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More control
More strategic

Figure 5.3 Offshore collaboration strategies.


The “Build” strategy (really a build/own strategy) represents a larger investment
upfront and longer time-to-bene¬ts. It is riskier in the short term, but the ¬rm enjoys
greater control which is paramount if core competencies are to be offshored, or if intel-
lectual property leakage has serious consequences. The “Build” strategy is superior in
managing knowledge transfer, when creating the proper offshore organizational cul-
ture is deemed important. Finally, if ¬rms are leveraging offshore strategically, then
they can attain new revenue sources from the “Build” option, by spinning off their
units or spinning-off products.
The disadvantages of “Build” are in longer lead times, bureaucratic and corruption-
related hassles to set up and run offshore operations, and the need to recruit and hire.
Small ¬rms are likely to be hurt by attrition as their engineers are lured to larger ¬rms
that are able to offer more prestigious work and, often, higher wages. Firms have two
“Build” options: acquire an existing ¬rm offshore and then grow it, or “green¬eld” “ build
a subsidiary from the ground-up, sometimes by securing the land and constructing the
building.
The “Build” option has traditionally been practiced by large ¬rms that have the
resources and experience. No more. Small software ¬rms are getting into the act, urged
on by venture capitalists, and facilitated by ethnic ties of the diaspora, as well as cheap
communications. We have come across many startups with Indian executives, Israeli
executives, and now Chinese executives that build a green¬eld site. They draft a friend
back home, who leases an of¬ce, links the computers, and hires the human resources
required. Within a few months, a global technology company is created.
Large ¬rms often hedge on the “Buy-versus-Build” decision and choose both. For
example, Cisco, in its India operations, has both captive centers (“Build”) and provider
relationships with HCL, Infosys, and Wipro (“Buy”). GE, one of the largest foreign
players in India, described later in this chapter, has similarly built a portfolio of units
inside and outside its corporate boundaries.
105 Offshore strategy


Hybrids and partnerships
The pure “Buy” and pure “Build” strategies are both imperfect in some respects, lead-
ing many companies to experiment with countless hybrid approaches. Hybrids are
used for a number of compelling reasons: in order to reduce the risks for one or both
of the partners; when one or both lack resources (such as human resources); in order to
accelerate development; or, in order to create a long-term relationship. (We return to
these themes in Chapter 6, devoted to legal issues.)
The principal offshore hybrids are presented here.


Joint venture
The partners in a joint venture create a separate, independent legal entity in which both
have equity. In the case of offshore IT work, the foreign ¬rm usually ¬nds a local ¬rm
as a partner. The local ¬rm is familiar with the local conditions, has experience with
local recruitment, and can set up operations relatively quickly. For example, Indian-
based Zensar Technologies entered the Chinese market by forming a joint venture with
Shenzhen-based Broadengate Systems. A joint venture is a good structure for sharing
the ¬nancial risks and rewards between the two sides. The disadvantage in this kind of
marriage is that each partner comes with different objectives and different organiza-
tional cultures.


Alliance
An alliance is also created when partners combine some resources and capabilities, but
not in a separate entity like a joint venture. For example, IBM and Indian ¬rm i-¬‚ex
entered into an alliance, in 2003, in which i-¬‚ex develops its banking products on the
IBM platform, Websphere. On its part, IBM committed to help market i-¬‚ex products.
Alliances tend to be fuzzier than joint ventures. Large global corporations tend to have
hundreds (sometimes thousands) of alliances, some of which are labeled strategic
(because they strive for some kind of competitive advantage) while most are not con-
sidered strategic. Companies are reluctant to transfer leading-edge projects to the
alliance. In one study, only 13% considered alliances as a signi¬cant “technology
source.”10 Alliances are less common in offshoring than other hybrids.


