Global sourcing can deliver many benefits and a substantial return on investment (ROI).  However, many companies outsourcing for the first time often make the mistake of overestimating ROI, which leads to disappointment regarding the perceived value of the outsourcing engagement.  When IT managers are quantifying the business value of global IT sourcing, they must take into account such factors as realistic comparisons and hidden costs.

It is common for an organization to make a comparison between completing an IT project onshore versus offshore.  Cost is analyzed to determine if it would be profitable to send the work to a global sourcing provider.  Onshore costs are frequently inflated in this comparison.  For example, many IT managers assume that it would take the same amount of employees to develop a project in-house, as it would to send the project to a global sourcing provider.  However, for most companies, fewer employees are needed in-house due to the efficiency in areas like knowledge transfer, knowledge capture, environmental support and project coordination.

Many IT managers also make the assumption during the comparison that the work done onshore will be performed by newly hired internal staff.  This assumption inflates the cost of completing the work onshore, as most IT projects will be done by existing employees or contractors.

There are also hidden costs to consider when determining ROI in global IT sourcing.  It is easy to identify some costs associated with global outsourcing, such as labor costs, communication and IT infrastructure, but many of the other related expenses are not so apparent.  Some of these hidden costs include travel expenses associated with the onshore staff traveling to the global sourcing provider’s location, knowledge transfer, training and management of the outsourcing engagement.  Other hidden expenses that must be taken into account are the cost to retain work onshore and cost of the transitional team who will help in the transition of sending projects to the global sourcing provider.

A company looking to outsource to a global sourcing provider can calculate a realistic ROI by conducting an accurate comparison between having the work done in-house versus offshore and by incorporating the hidden costs.  A&E Consulting helps companies determine if outsourcing is the right strategic move.  The firm also assists with choosing the global sourcing provider and overcoming challenges related to outsourcing.

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Global sourcing is a great strategy used by many IT organizations.  It can help increase productivity, reduce costs and create a better focus on core business.  Whether a CIO decides to send work to India, China or another offshore location, it is important to understand the culture of that location.  One article posted on NetworkWorld.com regarding India even suggests that “North American companies could see better results with India-based outsourcing engagements if they take culture into consideration.”  The potential for conflict and misunderstanding is high when the two cultures clash. 

Understanding Cultural Differences
Many companies experience a cultural shock when working with vendors in other countries.  Often the work ethic between the buyer and vendor are quite different.   For example, in India, workers are focused on process and procedure, making sure they follow the appropriate steps.  American based companies on the other hand, expect independent thinking and initiative from employees.  Employees at U.S. companies also are used to working with set deadlines and can adapt how they approach the work, if they are concerned about not getting the task completed in time.  Indian employees many times will not stray from the established workflow and may consequently miss deadlines because the work to be completed is viewed as more important than time constraints.

In addition to work habits, IT managers should also be aware of other cultural differences.  For instance, in Asian countries, especially Japan, Korea and China, the people are very proud of their heritage.  They could be offended if someone brags about the American culture or puts down their own culture.  Many Asian workers do not understand slang that is commonly used in the United States and do not comprehend the majority of American jokes.  It is also considered rude to comment on how good an Asian businessman speaks English.  In the Asian culture, it is expected that an educated businessman will speak English well.

IT managers should be familiar with how relationships are viewed in the global sourcing provider’s country.  In India, relationships are commonly put before business and Indian managers might place a greater emphasis on intrapersonal relationships before discussing business.  In the United States, it is typical to do a quick introduction and then to immediately start talking about business matters, while keeping personal subjects for later.   

Addressing Cultural Differences
Problems stemming from cultural clashes can be avoided if managers address these differences immediately.  Employees from the IT organization should be trained and well-versed in the culture of the global sourcing provider to create a more efficient and profitable outsourcing engagement.  An expert quoted in the NetworkWorld.com article stated that “cross-cultural training would help American companies train onshore and offshore staff how to better collaborate and work toward common goals.”

A&E Consulting helps companies weigh the benefits of global sourcing and assists with choosing the right outsourcing partner.  The consulting firm will also oversee the first outsourced project to ensure a smooth transition.

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An outsourcing contract can be responsible for creating a strong relationship with the global sourcing provider, but can also cause a project’s failure.  Therefore, it is important to understand the contract terms and conditions, before signing any agreements with the global sourcing provider.

