Jun. 1, 2003 Issue of CIO Magazine

offshore outsourcing

Inside Outsourcing in India

Outsourcing to India can provide a huge payback—if you're willing to work at it. Two offshore veterans share their hard-earned lessons to help you determine if Indian outsourcing is right for your company.

BY STEPHANIE OVERBY

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Reader ROI

When outsourcing to India is right for you

How to manage a successful relationship with an outsourcer in India

Strategy and processes for Indian outsourcing

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Balancing the Risks
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Want to know the real cost efficiencies of outsourcing? Talk to David Wood for the inside scoop on outsourcing to India. For the next two weeks, you can grill Wood at ASK THE SOURCE.

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DON'T BOTHER TRADING horror stories about outsourcing to India with John Doucette. He'll trump you every time. "I was doing this back when you didn't want to be doing this," says Doucette, CIO of Hartford, Conn.-based United Technologies, who first sent coding work to India more than a decade ago when he worked at General Electric. "Most CIOs don't have any clue what it used to be like. You had people who couldn't speak English. The telecommunications were terrible. It was awful trying to transfer files back and forth."

Head down the highway 10 miles to Otis Elevator in Farmington, one of United Technologies' six business units, and you won't get much sympathy from offshore veteran David Wood either. "Back then, there was not a lot of capability in India," says Wood, who set up a captive development center in India in the early '90s when he was CIO of Otis Asia Pacific in Singapore. "It was a phenomenon that was only just starting," adds Wood, now Otis's director of systems development.

John Doucette, CIO of United Technologies, is an offshore outsourcing veteran, sending work to India since "back when you didn't want to be doing this."

Today, however, Indian outsourcing is one of the best ways for CIOs to cut application development and maintenance costs, deal effectively with the peaks and valleys of software demands, and focus on more strategic work. Depending on whom you ask, anywhere from one-half to two-thirds of all Fortune 500 companies are already outsourcing to India, and, according to Forrester Research, the amount of work done there for U.S. companies is expected to more than double this year. If you're not already sending some development or maintenance work to Mumbai or Chennai, chances are you're either looking into it or your CFO, salivating over potential labor cost savings of 70 percent, is wondering why you aren't.

But despite its popularity, successful outsourcing to India is still difficult. While the market has matured, telecommunications have improved and English fluency in India has flourished, challenges still remain. Cultural issues creep in, service-level expectations are set too high, transitional costs can be foreboding, and ongoing relationship management is expensive and labor-intensive. And although United Technologies is an Indian outsourcing success story, to be sure—the company has already saved $50 million and attributes $30 million annual savings to it—United has had to overcome some obstacles. Even old hands like Doucette and Wood make missteps, and they agree that outsourcing to India is a work in progress—a journey, not a destination. But they are still big believers of the India phenomenon. They recently shared with CIO some of the lessons they've learned along the way.

Big Changes at a Big Company
For years, $28.2 billion United Technologies Corp., or UTC, acted primarily as a holding company for its subsidiaries—Carrier, Hamilton Sundstrand, Otis, Pratt & Whitney, Sikorsky Aircraft and UTC Power—with offices in nearly 180 countries. Each subsidiary had its own enterprise systems, processes for sourcing projects and IT organizational structures. UTC continues to function as a holding company, but it also provides support for its subsidiaries for common business processes such as HR and indirect sourcing. In 2001, Chairman and CEO George David decided it was high time for UTC to reap some benefits from the combined size and power of its companies. He issued a decree that UTC squeeze $500 million out of its annual $3.5 billion direct procurement costs. Doucette, who had just been promoted to CIO of UTC, was responsible for $40 million of the mandated savings.

In addition to doing the more obvious things such as centralizing back-office IT functions and standardizing all locations on certain platforms, Doucette's experience told him that he could wring a hearty chunk of change out of application costs by sending more work to India. With the help of UTC's sourcing office in the finance department, Doucette ran the numbers. The office estimated that he could cut $28 million of an annual $125 million spent. The savings would come as UTC began replacing high-priced U.S. contractors with less expensive Indian labor (for a look at UTC's offshore growth, see "Outsourcing Explodes," right).

