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Offshoring Information Technology
Sourcing and Outsourcing to a Global Workforce



The decision to source software development to an overseas ¬rm (offshoring) is fre-
quently looked at in simple economic terms “ it is cheaper. In practice, however, off-
shoring is fraught with dif¬culties. As well as the considerable challenge of controlling
projects at a distance, there are differences in culture, language, business methods, pol-
itics, and many other issues to contend with. Nevertheless, as many ¬rms have discov-
ered, the bene¬ts of getting it right are too great to ignore. This book explains
everything you need to know to put offshoring into practice, avoid the pitfalls, develop
effective offshore strategies and effective working relationships. Split into three parts:
offshoring fundamentals; management competencies; and a section on broader issues
including a unique look at the viewpoint of an outsourcing provider. Written for CTOs,
CIOs, consultants and other IT executives, this book is also an excellent introduction
to outsourcing for business and MIS students.

Erran Carmel is an Associate Professor at the Kogod School of Business at American
University in Washington DC, USA.

Paul Tjia is a Senior Consultant and founder of GPI Consultancy in Rotterdam,
The Netherlands.
Offshoring Information
Technology
Sourcing and Outsourcing to
a Global Workforce


Erran Carmel
Kogod School of Business, American University, USA



Paul Tjia
GPI Consultancy, The Netherlands
©¤§ µ®©© °
Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo

Cambridge University Press
The Edinburgh Building, Cambridge  µ, UK
Published in the United States of America by Cambridge University Press, New York
www.cambridge.org
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© E. Carmel and P. Tjia 2005


This book is in copyright. Subject to statutory exception and to the provision of
relevant collective licensing agreements, no reproduction of any part may take place
without the written permission of Cambridge University Press.

First published in print format 2005

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Cambridge University Press has no responsibility for the persistence or accuracy of
µ¬s for external or third-party internet websites referred to in this book, and does not
guarantee that any content on such websites is, or will remain, accurate or appropriate.
Contents



List of contributors ix
Foreword xiii
Preface xvii
Acknowledgments xxiii



Part I The fundamentals 1

1 The offshore landscape 3
Historical context and lessons for the future 5
The Offshore Stage Model: progression and diffusion 8
Strategic advantages 10
Offshore challenges 12
What is done offshore? 13
The demand for offshore work 18
The offshore supply 24
IT-enabled services 28
Concluding comments 30

2 Offshore economics and offshore risks 31
Labor arbitrage: ¬nding the lowest wages 31
Transactions Costs and Total Savings from Offshore Strategy 34
Extra offshore costs 36
What is the bottom line? Does offshoring lead to cost savings? 40
Case study “ Calculating the extra offshore costs at a giant
American corporation 41
Offshore risks 44
Concluding lessons 50

3 Beginning the offshore journey 51
Phase 1: Laying the foundation 53
Phase 2: Identifying the providers 60
vi Contents


Phase 3: Assessing and selecting the provider 64
Concluding lessons 68

4 The offshore country menu 69
Three tiers of software exporting countries 69
What country to choose? 71
Case study “ Sport Systems Inc. shops creatively for an offshore
provider 77
Country sketches: the Big Three and eight more 79



Part II Managerial competency 91

5 Offshore strategy 93
Cost-reduction strategy 94
Leveraging offshore strategically: beyond cost savings 96
Strategic perils 101
Strategic collaboration: offshore business models 103
Case study “ GE in India 107
Concluding lessons 111

6 Offshore legal issues 112
Key legal considerations in offshoring 112
Principal deal structures 119
Agreement structures 121
Key service agreement terms 124

7 Managing the offshore transition 130
Knowledge transfer 130
Case study “ Knowledge transfer by “Eating Your Own Dog Food” 133
Change management 135
Case study “ The ups and downs of building support for offshoring
at a giant US corporation 137
Governance in offshore outsourcing 140
Concluding lessons 148

8 Overcoming distance and time 149
We like to be close 149
Understanding the problems of distance 151
Formalize and informalize 154
Managing time differences 160
Collaborative technology 164
Case study “ Intel™s vision for new collaboration technologies 166
vii Contents


