OFFSHORE OUTSOURCING - A SWOT ANALYSIS

INTRODUCTION
No company is too large or too small for outsourcing to be a viable strategic option. Through the process of outsourcing, smaller companies can match the capabilities of larger firms without the expenses and delays of acquiring and managing new resources. Outsourcing can allow them to focus their efforts on the value-added functions of their business. In the past, taking functions outside the corporate structure was prohibitively costly. However, with the increased number of companies ready to provide specialized services with factor-cost advantage there lies a sea of opportunities for the companies to exploit.
Outsourcing is rapidly becoming thought of as the corporate “silver bullet” that will solve your operation’s problems. It can be a great business decision or the road to a brand new set of headaches.
Historically outsourcing was opted for when an organisation could not perform due to incompetence, lack of capacity, financial pressures or technical inefficiencies. But now it is not the solace of a dysfunctional company, but is being utilized to leverage them to peaks of success. It is the wave of the future and not a thing to be ashamed of.
“Outsourcing” is the act of transferring some of an organization’s recurring internal activities and decision rights to outside providers as set in a contract. Outsourcing allows companies to focus on their critical core processes while having the details taken care of by the outside experts. The specialized company that handles the outsourced work is often streamlined and often has world-class capabilities and access to new technology that a company couldn’t afford to buy on their own. Also if a company is looking forward to expand, outsourcing is a cost-effective way to start building foundations in other countries. For the first time it was done in the data processing industry but now its practised in almost all fields such as telemessaging, call centres, distribution services, staffing, accounting and tax preparation, etc.
“Offshoring” of services/processes refers to an organizations purchase from other countries of services that it previously produced or purchased domestically. The offshore progression has been traced starting from outsourcing information technology arising from the need to start using enterprise resource planning (ERP) software packages to e-commerce and then on to application maintenance outsourcing.
However, there are costs to offshoring in terms of vendor appraisal and selection, and process transition. Also managing the media and employee goodwill requires the use of professional public relations (PR) firms, a cost that companies have to reckon with. Also, lobbying to prevent changes in the laws that create hurdles in offshore outsourcing has a cost component to it.
“Offshore Outsourcing” is a much-debated topic these days with the atmosphere getting charged with political overtones.

Avantages of Offshore Outsourcing:
1. Innovative solutions
2.Continuous improvement
3.Reduced operating costs
4. Consistent service level
5. Shared financial risk
6.Accelerated process design


Risks in offshore Outsourcing
1. Loss of control
2.No development of internal competencies
3. Higher costs
4.Lower quality
5.Requires constant management of relationship


IMPERATIVES OF OFFSHORE OUTSOURCING
Offshore outsourcing involves certain vital issues, which need careful analysis by the companies.
Rule 1: Getting the most from outsourcing starts with identifying what to outsource?
Rule 2: If you’re going to trust someone with a critical part of your business, make sure they understand it really well.
While choosing an outsourcing partner companies should look out for maximum compatibility in all respects be it be quality, ethical practices, smooth data transfer or culture.
Rule 3: Outsourcing should lead to enhanced concentration of the patron on his own business.
The major benefit derived from outsourcing is the time saving of the client company so that it can concentrate on its business, which will ultimately lead to measurable business results of offshoring.
Rule 4: You need someone who can scale up real quick.
Because the only thing constant in our world is “change”. Change-management processes should exist to help the provider stay on top of dynamic customer needs.
Rule 5: Sharing a vision
Successful offshore partnerships require teamwork that seamlessly works towards a common goal. From top management involvement to cultural synchronization, companies should ensure a good fit.
Rule 6: Never compromise on quality.
There should exist an assurance that the quality of the project will never be compromised be it product, process or service.
Rule 7: Ensure a reporting system with the vendor to make sure you are never out of touch.

INDIA -­­­­ The World’s Favorite Outsourcing Destination
India's share of the global offshore outsourcing market for software and back-office services is 44%. According to the National Association of Software Companies (NASSCOM), India’s premier trade body of the IT software and services industry, technology and IT services exports in India were worth $17.2bn (£9.5bn) in the year ended March 2005, a rise of 34.5% over the previous year. A further expansion of 30% in exports is predicted in the next twelve months, to reach $22.5bn. The US accounts for 68% of Indian exports. According to a special survey on outsourcing and offshoring, The Global Outsourcing Report, 22 March 2005 – Geneva and New York, released by Horasis and Going Global Ventures, three-quarters of U.S. companies outsourced some or all of their information technology activities in 2004, and that percentage is likely to increase this year. While a smaller percentage of companies are outsourcing those activities offshore (32%), half of them have cut full-time jobs as a result. India is the most competitive and popular technology outsourcing destination in the world in 2005, according to the Report, and China will be the No. 1 technology outsourcing country in 10 years. The Global Outsourcing Report 2005 is the first-of-its-kind report to rank countries based on the opportunities, costs and risks they present for IT outsourcing, both now and in the future.