Outsourcing arrangements generally last for several years, which is why it is essential for buyers to recognize the terms and conditions in which they are agreeing to abide.  Global sourcing providers will want to make sure that their interests are being protected and they will create a contract that reflects this protection.  However, it is possible to have a contract that protects both parties, as long as the time is taken to review the terms and conditions to determine the relative position of the contract.

When evaluating the terms and conditions of a global sourcing contract, the buyer should know what key elements should be included.  The terms and conditions of most global sourcing contracts will include such components as scope of work, performance expectations, security procedures, responsibilities, pricing and termination conditions.  Other areas that are often addressed in the terms and conditions of global sourcing contracts include governance, rights of recourse and pricing. 

Some companies frequently include reward and penalty clauses in the contract, which include incentives or rewards for achieving certain goals and expectations and sanctions or penalties for non-performance and failure due to gross negligence.  The termination provision also becomes an important component in this area as the reasons for terminating the agreement should be clearly defined.  The termination clause may include termination for cause, termination for convenience, change of control and flexibility of termination. 

Global sourcing contracts should also incorporate remedies for dispute resolution and identify the jurisdiction in which the resolution should take place.  This jurisdiction should not be so slanted that it is unfair to the buyer and could cause the buyer to not be able to obtain a prompt, neutral and cost effective resolution to the dispute.

Before signing the contract, the buyer should carefully review the terms and conditions to identify any areas that may need to be negotiated.  An attorney or industry expert can help determine the level of protection for the buyer by thoroughly analyzing the contract.  Understanding the terms and conditions of the global sourcing contract can help the buyer find success with the outsourcing arrangement.

A&E Consulting provides assistance to companies looking to outsource, by helping develop an organizational global sourcing strategy, searching and evaluating global sourcing providers and establishing the outsourcing program.  In addition, A&E Consulting will oversee the first outsourced project to ensure a smooth transition.

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After choosing the appropriate outsourcing provider the negotiation begins.  One of the biggest and most common mistakes made by IT executives is focusing on price when it comes to negotiations.  The focus on price often leads to disappointment and frustration for both parties, which is why IT executives can greatly benefit from focusing on other essential aspects of the contract as well.  The negotiation process is crucial in establishing the outsourcing relationship, which can last for many years and it is important that buyers understand how to prepare to negotiate.

A global sourcing contract is what defines the relationship and the requirements of each party.  Both parties involved in the outsourcing arrangement must be comfortable with the terms and conditions that are agreed upon.  The contract should include such items as the scope of work, pricing model, expectations, deliverables, performance measures, deadlines and termination conditions.  All of these issues should be thoroughly discussed before a contract is signed.  There should not be any components of the contract that could be considered “gray” areas, as everything contained in the agreement should be clearly expressed.

It is to a buyer’s advantage to take the time to adequately prepare for the negotiation.  A company looking to outsource should understand objectives and needs for the outsourced projects, which will help maintain a better focus on the key issues when negotiating with the global sourcing provider.  IT executives should also define and prioritize these issues and their approach and strategy for obtaining their objectives.  

A strong global sourcing contract is one that balances the interest of both parties.  The contract should be as balanced as possible to protect the interests of both the buyer and global sourcing provider.  When the contract is clear and well-negotiated, it can maximize the effectiveness of the arrangement.

Before signing the contract, the document should be thoroughly reviewed, preferably by an attorney or industry expert.  All of the agreed upon terms and conditions should be specified in the contract to avoid future problems. 

The negotiation process for global sourcing agreements can be time consuming and it often takes longer than anticipated.  Global sourcing providers sometimes take a substantial amount of time to respond to buyers.  However, a buyer should never cut corners when negotiating with a vendor as a well-thought out negotiation is well worth the effort.

A&E Consulting helps companies looking to outsource by assisting with the development of an organizational global sourcing strategy, searching and evaluating global sourcing providers and establishing the outsourcing program.  In addition, A&E Consulting will oversee the first outsourced project to ensure a smooth transition.

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China has made many recent changes that have impacted U.S. businesses outsourcing to the country.  Within the outsourcing industry, China has been well known for its low cost of labor, which attracted many companies wishing to outsource various functions.  However, with China’s new regulations and economic changes, outsourcing to this location has become increasingly expensive. 

Many environmentalists, economists and labor advocates are pleased with the changes that have been implemented by the Chinese government.  Some experts feel though, that China’s moves may put a financial strain on smaller U.S. businesses that have been outsourcing to this country.

