Emerging Business Models in Offshore Outsourcing

In the early 1990s, former General Electric (GE) chief executive Jack Welch declared that "70-70-70" would be his company's rule for sending technology work offsite: 70% would be done by outside suppliers, 70% of that overseas, and 70% of that in India. Welch's vision was to recreate the company using Indian resources. Today, GE is considered by many to be the most advanced practitioner of the offshore outsourcing business model. Does the GE strategy make sense for your company? Have you thought about which areas or functions you would like to send offshore, or what you would like to accomplish through offshoring - increased cost savings, reduced head count, or quality improvement in your processes? Is your goal to build up your presence in a particular country? How much ownership of the offshore project would you prefer? Are you comfortable working with an offshore partner who is almost a day's flight away, or would you be willing to pay more to work with a nearshore vendor located in Canada for example? Once you have answered these questions and completed some other preliminaries, such as defining the scope of your project, performing a gap analysis, and developing your business case, it's time to start thinking about which offshore business model will help you accomplish your objectives. Five models exist: global delivery, hybrid, build-operate-transfer, global shared services, and multisourcing.

Global Delivery Model

The global delivery model (also called blended outsourcing) is a trademark offering of multinational service providers such as Accenture, EDS, and IBM that combines onsite, offsite onshore, and offshore resources. Vendors have a variety of marketing names for the global delivery model: best shore, any shore, right shore, and multishore. Whatever it is called, its objective is the same: to distribute and manage engagements and resources across multiple global locations, thereby allowing the service provider to better respond to client requirements from around the globe. If disaster strikes any of the vendor's locations, it can immediately shift work to other locations so that there is no interruption in business processes. Accenture exemplifies this model. Accenture has more than 83,000 employees, over 5,000 of whom are based in low-cost delivery centers in locations such as India and the Philippines. The company tentatively plans to hire an additional 5,000 people in India in 2004 alone. The objective is to provide a seamless outsourcing experience for corporations.

The global delivery model allows vendors like Accenture to innovatively distribute and manage their engagements across multiple global locations. Its chief advantage is a lower rate without the risk. It can accommodate faster time-to-market requests by divvying up work among onshore, nearshore, and offshore development facilities. Large corporations that hire major global outsourcers often prefer this distributed approach. Another advantage of the global delivery model is that it saves the client from investing in a huge team of employees. It adapts to the client's changing requirements and, if there is a sudden need for more resources, the service provider can supply them immediately.

Global Delivery Model in Action

EDS's Best Shore Services, the company's trademarked name for its global delivery outsourcing service line, helped Coors Brewing Company decrease the cost of applications management by 40%. Coors was struggling with an IT environment that had grown so large it hindered the brewer's ability to respond to business challenges. The company wanted to simplify its IT infrastructure and slash spending. Enter the global delivery offshore outsourcing model. EDS's Best Shore Services and others like it determine the optimal mix of sourcing options for the customer - onshore, nearshore, and offshore - based on risk tolerance, degree of cost savings desired, language requirements, and other factors. EDS's Best Shore Solutions Centers are situated in India, Egypt, Australia, Brazil, Canada, Ireland, the Czech Republic, Mexico, and New Zealand. For EDS, the global delivery model creates shared economies of scale. For instance, EDS New Zealand has undertaken applications work for Coors and the Royal Bank of Scotland, as well as contact center work for ChevronTexaco. For Coors, the global delivery model resulted in application management costs that dropped by 40%.

Hybrid Delivery Model

The hybrid outsourcing model, also known as the dual-shore model, takes advantage of onsite and offshore services to deliver results to clients at reduced costs. Midsize service providers headquartered offshore commonly adopt this delivery model. A software development project undertaken by a hybrid provider would go something like this: A local team stationed onsite with the client would manage the project's program management office and handle the client-facing components of the project, such as requirements gathering and user-interface development. The onsite team would control the defined portion of the project that required interaction with the business subject matter experts and software architects onsite. Meanwhile, the team based at the provider's offshore facilities would take care of the coding, testing, and bug fixing so work could be performed around the clock. One of the most popular to have emerged so far, this model maximizes efficiency in resources and costs. Ideally, 20%-30% of work is done onsite and 70%-80% is sent offshore, depending upon the criticality of the project. Its benefits include near 24-hour work cycles; the ability to structure and assemble teams with diverse, multiple skill sets; lower-cost resources; and the ability to quickly scale (up or down) depending on the requirements. The hybrid delivery model owes some of its success to the fact that it enables clients to directly interact with the service provider through the onsite team and simultaneously enjoy the benefits of offshoring. The hybrid delivery model also has its own set of challenges - project management and administration costs, optimization of cross-cultural communication, and the supervision of onsite teams.

