On again, off again

At Nielsen Media Research Inc., the TV and radio audience measurement company, offshore outsourcing plays a part in nearly every link of the product chain. But it’s not the whole chain.

“We choose to outsource a lot of different things, but we manage these projects as if there’s a single staff made up of three groups — an offshore team, an onshore team and a core group that remains internal to the company,” says Nielsen CIO Kim Ross. In so doing, Nielsen is pioneering a new and more selective approach to outsourcing that relies less on transferring IT jobs abroad and more on using overseas talent in tandem with IT personnel stationed closer to home.

Offshoring is growing

By all accounts, more companies are shifting IT functions overseas. AMR Research Inc. reports that 20 per cent of U.S. IT organizations already have moved portions of their technology services offshore. Gartner Inc. says the real percentage is twice that and will jump to 80 per cent of large corporate IT departments this year.

“The reason for this growth is really quite simple,” says AMR researcher Lance Travis. “Cost savings from offshore outsourcing are too compelling to ignore.”

The savings come from farming out work to places such as India, China and the Philippines, where programmers are paid as little as US$10 per hour. The salary differential between developers in the U.S. and similarly skilled professionals in countries where wages are significantly lower can mean annual savings as high as 50 per cent, according to James Brewer, vice-president of global services delivery at Keane, a provider of application outsourcing services in Boston.

Michael Doane, an analyst at Meta Group Inc., says the savings is closer to 15 to 20 per cent. “The biggest mistake companies make is to assume that their savings will match the salary differential,” he says. “There are other expenses that need to be taken into account, such as the cost of additional project oversight, communications and travel.”

But the advantages of offshore development go beyond simple cost reduction. “For new development projects,” Doane says, “taking a follow-the-sun approach allows the work to proceed 24-7. Completed work can be reviewed and next steps planned during the onshore cycle, and then coding can move forward during the offshore cycle.”

Known as global sourcing, globalization or the global virtual resource, this development model generally involves three groups of IT professionals working closely together: company employees who can work face-to-face with users and translate business requirements into technical specifications; third-party developers who work in the U.S. or in Canada (where wages are lower than in the U.S., but not nearly as low as in a country such as India) and share the same time zone with the internal team; and offshore personnel who perform a variety of functions at a fraction of what it would cost in the U.S.

Nielsen learns

Nielsen discovered early on that offshore development work was about more than replacing well-paid U.S. programmers with less-expensive foreign engineers. The media research firm began experimenting with offshoring in 1995 and now does 25 per cent of its development work offshore through Cognizant Technology Solutions Corp. Nielsen has had success with three types of offshore projects: ongoing software maintenance, software conversion projects (such as Y2K) and original application development.

“Most of our IT work has to do with producing our product — collecting data from 30,000 homes on a daily basis, analyzing that data and packaging it in a proprietary database built by Nielsen,” Ross says. “We use Cognizant in every link of this chain except data collection.”

Nielsen learned by experience to determine which types of projects were most cost effective to move offshore. “We see little value in offshoring legacy work,” Ross says. “Next-generation applications is where the payoff’s the greatest.”

His reasoning is that Nielsen’s internal IT staff already understands the legacy applications and that the time spent transferring that knowledge to offshore personnel would eat any potential savings. On the other hand, new applications are driven by new business opportunities that require a rapid response, which the internal staff is usually too busy to provide. For instance, when advertisers wanted better information on Internet usage, Nielsen quickly launched a new Internet usage measurement business by using Cognizant programmers in India.

Although he says the time saved on project development is difficult to quantify, Ross says new projects can be started more quickly because Nielsen doesn’t have to recruit new people. This lets the company respond swiftly to unexpected developments with minimal risk. If a new application fails to pan out, then the cost of the initial design work will have been significantly less than if it had been pursued at home. But if the application bears fruit, then the offshore developer will be in an ideal position to support it, significantly reducing the cost of ongoing maintenance.