An article posted on CNNMoney.com titled, In China, Outsourcing is No Longer Cheap, examined these recent movements.  Some of the key points of the article are summarized below.

New Labor Laws
A strict labor regulation went into effect on January 1, 2008 in China, which mandated employers to offer employment contracts, overtime pay and a social security program.  It is believed that this law was the direct result of internal political dynamics.  There had been a growing public outcry regarding low wages, insufficient labor rights and economic inequality.  Recent studies have shown that the wages in China are increasing by 10 to 15 percent each year.  That statistic, along with the tough labor law, has made many businesses nervous.

Auret van Heerden, President of the Fair Labor Association, was quoted in the article as saying, “There’s a feeling that this law might be too much, too soon.  HR is a recent discipline and the courts are starting to get overwhelmed.”

Environmental Reform
China has been making great efforts at environmental reforms.  In 2006, the Chinese government started a 5-year plan to increase the country’s energy efficiency by 20 percent between 2006 and 2010.  China anticipates that by 2020, renewable energy will account for 15 percent of its national consumption.  There has also been a greater enforcement of safety and cleanliness rules that had been in China’s plans for a while.

Last summer, China took emergency measures to address air pollution due to the Olympic Games.  As a result, many factories were forced to stop or slow production.  Some of the factories were later re-opened, but many were not. 

Eliminating Tax Rebates
China had been allowing tax rebates for exporters since 1985, but recently these rebates were cut.  Over the last few years, Beijing has drastically cut rebates on thousands of goods across a range of industries as a way to reduce China’s trade surplus.  China charges a 17 percent value-added tax (VAT), which is placed on added value of goods and services that is incurred in any exchange.  Exporters were usually given a full rebate on this tax, but that has changed.  China will now only offer VAT refunds ranging from 5 to 17 percent.  For goods that are considered to cause high pollution during the manufacturing process, the tax rebate has been cut all together.

Rising Chinese Yuan
The weakening U.S. dollar has also been compounding problems for many U.S. companies outsourcing to China.  In 2007, the Chinese Yuan rose more than 10 percent against the dollar.  Chinese vendors are typically paid in Yuan, which has placed a large financial strain on profits for many businesses in the United States.

Despite all of these changes, China still has a lot to offer a company looking to outsource.  A&E Consulting offers valuable insight into the outsourcing industry and helps businesses in choosing the right location and vendor.  The consulting firm will also oversee the first outsourced project to ensure a smooth transition.

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One of the most common questions asked by businesses is – when is the right time to outsource to an IT service provider?  There is no simple answer to this question, as it will depend on specific details related to each individual organization.  Too often, companies decide to outsource solely based on the cost savings, which should not be the main motivation. By analyzing internal resources and other variables, executives can make an informed decision regarding outsourcing.

Global sourcing is a powerful strategic tool that when used at the appropriate time, can help businesses increase productivity, reduce costs and focus on core competencies.  It can make an organization more productive and profitable.  When deciding whether to outsource IT development, there are some important considerations to keep in mind.  For example:

• Would outsourcing a particular IT project cause the company to lose business knowledge? 
• Is the IT project something that is routine? 
• Are there enough internal IT employees to complete the project?
• Would it be cost effective to send the work to a global sourcing provider versus keeping the project in house? 
• By outsourcing, would resources be better allocated to strategic business matters? 

These are essential questions that should be addressed before making the decision to outsource to a vendor.  Once the decision is made to pursue outsourcing there are some ways to ensure that the right global sourcing provider is chosen. 

Before signing any contracts, research should be conducted.  Some of the key criteria in choosing a vendor include the vendor’s size, industry expertise, employee qualifications, communication capabilities and security measures.  The location of the vendor is also a significant issue and each country boasts its own advantages and disadvantages.  Language, government support and education are among the many factors that should be analyzed when deciding on a destination for the IT project.  Finding the right vendor is crucial in the success of an IT project and a vendor that fits well with one organization, may not align with another.

Companies looking to outsource should also have an established plan to handle the relationship with the global sourcing provider.  A manager should be assigned the task of overseeing the outsourced project to ensure its successful competition. 

A&E Consulting offers valuable insight regarding outsourcing decisions.  The consulting firm assists companies with assessing whether global sourcing makes sense and what processes should be outsourced.  A&E Consulting will also oversee the first outsourced project.

