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Companies thinking about using offshore outsourcing need to consider more than just cost savings.

Mary Hayes Weier, Contributor

October 17, 2003

4 Min Read
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How much hands-on management is required depends on the project and the company. Guardian's internally staffed project-management offices, based in the United States, deal with offshore vendors. Guardian managers visited the Indian site just once but have an outside audit firm make regular visits. Sony places a lot of importance on person-to-person communication and hands-on oversight because of the customer interaction involved in outsourcing call-center functions.

Picking the right vendor is crucial. Mehta of Metropolitan Life, which outsources through a U.S. company, Cognizant Technology Solutions Corp., says handing over work to an offshore vendor requires going far beyond the typical request-for-proposals. "You have to look at the vendor's cultural fit and its reputation," he says. At MetLife, for example, it's very important to be associated with a company that treats its employees well, he says. "We didn't want to be associated with a sweatshop."

Mehta says businesses should consider even soft issues such as whether there's good chemistry among the managers of each company. "In a vendor relationship, you hammer out the best contract you can negotiate and the best pricing and then hold each other hostage," he says. "But in a partnership, the contract should never have to come out of the drawer it was filed in." Mehta recommends spending time with management so there's a relationship as well as a process to lean on during a crisis.

So far, the most-popular IT tasks to move offshore have been routine or predictable software work. Offshore companies want to move up the value chain to strategic-consulting and business-process outsourcing (see story, "Opportunity On The Line"). Yet Meta analyst Davison says some of his clients have bypassed offshore outsourcing because they believe their business processes change too quickly and need more flexibility than an outsourced relationship can deliver. "A good candidate for offshoring is legacy code," he says. "It's very stable and doesn't require a lot of changes. The knowledge transfer is doable." A poor candidate might be Web content, Davison says. "Most companies frankly don't have [solid] business strategies for the Web, and there can be an uncomfortable amount of change."

chartSecurity is another reason companies pass on offshore outsourcing. And for those that do or plan to go offshore, security of data or physical assets is the third most-often-cited concern, according to the information Research survey (see chart, left). Surely, poor security measures can cost a company money and reputation, whether it's a breach that fosters customer distrust or a catastrophic event that affects data or processes.

NeoIT, a consulting firm that helps companies find offshore vendors, advises that businesses view security and business-continuity differently when sending work offshore. There are standard assessments to consider, such as the offshore firm's plan for business continuity, data recovery, and data security, but also some things unique to overseas work. For one, insurance coverage should go beyond standard liability to insure electronic information. Also important is the protection of intellectual-property rights. Companies should evaluate a country's track record on things such as intellectual property and piracy, and compare the laws on the books with their actual enforcement. Thorough background checks are a must for those dealing with sensitive information, and around-the-clock access control and personnel security need to be in place. "A third-party security organization could add a lot of value by conducting a health check on offshore suppliers," neoIT CEO Atul Vashistha says.

Some companies decide outsourcing isn't worth the risk, even if they need global development. For Hewitt Associates LLC, a human-resources outsourcing firm that handles personal data such as salaries and health records, security is a legal as well as a business requirement. Hewitt did some application development through Indian contractors, but it saw the need to increase its offshore development efforts that included more client data. So it decided to hire Hewitt employees in India. "When you outsource, you have less control than if they're your own employees," says Dan Josephites, chief information security officer. "The idea of giving [offshore employees] access to client data is more palatable." Josephites says the security standards at Hewitt's new Indian development facility will be no different than those at the one in Long Beach, Calif. After all, he notes, Hewitt handles data for European clients, and Long Beach is offshore to them.

Offshore outsourcing can be a great way to cut costs, and it can even improve quality when it forces companies to tighten their internal-development processes. But unless companies spend the time to evaluate all the risks and whether it's a good fit for their individual circumstances, offshore outsourcing can be a lesson in lost time, money, quality, and productivity.

Illustration by Jonathan Weiner

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