managing risks when offshoring services including a practical indian experience - sajai singh

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J. Sagar Associates advocates & 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

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Page 1: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 2: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 3: Managing risks when offshoring services  including a practical indian experience - sajai singh

Offshoring from Europe

Page 4: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 5: Managing risks when offshoring services  including a practical indian experience - sajai singh

Motivation factors for Offshoring

Page 6: Managing risks when offshoring services  including a practical indian experience - sajai singh

Positive Impacts of Offshoring

Page 7: Managing risks when offshoring services  including a practical indian experience - sajai singh

Destination for Offshoring

Page 8: Managing risks when offshoring services  including a practical indian experience - sajai singh

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Offshoring Strategy

Page 9: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 10: Managing risks when offshoring services  including a practical indian experience - sajai singh

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%)

Page 11: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 12: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 13: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 15: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 16: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 17: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 18: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 19: Managing risks when offshoring services  including a practical indian experience - sajai singh

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Risk Management

Page 20: Managing risks when offshoring services  including a practical indian experience - sajai singh

Barriers met on Offshoring Activities

Page 21: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 22: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 23: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 24: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 25: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 26: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 27: Managing risks when offshoring services  including a practical indian experience - sajai singh

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.

Page 28: Managing risks when offshoring services  including a practical indian experience - sajai singh

Custom

ers

The Extended Enterprise

ITO

BPO

Contract Manufacturer

ExtendedEnterprise

Supplie rs

Con

trac tors

Interm

e diarie s

Custom

ers

Page 29: Managing risks when offshoring services  including a practical indian experience - sajai singh

Enterprise Imperatives

Page 30: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 31: Managing risks when offshoring services  including a practical indian experience - sajai singh

Reducing Risk …

Impact

Hig

h

LowLikelihood

High

Low

Controls, Communication and Monitoring

Page 32: Managing risks when offshoring services  including a practical indian experience - sajai singh

Requires Good Governance

Page 33: Managing risks when offshoring services  including a practical indian experience - sajai singh

Disaggregating Compliance Responsibilities

Page 34: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 35: Managing risks when offshoring services  including a practical indian experience - sajai singh

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

Page 36: Managing risks when offshoring services  including a practical indian experience - sajai singh

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…