But Ross adds that only stable, well-articulated projects should be moved offshore. “That’s the first acid test,” he says. “If the requirements need continuous end-user feedback and will be defined as you go, then you’re better off keeping that project in-house.”

Ross also learned that splitting one development project between two teams of programmers — one offshore, the other onshore — does not work well. When Nielsen attempted this, the additional development cycles and overhead required to coordinate the two teams offset any economic advantage. There were also timeline issues. “We found we couldn’t manage the critical path quite so well,” he says.

A better model

Ross says a better model is to assign the initial design phase to the offshore development team and to use Nielsen’s internal staff of 500 developers to manage the project. Cognizant’s programmers in the U.S. or Canada, who operate in the same time zone as the internal team, frequently carry out revisions and enhancements. This allows for faster turnaround and closer collaboration with the internal staff. Typically, 30 per cent of a project team will operate onshore, and the remaining 70 per cent work abroad. This strategy resulted in a 25 to 30 per cent savings compared to staffing a project entirely with internal employees, Ross says.

State Street Corp., a financial services company with offices in 23 markets around the world, considers offshore outsourcing “a natural and necessary ingredient in State Street’s growth as a global company,” says CIO Joseph Antonellis. “Since our clients expect us to provide constant, high-quality service 24 hours a day worldwide, we’ve strategically placed IT staff in various time zones to ensure that the company is always ‘open’ for business.”

Antonellis says cost savings are important, but of greater concern is the effect that moving an IT function or operations centre will have on clients.

Development projects are often undertaken using the onshore-offshore model. For instance, portions of State Street’s financial Insightapplications and proprietary investment tools such as Lattice, Price Alert and Mystatestreet.com were developed overseas. “The basis for deciding which piece of a project stays in-house, vs. which piece is taken offshore, is whether or not it will create greater efficiencies in our processes, free up time for our IT staff to concentrate on more important projects and allow us to better manage our costs,” Antonellis says.

State Street developers whose jobs move overseas are shifted to project management tasks that require in-depth knowledge of State Street’s business operations and direct interaction with clients and end users.

One example of this approach is State Street’s research and development partnership with China’s Zheijang University Technology Center. The university works with the company to develop software for China’s financial services industry.

“We commissioned Ph.D. technicians from Zheijang for the R&D, but did not outsource the data centre and IT infrastructure that will support the applications,” which State Street will deploy and operate, Antonellis says.

Support from Sony

In contrast to State Street and Nielsen, Sony Electronics Inc. avoids sending new development work offshore.

“The functions we outsource are all repetitive, standardized processes, where the knowledge and training are fully developed,” says Maureen Read, vice-president and general manager of Sony Electronics’ Customer Information Services Center, which farms out several support functions to India and the Philippines.

An example is product support. When Sony releases a new product, it’s supported in-house, Read says. Only after the process is well-established and Sony is confident that customer expectations are being met, would it consider outsourcing the process.

“We don’t outsource unique processes or products where the infrastructure has too many variables to be in control or where the knowledge is proprietary in nature,” she says.

But Sony still uses the onshore-offshore model to its benefit. Last year, the company installed a new knowledge base to support its internal help desk and external customers via the Web and e-mail. “This was a large undertaking,” Read says, and initially “all of our knowledge developers were totally consumed with migrating data and handling inputs to the database. That left no time to do the futuristic things that we had planned or to implement ideas that we came up with during the integration process.”

Sony responded by sending some of the routine, standardized tasks offshore, freeing the in-house team to work on expanding the systems capabilities. “While sending a portion of the work overseas didn’t lower the cost of the original project,” it enabled us to expand our results and still come in on budget,” Read says,

Read cautions that anyone sending IT work abroad should expect the unexpected. Recalling her first visit to Sony’s overseas service centre, she says, “Nobody can prepare you, as an individual, for doing business in India. As the car I was in became stuck in traffic, I turned to see an elephant passing us by. I realized then that nothing was going to be quite as we expected.”

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