UTC's subsidiaries had begun outsourcing to India long before UTC set up a corporate strategy to support it. In addition to the Pune, India-based development center Wood set up for Otis Asia Pacific in 1995, Otis's U.S. headquarters began sending projects to Bangalore-based Wipro Technologies four years ago when Doucette was CIO of that division. "It wasn't cost-driven at the time. It was just to get the work done," Doucette explains. But two years later, he decided it was time to develop an overarching strategy and process for sending software work to India.

First he revisited the decision to make India his country of choice. New players such as Russia and China had joined the IT services game, and Doucette gave them a look. Ultimately, however, he decided India was still the best choice because of the maturity of the software companies operating there. "It's taken India 10 years to get to where they are," Doucette says.

Vetting the Indian Vendors
Then it was time to start crunching some serious numbers. In order to help UTC's divisions buy in to the idea of outsourcing to India and leverage the conglomerate's scale, Doucette thought it best to create a list of preferred vendors and negotiate prices up front. With part-time help from three employees in UTC's sourcing office, he issued RFQs (what UTC calls RFPs) on the three main areas of work UTC would need done: mainframe, e-commerce and ERP programming. The company received bids from 43 vendors via an automated online system called FreeMarkets—basically an eBay for corporate procurement in which UTC holds a stake. From there, the sourcing team began whittling down the list based not only on bid prices (Doucette ruled out the five lowest bidders), but on 500 discrete criteria in the areas of service offerings and capabilities, price, management practices and procedures, customer base, and business profile and strategy. Holding a giant spreadsheet, Doucette explains how the sourcing staff scored each vendor from one to five on each criterion, giving more weight to service offerings and price than to other, less important criteria such as business strategy and customer base.

The sourcing folks informed their scoring not only with their own experience but with input from those at UTC already doing offshore outsourcing, visits to the companies and interviews with customers. The sourcing staff trimmed the list down to 20, and then Doucette and the other UTC business unit CIOs settled on five preferred providers—Wipro Technologies, Mumbai-based Tata Consultancy Services (TCS), HCL Perot Systems (HPS) and HCL Infosystems (both based in Noida), and ITC Infotech India in Calcutta. Such a strategy is common. "More than 70 percent of companies going to India are putting together lists of two or three vendors to work with," says Dean Davison, vice president of service management strategies with Meta Group.

Finally, Doucette signed contracts with the five companies, creating fixed prices for development and maintenance work for all UTC divisions. The entire process took about three months.

What Stays and What Goes
The vetting process was only the beginning. Doucette also had to create an overarching strategy for outsourcing to India. Taking the time to make such a strategy clear is something novice CIOs might skip, but that would be a mistake. "There's much more to going offshore than sending out an RFP, selecting a vendor and doing it," says Marty McCaffrey, executive director of Software Outsourcing Research. "You have to go to extraordinary lengths to establish goals and objectives first."

"We should have had the basic processes well-thought-out, documented and understood by everyone before the team went offshore."

—DAVID WOOD, DIRECTOR OF SYSTEMS DEVELOPMENT, OTIS ELEVATOR

Doucette created a sourcing plan stating what goes offshore, what goes to U.S. outsourcers and what stays at UTC. His criteria for what goes where are pretty simple. "First, you have to ask yourself if the work is strategic. If the answer is yes, you should keep it internal," Doucette says. "Then, if it's not strategic, you have to ask yourself if it's going to the lowest-cost source. If you're not the lowest-cost provider of that service, you need to contract it out."

The result of that analysis: Doucette and his divisional CIOs send all help desk, network, desktop, midrange, mainframe and Web-hosting work to Computer Sciences Corp., and have a goal of sending 80 percent of all application development and support to India. That means UTC and its subsidiaries keep in-house IT leadership, project management, business analysis, and (eventually) 20 percent of application development and support. Keeping a certain number of skilled developers in-house ensures that UTC and its divisions don't get overcharged by an outsourcer. "When I was at Otis," Doucette says, "we put out an RFQ for an e-commerce project, and we got bids ranging from $60,000 to $3 million. If you don't have someone in your operation who knows how much that should cost, then how can you outsource it?"

