Enabling Successful Offshoring

September 7th 2010 London

Contents

1. Introduction 2. The Offshoring Paradigm 3. Impact From The Current Economic Climate 4. Barriers to Successful Offshoring 5. Critical Success Factors For Offshoring 6. Conclusion & Recommendations

1.) Introduction

Services are being moved abroad increasingly by an outsourcer

Outsourced

Outsourced Onshore
18% $664BN $784BN

Outsourced Offshoring
$225BN 37% $164BN

Outsourced offshoring is an integral part Outsourced offshoring is an integral part of our strategy, but II do think serious of our strategy, but do think serious consideration have to be made to ensure consideration have to be made to ensure quality quality Customer Service Manager, IT service Customer Service Manager, IT service provider provider This is not about labour cost. If you do This is not about labour cost. If you do not do it you will not survive not do it you will not survive MD, Bank MD, Bank I do not see public sector organisations I do not see public sector organisations making the cost saving without starting to making the cost saving without starting to consider offshoring consider offshoring CIO, Central Government Organisation CIO, Central Government Organisation Increasingly all companies must have an Increasingly all companies must have an offshoring and outsourcing strategy offshoring and outsourcing strategy CIO, Telecom Vendor CIO, Telecom Vendor We first embarked on outsourcing and We first embarked on outsourcing and offshoring for cost reasons but we realise offshoring for cost reasons but we realise that the benefit really lies in the additional that the benefit really lies in the additional value and flexibility we are getting value and flexibility we are getting COO, Retail Chain COO, Retail Chain

OWNERSHIP

2008

2013

2008

2013

Captive Onshore
$3,000BN 3% $3,090BN

Captive Offshoring
$220BN 21%

Captive

$182BN

2008

2013

2008

2013

Onshore

LOCATION

Offshore

Sources: Business Week, 2006, Gartner, 2009 and Frost & Sullivan, 2010

2.) The Offshoring Paradigm

Back to the Future: It is becoming all about costs again

Key Drivers for Offshoring Over Time Key Drivers for Offshoring Over Time

Strength of Driver in 2005 Reduce Cost Reduce Cost Access to Skills Access to Skills Core Business Core Business Knowledge Base Knowledge Base

Strength of Driver in 2008 Core Business Core Business Flexibility Flexibility Reduce Cost Reduce Cost Access to Skills Access to Skills

Strength of Driver Beyond 2010 Reduce Cost Reduce Cost Flexibility Flexibility Capacity Capacity Access to Skills Access to Skills

From Cost

to Competency

and back to Cost and Revenue

Drivers have been and are Cost, Revenue and Competency related Drivers have been and are Cost, Revenue and Competency related
Source: Frost & Sullivan, 2010

3.) Impact of the Current Economic Climate

End users expect more business value add but have no extra money to spend

IT Budget % Change: Previous Year IT Budget % Change: Previous Year

6%

Computer Economics Survey, 2010 Computer Economics Survey, 2010 42%: Decrease spending 42%: Decrease spending 13%: Spend the same 13%: Spend the same 45%: Increase spending 45%: Increase spending

Stagnating Stagnating IT Budgets IT Budgets Decreased Decreased Spending Spending

5.0% 5% 4.1% 4% 3% 2% 1% 0.0% 0% 2006 2007 2008 2009 2010 0.0% 4.0%

Spending per user decreased by 13.7% 2006/10 Spending per user decreased by 13.7% 2006/10

Driver Driver Value for Value for Money: Money: Cost and Cost and Revenue Revenue

Cost Cost Forced into it Forced into it Tier 2 countries Tier 2 countries

Cost & Flexibility Cost & Flexibility Offshoring more processes Offshoring more processes
Multi-sourcing Multi-sourcing

Flexibility Flexibility Revenue generating while Revenue generating while cutting costs cutting costs

Expect business value add Expect business value add Impact: Higher Impact: Higher Expectations Expectations
Processes must have further cost and/or revenue benefits. Processes must have further cost and/or revenue benefits. Expect greater ability for close collaboration with offshoree and offshorers staff Expect greater ability for close collaboration with offshoree and offshorers staff

Expect no change in service and quality levels Expect no change in service and quality levels

