information on their expertise, delivery capabilities or financial stability. Avoid using experimental offshore providers unless you know exactly what you're getting, have an extremely tight rein on the project — and can tolerate some surprises.

Each category of offshore provider has arisen to meet a market demand. Make sure that your offshore choice takes into account your organization's tolerance for risk and aggravation, not just the desire to reduce costs. Choose a vehicle that will leverage your offshore efforts by providing the best chance for success on distant shores.

Bart Perkins is managing partner at Leverage Partners in Louisville, Ky., which helps CIOs manage their IT suppliers. He was CIO at Tricon Global Restaurants and Dole Food. Contact him at BartPerkins@LeveragePartners.com.

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