Commentary: Four stages of going offshore

By Forrester Research
Special to CNET News.com
December 22, 2003, 12:30PM PT

By John C. McCarthy, Research Director

Offshore governance changes dramatically, as companies migrate through the four stages of the offshore journey. What starts as an administrative function evolves over three or more years into a program management and development discipline.

Forrester recently attended a panel on "offshoring" in the insurance industry, at which offshore users revealed divergent levels of insight and experiences. These companies represent a reality that the move offshore is not a simple six-month project businesses can dial up instantly. As we have observed in our research, there is a four-stage migration companies go through over a period of 24 to 60 or more months.



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• Bystanders. Despite the rising tide of offshore hype, the reality is that most companies are either doing nothing or just starting their journey to locations like India, Russia and the Philippines. Today, more than 60 percent of the Fortune 1000 falls into this segment. These companies have no offshore relationships. Research shows that the perceptions of those with no overseas experience vary dramatically when compared with the perceptions of companies that do have offshore information technology or business process outsourcing expertise.

• Experimenters. Another 25 percent to 30 percent of Fortune 1000 companies have offshore experience and relationships with offshore vendors, but offshore is not a key element of their overall IT strategy or spending plans. This segment is typified by its use of multiple offshore providers--often more than 10 different firms--as well as its perception of offshore as providers of staff augmentation or low-cost contractors. For experimenters, offshore spending often represents less than 20 percent of their overall IT third-party services (in most cases less than $2 million) budget.

• Committeds. A small group of companies--5 percent to 10 percent of the Fortune 1000--has scaled its offshore efforts to incorporate sophisticated governance techniques, such as creating an offshore-specific sourcing office and focusing its spending with only two to three key providers. These companies employ the offshore suppliers for more complex application maintenance and mission-critical development services.

• Full exploiters. At the top of the offshore pyramid sit those companies--less than 5 percent of the Fortune 1000--that take complete advantage of offshore activities through the combination of development of global sourcing as a core skill and investment in the IT process maturity to take a high percentage of work offshore. They have retrained their staffs to use a consistent methodology and processes based on the capability maturity model (CMM) to drive their higher utilization of offshore suppliers. For example, one company in this camp has 95 percent or more of its legacy maintenance being done in India.

The evolution of governance
Directly tied to the four stages of the offshore journey is a parallel evolution of the offshore-governance and the global-sourcing function. The role and responsibilities of the offshore governance/sourcing function change dramatically over time--it is not a short-term or stopgap position. There are three primary stages companies go through, as they bolster their reliance and utilization of offshore resources.

• Phase one: establishment. The strategic focus in this period is on developing and articulating the overall offshore strategy. With a clear plan in place, the CIO can articulate which IT jobs will be phased out, preserved or partially affected and the plan for retraining redundant staff. This was the consensus best practice on internal communication from a recent governance workshop.

• Phase two: encouragement. In this stage, governance evolves to drive use. Internal resistance to taking mission-critical development and maintenance offshore has to be overcome through joint workshops with vendors on successful projects and cultural training. The program office will also work with human resources to develop and implement offshore usage metrics for senior IT managers.

• Phase three: advancement. In the final IT phase, attention shifts to upgrading IT processes and methodologies. This process discipline is what enables early adopters such as General Electric and Citibank to send such a high percentage of work offshore. The scope of vendor management also shifts from providing the supplier with a to-do list to pushing the vendor to deploy precious domain expertise and proactively offer up shared risk/reward-based projects.

A variety of approaches
The growing diversity of the customer or prospect base means that it cannot be treated as a single constituency. A new level of investment and a higher level of sophistication is required--especially in the area of marketing and services segmentation--from offshore players such as Infosys Technologies, Cognizant Technology Solutions and Satyam Computer Services. Clients and prospects in each of the four stages have different challenges with different support requirements.

• Bystanders need to feel comfortable with security risks. As neophytes, their lack of activity is driven by management concerns and a perception that the savings in offshore are overstated. They need to hear about vendors' base-level security investments and processes, as well as disaster recovery plans. Bystanders also need simple spreadsheets that lay out the costs and savings based on case studies to allay their skepticism.

• Experimenters require assistance to put program management in place. The biggest challenge for experimenters is their lack of a centralized global program management office and the resulting hodgepodge of vendors with hit-or-miss project results. As they move to the next stage and winnow down their suppliers, experimenters represent the primary sales battleground for suppliers. Vendors need to bolster their soft project management skills so that they can help clients develop their program management office. Suppliers with consistent on-time and on-budget delivery track records can use their resulting credibility to share best practices from committeds or full exploiters on consolidating and managing multiple vendors.

• Committeds are open to new services and locations. These clients are looking for help with driving additional usage across the organization and pushing a higher percentage of the work offshore. This means that vendors need to deliver workshops on best practices and consult on how to bolster the client's CMM capabilities. Small multiclient events for sharing best practices on driving offshore usage and developing and implementing utilization metrics will help accounts move to the next level. These clients are also open to hearing about more advanced packaged application implementation and business process outsourcing services.

• Full exploiters want to hear about innovative pricing and relationship models. The most sophisticated accounts are looking to evolve their relationships into full partnerships. This is where vendors need to deploy their bolstered domain expertise and train account teams to have business-level discussions with non-IT executives. These investments in business acumen will allow vendors to proactively suggest innovative risk/reward pricing models. The complexity of full exploiters' projects dictates this level of pricing and delivery creativity.