Sunday, December 19, 2004

Offshoring: Dos & Don'ts

The SWOT analysis of my first major project involving offshore software development in early 2000 can be summed up like this. Strengths – I saved my company £500,000 by spending 30% of what it would have cost me in the U.K. Weaknesses – the system delivered didn’t quite look like what I had envisioned. Opportunities – the learning experience made the next several projects easier. Threats – I had more grey hair at the end than when I started.

As an interim CEO for a Yellow Pages business and responsible for migrating it to an online business, keeping IT costs down during the transition was a big consideration. There was simply no other way to do so than by having software developed and our data entry done at a lower cost offshore centre.

The trick was to ensure that nothing was ‘lost in the translation.’ Tell a programmer in Europe, the software he’s constructing should look like a fine building – and he’ll come back with the equivalent of the Eiffel Tower. Tell the same thing to an Indian programmer – and he’ll come back with the Taj Mahal. Both are beautiful buildings – just very different!

That operational experience and a cross-cultural background has proven very valuable for companies we’re investing in or otherwise advising. As a venture capital firm, our ability to provide a low cost and scaleable development centre in India that can plug-and-play with a western company, is a huge value-add.

At Ariadne Capital, we’ve had a program called “ArbitrageIt” to take companies to India. The idea is for companies not to outsource their problems, but to arbitrage the cost of their operations even as they grow them. We’ve helped companies from a 10-person size to a FT-SE company with 15,000 staff devise and execute the best offshore strategy.

Rather than build our own centre, we have selected a set of preferred suppliers for specific tasks based on our years of experience with them.

The ready-to-use option is a huge differentiator for us. It is especially attractive and relevant for a start-up that can hardly afford the cost of exploring and selecting an offshore partner in India, or worse, choose the wrong one.

Our knowledge of best of breed outsourcing practices helps make the experience a productive one, rather than a frustrating one. We find offshoring for IT software and services companies or those with at least 15 percent of their cost base dependent upon IT services. That’s usually enough of a critical mass to justify the increase in capital expenditure for setting up an offshore partnership and the additional operating expenditure in the form of increased logistics and communications costs.

With the experience of commissioning offshore development as well as advising FT-SE companies and high-growth start-ups on their offshore development strategy in mind, here are a few tips to keep in mind.

Cover Your Achilles Heel. The biggest reason for IT offshore development to fail is if the western company itself is not prepared for it. Choose projects and departments that are not going to threaten existing staff. The offshore facility should be a way to scale operations not politicise it. Get project managers who are accomplished at delegating tasks, monitoring workflow, policing and communicating with external suppliers. Start with a small project that is low risk before betting the house. Actually, never bet your house – your core competence and mission critical elements are often based kept on site.

Make Talent the Driver. Tata Consulting Services and Infosys Technologies Ltd, among India’s largest IT services company, had 1 million job applicants each in 2003. It only offered jobs to fewer than 1 percent of them. That’s a Darwinian filtering of talent if you’ve ever seen one. The people working in top IT services companies in India and China are not just smart – they’re super-smart. The desire to access superior talent anywhere in the world should be your driver. The fact that you will experience lower churn is a bonus. The fact that you will pay them much less for the same work in your home market is an additional bonus.

Peanuts Attracts Monkeys. Since you’re paying less than what you’d pay for a comparable skill set in the West, don’t be a tightwad. If you only go for the lowest cost (i.e. less experienced and lower skills), you’ll end up paying a higher price. Choose a partner company and personnel for their quality, not their price. Offshore companies come in all shapes and sizes. If you pay peanuts, know what to expect.

Manufacturing is Different: Offshore outsourcing, however, is not the cost reduction panacea for every product or part in all types of manufacturing. During the planning for the transfer of parts and products currently manufactured and consumed in the U.K. to offshore production facilities, the parts will often be estimated with lower unit costs. However, offshore production does not mean the final ‘total cost of ownership’ will actually be less since unlike software or services, the goods have to be physically packaged, transported and delivered. ‘Total cost of ownership’ will have to calculate capital expenditure as well as the ‘landed cost’, which will include freight, duties and insurance. These costs must also be recognized.

Find the Golden Nuggets. The best protection against failure is not an airtight SLA or the latest remote workflow management product. That doesn’t help when you find out your software isn’t ready with the goods a day before expected delivery. Build a relationship with your supplier. If you can, eventually build your own subsidiary. Find a person who understands the local milieu and can help find the best supplier or partner and facilitates the building of a relationship with them.

There’s a reason why Edmund Hillary partnered with Tenzing Norgay. You need to find your way to the top of the mountain -- and your way back too.