Hybrid Delivery Model in Action

As the world's largest provider of electronic design automation products, Cadence Design Systems helps companies bring their ideas for electronic products to life. It does the bulk of its design work for businesses that manufacture items such as semiconductors, computer systems, mobile and wireless devices, and other advanced electronics. With almost its entire customer base adversely affected by an economic downturn,

Cadence had to work much harder to sell its products. To reduce IT costs, Cadence outsourced some of its application development to Aztec Software. When the project began, Aztec sent between eight and ten software engineers to Cadence's California location to support its design team. The two groups worked to pinpoint what would make the project a success and to get comfortable with each other's work styles. Aztec had to understand Cadence's processes, infrastructure, and reporting before it could move any work to headquarters in India. Eventually, Aztec began moving the work to Bangalore piece by piece, and the Aztec group dedicated to the project increased from eight people to 38 people. Currently, two Aztec staffers remain in California and 35 work offshore from India. Faced with an urgent need to enhance competitiveness, more technology companies are choosing the path Cadence chose: offshore outsourcing.

Global Shared Services Model

Global shared services centers, also known as captive centers or offshore insourcing, consolidate organizations' internal service operations into mega-service centers. Sometimes these global centers are run as independent businesses, with their own budget and bottom-line accountability. GE, HSBC, and American Express are considered the most sophisticated at deploying this model. Global shared services centers have significant advantages. First, they have guaranteed markets for their services and an established management hierarchy. They also alleviate some of the organizational issues such as control and politics that crop up when firms relocate back-office activities offshore with external vendors.

Global Shared Services Model in Action

In the early 1990s, American Express Travel Related Services had more than 46 transaction processing sites, each employing 20 to 40 employees. These sites processed credit card records and other financial transactions. They sprawled across North America, Latin America, EMEA (Europe, Middle East, and Africa), and APA (Asia Pacific and Australia). They were internally focused, geographically fragmented, inflexible, and legacy bound. Duplications and inconsistencies made these sites inefficient and costly.

To cut costs, American Express devised a shared services strategy that combined, standardized, and re-engineered scattered support activities. The corporation merged the 46 sites into three financial resource centers. These three shared services centers consolidate credit card authorization, accounts payable, general ledger, and other administrative services at one location serving a geographical area. They were designed to reduce costs, standardize business processes, leverage enabling technology, and produce economies of scale in transaction processing. They operate as cost centers with costs charged across the different business units. By treating them as cost centers rather than profit centers, there are significant tax advantages. To distribute the workload, American Express selected Phoenix, Arizona, as the location to serve the Americas and Brighton, United Kingdom, as the location to serve Europe. After some review, American Express picked India as the location for the third center dedicated to handling Japan and APA. This center, called the Financial Center East (FCE), was established in Gurgaon, India, in 1994. Today, the Indian center has migrated from an Asia-focused center to a global shared services platform. The range of business processes conducted in this center is growing rapidly. The American Express case illustrates the growing trend towards global shared services models.

Build-Operate-Transfer Model
Some companies reject outsourcing to third-party vendors and instead opt to start their own foreign subsidiaries, a process that frequently is not as smooth as they expect. They face obstacles - legal, taxes, hiring, and management - from start to finish. While some eventually attain a steady state, others struggle, and a few even wind up shuttering their operations. The failures of these captive subsidiaries have led to the evolution of a new business model in the offshore services industry called a build-operate-transfer (BOT). In this model, a firm contracts with an offshore partner to build a shared services or offshore development center and operate it for a fixed interim period. The logic behind the BOT model: the offshore partner can initiate operations and reach operating stability much faster than it can with an in-house effort.