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There was a great article posted on CIO.com in March 2008, titled, “Outsourcing: The Pros and Cons of Offshore Remote Infrastructure Management.”  The article discussed many of the recent trends related to remote infrastructure management, including the increase in competition caused by offshore vendors.

Infrastructure is generally managed remotely, even if the data center is located nearby.  According to Bill Piatt, CIO of the International Finance Corporation, “remote infrastructure management is something that virtually every organization does every single day.”  He goes on to say that people think there is a difference if that work is done offshore.   However, recent trends show that remote infrastructure management is being included as an additional service in global sourcing.  Numerous global outsourcing proposals now contain some form of offshore infrastructure delivery of services.

Many of the large global sourcing providers believe that infrastructure management will be the next main revenue source.  IT vendors are increasing their delivery capabilities to attract more business from outsourcing companies.  From 2003 to 2005, the number of vendors who have the ability to handle infrastructure tasks tripled to 15,000. 

The utilization of global sourcing providers for services involving infrastructure management has become more mainstream.  The market for remote infrastructure management is estimated to be somewhere between $80 billion to $120 billion.  Experts feel that global sourcing providers will gain additional market share and will continue to grow by 20 percent each year.

The article on CIO.com listed the percentages of infrastructure support functions that could be sent to a global sourcing provider.  These functions included:

• Network Services 80%
• Internal Help Desk 75%
• Servers 70%
• Maintenance 60%
• Administration 35%
• Mainframe 30%
• End-user Devices 15%

A report published last February by India’s National Association of Software and Services Companies (Nasscom) asserts that up to 75 percent of all infrastructure management roles could be outsourced globally, which would create a $26 billion to $28 billion revenue potential by 2013.   The report stated that Indian companies could capture approximately 50 percent of this revenue. 

There currently is a lot of competition among infrastructure providers.  Global sourcing vendors have been purchasing infrastructure service providers to grow that segment of their businesses.  The recent changes will give outsourcing companies additional options, but can also create more confusion on making the right decision for remote infrastructure management.

There are benefits to sending infrastructure management to a global sourcing provider, but it may not be a good fit for every organization.  A&E Consulting can help you weigh the benefits of working with a global sourcing partner and will oversee your first outsourced project.

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Quality assurance is crucial with IT development.  Even the most knowledgeable, experienced developers can create code that has errors or “bugs.”   If a defect is not detected until the point of construction or maintenance, it can cost the company significantly more to fix it than it would have cost during the initial creation process.  Companies involved in IT development generally have a system for quality assurance. When IT managers decide to global source part of the development, they need to ensure that the vendor has similar quality assurance testing in place. 

Quality assurance testing will confirm that all functionality, security and scalability issues have been addressed based upon the system requirements.  This testing should be done for every process that is developed through global sourcing or in house.

The most common causes of code errors have to do with the IT vendor.  The vendor may have lacked its own quality assurance team or assumed the outsourcing company would handle quality assurance testing in house.  The project could have had a tight deadline and the vendor rushed through a quality assurance check or may have skipped it all together.  Vendors also may misunderstand the system requirements, which would lead to inadequate testing.  Whatever the reason, poor quality assurance can greatly impact a project.

Before signing a contract with a global sourcing provider, it is important to find out what type of quality assurance system has been established.  Is there a quality assurance team?  What processes are set up to correct code errors?  How is the software being tested and does it include the end-user experience?  Another key fact to uncover is whether the quality assurance testing done by the vendor is comparable to that of the outsourcing company.  Many vendors have quality assurance teams that work with the developers to test the software. 

It would be ideal for the global sourcing provider to conduct regular inspections of the software as it is developed.  Inspections can be done at every stage of the development process and can include technical peer reviews of software designs and implementations.  By conducting these inspections, schedule delays can be avoided and costs can be better controlled because problems would be detected early.

When choosing a global sourcing provider, take the time to review its quality assurance system.  By carefully evaluating a vendor’s quality assurance processes, outsourcing companies can avoid waiting until software is released to discover it has code errors.  A&E Consulting can help you choose a global sourcing provider and will oversee your first outsourced project.

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Most global sourcing experts will agree that communication is one of the key factors in the success of IT development.  Even though so many people know that communication is important, it still creates problems for outsourcing companies. Communication with a global sourcing provider has its own set of unique challenges.  When referring to communication, it is more than just language.  The outsourcing company must find a way to handle the different time zones, distance and multiple locations. 