It's a mistake many CIOs make. "One way to circumvent that is to have multiple vendors continually bidding against each other," Meta Group's Davison says. "Another way is to keep people in-house who are really smart about those things."

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In setting standards for what should go to India and what should stay, Doucette also took into account that UTC's six subsidiaries have very different structures and needs. Companies such as Otis, with most of their IT departments centrally located at headquarters, were good candidates to go offshore. Carrier, however, was not. It has 49 manufacturing plants scattered across the United States with a handful of IT people located at each one. "When creating an offshore model, you really need to look at your own business model and where your IT staff is, and customize it based on that," explains Doucette.

Another issue Doucette had to consider was the companies' security needs. While security is clearly a priority for every UTC company (it uses secure private networks, stores most code stateside and uses software that limits offshore network access), UTC simply cannot put any military-related work offshore. Pratt & Whitney, Hamilton Sundstrand and Sikorsky Aircraft all do government work, which accounts for 16 percent of UTC's combined revenue. "We have to split up military and commercial work and be careful about what we give them access to," Doucette says. "It's a struggle because we're trying to work together as much as we can to save money. For example, if Pratt & Whitney and Carrier are in the same building, they share a network. But that means I can't put that network support in India even though I'd like to."

Otis Sets Up a Dedicated Offshore Center
While Doucette makes overarching strategy decisions and handles some vendor relation issues on a macro level from his penthouse office on the 26th floor at UTC headquarters, the day-to-day management occurs at the individual business level. At Otis, that task falls to Wood, sitting in his office amid a cluster of Otis buildings off I-84.

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Though Otis was sending work to Wipro before Wood transferred from Otis Asia Pacific in 2001, Wood has made significant changes to the relationship during the past two years. The biggest change: moving from a project-by-project service delivery model to having Wipro set up a dedicated offshore development and maintenance center for Otis (for a closer look at dedicated centers, see "The Hottest Trend in Outsourcing Management," right).

"When I showed up here, Otis's experience outsourcing to Wipro was in full swing, but it was not mature," Wood explains. Otis would have a specific project and requirements; Wipro would come in and provide a proposal and a quote. If accepted, the outsourcer would do the project with roughly one-quarter to one-half of its people offshore and deliver it to Otis. Otis retained Wipro's personnel for what Wood calls a 30- to 60-day "warranty" period, after which they would disappear until a new project came along or modifications had to be made. Otis was saving $500,000 a year over doing the work internally, but this model was becoming burdensome. "It's a cost-effective model for doing a single project, but when you build up a portfolio of applications, it's very inefficient," Wood says.

In 2001, Otis had a total of 30 applications, and the old model wasn't working. Wood proposed that Otis and Wipro transition to the dedicated center model, where Wipro would assemble a permanent team in Bangalore to work on nothing but Otis projects. "It's basically a standing army of resources provided by the vendor that addresses all of your application needs," Wood explains.

"When you're outsourcing to India, you need the rigor in your QA organization to be tenfold over what it was before to make sure what gets built is what was agreed upon."

—RON BEAVER, CIO, OTIS ELEVATOR

"The benefit is that people assigned to the project feel more attuned to the company, so turnover rates are lower," says McCaffrey of Software Outsourcing Research. "And those vendor personnel are acquiring long-term knowledge about your systems, so you have a more productive worker."

Wood and four of his employees spent six months analyzing the business case, creating a proposal for CIO Ron Beaver, who approved the transition. "We went through the kind of phases a lot of companies go through in outsourcing to India," explains Beaver, who performed Wood's role for five years before taking over as CIO. "You don't wake up one day, fire everyone and send it all to India. You have to get comfortable with it, find the right partners and evolve in a way that makes sense for your business."

Wood then conducted the vendor bidding and selection process. Much like UTC did at a higher level, he defined Otis's goals in outsourcing, reestablished reasons to go to India rather than other countries, and conducted Otis-specific research on the vendors. The only thing Wood didn't have to do was negotiate price; Doucette had taken care of that. In the end, Otis stayed with Wipro, doing $3 million worth of work a year with the Indian company.