Selecting the right people for distributed collaboration 170
Distance considerations in organizational design 171
Concluding lessons 174

9 Dealing with cross-cultural issues 175
What is culture? 175
Cultural orientations 176
Does culture matter? 180
Technology and cultural differences 184
Steps to improve cross-cultural communication 185
Case study “ Why the project was late: cultural miscommunication
in an Indian“American collaboration 187
Case study “ In a Russian sauna with the Dutch manager 190
Case study “ Offshoring usability to India 193



Part III Other stakeholders 197

10 Building software industries in developing nations 199
Choosing a national strategy 200
Why developing nations should invest in building a software export
industry 207
Principal success factors 210
Concluding lessons 218

11 Marketing of offshore services: the provider perspective 219
Lessons from marketing strategies of the largest offshore providers 221
The ¬rst steps 224
Local marketing activities 229
Dealing with prospective clients in business discussions 232
Country branding “ marketing your country 236
External assistance with market entry 238
Concluding lessons 240

12 Offshore politics 241
The immediate policy issue: job loss and wage decline 241
Reactions to the backlash 242
The longer-term policy issues 245
Concluding lessons 248
References 249
End notes 257
Index 273
List of contributors




Principal authors

All chapters and cases were written by Carmel and Tjia unless indicated otherwise.
Erran Carmel is an Associate Professor at American University™s Kogod School of
Business in Washington D.C. He co-founded the school™s program in Management of
Global IT. He is the author of the successful 1999 book Global Software Teams:
Collaborating Across Borders and Time Zones. He has also written over 70 articles,
reports and manuscripts. He consults to a variety of organizations on global software
development and is often asked to speak at industry and professional groups around the
world on this subject. He has been visiting professor at University College Dublin
(Ireland) and Haifa University (Israel).

Paul Tjia is a Senior Consultant and founder of GPI Consultancy in Rotterdam, The
Netherlands. He has a background in information technology (IT) and cultural anthro-
pology. He has assisted many clients embarking on the offshore journey with research,
feasibility studies, country and partner selection, and due diligence. He also conducts
intercultural training and promotes offshoring by organizing seminars and study tours.
For offshore providers, he arranges workshops on the marketing of offshore services.
He writes articles and reports, and often speaks at offshore industry events. He can be
contacted at info@gpic.nl




Biographies of contributors

Kaladhar Bapu is the Manager of Usability Engineering Group at Cordys R&D, India,
Asia™s best equipped usability laboratory. Prior to Cordys, while at Baan, he was one of
the very ¬rst to bring usability to India. As a visiting faculty he has been spreading usabil-
ity awareness among design and technology students at institutes like the Industrial
Design Center, IIT Bombay, and IIIT Hyderabad. He founded “usabilitymatters.org”,
x List of contributors


a non-pro¬t organization to make the common man more sensitive towards usability and
design. He co-authored the case about offshoring usability that appears in Chapter 9.

Erik Beulen, PhD, is an International Business Development Manager with Atos
Origin based in The Netherlands. He is also af¬liated with Tilburg University as an
Assistant Professor. His papers have been published in academic journals including the
Communications of the AIS and the Proceedings of HICSS and ICIS Conferences. He
is the author and co-author of various book chapters on outsourcing. He co-authored
Chapter 7, Managing the Offshore Transition.

Rebecca S. Eisner is a Partner in the International Law Firm of Mayer, Brown, Rowe
& Maw. Her practice focuses on complex global and offshore technology and business
process outsourcing transactions. She also advised clients in strategic alliances, joint
ventures, licensing, technology development, communications agreements, Internet
commerce, data privacy and data transfer issues. She is a frequent writer and speaker on
outsourcing, licensing and e-commerce topics. She is also recognized by Chambers
Global “ The World™s Leading Lawyers in the area of IT, Communications and Out-
sourcing (2003“2004). She wrote Chapter 6, Offshore Legal Issues.