It is common for an outsourcing company to not place a high priority on communication.  When communication goes wrong in global sourcing, cultural differences are often blamed.  However, usually there is more to it than just cultural differences.  If information cannot be communicated to the correct people, at the right time, there is a strong potential of the project being delayed or not properly developed.  Before a project is sent to a global sourcing provider, a communication plan must be created that will address how and when communication will take place.

Establish a communication infrastructure.  Will correspondence take place via email or telephone?  Who is the point of contact?  When communicating with the vendor, it may be wise to invest in high quality digital communication lines, to ensure a clear connection.  Some outsourcing companies have also found it helpful to create a toll free number that can be used for team members.  Direct telephone numbers and extensions, plus email addresses should be exchanged among those involved in the project.  By having an established communication infrastructure, team members will know how to contact each other and there should be minimal to no delay in relaying information.

Determine the frequency of communication.  How often should virtual meetings take place?  Who should be included in each meeting?  As the global sourcing provider and outsourcing company work together, it is important to determine if regular conversations will occur, which will go over the project status and address any issues that may have arisen.  The frequency of such meetings should be determined in advance to avoid any complications or schedule conflicts.  This interactive communication will effectively relay pertinent information to those involved in the project.  After a team meeting, there should be some type of follow up report, outlining what was discussed in the meeting.  This information should be dispersed to the meeting participants.

Create methods for communication.  In addition to telephone and email, what other methods will be used in communication?  Status reports, newsletters and Intranets are all helpful tools for communication.  A dedicated Intranet can be used to communicate project goals and expectations to ensure the success of the project.  However, whatever method of communication is used, it is vital that all team members and project managers read the information.  Even though a lot of effort may be put into creating great information, if it is not read, it is useless.

There are many additional ways to overcome communication barriers.  A&E Consulting can help you create a communication plan and choose the right global sourcing provider.  We will also assist you with your first outsourced project.

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Companies have a lot to gain through global sourcing, such as the ability to get products to market faster, lower costs, increase productivity and create a better focus on core competencies.  All of these benefits can be lost if the wrong global sourcing provider is chosen.  Failing to choose the right vendor can leave the outsourcing company in a worse condition than before. 

By thoroughly analyzing a global IT provider, organizations can avoid repeating the same mistakes that many others have made in the industry.  It is vital that the vendor chosen is able to deliver solutions that will meet the outsourcing company’s needs.  There are key criteria that must be considered when deciding the appropriate global sourcing provider.  Even though a vendor may be a good fit for one company, doesn’t mean the same vendor will align properly with another.

Vendor Size – Deciding to go with a large vendor versus a smaller one is tricky.  Larger vendors tend to have several outsourcing services in order to provide multiple offerings to clients.   The problem with going with a large IT vendor is that there is a lack of individualized attention.  On the other hand, vendors that are too small may not have the services needed.  The solution is finding the right balance - a global sourcing provider that is big enough to handle the IT work, but small enough to give personalized and prompt attention to the outsourcing company.

Industry Expertise – Vendor expertise is crucial to the success of IT projects.  It is ideal to outsource to a global sourcing provider that has knowledge in various software technologies.  If a vendor has limited expertise, there is no way of knowing if there is a better method for software and process development.  Vendors should also have knowledge in the outsourcing company’s market.

Employee Qualifications – The quality of development is only as good as the developer’s knowledge and experience.  When interviewing vendors, it is important to inquire about the background and experience of the employees.  How many years have they been in this line of work?  What type of degrees have they earned?  Finding out the language skills of the employees is also crucial as language barriers can harm an IT project.

Communication Capabilities – Vendors should have some type of communication infrastructure in place.  There should be a system for knowledge transfer and a well defined method for communicating project requirements.  Also, the vendor will need to have either email, phone or other type of communication capability that would allow the outsourcing company to discuss the project with the vendor. Some global sourcing providers have project managers located in the United States to coordinate projects and schedules.

Security Measures – The protection of intellectual property is essential in the IT industry.   If the vendor is located in another country, the laws of that region should be reviewed to find out the level of intellectual property protection.  Employees of global sourcing providers are often culprits of trade secret theft.  Before signing a contract with a vendor, find out what kind of background checks are done on employees.  Vendors should have firewalls and other types of security protection methods established to protect proprietary information.

This list is just a sample of criteria that should be reviewed.  A&E Consulting can help you choose the right global sourcing provider in order to ensure the success of your IT projects.

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