The Make-or-Break Transition Phase
Then the real work began.

As is the case with almost all offshore work, the most critical phase is the transition. "The first big issue was knowledge transfer. We were sitting on a large inventory of applications built by a variety of vendors," Wood says. He and the project leader from Wipro spent a month creating a transition plan. "The transition period requires bringing a few people who will eventually be working offshore onsite to go through the application, get an understanding of it and create the documentation that's required," Wood says. Offshore developers were paired with someone at Otis who knew the application or with someone from the vendor who created the application. "Creating transition documentation is critical to the vendor getting off to a good start as quickly as possible," says McCaffrey. Otis created an overarching transition plan that included writing standard technical documentation outlining such things as file-naming standards, and hardware and software environments; creating a high-level project plan; identifying the best onshore and offshore managers; and providing opportunities for knowledge transfer such as job shadowing.

The transition stage also requires close collaboration with the vendor's project leader who works onshore throughout the course of the relationship. The onsite project leader is basically a go-between, making sure the work done at Otis in terms of project requirements and specs translates into the right coding or maintenance work in India. Doucette says the project leader is the most important person in the Indian outsourcing proposition. "The mistake we made initially at Otis was trying to have our own employees communicate with the offshore workers in order to save as much money as possible," Doucette recalls. "We found we needed a strong business analyst from the offshore company working onshore as an intermediary."

"The mistake we made initially at Otis was trying to have our own employees communicate with the offshore workers in order to save as much money as possible."

—JOHN DOUCETTE, CIO, UNITED TECHNOLOGIES

Once few and far between, competent business analysts and project leaders are no longer in short supply in India, Doucette says. But that doesn't mean Doucette and his reports rest easy. "We are ruthless on the people who come in," he says, recalling the time at Otis when he sent the vendor's proposed project leader, who was a database administrator lacking business analysis and project management skills, back to Bangalore after just four hours.

Meanwhile, in Bangalore, Wipro was setting up the Otis shop so that employees had a development environment to plug into when they got back. The transition took four months—January to April 2002—and Otis work was at a steady state by June.

In addition to being the most critical stage, the transition period is also the most costly because of high rates for offshore workers onsite and the set-up costs. Otis spent $420,000 on the transition and didn't recoup that investment and start saving money for a year. Today, with 75 percent of the 20-person offshore team working in India and 25 percent working at Otis, Wood says the company is saving $1.4 million a year on application development and maintenance, a nice complement to the annual $7 million it has been saving by using its own captive development center of 70 employees in Pune.

The Importance of Process
If you want to know how important Wood thinks application development and maintenance processes are to working well in India, all you have to do is listen. In the course of an hourlong discussion of offshore outsourcing, Wood uses the word process 48 times, sometimes up to four times in one sentence. "You cannot underestimate the importance of structuring and defining your processes, putting tools in place to measure the performance of those processes, and having processes in place to improve those processes," he says. Sounds simple, yet complicated. Which, Wood found out, it is.

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Indian companies have spent years honing rigorous development methodologies, and many are certified Level Five, the highest level of Carnegie Mellon University's Capability Maturity Model (CMM). That means they've moved ad hoc, chaotic software processes (Level One—where the average U.S. company is) to mature, disciplined software processes that allow for continual improvement in quality. But the CMM level of your Indian vendor means nothing if it is not complementing similarly rigorous processes in-house. "The vendor can only operate, at the most, two levels higher than the customer," Meta Group's Davison explains. "If you continue to run at a Level One, the vendor will have to put more people onsite to compensate for your inadequacies, and they'll spend all of your savings."

Wood didn't begin investing in defining and implementing those all-important processes until the end of the transition phase, which was much too late. "It should have been the first thing we had done," Wood explains. "We should have had the basic processes well-thought-out, documented and understood by everyone before the team went offshore." If Otis's offshore development center was larger—say, 200 people rather than 20—that mistake would have been fatal; cost savings and quality would have been sacrificed completely, Wood says.

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Also vital to a viable Indian outsourcing relationship is having robust quality assurance processes. "When you're outsourcing to India, you need the rigor in your QA organization to be tenfold over what it was before to make sure what gets built is what was agreed upon," Beaver says. That's something that's still being developed after the fact at Otis, according to Beaver, largely because skilled QA employees are tough to find.

