Over the last 10 years IT Application outsourcing with off shoring has been growing in size and volume, an indication that organizations have been benefiting from outsourcing. However, there are projects and deals that have been rolled back and organizations have been hurt due to vendor's inability to deliver quality product on time. This article addresses how organization can do an effective IT application outsourcing and not get trapped into standard headcount replacement by cheap labor pool. The article brings out perspective from the Authors; Vendor manager has worked for 12 years for outsourcing companies, managed large teams/project for outsourcing vendors and the customer who has championed outsourcing successfully in his organization. The article brings out the challenges that IT organizations face today in outsourcing effectively and successfully and how can they address these challenges.

A business will always try to produce at the least cost and sell it at the highest cost to maximize the return to promoters/stakeholders. No wonder that outsourcing in some form has always been present since ancient time when people traded goods or services. In the modern times, with communication cost coming down and availability of large pool of educated labor force in a developing country, IT application outsourcing with off shoring started to take place. The application outsourcing started with Year 2000 problem in a big way when industry ran out of resources and a problem that needed attention before the time ran out. Over the time, outsourcing vendors based out of India have established themselves and have grown in size many folds (The employee strength of Infosys's # rose from 1100 in 1996 to 91,187 in 2008 Apr, the figure for TCS is 3000 to 111,407 in 12 years, and for Wipro 3000+ to 82,122) and along the line have built credibility and capability to deliver large projects as well. The number indicates that outsourcing in general is working. Let us look at closely what are the challenges that IT organizations face with outsourcing, how it impacts them and what they can do to address these issues.

Current IT Projects are more complex compared to Year 2000 projects - Year 2000 projects were simple in nature. One would just review the source code base offshore and provide the fix. Completing these projects didn't require writing new software or working with new technologies. Nor did it require the domain or application knowledge.

All projects today however require working with new technologies, deep domain knowledge, other interfacing application knowledge and experienced staff. While IT vendors have done a good job of training their personnel in new technologies, but biggest problem faced today is lack of personnel with requisite knowledge as there is high attrition among these skilled labor.

IT vendors have tried to answer some of these problems by having vertical units aligned to a particular segment of the business and specialized domain within the same. However this also doesn't solve the problem as these trained people would not have enough knowledge of an organization's application landscape and domain.

One of the ways in which IT organizations can address these challenges is by training their employees on new technologies. These employees who already know application and adding domain experience will make them subject matter expert in a short time... CIO and senior management should plan to have trained employees in each technology and each application. IT organization can form center of excellence within organization for different technologies and identify key personnel to meet the organization's requirements. Center of excellence can be around technologies (J2EE, Mainframe, Reporting, and EDI) as well as around business processes. Team members from Center of Excellence (CoE) should play key roles as lead or architect on large projects.

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Western companies are increasingly getting away from running their own offshoring operations, handing the jobs over to Indian tech-services specialists

A monumental shift in how Western corporations tap into Indian talent is taking place. Companies are moving away from running their own offshoring operations and handing at least some of those jobs to Indian tech-services specialists.

The most recent sign of the sea change came July 10, when British insurance giant Aviva (AV) said it sold a 5,000-strong South Asian outsourcing operation to WNS Global Services (WNS) of Mumbai. WNS paid $228 million for these so-called captive operations in Bangalore, Pune, Chennai, and Colombo, Sri Lanka. In return, Aviva agreed to pay up to $1 billion to WNS over more than eight years for handling customer service, account setup, accounting, and claims processing.

There has been a steady drumbeat of similar large deals in recent years, but industry executives and analysts say the pace is quickening—driven by currency swings, the increased costs of doing business in India, and the need for some Western financial services to raise cash to handle shortfalls elsewhere. "The writing is on the wall," says Sudin Apte, an analyst at market researcher Forrester Research (FORR). "This is not working anymore."
Labor Savings Aren't Enough

Apte estimates more than 150 companies have shifted in the past few years from running captive operations to using a mix of internally run and outsourced operations. He expects another 80 to 100 companies will make the move in the next year or so. In an April report, his survey of 59 corporate information technology executives showed 22% of them plan to stick with captive operations while 66% will use outsourcing companies in whole or part. That's a huge shift from the results of a survey at the end of 2005, when 55% of respondents said they'd run their own offshore operations.

A lot has changed since 2005. For one, many of the captive operations have swelled in size and have staffs numbering 3,000 to 6,000. Apte and other analysts believe offshoring outfits that large are hard for parent companies to operate efficiently. In many cases, it's better to hand the business to outsourcing firms that have even larger-scale operations and can move employees from one project to another as the needs of a large customer base shift. The other major change is that the rising costs of doing business in India mean it no longer makes sense to move work there just for the labor-cost reductions. To pay off big-time, these shifts must include gains in productivity through process improvements and innovation that the top Indian outsourcing companies have mastered.

Other notable handoffs include the 2007 Infosys acquisition of Philips Electronics' business process outsourcing (BPO) operations in India, Thailand, and Poland; and the 2006 joint venture formed between Tata Consulting Services (TCS.BO) and Britain insurer Pearl Group. General Electric (GE) gave the trend a lot of momentum in 2005 by spinning out its Indian back-shop operations as Genpact in 2005. WNS itself was formed six years ago as a spinout from British Airways (BAY.L).
Economies of Scale

The Aviva deal gives WNS a chance to get bigger fast. The BPO specialist now has 22,000 employees. WNS bested a handful of other bidders. "This is a very sizable piece of business that makes us a company of a different scale," says WNS chairman Ramesh Shah. "We understood the business, and we wanted to have a long-term relationship with them."

Aviva had pioneered the strategy of hiring Indian outsourcing specialists to set up and temporarily run operations and then pass them off to Aviva. It was new to the market and figured it could benefit from the expertise of local players. WNS was one of its partners. But last year it reviewed its options and decided to reverse the way it does things. In a time of volatile currency and salary shifts, Aviva sought more predictable costs. Also, it believes WNS can wring more costs from its operations. "These companies have been better than corporations at driving efficiencies because they're specialists in the area," says Cathryn Riley, chairman of Aviva Global Services. She says the company is as committed as ever to having much of its work done in India, in spite of rising costs.

One of the advantages the Indian firms bring is their sheer size. Infosys, for instance, now has nearly 100,000 employees and plans to hire another 10,000 this quarter alone. These companies have hundreds of customers they can serve from their large delivery centers, using standard technologies and business practices.

A wild card in the shift from captive offshoring operations is the problems of big Western banks. Hard up for funds as a result of their mismanagement of real estate finances, they need cash. But analysts and executives caution that these firms may not be able to get the kind of money they're looking for by selling Indian operations, mainly because the Indians typically drive a hard bargain. "Sometimes the price is too high for us," says Kris Gopalakrishnan, chief executive at Infosys, which is now looking at two potential banking deals.

But Forrester's Apte believes the banks may eventually be forced to sell out even if it means settling for less. "Their desperation is going to grow," he says.

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IT offshoring deal leads to layoffs at ratings giant's global technology center.

The Nielsen Co. is giving up tax breaks that have netted it $1.4 million since 2001, in response to political fallout from an IT offshoring deal that has led to layoffs at its global technology center in Oldsmar, Fla.

Nielsen, which is best known for measuring TV audiences, began getting the tax breaks after agreeing to build the $100 million facility in Oldsmar, west of Tampa. The incentives were pegged to the number of jobs paying at least $52,000 annually at the tech center, which had about 1,200 employees at first and grew its workforce to 1,700.

In addition to the $1.4 million in tax breaks that Nielsen has received from the Oldsmar and Pinellas County governments, the company got $1.7 million from the state under an incentive program that has expired. The local incentives, though, were scheduled to continue until 2016.

But then last October, Nielsen announced a 10-year, $1.2 billion outsourcing agreement with India-based Tata Consultancy Services Ltd. That move was followed in April by the news that 117 people at the Oldsmar tech center would be laid off.

Although 50 of those employees have since been hired by Tata, Nielsen late last month said that it was cutting another 170 jobs in Oldsmar -- and that some of the affected workers are training Tata employees to do their work. The company now expects to have about 1,300 employees at the facility by year's end, plus 250 or so contract workers.

Gary Holmes, a spokesman for Nielsen, said the company decided to pull out of the tax-break program after members of the Oldsmar city council expressed "second thoughts about the agreement" because of the layoffs. "It became kind of an emotional issue," he said.

That's evident from the minutes of a council meeting held in April. One member accused Nielsen, the city's largest employer, of "making a joke of the tax- incentive program," while another said the company "had abdicated [its] responsibility as a corporate citizen."

Despite the layoffs, the incentive deal "did everything it was intended to do," said Mike Meidel, director of Pinellas County Economic Development. Nielsen could have built its technology center somewhere else, Meidel said, adding that the company still has enough employees in Oldsmar to qualify for the tax breaks.

Software Associates Breaks Into Australian Export Market With Wireless Barcode Scanning System For Warehouses

Software Associates, one of New Zealand’s fastest growing information technology specialists, has started exporting an innovative warehouse management product to Australia. Independent Distillers Group, a major manufacturer and distributor of alcoholic beverages, is the first organisation to have implemented the solution, with the system now operating at their Melbourne and Sydney facilities.

The solution utilises the dcLINK wireless data capture system from Software Associates strategic partner, Data Systems International (DSI). A pivotal step was integrating dcLINK with IDA’s comprehensive business management solution, Microsoft Dynamics AX. Both products are well established globally, however integrating the two was a world first, using technology developed by Software Associates.

Initial feedback from IDA has been positive. Group Business Analyst at Independent Distillers, Crystal Chan, says:

‘The hardware, software and process framework that Software Associates has provided us with has significantly streamlined warehouse product handling. I am sure that we will be much more productive, profitable and efficient now that we are able to track inventory using bar code scanning and mobile application technology.’

Michael Harrod, Operations Manager at Software Associates, agrees:

‘Previously, IDA was entering data manually from paper which is time consuming and inefficient. The new system will help reduce costs and improve profitability. Efficiency, accuracy and visibility will all be much improved.

‘We are extremely proud of the results that we have achieved for IDA and look forward to helping other businesses across Australasia.’

Partnering With R&D Providers to Achieve Innovation, Decrease Cycle-Time, and Significantly Reduce the Time It Takes to Get Your Products to the Market

In the newly released benchmark report, "Software Development and Innovation: Speeding 'Time-to-Market,'" Aberdeen Group, a Harte-Hanks Company found that Best-in-Class organizations realized an 18% decrease in time-to-market as a result of their R&D / Engineering Outsourcing engagement -- a rate that is over 26x greater than Industry Average organizations.

This report examined and analyzed organizations' planning, deployment, use, and management of Research and Development (R&D) and Engineering Outsourcing to provide a roadmap for constructing the internal framework necessary for a successful outsourcing relationship. As part of their outsourcing strategy, Best-in-Class organizations determined and allocated the proper amount of internal resources, incorporated clearly defined Service Level Agreements (SLAs), utilized a variety of analysis and measuring tools, and essentially viewed their outsourcing partner as an extension of their internal R&D team to achieve product differentiation and expedited time-to-market. In fact, Best-in-Class organizations are 123% more likely than Laggards to ensure their outsourcing provider has "skin in the game." By viewing the outsourcing engagement as a value partnership rather than merely and employee-contractor relationship, most often accomplished by contractually stipulating that both the outsourcer and outsourcing provider have a financial stake in meeting and exceeding project objectives, Best-in-Class organizations experienced an 18% increase in research productivity / efficiency, as well as a 13% increase in customer satisfaction.

"R&D and engineering outsourcing is most effective when organizations choose partners that share the business-critical mindset about the work they are performing," said Ralph Rodriguez, Senior Vice-President of Research, Technology Markets group. "In R&D it is especially relevant that delivery teams leverage deep knowledge to develop insights and find new ways to add continually value through the communication and application of their professional expertise."

The report educates end users on how Best-in-Class organizations are developing and managing their outsourcing initiatives as compared to others, and recommends clear actions to improve end user satisfaction and increase their ROI through the correct blend of capabilities, policies, and procedures. SLA management, internal structuring, monitoring and optimization tools, as well as other key performance indicators are reviewed.