India took the No. 1 spot in neoIT's ranking of 14 possible IT outsourcing destinations for the reason that:

• It offers "cost competitiveness, a highly skilled labour pool and a high level of service maturity," as said by 'Mapping Offshore Markets Update 2005’ in its annual report.
• The country's skilled labour pool and mature level of services helped to provide $12 billion in outsourced IT services last year. It also leads the world in IT services exports, with sales topping $12 billion last year.
• American businesses looking to place their technology operations offshore give strongest consideration to India, Canada, or China, as said by a report released by outsourcing consulting firm neoIT.
  To help companies evaluate potential offshoring location, neoIT has ranked countries based on the neoIT 'Offshore Attractiveness Index,' which rates each country's characteristics to generate a quantitative net cost benefit of outsourcing to that destination.

SWOT ANALYSIS
“INDIA AS AN OFFSHORE OUTSOURCING DESTINATION”

STRENGTHS

India has been a favourable outsourcing destination for more than a decade. Today, the offshore outsourcing industry in India is a matured one. In the initial stages, India was only a means to cheaply supplement overworked internal application developers. But now India has grown into a worldwide location for search for the right mixture of talent, resources and cost savings to create and manage today’s most complex IT environments. Even though the technology is available in countries like China Philippines and Russia, offshore outsourcing is most mature in India.

Today India is:
· The biggest provider of offshore software development with over 55% growth with low cost1.1.
· It has a large network of colleges and universities that are competing with other international institutions that produce more IT graduates.
· Indian offshore organizations achieve a high maturity profile.
· The mutual trust and professional project management are the key ingredients possessed by the Indian companies for successful offshore outsourcing.

WHY INDIA IS THE FAVOURITE OUTSOURCING DESTINATION?
India is the hot from the oven of offshoring but one should understand the need for offshore outsourcing better before making a decision. Cost is definitely one of the main reasons for offshore outsourcing to India, but one should realize that this cost advantage might not be seen immediately. Initial investment in infrastructure, training, and other such preliminaries may make one believe that the cost advantage promised is just the illusory pot of gold on the other side of the rainbow. So the aspect of saving money does exist, but one has to realize that initial investment may make the promise of cost reduction seem false.
There will be savings and along with these savings there is great value addition. Most who outsource only realize the quality and value addition after the offshore outsourcing relationship begins. This is not usually the primary goal when deciding to outsource, and the creativity and talent in India comes as a surprise to many.

The other factors that make India an eye-catching vista are as follows:

