managing risks when offshoring services including a practical indian experience - sajai singh
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J. Sagar Associatesadvocates & solicitors
Delhi | Gurgaon | Mumbai | Bangalore | Hyderabad
Managing Risks when Offshoring Services: Including a Practical Indian Experience
IFCLA Conference 2010
Helsinki, June 10, 2010
Sajai Singh Partner and Head of Technology
Practice
Offshoring
Offshoring describes the relocation by a company of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting
Types/Kinds of Offshoring
Production Offshoring
IT Services Offshoring
Innovation Offshoring
Offshoring from Europe
Offshoring as a Business Model
The continuous globalization of the economy has lead several enterprises to adopt Offshoring as a business model because of
the following benefit factors:
Access to cost-effective services
Can concentrate more on core business
Increase in profits, productivity, level of quality, business value, business performance
Can gain access to specialized, expert and skilled services
Faster deliveries to customers and improved customer satisfaction
Benefit from time zone advantages
Helps organizations gain a competitive edge in the market
Motivation factors for Offshoring
Positive Impacts of Offshoring
Destination for Offshoring
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Offshoring Strategy
Key Observations
Majority of outsourcing companies have corporate-wide
offshoring strategy
Offshoring of highly skilled innovation activities is new
strategic imperative
Service providers are adapting offerings to meet new
demands
Small and medium businesses are increasingly offshoring
Offshoring continued to grow despite downturn
New Strategy - Offshoring of highly skilled innovation activities
Engineering, research & development, product design,
software development
Key drivers: growth strategy; speed to market; domestic
shortages of qualified personnel
Main magnets: labor costs; talent availability; high levels
of expertise
Most common concerns: service quality; employee
turnover; operational efficiency; loss of managerial
control; data security
Flows to India: Scandanavia (65%); US and UK (50%)
Service Providers adapting Offerings
Smaller service providers are specializing in product
design, engineering, and R&D
India faces challenges due to wage inflation and worker
attrition
Russia and the Middle East (e.g., Egypt and Jordan) are
emerging new knowledge center clusters
Canada, Mexico and Central America are increasingly
popular destinations for product development
Companies prefer captive delivery model in China and
other countries where IP protection is weak
SME’s Increasingly Offshoring
Offshoring is no longer the domain of Fortune 1000; it has
been embraced by SMEs
SMEs find it difficult to compete for highly qualified
domestic talent
Time to market is important driver for SMEs
SMEs are more adept at identifying and accessing new
geographic talent clusters (e.g., Brazil, Egypt, Sri Lanka)
SMEs are sophisticated users of web-based collaboration
tools and prefer specialized service providers
Offshoring Growth continued despite Slowdown
Those who have already offshored; aggressively planning to
expand offshored activities
Many have aggressive plans to initiate new offshoring
initiatives
Companies with existing offshored activities seek
improvements by revamping internal processes, provider
selection, performance monitoring, best practice sharing
and renegotiating provider terms
Some plan to spin off captives to monetize assets in
exchange for long-term service contracts
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Offshoring to India
Benefits of Offshoring to India
India offers many advantages that make it the favorite of 82% of US software export market (Nasscom)
Large pool of computer literate and English speaking professionals
Well recognized Information Technology skills
Wide gap between personnel costs in India and developed countries
Work practices largely comply with ISO and SEI CMM standards. Three out of every four SEI-CMM 5 companies worldwide are located in India
Quality standards meet the approval of the world. India exports software to more than 95 countries
India has a stable political environment and pro-IT government Reliable satellite and submarine communication links facilitate
good broadband connectivity with the rest of the world
Weathering the Economic Storm
US Offshoring needs recently reduced by: - Decrease in corporate growth initiatives
- Reduction in domestic labor costs due to unemployment
Concerns for Indian Vendors:
- Focus solely on back-office operations
- Lack of client diversification
• Major Indian technology companies get at least 50% of revenue
from the U.S. and 20-30% from Europe
• Majority of revenues are from banking & financial services sector
Weathering the Economic Storm
Offshoring continued to grow in the areas of R&D, product development, media, health care, utilities, engineering (ESO) and legal (LPO) outsourcing
Opportunities for Indian offshoring firms during the slow down:- Acquisition opportunities in the US and Europe at low cost
- Acquiring laid-off technology talent from financial services sector
- Acquisition of niche outsourcing companies / vendor landscape consolidation
- Time to focus on integration work and standardization
- Flexibility in contract ‘term’ & other terms
Green Outsourcing
Environmental concerns are creating a green revolution worldwide
Green IT: reducing the harmful environmental impacts of computing- Inside vendor organization - increases savings in energy costs
- Outside IT as an enabler
- Opens market for energy efficient products
NASSCOM Initiative:- Making IT Green – from obligation to opportunity
- Making ‘Green’ happen through IT – cloud computing, video-conferencing, etc.