A typical BOT is built and managed in three phases: 1. Build. The offshore partner provides clients with a complete solution for building a presence in a particular country. The clients receive their own office space and establish their own brand identity at a lower price than comparable offshoring arrangements. Vendors take care of all administrative and legal issues, from real estate, utilities, and permits, to computers, communications, and office supplies. The vendor also provides the professional support staff and operating licenses to run functions such as call centers. 2. Operate. The offshore partner provides a comprehensive set of operational management services, from HR and staffing, to accent training, accounting, payroll, legal, facilities, and security. The clients are able to focus their management time on their core business rather than on operational issues. 3. Option to Transfer. The offshore partner cannot lock in clients. The clients have the option to bring the operation in-house at any time. Typically, the outsourcing contract includes a clause that states the client has the option to buy the entire operation after a fixed period. Building a subsidiary in a foreign country requires much knowledge and information about the country and culture, as well as the right personnel. Traditionally, the BOT model is usually found in the civil and construction engineering business, especially in the maintenance of highways and airports. Now the BOT model is becoming popular in the offshore outsourcing world. A BOT model provides customers with bottom-line enhancements and fully offloaded costs, risks, and ownership of the new venture. The risk of execution is minimized, and companies can spend their money on core functions. We expect the number of BOT contracts to increase.

BOT Model in Action

Struggling to reduce the development costs of new software products and to bring those products to market faster, J.D. Edwards signed a six-year contract with Covansys, a global consulting and technology services company, in February 2003 before it was acquired by PeopleSoft later that year. The maker of application enterprise software bet that 60 full-time Covansys developers devoted to quality assurance, testing, and maintenance of J.D. Edwards products would decrease the time it took for the company to deliver new products.

In hiring Covansys, J.D. Edwards freed up its internal testing and maintenance teams for strategic, new software development. By taking advantage of Covansys' development operations in Chennai, India, J.D. Edwards reduced the initial expense of establishing a new offshore operation. According to the six-year agreement, J.D. Edwards can increase the number of Covansys developers annually. It can also assume ownership of the infrastructure that Covansys created and even take over the physical lease for the Chennai facility held by Covansys. If it doesn't work out quite the way J.D. Edwards intended, the company can walk away, an option that PeopleSoft may choose to exercise. Either way, the BOT arrangement minimizes the risk for J.D. Edwards.

Offshore Multisourcing: Hub-and-Spoke Model

Multisourcing is the practice of using multiple offshore suppliers to reduce the power that a single monopoly supplier might have. It also helps companies achieve the advantages of a best-of-breed strategy. Citibank and American Express both have used multisourcing approaches that resemble a classic hub-and-spoke model: They have offshore operations of their own, as well as three or four partners with whom they collaborate. This is an interesting model because the businesses actually get some of their offshore partners to work with them in their own hub centers, then they train them, and send their offshore partners back to the spoke center. The rise of multisource deals could be a sign that companies are taking a more cautious, risk-averse approach to outsourcing, but multisourcing only works when organizations have the internal ability to manage and integrate multiple providers (products, projects, and services) to derive a single solution. When should organizations choose full-service outsourcing (using one provider) over multisourcing? It depends on the maturity of the organization. Companies that are new to outsourcing tend to multisource until they become comfortable with the process. When they renegotiate contracts later, they tend to give more thought to using one provider. Often, to reduce complexity, very large businesses will look for one dominant provider, and that provider will then work with a big network of companies.

Offshore Multisourcing Model in Action

GE has long focused on four corporate initiatives - globalization, services, Six Sigma quality, and e-business. Of these, globalization is probably the most prominent. GE's globalization initiative centers on a high-quality labor pool, lowcost suppliers, and engineering and manufacturing plants in less expensive countries such as Mexico, China, India, and Russia. Consider the strategy in India. As of 2003, GE had 20,000-plus employees in India, 70% of whom support GE globally. The company's activities in India can be grouped into six categories: 1) local market sales and services, 2) sourced software in global development and engineering centers, 3) GE-owned technology and software operations, 4) back-room services such as call centers and legal and accounting processes, 5) exports of components and products made by GE, and 6) sourcing of components from key suppliers for export to GE's global manufacturing locations. In 2002, GE India's revenues and orders exceeded $1 billion. In India, GE has evolved from the model of outsourcing practiced by many of the new entrants to a more complex hub-and-spoke business model called multisourcing. Depending on the business need, GE is able to find the model that is most suitable for getting the job done quickly. Due to its complexity, the multisourcing model requires superb program management talent to oversee the many vendor relationships and execute effectively.

Conclusion
Offshore outsourcing has surfaced as both a strategic and tactical method of meeting new business demands. Similar to most business ventures, the challenge of offshore outsourcing lies not in envisioning it but in executing it. Selecting the appropriate business model is a crucial factor in ensuring offshoring success regardless of whether your company decides to outsource finance and accounting to an Irish vendor or to build a software development facility in China.