• Offer cost effective solutions: When companies worldwide wish to turn back their fortunes by retaining profits, the first thought that springs to mind is cutting costs without losing on quality, and instantly, off-shoring / outsourcing to India becomes the first choice. India is a popular offshore outsourcing destination as it offers cost effective solutions. Many software giants like Microsoft, Sun have set up development stations in India for cost effectiveness.
• Infrastructure Improvements: The government has been continuously improving infrastructure with better roads, setting up technology parks, providing uninterrupted power to augment growth, opening up telecom for enhanced connectivity.
• The English Advantage: A large IT manpower pool and dominance of English in higher education system only helps to build India as a preferred choice for "offshoring".
  In all good educational institutions, from kindergarten to graduation and beyond, the preferred medium of language is English resulting in easy communication with other countries that don’t understand the native language.
• India –The Trust Factor: From individual to associations like NASSCOM (The National Association of Software Service Companies) and the government, proactive measures are being taken to ensure that India is viewed as a destination of trustworthy outsourcing. There is a wealth of articles and write-ups about the cost advantages of offshore outsourcing with a majority claiming anywhere between 40-50% savings.
• Laws Governing International Contracts: When contracts transcend national boundaries, the national legal regime of any single country becomes inadequate to grapple with the situation. When the parties to the contract are located in different countries, at least two systems of law impinge upon the transaction and the rules of Private International Law come into play.
  The best way to ensure the application of a particular legal system to international contracts is to choose a particular law to govern the contract. This law is called the "Proper Law of the Contract". The Courts have held that "Proper Law is the law which the parties have expressly or impliedly chosen, or which is imputed to them by reason of its closest and most real connection".
  Under Indian Law, parties are free to stipulate their terms of contract and lay down the law by which the Contract is to be governed. Courts in India have held that the intention of parties would decide the law of which country would govern the Contract and which Court would have jurisdiction. Sections 13, 15 and 44A of the Indian Civil Procedure Code and Section 41 of the Indian Evidence Act, govern the conclusiveness and enforcement of foreign judgments in India.
• Quality and value addition at a reduced cost: The new mantra of offshore outsourcing to India is quality solutions. When processes are offshored to India, companies not only get the advantage of low cost but also experience improvement in productivity and quality. In an article featured in COMPUTERWORLD on India's prowess in the outsourcing domain, several analysts and outsourcing parties believed that cost was no longer the only reason why outsourcing to India is an attractive option. Companies in countries such as Russia and China have begun offering better rates than Indian companies.
• Talented and professional workforce: The increasing volume of work that is pouring into the country comes from recognition of the talent and expertise possessed by Indian Service Providers. Indian Workforce also offers the largest pool of technical skills in the world, and the country's universities add 180,000 engineering graduates to its ranks annually. India is rich not only in terms of number of qualified people but the quality of our professionals is also of international level. Google has made a recent announcement about setting up an R&D center in Bangalore. The company's move is motivated by the vast engineering talent pool in India and is not a cost cutting move.1
• Time Zone Difference: India has an 8-12 hour time zone difference with respect to the US and other developed markets. It is of great advantage in outsourcing operations, which offers reduced turnaround times, since processing services are performed at night hours in the developed countries. India is able to offer a 24x7 services and reduction in turnaround times by leveraging time zone differences. This difference in time zone is because of India's unique geographic location. When it is day in India, it is night in America and even as we go to bed, they rise and go to work.
  Global giants such as IBM, Microsoft, Novell, Oracle, AT&T, Fujitsu, Motorola, Digital, Hewlett-Packard Philips, General Electric, IBM, Reebok, Fujitsu, British Aerospace, General Motors and Sears are keeping ahead of their rivals thanks to the competitive advantage conferred on them by some of the best software companies in India.
  
  WEAKNESSES
  
  “Like marriage, outsourcing is much easier to consummate than it is to terminate, and recover from, if done poorly.”
  Failure to put into place effective governance and relationship management mechanisms is a leading cause of value destruction in outsourcing relationships. When parties move rapidly into transition and implementation after negotiation, without clear and operational processes, performance metrics, and roles and responsibilities, they will likely get themselves into trouble.
  Though the Global Outsourcing Report 2005 has ranked India as the most favoured outsourcing destination now but the report also says that China is going to replace India in the coming 10 years. The Report predicts that in 2015 the top five outsourcing destination will be China, India, the U.S., Brazil and Russia.
  The raison d'être for this could be any of the following:
• Infrastructure
  India ’s ability to develop infrastructure is far outpaced by neighboring China
  Metro cities are getting saturated and costs are rising -- Tier II towns need to develop infrastructure but India’s track record does not bode well for fast development.
• Human resources and training
  The demand-supply gap in India for knowledge workers is being felt now in Bangalore but may peak India wide in 2008-2009
  The education system needs transformation to produce people with skill sets that match industry needs.
  The transition to knowledge processing will be a much bigger challenge for the Indian company and employee than it was for BPO services. The typical college graduate many not have background or flexibility to understand global issues required by this type of service.
• Political issues
  The instable political system of India, coupled with the complexities of being ruled by governments of entirely different ideologies and priorities will also act as a deterrent to the growth of offshore outsourcing.
• Cultural differences
  The Indian culture focuses more on individualistic growth rather than teamwork, whereas the entire locus of offshoring is working as a team and sharing the vision of the client company. Hence such cultural lag is another weakness inherent in our system.
• Poor globalization skills
  Although the Indian government has taken multitude of steps to prove its interest in LPG, but the contribution that these reforms have made to the total requirement is still negligible.
  
  
  
  OPPORTUNITIES
  
  The myth that that Indian Companies can only provide “software collies” is soon changing to the reality of Indian companies being capable of almost anything, even rocket science! India is uniquely placed to offer a wide range of quality, cost-effective outsourced services as IT and IT enabled services including finance and accounting, human resources and customer care.
  