- Making Green Warriors - employees adopt green lifestyle
Dell Policy – “Go Green”- Delivering energy efficient projects
- Assisting companies in becoming green
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Risk Management
Barriers met on Offshoring Activities
Risks and Barriers faced when Offshoring
Some of the major barriers faced when offshoring may be
categorized as:
Operational Risks
Strategic Risks
Composite Risks
Miscommunication
Public Resistance
Security and Data Integrity
Wage Inflation
Managing Operational Risk
Operational Risks can be minimized by the following means:
Create joint knowledge repositories and deploy collaboration
mechanisms
Have a well defined Risk Matrix
Proper Transition Management
Good monitoring and controlling
Managing Strategic Risk
Strategic Risks can be minimized by the following means:
Build Transition Service clauses into the contract
Use multiple suppliers
Retain residuary capacity
Monitor and Control the Offshoring activities, on a stricter
basis
Managing Composite Risk
Observe the Extended Organizational Form (EOF):
The EOF bridges the strengths of both organizations by letting
the providers employees report to the buyer’s management
It allows companies to exert operational and strategic control
over their offshore operations without having to carry the
expenses on their balance sheets
In difficult times it provides a compelling rationale for
offshore services
Risk of Miscommunication
The following risks associated to miscommunication may be
minimized;
Language barriers and cultural differences can increase the
risk of miscommunication
Same words and expressions holding multiple meanings in
different cultures
Other Risks
Public resistance - Pressure from labour unions, anti-globalists
and some political figures may attempt to block the offshoring
process
Security and data integrity- At times the management by
staff in another country may be perceived or inherently less safe
than that is managed on a domestic basis
Wage inflation – The increasing demand for offshore services
may dive the wages up thereby nullifying the benefits of
offshoring
Enterprise Risk Management
Enterprise risk management is a process, effected by an
entity’s board of directors, management and other
personnel, applied in a strategy setting and across the
[extended] enterprise, designed to identify potential events
that may affect the entity, and manage risk to be within its
risk appetite, to provide reasonable assurance regarding the
achievement of entity objectives.
Custom
ers
The Extended Enterprise
ITO
BPO
Contract Manufacturer
ExtendedEnterprise
Supplie rs
Con
trac tors
Interm
e diarie s
Custom
ers
Enterprise Imperatives
Key Offshoring Compliance Risks
Industry Guidance/Regulations Money Laundering Permanent Establishment Product Safety/Recall Professional Codes Records Management SOX/Listing Requirements Security Breach Trade Sanctions Transfer Pricing VAT/GST
Antitrust/Competition Law Codes of Conduct Codes of Social Responsibility Customs/Import Data Protection/Privacy Employment Environmental/Climate Change Export Controls FCPA/Bribery Foreign Investment Controls Foreign Exchange Controls
Reducing Risk …
Impact
Hig
h
LowLikelihood
High
Low
Controls, Communication and Monitoring
Requires Good Governance
Disaggregating Compliance Responsibilities
Other Risks to Assess in India
Geopolitical Factors
- Infrastructure Issues
- Regulations for vendors
- Legal environment
- Political stability
Manpower Quality
Business Value
- Training and travel costs
- Time concerns
Intellectual Property Protection
- Theft by employees, hackers, errors, negligence or espionage
Mitigating Risk in India
Conduct Due Diligence Complete a Risk/Benefit Analysis Negotiate a thorough Contract – flexibility is key Create an Emergency Response Plan Perform Routine Audits Learn who is performing the work and where the work is
being done Remember cultural barriers (i.e. Indian vs. American
communication of “yes” and “no”) If possible, travel to India to observe facilities and meet
face to face
Future for Indian Vendors Increase in work related to customer strategy Become experts in transforming businesses, not simply being a
passing sourcing entity
Sajai Singh
Partner and Head of Technology PracticeJ. Sagar Associates 2 Frontline Grandeur, 14 Walton Road, Bangalore 560 001, Karnataka, India
Telephone # (+91-80) 435 03627Facsimile # (+91-80) 435 03617Mobile # (+91) 98450 78666
Email : [email protected]
THANKS FOR YOUR ATTENTION…