Continuing to invest in the Indian outsourcing relationship on an ongoing basis in order to catch mistakes and improve processes is key. As it is, Wood is automating many of the new processes as well as the metrics to monitor them using software that captures and analyzes data such as cycle times and defects. "It's one thing to have good processes in place, but if you don't have another process to constantly monitor and improve those processes, they will be out of date in a month," Wood says.

Even with the maturity of the Indian market, understanding the continuing high cost of ongoing management is important. "It costs a lot to keep a relationship alive and functioning properly, and that's the biggest challenge CIOs face right now," Davison says. "You do have to expect to pay some money going forward, usually 5 percent to 7 percent, just to keep it functional."

Think Global, Act Global
Wood adds that investing in the process of Indian outsourcing "will make it that much easier to implement this model around the world." And that's one of the goals at Otis—to get more of the company's locations in 200 countries and territories worldwide to benefit from Indian outsourcing. Doucette also hopes to use the initial offshore work done at Otis and Pratt & Whitney to get its other subsidiaries to India where appropriate.

UTC and its subsidiaries are exploring the possibility of sending other work to India, including call center operations and nonstrategic engineering work. After all, the only way to increase the company's Indian savings—barring a highly unlikely drop in labor prices there—is to send more work there. Check back in a few years. They'll probably have some stories to tell.

In the meantime, Beaver has some advice for other would-be outsourcers to India: "If you're not already doing it, find a project and just get started. It's inevitable."

Senior Writer Stephanie Overby can be reached at soverby@cio.com.

PHOTOGRAPHY BY TRACY KROLL

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Most recent responses ...

Since 1998, I have been employed in the IT departments of three different companies. I have watched two of these companies outsource significant portions of their support infrastructure to India. In both cases I had an opportunity to observe the people who would be replacing me during their training periods here in the states. These people were uniformly described as competent, knowledgeable technology professionals with years of experience. Many claimed MCSE or MCP certification.

Not one of nine at the first company could tell you the difference between a printer port and a LPT port. When asked about the Control Panel, several indicated the laptops keyboard, or alternatively the small status display LCD just above. At the second company, all six of the "Lead Techs" -- the ones that were supposed to teach the other 20 back in India -- fixed a static IP address conflict by recommending a three-hour reimage, reload, and reconfiguration to be performed by the local (USA) staff. One infamous trouble ticket: "computer wont boot - removed battery floppy drive hard drive - computer still wont boot - escalating".

Be careful to ensure that you actually get what you are looking for. In both cases, middle management falsified efficiency reports in order to present a scenario combining lower costs with increased efficiency, to provide a seemingly glowing success to their superiors. Underlings who are informed by their superiors on the obvious advantages of a course of action have an unhealthy tendency to seek to ensure that no contradictory information appears.

Furthermore, please be aware that as you send jobs overseas, you sacrifice flexibility and adaptability, as well as the ability to grow expertise with your software, your clients, and your business practices within your own company. You'll be paying the same amount every quarter for services that will not grow or mature with time, nor will you have any real input or direct control over the systems and people that will be providing a critical service your company.

In order to avoid these pitfalls, I recommended initiating a change control process simultaneous to the offshore migration. Select one or several technologically competent individuals from departments not under threat of downsizing and use them to monitor the abilities and capabilities of the overseas contingent. Ensure that these individuals are not in any way under the management or influence of anyone in the department that is being decimated -- this is simply good practice to obtain clean information. An efficient practice would be to use those IT professionals that already take care of your own computer, office, and local area network - under the assumption that you know these people well enough to have faith in their judgment in an area you are not directly qualified to hold an opinion.

Finally, above all else, remember to listen to and except the reports that these people will bring you, even if it tells you straight out that you made a mistake. Unfortunately, based on what I've experienced, they probably will...