  OPPORTUNITY AREAS FOR INDIA
  Today more industries are where IT was in the 1990’s - knowledge based. Knowledge Process Outsourcing (KPO) may soon be the biggest revenue grosser in India as BPO companies move up the value chain in their service offerings. This includes:
  Research and Development
• Product Innovation - Companies are going beyond basic research to invest in innovation and new product development. Companies that have invested in R&D in India are Cisco Systems, Motorola, Hewlett-Packard, Google General Motors Corp. and Boeing Co among others.
• Co-development- In pharmaceuticals, India has the opportunity of co-development and ownership of new-patented drugs through drug research, clinical trials and manufacturing. Indian pharma major Ranbaxy has an agreement with MNC GlaxoSmithKline to commercialize compounds they develop together.
  Legal Outsourcing:India ’s large pool of qualified English-speaking lawyers with experience in the British legal system can offer paralegal support, legal support and patent services. A few Indian companies affiliated with American law firms are now able to capture a tiny piece of the American market. They are now doing legal research at very high rates by Indian standards but yet 50% below typical American rates.
  Engineering Outsourcing:India can provide high-quality engineering services in the fields of:
• Mechanical & Electronic engineering - analysis and design, embedded software
• Plant Design, Process Engineering
• Plant Automation Services
• Enterprise Asset Management and OEM solutions
  Remote Infrastructure Management Services: India can offer management services for IT infrastructure, applications operations, IT security and maintenance. This sector presents great potential through large-value multi-year contracts.
  Accounting Services:We are in the initial stage where payroll processing and some accounting is being done for large American companies. This trend will continue and soon Indian companies will provide a full range of accounting and tax services.
  Other fields: Outsourcing opportunities for India exist in other fields like Financial Research, content development, medical writing: animation, film, publishing, web services; Human Resource outsourcing: recruitment, training, Education, Nanotechnology and many others.
  Near-shoring as a business strategy

Also, India can collaborate with other countries to leverage local knowledge of the business environment and language skills while providing its domain knowledge and technological expertise for successful outsourcing. For example, TCS has a Latin American arm based in Mumbai, India, which serves an insurance client in Chile with a center in Uruguay as a near-shore location.

THREATS

All is not wine and roses in many outsourcing relationships. Infact more than half the participants in a survey of CIO’s at fortune 1000 companies reported severe problems in their relationships with vendors, including service level failures, scope disagreements, cost blowouts and personal clashes3. Another report found that 20 to 25% of outsourcing agreements fail within two years, and half within five years4. Some 5 to 6 percent companies went so far as to bring back in-house functions they had previously outsourced5.

Strategic Dilemmas and Management challenges
Given below is a list of management concerns ensuing from offshoring .

1. Employee Relations:Employees may perceive that additional positions will be offshore and as a result unionization may increase in various employee groups.
2. Management control of Operations:Offshoring makes it difficult to measure and correct performance failures. Also,offshore country’s legal system may make it difficult to seek prompt redress of contract issues.
3. Public Perception:Transferring the jobs overseas might trigger negative publicity resulting in the wrong image of the company in front of the public at large.
4. Resource Constraints:Aggressive implementation deadline might compromise process quality and vendor mishandling of the process might require more supervision reuslting in more demand for the already scarce resources.
5. Continuity of Business:Geopolitical events may disrupt offshore operations.Vendor may cease operations due to local strikes or financial problems.

Other reservations concerning India to continue to be a most preferred outsourcing vista are:

• Rising competition
  1.In the next ten years, China will replace India in its number 1 position in the global ITES-BPO industry.
  2.Rising costs and low efficiency in many cities like Bangalore will make software outsourcing less attractive in 2006. The giants may show a drop in earnings.
  3.India ’s terrible Infrastructure will continue to be a drag on the potential of India giving other countries the competitive advantage.
  4.Other competing countries providing low-cost outsourcing options will exert a downward push on costs – East Europe, Latin America, South Africa
  5.Experts predict China will become a popular provider of IT offshoring services for UK firms within the next five years6.
• Sometimes blinding nationalism
  Irrational feelings of not serving, not going in for partnerships with forgein clients could further act as a threat for India wanting to be the biggest offshore destination in future as well.
• Corruption / Piracy
  These are the two evils which are ingrained in our country and by far have a reaching effect on the overall image and profitability of our country.
  Offshore outsourcing has come under attack recently. There is an outcry against outsourcing by parties in the US and UK because of the loss of jobs to people in these countries. Many have pointed out actual costs and poor quality of service as the hidden truths behind the attractive packaging.
  