Julia Kotlarsky is a Lecturer in Information Systems at Warwick Business School,
UK. She is completing a PhD degree in Information Systems at Rotterdam School of
Management, The Netherlands. Julia grew up in Russia and holds an MSc degree in
Industrial Engineering and Management at the Technion, Israel. Her research interests
revolve around social and technical aspects of globally distributed software develop-
ment: coordination, knowledge sharing, social networks, and e-collaborative technolo-
gies; as well as component-based design and innovation in software development. She
wrote the case about Russian cultural differences that appears in Chapter 9.

Subramanian Ramanathan has been involved in offshore and distributed software
development for over 17 years. As General Manager and Director of Baan-India, he
was responsible for setting up and operating Baan™s product development center in
India with over 800 software engineers between 1987 and 2000. He later established
the development center for Vanenburg group in India (now called Cordys R&D). He is
currently the Managing Director of Vanenburg IT Park, Hyderabad, India. He is also
associated with the Hyderabad Software Exporters Association. He co-authored the
case about offshoring usability that appears in Chapter 9.

Lu Ellen Schafer is the Executive Director of Global Savvy, based in California.
Global Savvy is a consultancy that works with international companies to bridge the
cultural gaps between clients and outsourcing partners in India, China and other
locations around the globe. It has trained over 11,000 individuals to date from a
range of the largest technology companies including Cisco, HP, IBM, Oracle, Accenture,
Infosys, Wipro, and HCL. Global Savvy™s work has been written about in the
xi List of contributors


New York Times and the Economic Times of India. Lu Ellen is a frequent speaker at
international outsourcing conferences. She wrote the case about cultural miscommu-
nication that appears in Chapter 9.
Peter Schumacher is the founder, President, and CEO of the Value Leadership Group,
based in Germany. Peter is an internationalist, having lived and worked in Europe, the
USA, and Asia. Early in his career he built a logistics business in Japan and Asia from
the ground up. He later worked at Perot Systems in the USA, London, and Munich. He
has managed several mergers and acquisitions projects and was the CEO of a European
leasing business. Peter has been involved with offshore strategy and operational issues
since 1999. He holds an MBA from New York University. He co-authored Chapter 5,
Offshore Strategy.
Johan Versendaal is an Assistant Professor at Utrecht University, Institute of Information
and Computing Sciences, in The Netherlands. He is the co-architect of the university™s
newly developed Business Informatics program. His research interests include business“IT
alignment, product software development, and human factors and organizational issues
of (e-)procurement. Prior to joining Utrecht University, he was the Product Manager at
Baan for the purchasing applications, and manager of Baan™s usability team. He also
worked as a business and usability consultant for Atos Origin. Johan holds a PhD from
Delft University of Technology. He co-authored the case about offshoring usability
that appears in Chapter 9.
Foreword

Offshoring Information Technology is an appealing book. Appealing not only because it
deals with a topic of growing contemporary signi¬cance but also because it does so with
lucidity, comprehensiveness, thoughtfulness and insightfulness. Over the last decade,
offshoring of IT has become a mainstream business phenomenon and, as a result, man-
aging offshoring has emerged as a critical business competence for ¬rms. Erran Carmel
and Paul Tjia in this book present a comprehensive treatment of IT offshoring and
discuss the competencies required to successfully manage it. Dexterously guiding the
readers through the offshore IT landscape and navigating through a range of pertinent
topics, this book presents a well-crafted body of knowledge and guidelines to succeed
with offshoring of IT. Recounting my experiences over the last 9 years or so, my imme-
diate reaction to this book was: “Why the hell was this book not available a few years
ago?” Had it been available, I thought, it would have positively in¬‚uenced productivity
and performance in offshore IT work “ and saved sleepless nights for many people!