Sources: Frost & Sullivan, 2010 and Computer Economics, 2010

4.) Barriers to Successful Offshoring

Successful offshoring is about people attention to culture, communication and change

Key Barriers to Successful Offshoring Key Barriers to Successful Offshoring

Key Actions to Achieve Successful Offshoring Key Actions to Achieve Successful Offshoring

Lack of Cultural Awareness Lack of Cultural Awareness

Prepare to Tackle Cultural Differences Prepare to Tackle Cultural Differences

Lack of Efficient Communication Lack of Efficient Communication

Ensure Appropriate Structure, Communication Tools Ensure Appropriate Structure, Communication Tools and Processes and Processes

Lack of Partnership Mentality Lack of Partnership Mentality

Ensure Structure and Foundation for Collaboration Ensure Structure and Foundation for Collaboration and Several Visits to Offshorer and Several Visits to Offshorer

Lack of Common Expectations Lack of Common Expectations

Ensure Common Expectations Ensure Common Expectations Ensure Involvement of Key Stakeholders Ensure Involvement of Key Stakeholders

CASE STUDY: UK Service Provider We had the expectation that as soon as we offshored, we would cut costs. It turned out to be a disaster, and quality really suffered. It has taken a lot of work to efficiently work with people half way around the world. We should have put a lot more effort into tackling, especially, cultural differences and communication from the beginning. We have now invested in video conferencing to enable closer collaboration between our UK and Indian staff, which has helped. We have reduced costs, but it has happened over time.

Sources: Frost & Sullivan, 2010

5.) Critical Success Factors for Offshoring

By following these 10 steps organisations can successfully offshore

Checklist for Successful Offshoring

1 2 3 4 5 6 7 8 9 10 Identify and Analyse What to Outsource and Offshore Ensure an Experienced Partner Ensure a Common Goal and Be Specific About Benefits Manage Change Enable partnership Know the Key Stakeholders and Their Expectations Manage Cultural Differences Sign a Complete Contract and Involve Senior Management Be Flexible Consider Alternative Approaches to Risk Establish a Sustainable Relationship and Structure Remember That Reaping the Full Benefits Take Time By following this checklist we believe users are a step closer to enabling successful offshoring

We have later realised, We have later realised, that the highest value was that the highest value was the partner approach that the partner approach that allowed us access to best allowed us access to best practices and knowledge. practices and knowledge. Head of IT, Central Head of IT, Central Government Department Government Department
7

6.) Conclusion & Recommendations

Remember that check points for end users are selling points for vendors

Offshoring increases Offshoring increases

Outsourcing Increases Outsourcing Increases

Outsourced Offshoring Increases Outsourced Offshoring Increases

Offshoring is about Cost again, but there must be business value add Offshoring is about Cost again, but there must be business value add
-- Cut Costs and Increase Revenue Cut Costs and Increase Revenue

Key Step To Successful Offshoring Key Step To Successful Offshoring

1 1 2 2 3 3 4 4 5 5

Systematically Choose Offshore Processes Systematically Choose Offshore Processes

6 6 7 7 8 8 9 9 10 10

Manage Cultural Differences Manage Cultural Differences Sign a Complete Contract & Involve Sign a Complete Contract & Involve Management Management Be Flexible Alternative Approach to Risk Be Flexible Alternative Approach to Risk Establish Sustainable Relationships and Establish Sustainable Relationships and Structure Structure Remember It Takes Time To Reap Benefits Remember It Takes Time To Reap Benefits

Ensure an Experienced Partner Ensure an Experienced Partner

Ensure Common Goal and Specific Benefits Ensure Common Goal and Specific Benefits

Manage Change Manage Change

Enable Partnerships Involve Stakeholders Enable Partnerships Involve Stakeholders

If you have any queries, please do not hesitate to contact us

Jon Stephansen Senior Consultant ICT Practice, Europe, Israel & Africa Tel. +44 207 343 8336 Mob. +44 787 216 6975 Fax +44 207 730 3343 E-mail: jon.stephansen@frost.com

Sille Gavnholt Jygert Consultant ICT Practice, Europe, Israel & Africa Tel. +44 207 343 8312 Mob. +44 777 190 2474 Fax +44 20 7730 3343 E-mail: sille.jygert@frost.com