  
  
  
  SUGGESTIONS
  
  Matching Needs and Solutions is the mantra of successful outsourcing. There are a number of gaps that exist in our system as well as our approach towards outsourcing. Although we are at the top right now but maintaining this position is a bigger challenge to face for which a plethora of suggestions are given as an outcome of the SWOT Analysis carried out in the paper.
  
  Government policies that will boost offshore outsourcing to India:
  The Indian government should realise and acknowledge that offshoring to India will influence economic development extensively in the future and we should take measures towards liberalization and deregulation reforms like reducing licensing requirements, making foreign technology easily accessible, removing restrictions on investments will make the offshoring easier.
  
  Infrastructure improvements
  The government should continuously improve infrastructure with better roads, setting up Technology Parks, opening up telecom for enhanced connectivity, providing uninterrupted power to augment growth.
  
  Efforts at information security
  Indian companies should become increasingly serious in protecting the information of their customers. Common security procedures in companies like employees swiping identity cards through readers, shred notes of client conversations after the shift ends etc. should be carried out.
  
  Employee scrutiny
  Companies should set up advanced systems to monitor phone conversations, guard data and watch workers every move. It may also include biometric security- retina scans and palm reading, to identify employees against their records. These measures work well towards alleviating concerns of privacy and information security of customers wishing to source services of Indian vendors.
  
  Sustaining the momentum
  The government should take the right steps to ensure an ever – increasing talent pool of highly qualified professionals. IIT’s should be planned in every state. The help of industry should be taken to formulate some of the courses offered to ensure emerging professionals are in sync with industry requirements.
  
  Moral responsibility
  The Indian government should righteously take up the responsibility of promoting offshoring and not allowing the differential ideological political rulers to hinder the path of success.
  
  
  CONCLUSION
  Despite the supercharged politics surrounding the issue, offshoring has become a fact of life, and it's growing quickly. Why? Because despite the difficulties, offshoring can provide huge benefits in terms of productivity, prices, profits and wages—an irresistible combination in a highly competitive world. A natural evolution of how the global marketplace operates today, offshoring is on the way to becoming a mainstream business. And the future for outsourcing looks even brighter.
  Still, offshore outsourcing brings with it a wide variation in costs from country to country, as well as significant risks—geopolitical, economic, legal, cultural, and IT infrastructure and competency—and companies making decisions about where to outsource must take these into account.
  Offshoring is rapidly moving up the value chain A SWOT analysis has been done, which shows that India is a clear winner for now. A number of suggestions concerning infrastructure development and enhancing the talent pool have been offered. The issue of job losses in the West is expected to become a major concern in politics.
  There are so many factors that play a role in achieving outsourcing success. Other than the obvious ones of good partners, quality output, productivity, infrastructure, and so on there are other vital areas like communication and maintenance. For a person considering outsourcing, the whole idea of managing and having one's project successfully executed in another country seems like a daunting task.

Offshore outsourcing to India is one of the most popular management practices today. Though it is generally spurred by the cost reduction factor, this is just one of the reasons one should consider offshore outsourcing. Most parties who outsource are unaware that Indian Service Providers do not just offer cost effective solutions, but also value addition by improving productivity and quality.
Off-shoring / outsourcing benefits all, as the wheel of fortune comes full circle i.e. back to the countries that offshore / outsource!

1.1 Source –Gartner Group

1 "Google Eyes India R&D Facility for 2004", by Keith Regan, E Commerce Times, December 12, 2003

3 Kris tan Mulley, "IS Outsourcing Posing Problems for Fortune 1000 Companies," AS/400 Systems Management, p.49, October 1, 1998.
4 Dun & Bradstreet, "Dun & Bradstreet Survey Finds 50 Percent of Outsourcing Relationships Worldwide Fail within Five Years; Principal Cause is Poor Planning for New and Evolving Business Process," Dun & Bradstreet's Barometer of Global Outsourcing Business Wire, February 24, 2000.
5 Lisa Harrington, "Insourcing: Smart Move or Overreaction? Transportation and Distributing, .109, May1, 1998.

6 Staff Writer, IT Week 11 Jul 2005