Circa 1995: The phenomenon of offshoring was starting to gain prominence. Attracted
by its low cost structure and the ability to access a global resource pool, many multi-
national companies had begun leveraging the bene¬ts of offshore IT either through their
own subsidiaries or from third-party suppliers. Lured by its promise, I made the tran-
sition into the growing IT industry in 1996 to join a subsidiary of Siemens in
Bangalore, engaged in communications software development. My job there was to help
improve the performance of projects and the resultant quality of software “ aspects cru-
cial to establish credibility of an offshore IT organization. Being new to offshore work
with no aid available to rely on, I was obviously overwhelmed by the complexities and
challenges of the globally distributed work. I struggled hard to successfully deliver on
my objectives amidst cultural and time zone differences, geographical separations, and
diverse stakeholder expectations.
However, when I took up a new position in 1997 as a member of the management
team that was responsible for setting up Lucent Technologies product software R&D
center in Bangalore, I received my ¬rst full-blown exposure to the world of offshore
development and its various nuances. The challenge at hand was to establish a best-in-
class offshore software development organization while beating the barriers of time
and distance and simultaneously balancing the various considerations (for instance,
economic, technical, legal, cultural, organizational and managerial) involved in off-
shore work. As a general manager, my job also required me to engage with third-party
service providers. There were times when the work I managed spanned seven countries!
xiv Foreword


With no account of proven practices available, I was forced to meet complexities head-
on, devising my own ways and learning through perpetual re¬nement the art of man-
aging offshore work.

Circa 2005: Offshoring of IT is now an irreversible trend and is regarded as a business
necessity. Companies across the globe are capitalizing on offshoring to achieve business
competitiveness. In the last 3 years or so, offshore IT has assumed new forms to include
offshoring of business processes and even R&D. Offshoring of IT is intensifying and
¬rms are strategically leveraging offshore capability and the structural cost savings,
while also focusing on deriving operational innovation. Robust models and quality and
project management processes are employed to unleash the bene¬ts of offshore IT, such
as the Global Delivery Model of Infosys Technologies “ the company where I currently
work as an associate vice president. However, the same complexities and challenges still
exist, some even growing in their magnitude and assuming new dimensions. Although
many re¬ned and proven managerial and organizational practices, and technological
tools and infrastructures, are now available, the challenges and constraints involved in
managing offshore IT are far from gone. The art of managing offshore IT work is still
evolving.
I consider Offshoring Information Technology an important book in many ways.
First of all, IT offshoring is part of the larger phenomenon of globally distributed work
and while much is understood about globalization of work in general, the body of
knowledge on IT offshoring is rather scarce. In this book, Carmel and Tjia provide
a structured understanding of the phenomenon of IT offshoring, discuss its various
nuances and offer effective practices to succeed with offshoring of IT. As a practi-
tioner-scholar, I have been researching globalization of R&D and software develop-
ment for about ¬ve years now and I am impressed with the systematic and pragmatic
coverage of offshore IT Carmel and Tjia have crafted. To the best of my knowledge,
this is also the ¬rst comprehensive source of knowledge on IT offshoring.
Secondly and very importantly, this book provides practical insights and guidance for
managers to help them acquire or re¬ne the competencies required for effectively lever-
aging IT offshoring. Even though my stints in different organizations in various capac-
ities and settings have allowed me to gain some experience in managing offshore IT,
I ¬nd this book containing pearls of wisdom. Carmel and Tjia discuss a range of impor-
tant topics for embarking on and managing offshore IT work. Among other things, this
book addresses economics and risks of IT offshoring, assessment and planning for off-
shoring IT, offshoring strategy, and transition management. It also offers advice on how
to alleviate the issues arising out of distance, time zone differences, and cultural diver-
sity in addition to discussing some typical contractual and legal considerations. Notably,
the book also presents national policy-level implications for capitalizing on the off-
shoring wave in addition to offering perspectives on marketing of offshore IT services.
xv Foreword


Interestingly, there is also a chapter devoted to discussing the political dimension asso-
ciated with offshoring.
Both as an executive operating in the midst of accelerating pace of offshoring and as
a practitioner-scholar deeply interested in the area of globally distributed work, I believe
this book greatly enhances our understanding of a jigsaw puzzle called IT offshoring
and equips us well to deal with it. In recording my appreciation for this valuable book,
I am also quite hopeful that it will signi¬cantly illuminate the people engaged in the
business of offshoring IT.

Bangalore, India Deependra Moitra
21 January 2005 Associate Vice President
Infosys Technologies Limited
Preface

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