As an addendum, I should also report here that both companies that outsourced their local IT staff have had to develop suspiciously large "High Availability Technical teams", "High Piority -- Rapid Resolution desks", and "Priority Escalation teams". I would regard any post-outsourcing recommendation to form any variant of one of the above departmental groups as a clear bureaucrateese admission of failure. Basically, your department heads have noticed the startling new levels of incompetence in the IT department and are taking steps to protect themselves -- the rest of your employees and / or customers will not be so fortunate.

J Koch
Currently Unemployed
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hello i m shoeb and i have studying in secondyear bca

syed shoeb ellahi
what jobs after bca
management
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Indians only think about gaining money for themselves. Russians think about populating Mars with humans. Indians have high telecommunications cost. It's cheaper to call Russia than to call across the street. Russian scientists first sent rockets and life beings to space. It's more profitable to deal with them, they work 12 hrs/ day with their own initiative, as they are inspired and think the planet Earth.

Elsa Uhl
Director, Business Dev
NDNT, Inc.
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TEC-BAM Workers of America is a non-profit, non-partisan, public policy organization that favors an environmentally sustainable and economically sound America. We oppose all efforts to use federal immigration policies to depress wages of vulnerable workers. TEC-BAM is pro-environment, pro-worker, pro-liberty and pro-immigrant. Activists and Members of TEC-BAM are Americans of all races, religions and we heavily encourage diversity in our ranks. We would love to have you join our mailing list and our group. We are bringing together the resources of displaced workers from many sectors to become a sizeable force. We hope to show support to each others groups by helping with protests and through shared publicity. Current and future sponsorship is much appreciated. We are in the process of creating bumper stickers, car magnets, and yard signs. The media coverage we have so far received has helped our site surpass a quarter million hits in a little over 2 months.

We are getting together with other groups in a coalition to effectively lobby State Representatives and raise public awareness.

TEC-BAM represents workers in the Technology, Engineering, Call Center (Customer Service), Business Management, Accounting, and Manufacturing Industries. Our goals are;

Educate the VOTING public on this issue and to get them to contact their State Representatives.

Protest Corporations considering or actively "Off-Shoring" U.S. jobs. Contact and work with politicians that are with us.

Protest and email politicians that are behind the large corporations.

Contacting the media and keeping them informed on "Off-Shoring" and Visa abuse.

Get our members back to work through networking and references.

We have members from the Dallas, TX area and would like to have similar groups form around the country and raise awareness in their home towns. We have no problem with you being a member of other groups. The founder of TEC-BAM is a member and co-founder of the Texas Labor Champions.

The average person really has no idea on how this will impact their lives in the next few years. Its up to us to educate them before it is too late!

--------------------------------------------------------------------------------

NOTE: We are NOT interested in dialog with Xenophobes or Radical Anti-Government Groups! We embrace ALL ethnicities and religions. Our issue lies with the lack of ethics in our large corporations and government officials. We understand there is a lot of emotion tied up in losing your job, and it is human nature to attack the differences we see in each other. We have been disturbed by some of the emails we have received and we hope that we as a NATION can rise above such petty things. Lets TRY to make that an Embarrassing Memory and Chapter in American History! But lets NOT forget those mistakes lest we make them again.

We don't blame the people in other countries for taking advantage of our Corporate and Political Greed to better their lives! Thank You, Corey www.goodetech.com

Corey Goode
IT Worker
www.goodetech.com
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Wipro to increase workforce by 9000. Software exports to touch $50 bn by 2008- Premji [wipro chairman]. No major threat to India emerging in BPO - Karnik [head of a national IT organisation].

These are three random headlines I picked up on the issue of outsourcing from the site that Indian CIOs and CEOs use, www.sanghanak.com (it's a news site on the business of IT for CIOs/CEOs/CTOs.)

These headlines would alarm an American IT worker even more. But remember that American CIOs and CTOs are under pressure from shareholders/Wall Street/Nasdaq to ALWAYS cut costs and increase profits. If it wasn't for this pressure, they wouldn't be outsourcing. Who are the shareholders of the big US companies that outsource work to India? Mostly Americans. So if you want outsourcing to stop, target the real "culprits" - not the hapless Indian techie, but the shareholder who wants higher profits all the time.

(headlines for sept 7)

PK
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In the June 1, 2003 Issue of CIO: