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Driven by cost pressures and a desire for increased business agility, offshoring of IT services has seen consistent growth since the 90s that paused briefly during the global recession but is now rebounding. Both large and small organizations need to understand the environment that is driving this momentum, to better leverage its benefits and avoid its risks.

Copyright 1999-2010 Info-Tech Research Group

Executive Summary

After a brief pause during the global recession, offshoring of IT services has resumed its rapid historical growth in both large and small organizations. This note considers the following questions in light of these trends:

• Who is buying offshore IT services?
• Why are they buying?
• What are the key offshore locations?
• Who is selling?

Use this note to gain the insight required to make informed offshoring decisions.

Trend Point

Recent Info-Tech research found that the outsourcing of application development, maintenance, and support often leads to significant benefits; for example, faster delivery (62% of those polled) and increased user satisfaction (61%), especially when good governance and project management principles are applied. For more information, refer to the Impact Research Report, "Application Outsourcing: Achieving Success & Avoiding Risk."

If an organization decides to outsource to gain these benefits, the next consideration is whether to partner with an outsourcer whose delivery team is in the same country (onshore), or in another country, typically a low-wage destination (offshore or nearshore).

The offshore option has seen rapid growth, and now accounts for $80B US in economic activity per year (Source: McKinsey Quarterly). The global recession stalled this rapid growth, but offshore outsourcing is already seeing a strong rebound:

Globally, the total contract value of new deals was essentially the same for 2008 and 2009 at $56B US.

Q4 of 2009 saw $19B US in new deals, a 54% increase over the previous quarter and 32% over the same quarter last year (Source: TPI).

This note examines trends in outsourcing to low-wage destinations that are either offshore (far from your organization) or nearshore (close to your organization).

Situation Analysis

Who Is Buying?

Large organizations pioneered offshoring and now both large and small organization are involved:

50% of the Forbes 2000 has initiated some sort of offshore activity (Figure 1).

35% of small organizations also offshore.

38% of companies that offshored IT functions have aggressive plans for more offshoring (Source: Duke University " Offshoring Reaches the C-Suite").

These trends suggest that offshoring is becoming a common practice for both IT and business tasks (Figure 1). Although many companies are involved in some offshore IT activity, this activity represents only 6.5% of the global market for IT services, so there remains plenty of room for growth (Source: Kennedy, The Services Shift).

Figure 1. Offshoring Shows Rapid Growth in Organizations of All Sizes.

Source: Duke University "Next Generation Offshoring"

Offshoring optics. Despite the popularity of offshoring, some executives interviewed were reluctant to broadcast their use of offshore services, for fear of being perceived as unpatriotic, especially in times of economic difficulty. While on the surface it may appear that offshoring creates job losses onshore, an alternative explanation is that "outsourcing is not about 'exporting jobs'; it is about 'importing competitiveness'" (Source: Prahalad & Krishnan, The New Age of Innovation). In other words, offshoring improves a company's competitive position, and the net effect of that competitiveness is increased prosperity onshore. An economic analysis of the data supports this view with each dollar spent offshore returning $1.14 in reduced costs, increased exports, repatriated earnings, and reassignment of labor into higher value work (Source: Mckinsey Global Institute, Offshoring).

Why Are They Buying?

Outsourcing can have many motivators such as flexible resourcing and improved business processes, and these are often important to those who buy offshore. However, buyers of offshore outsourced services cite cost reduction and business agility as central motivations.

Cost reduction was cited by 53% of organizations as a main driver for outsourcing (Source: Brown & Wilson, The Black Book of Outsourcing), and lower costs are especially important for those that chose an offshore partner. Info-Tech's research found that 72% of those that chose an offshore partner said that cost reduction was very important, compared to 38% who went with an onshore provider. In addition, those that choose offshore outsourcing are more likely to reach their cost reduction targets (Figure 2).

Figure 2. Cost Reduction More Likely in Offshore Outsourcing than Onshore.
Source: Info-Tech Research Group

With offshore salaries as low as $10,000 US per year for entry level positions, some buyers make the mistake of assuming huge cost savings will accrue. However, wage arbitrage is offset by new costs such as contracting, travel, and relationship management. A typical breakdown is provided in Table 1. Although not all of these expenses apply to all contexts, the breakdown serves as a useful starting point.

Table 1. Cost Breakdown: Accounting for More than Labor.

Source: Vashistha, The Offshore Nation While a handful of those interviewed for this research saw cost reductions of 50% over what they had been spending internally, 20% was a more typical level of cost saving. Neither of these outcomes are the inevitable result of the decision to offshore. For cost reduction to succeed, a project must be carefully managed with cost savings in mind.



Business agility. Cost also impacts the scale and flexibility of resourcing. In the words of one IT leader:

"I like the ability, from a cost standpoint, to swarm a problem. I can put a lot of talented people on a

particular issue in India, and I can't afford to do that here." CIO, Engineering Services Organization

Offshore providers often have flexible access to significant numbers of skilled professionals, which in turn allows their clients to respond to a changing business environment with enhanced agility. When this advantage is leveraged, the real payout is not the 20% or 30% savings on development costs, but rather the new revenue opportunities seized by an organization agile enough to respond to a market opportunity in months, rather than years.

What Is Driving the Expanded Menu of Locations?

In the 90s, India emerged as the near exclusive source of low-cost IT and IT-enabled services. Today, more than 30 countries have IT service ecosystems at varying stages of maturity. This expansion of geographic choice has been driven by the confluence of the following trends:

• Global technology access. The penetration of low-cost telecom, broadband Internet, and computer literacy into many new locations.
• Provider push. India's export revenues in IT and IT enabled services grew from $128 million in 1991 to $40.8 billion in 2007, a compounded annual growth rate of more than 43% (Source: NASSCOM Strategic Review). Other developing countries are following India's example and are rolling out supportive service-export policies alongside trade liberalization to win a piece of the offshoring pie. Local entrepreneurs and multinationals are also scrambling to capture a share of this market which has only about 11% of its potential (Source: Kennedy, The Services Shift).
• Global diversification. Both consumers and providers of offshore services are interested in reducing the risk of service disruption associated with geopolitical change by having delivery centers in several locations.

What Are Key Locations?

The offshore IT outsourcing market has seen rapid global growth and service buyers can now choose from many locations, all claiming to deliver quality service at discount prices. But not all geographies are ready for primetime, so Info-Tech has short listed ten key locations that meet the following criteria:

• Low cost. Can provide IT services whose total cost is at least 20% less than the total cost of onshore delivery, with equivalent or better quality.
• Basic maturity. Has a reasonably developed supplier network that provides diversity of selection and risk mitigation.

Table 2. Ten Key Outsourcing Locations.

Source: Info-Tech Research Group For an evaluation of key Asian outsourcing locations, refer to the ITA Premium research notes, "India for Outsourced IT Services," "The Philippines for Outsourced IT Services,"and "China for Outsourced IT Services."



Nearshore Alternatives

Each region listed in Table 2 has countries that are nearshore, or are in close proximity, to major Western markets. Nearshore locations are in similar time zones and reasonable travel distance from their clients.

One advantage of a nearshore location is reduced travel cost and travel fatigue. More important is that the near synchronized time zones allow meetings and other synchronous communication to occur during normal business hours for both parties. This improves staff motivation and retention, which is especially important for high-end tasks performed in a distributed collaborative environment, where top talent on either end of the relationship can become burned out by late night or early morning meetings.

Of course, some city combinations are "more nearshore" than others: Los Angles and Guadalajara, Mexico are only a three hour flight apart. New York and Rio De Janeiro, Brazil are separated by a ten hour flight. Therefore, consider the exact location of both your onshore and offshore teams.

Who Is Selling?

Buyers have several Tiers of vendors to choose from (based on vendor revenue):

• Tier 1 vendors. Defined here as vendors with more than $200M US revenue. These may be companies headquartered onshore (e.g. IBM, Accenture) or offshore (e.g. Tata Consultancy, Infosys). Tier 1 vendors generally have a broad service offering, offshore locations in multiple cities and countries, and mature processes. However, they often cannot offer a high service level to small customers and may lack business agility.
• Tier 2 vendors. Defined here as vendors with between $100M to $200M US in revenue. Tier 2 vendors generally have a narrower service offering, fewer locations, and more flexible business processes. They provide an appealing blend of stability and agility.
• Tier 3 vendors. Defined here as vendors with less than $100M US revenue. Tier 3 vendors often have a narrow service offering, frequently focusing on a single niche, from a single location. They often provide a high service level to small customers and can be very flexible. However, their small size can make them vulnerable to financial strains and resource constraints.

Organization size and vendor size. A rule of thumb in vendor selection is for buyers to choose a vendor similar in size to their organization. So large organizations often prefer Tier 1 vendors, mid-sized organizations Tier 2, and small organizations Tier 3. In fact, small organizations have shown that they are adept at locating specialized vendors and inventing new organizational structures to work with them. However, there are exceptions to this general principle, for example a Tier 3 niche vendor working with a segment of a large enterprise, or a division of a Tier 1 vendor successfully supporting a small enterprise.

Info-Tech Predicts

Offshore growth will continue at a rapid rate. Growth of offshore outsourcing has been very high since it started in the early 1990s. India saw 43% compounded annual growth between 1991 and 2007 (Source: NASSCOM Strategic Review) and other countries have seen similar growth rates in recent years. Although growth stalled during the economic downturn, as the economy rebounds, growth has resumed: Q4 of 2009 saw $19B US in new deals, a 54% increase over the previous quarter and 32% over the same quarter last year (Source: TPI). Projects that had been shelved are being dusted off and new projects associated with mergers and consolidation are emerging. Additionally, conservative budgeting means that managers are looking for a low cost way to get their projects done, something offshore providers can offer.

Emerging locations will mature. Client side desire for location risk mitigation and avoidance of wage inflation and turnover, together with a push from new vendors will result in continued maturation of locations outside of India. This will include local companies setting up or expanding operations as well as multinational and Indian-based firms expanding into new regions.

SME market will continue to grow. As collaboration technology improves and vendors develop niche competencies, the financial overhead associated with offshoring will decline and more SMEs will leverage offshore resources.

Key Takeaways

An offshore relationship may be in your future. With offshore IT services increasing their penetration of the outsourcing market, expect new opportunities to emerge in the future, some of which may appeal to your organization.

Recognize that the benefits of offshoring extend beyond cost reduction. While cost reduction is typical motivation for offshoring, focusing exclusively on achieving the lowest cost option can result in a number of problems. Choosing a low cost vendor can mean sacrificing strong governance practices, service levels, and/or innovative business processes. Focus on the additional benefits of offshoring beyond cost savings, such as the ability to gain access to expertise and to improve business agility through flexible staffing arrangements.

Even smaller IT departments can leverage offshoring. The benefits of application outsourcing are not reserved for large enterprises. Projects beginning at ten resources can provide adequate scale if a project is well managed.

Bottom Line

Driven by cost pressures and a desire for increased business agility, offshoring of IT services has seen consistent growth since the 90s that paused briefly during the global recession but is now rebounding. Both large and small organizations need to understand the environment that is driving this momentum, to better leverage its benefits and avoid its risks.

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Small and mid-sized organizations are especially at risk when disaster strikes, since few have the resources or knowledge to develop full-scale continuity plans. Often, first actions are directed toward the protection of physical property. But more important than an organization’s physical property is ensuring the integrity of its data, communications capabilities and the information technology infrastructure to support both – regardless of the circumstances surrounding a disaster.

Here are seven habits that CDW LLC (CDW), a provider of information technology (IT) solutions to business, government, and education, advises organizations adopt to ensure they are prepared for any business contingency and that they remain resilient in the event of unplanned interruptions. These habits can help organizations prevent costly downtime, reduce inconvenience to customers and minimize damage to an organization or agency’s reputation. These habits are provided by CDW’s team of technology specialists and systems engineers, who are experts in evaluating and designing technology solutions for businesses, government agencies, educational institutions and healthcare facilities.

1. Conduct a business impact assessment. Because even the most thorough disaster preparedness plan won’t be able to justify the cost of including every mission process – especially for small organizations with limited resources – it is important to inventory and prioritize critical processes for the entire organization. Organizations should tier data based on its importance to operations. For example, processes that need to be resumed within 24 hours to prevent serious mission impact, such as customer service delivery, or that will have major effect on stakeholders could receive an “A” rating, while those that need to be resumed within 72 hours could receive a “B” rating followed by those “C” functions that can be restored in more than 72 hours. In addition, several software packages can help an organization assess its disaster preparedness and map out strategies that fit the organization’s needs and goals.

2. Take steps to protect data. Aside from people, information is the single most critical asset for virtually any organization. Organizations should back up data frequently to ensure records are kept, and consider upgrading the backup equipment to a faster version to reduce the time it takes to complete a backup cycle. Automated, remote backup services are available from many vendors. Organizations should also store multiple copies of data off site and a long distance from the primary data center. Outsourcing this service may make sense for small and mid-sized organizations that do not currently operate in a suitable, alternative location.

There are a few different approaches to backing up data that are increasingly affordable for smaller agencies and institutions. They include: · Tape Rotation: Information on servers is copied to storage media (typically tapes) on a set schedule. These tapes are then removed to an offsite location for safe storage. This is the most basic approach to data backup.

Data Replication: Information on servers in one location is copied – either in real time or on a set schedule – to servers in another location. As a result, the data in one location has an exact mirror image in another location – often at a great distance. The off-site server then takes over operations if the primary server is damaged .

Appliance Backup: Like data replication, the information on servers in one location is copied – either in real time or on a set schedule – to a storage appliance in another location. This does allow for a mirror image of the data on the server, but does not include offsite facilities should the primary server infrastructure be destroyed.

Data Vaulting Facilities: Information on servers is copied to an on-site central depository, which is then replicated to an off-site data vaulting facility typically owned by a third-party organization Once data is backed up, organizations will need to carry out a practical and well-tested plan to retrieve the information.

The same IT architecture should frame both the organization’s disaster recovery site and the primary data center, reducing complications. If the organization uses a wide-are network (WAN), the Internet, an intranet portal and telephones to provide citizen services, the same infrastructure should be built at its backup facility, for example.

Organizations focus so much on protecting and backing up network server data that they often fail to take steps to ensure their employees can remotely access that data if they are unable to work in the office. Remote-access software, such as products provided by Citrix and Microsoft, can enable employees to access networked server or desktop information offsite.

3. Review power options

Organizations should add uninterrupted power supplies (UPS) for critical servers, network connections, and selected personal computers to keep the most essential applications running. In addition, cooling systems should be supported by backup generators. Computer rooms can heat up quickly if computers operate on backup power without adequate, precision cooling. Monitoring for heat and humidity also are essential in critical computer rooms.

Heat is the biggest threat to UPS battery life, and temperature increases can reduce the lifespan of network equipment by half – and also cause unplanned system interruptions when agency operations are most critical. Having a power backup system does not eliminate the requirement to regularly inspect and maintain the power infrastructure. System administrators should periodically ensure that automatic transfer switches are configured so that there is little lag time to disrupt UPS power to computer systems. At the same time, they should take the opportunity to conduct regular battery inspections and replacement. Like flashlight and smoke detector batteries, UPS systems need to be inspected before they are needed. Finally, if the system must stay operation, building redundancy into the power system is another proven means to ensure power system reliability and, therefore, network availability. Redundancy enables maintenance of a UPS module without affecting power to connected equipment. It also increases fault tolerance.

4. Identify and appoint a cross-functional preparedness team and a recovery team.

Organizations should pull together a cross-functional team from appropriate departments that can include computer operations, applications development, server and systems administration, facilities, key service departments, data security, physical security and network operations. This team can identify and prioritize critical processes, design the overall process for recovery, select an outside service provider, conduct tests, identify members of the preparedness team and document the plan. The cross-functional preparedness team will select the recovery team, which will participate in recovery activities after any declared disaster. While the recovery team can be similar to the cross-functional preparedness team, its members should not be identical, even within a small organization. Additional members should include the executive sponsor (e.g., CIO or COO), key stakeholder representatives (e.g., community liaison), and representatives from outside service providers.

5. Document, test and update the disaster preparedness plan.

The cross-functional preparedness team should document a disaster preparedness plan that clearly defines the role of each individual on both the cross-functional preparedness and recovery teams. Documentation should include updated configuration diagrams of the hardware, software and network components to be used in the recovery. The plan should include logistical details, including travel to backup sites, and even who has spending authority for emergency needs. This plan also should include lists of emergency contacts and instructions. Once complete, the plan should be tested to ensure that it will be accurate and effective in an emergency. The true value of a continuity plan can be assessed only if rigorous testing is carried out in a realistic environment. That means testing the plan in an environment that simulates the series of events likely to occur in an actual emergency. It also is important that the tests be carried out by the people who would be responsible for those activities in a crisis. While an organization is likely to make mistakes during such testing, it is best to experience, identify and address these errors well in advance of a real emergency. Because change is constant within most organizations, and because the organizations are increasingly dependent on information systems, it also pays to update the plan regularly. Products and services designed to help in the event of an emergency also change, as does their method of delivery. A business continuity plan must keep pace with these changes for it to be useful in the event of a disruptive emergency, and tests must be conducted regularly to ensure organizational preparedness.

6. Consider telecommunications alternatives.

Key to any organization’s disaster preparedness plan is a contingency plan for telecommunications. Alternative communications vehicles, including wireless phones and satellite phones, should be considered. Power for communications is just as important as it is for the rest of an organization’s IT infrastructure, so it is important to become familiar with the local telephone system’s emergency power capabilities and limitations. Organizations may want to investigate auxiliary power sources such as an uninterruptible power supply or battery back-up, either of which can be coupled with a surge protector. If on-premises telecommunications equipment uses software voice mail or a call accounting system, the software should be backed up regularly so valuable information about the system’s configuration is not lost if it goes down. Copies should be stored both on and off-site. In addition, various telecommunications services can help organizations quickly restore communications connectivity:·

If the agency uses an 800 number for critical functions such as order taking or citizen services, this number can be terminated, or rerouted to another telephone number. A plan should be in place for answering those calls as well

Call forwarding is an optional feature offered by the local phone company. A main telephone number can be forwarded to another office location, depending on anticipated call volume, or to an employee’s home. Calls can even be forwarded to cellular phones. Organizations may want to have call forwarding permanently installed on their main business telephone number so it can be easily activated in the event of an emergency

In an emergency, the ability to place long distance calls can be greatly restricted. To minimize disruptions, organizations should maintain relationships with multiple service providers, enabling access with one network if another is down

7. Form tight relationships with vendors.A strong relationship with hardware, software, network, and service vendors can help expedite recovery, as these vendor contacts often can work to ensure priority replacement of critical telecommunications equipment, personal computers, servers and network hardware in the event of a disaster. This is especially important for small- and medium-size organizations, which may lack the resources that larger companies can tap in an emergency.