FORTUNE 500 FIRMS VALIDATE COST SAVINGS OF BOOMING OFFSHORE OUTSOURCING MARKET.

Choosing An Offshore Vendor Is No Longer Just A Simple Cost Reduction Issue

According to recent statistics from India-based software association NASSCOM, 203 companies among the Fortune 500 currently outsource application development to facilities in India. Exploding in the last ten years, the IT outsourcing business there has grown from a $20 million industry in 1988 to one worth a whopping $4 billion this year.

The substantial growth of offshore outsourcing parallels the shifting role of IT, from a cost reduction tool to a value and effectiveness enabler. Responses to a recent Corbett Group poll at the 1999 Outsourcing World Summit also portend continuing growth. In the poll, 97 percent of the 200-plus executive respondents predicted a 25 percent spending increase for outsourcing in fiscal 2000, despite predictions from the Gartner Group that total annual IS budgets will shrink from 4.07 percent of revenues in 1997 to just 2.75 percent by 2000.

Couple these numbers with the ongoing shortage of IT talent in the US and an expected application development boom post-Y2K, and the burning question today isn't if offshore IT vendors will positively impact the bottom line, but what they can offer an IT organization beyond less expensive code.

"Three factors are driving the changing role of IT: more demanding customer requirements, increased organizational focus on core- competency, and enabling technologies like the Internet," says Daniel Ferranti, the new CEO at Majesco Software Inc., a Santa Clara, Calif.- based outsourcing vendor with offshore resources available via their Bombay, India-based parent company.

Backed by a client list featuring AT&T, SeaLand, and Internet ventures like CMGI and Internet superstore Adatom.com, Ferranti says Majesco's role as an outsourcing provider is shifting in lockstep with the changing role of IT. Rather than talking exclusively about cost savings, he advocates approaching IT outsourcing from a value-added perspective, largely because it has matured into a legitimate strategic tool.

"Offshore outsourcing should be viewed as a way to increase an IT department's capacity for value generation, because while it delivers all the expected benefits of local outsourcing like lower cost, it can also deliver additional value in terms of resource availability and faster project turnaround," he says.

Today's CIO is under tremendous pressure, with demand for new applications and system improvements multiplying at the same time they face skyrocketing salaries and heavy competition to land top staffers. This shortage of IT talent makes it increasingly difficult -- and expensive -- for IT departments to keep time-intensive processes like software development, integration, and maintenance functions in house.

Accordingly, the capacity enhancing benefits alluded to by Ferranti can be critical to achieving larger enterprise goals that are increasingly falling under the aegis of the IT department. Offshore outsourcers help relieve the growing pressure by providing supplementary knowledge and manpower, and typically increase project throughput while reducing the total implementation curve.

Kevin Campbell, global managing partner for business-process management with Andersen Consulting's outsourcing unit, confirms the trend: "Outsourcing has moved from a cost-reduction tactic to a strategic weapon. Companies look to outsourcers for research capabilities, past experience, and a broad set of skills. These things can help the CFO, COO, and CEO when they're going through dramatic change."

Offering specialized knowledge in terms of specific applications, technologies, and development processes, outsourcers can help an IT organization quickly integrate new technologies and efficiently scale its workforce without drastically increasing labor overhead. New US government accounting guidelines are also accelerating the trend toward using outsourcers by requiring the capitalization of new development and enhancement projects done in house.

Even the time differential between the US and India, once a source of logistical headaches, now offers efficiency gains -- as well as a continuing cost benefit. Several of the top offshore firms now employ 24/7 development environments, allowing stateside programmers to create specifications during the day that their offshore partners code while they sleep.

"Application outsourcing in particular, either as a one-off project or in a longer term engagement, allows an IT organization access to additional work capacity on demand and can speed application development time which can increase revenues," says Ferranti.

He adds that long-term engagements without outsourcers are also becoming more common as IT takes on a more strategic role. This offers an IT organization the flexibility to seize strategic opportunities that might otherwise pass them by, as well as eliminating the need to maintain multiple vendor relationships.

Phil Hopkins, manager of National Clinical Systems Development at San Diego-based non-profit healthcare provider Kaiser Permanente, explains that their focus is on getting the best results for every dollar spent, and underscores that IT outsourcing plays its specific role quite well. "There isn't a massive movement toward 'virtualization' at Kaiser, but there will be continuing growth. Application development for specific types of applications is already being outsourced."

According to Hopkins, outsourcing is present in varying degrees at every level of the Kaiser IT organization. About fifty percent of the team behind their current NCIS (National Clinical Information System) project is external. A large pharmacy application created in Power Builder technology was completely coded in New Delhi, and they have also developed applications with a Bombay-based outsourcing firm.

Majesco's Ferranti says Kaiser's increasing use of outsourcing for application development is typical, and points out that to realize the value-added benefits available via offshore outsourcing it is in the best interest of IT organizations to establish solid, long-term relationships with their outsourcing firm of choice. "Establishing the level of trust that must exist between the organizations takes time," he says.

Ferranti lists four elements as necessary for a successful offshore engagement:

* Three-tiered communication between customer and vendor to align vision, management, and execution;

* A phased plan for transitioning to a "steady state" engagement;

* Metrics and measures specific to each phase of the engagement;

* Customizable support processes to meet different engagement objectives.

He adds that the mature infrastructure and processes of the current offshore outsourcing engagement model are no longer enough in the face of the changing role of IT. The key to success is the three-tiered engagement model, which creates a virtual extension of an IT department that uses local accountability and remote development to significantly reduce operational costs and the client's risk management overhead.

"We created the three-tier model to clearly define responsibilities and build effective communication with our customers," Ferranti says. "Onsite management keeps the engagement aligned with the client's larger organizational vision, while business-level insight is handled by directors and project managers to focus technical skills and application knowledge."