Offshore development center (ODC)
This hybrid model is a “pure” offshore era distillation. An offshore development cen-
ter is a dedicated offshore center established by a provider dedicated to one client,
where the client may supply some of the specialized hardware and software. Even
though the ODC may be owned by the provider; the workforce, security, and other
resources are often segregated just for the one customer. Also, slack resources may be
taken up by the client, not by the provider.
106 Managerial competency


Turn-key also known as Build-Operate-Transfer (BOT)
In this hybrid, the client hires a provider to set up the development center and get it run-
ning with the intention of taking full ownership after 3 years or more. The client ¬rm is
making a strategic choice to reduce its risks by building organizational experience and
capabilities ¬rst before taking over the offshore center. The client also bene¬ts from
faster setup time versus the 12“18 months to build it own “captive” subsidiary. In
exchange for the risk reduction provided by the provider, the client is paying a higher
price. BOT has been popular in India; for example, Aviva, a UK insurer, wanted to ramp
up its IT-enabled services quickly in 2004 and set up three different BOTs with three
different Indian providers. Recently, Russian ¬rms have entered this area. For example,
Cadence, the large US semiconductor design software ¬rm, contracted with one of the
major Russian ¬rms, Mirantis, to establish its Moscow R&D center using BOT.

Staff augmentation
In American business jargon this is a form of contracting for temporary services. The
provider supplies labor and manages the standard human resource issues of recruit-
ment, training, and bene¬ts. When offshore companies supply staff augmentation, the
workers tend to be foreign staff, often from India, who ¬‚y to the client™s site using a
special work visa, and work at the client site for several months. The client often pays
less for this foreign staff than for local professionals. Staff augmentation can be a tran-
sitional approach to allow the client to build its experience with the provider, transfer
knowledge to the provider™s personnel, and generally become more comfortable with
offshoring. In practice, some client ¬rms rely on staff augmentation for extended peri-
ods of time, often years. This has led to some controversy. Such usage of cheap foreign
labor has been the subject of some derision, sometimes called body shopping.
US-based professor Ron Hira, who has spoken critically of some offshoring practices,
calls staff augmentation, tongue-in-cheek, “onsite offshore outsourcing.”
In summary, what do most ¬rms prefer: Buy, Build, or Hybrid?11 We have seen some
questionable data on this question. Nevertheless, it is safe to say that the majority of
those offshoring are outsourcing, therefore they are using Buy. A useful benchmark is
to look at the broader picture of global R&D including manufacturing, pharmaceuti-
cals, and other industries. Companies spend 15“25% of their overall R&D budget on
technology outsourcing while only 5“10% on hybrid collaborations (such as joint ven-
tures and alliances), although the value may be higher for hybrids because of their
strategic importance.12

Multiple providers versus provider partnership
One of the perils of outsourcing is that the client may become too dependent on one
major supplier and may be “taken hostage.” In offshore outsourcing, in which there are
thousands of eager providers to choose from, foreign clients have tried to capitalize on
107 Offshore strategy


their bargaining power by contracting with more than one provider. This multi-
provider approach also coincided with the experimentation stage that many ¬rms have
journeyed through (Stage 2 of the Offshore Stage Model depicted earlier in this chapter).
Generally, it is the larger companies which offshore to a cadre of two, or three, or
several offshore providers.13 The managers dealing with these providers become deal-
makers, squeezing their suppliers and bargaining for lower bids. More importantly,
clients can threaten providers with termination, since the switching costs are low, given
that several other providers are already entrenched in the client™s business and can
quickly take over the slack.
In the early outsourcing era, clients were more likely to view their relationships with
suppliers as a “win“lose” relationship. That is, they tried to maximize their bene¬ts
from low bids without taking into account the provider perspective. The problem with
such an extreme win“lose view stems from the issues discussed earlier in this chapter,
namely, that the offshore activities need to go beyond mere cost reduction.
In this respect, both clients and major Indian providers are becoming more astute.
The offshore outsourcing relationship has come to be viewed as a partnership. The
label “partnership,” rather than the more traditional labels of vendor/supplier/provider,
has taken on a mantra-like signi¬cance in the offshore outsourcing business. Beyond
the slogans, partnerships can be melded by creative ¬nancial agreements. The ¬rst is
the increase in creative incentive-based contracts. These are performance-based con-
tracts that give the provider a stake in the client™s business outcome (the Balanced
Scorecard in Chapter 7 addresses this). The second ¬nancial mechanism is an equity
holding by one partner in another. For example, Indian-based provider Tata
Consultancy Services (TCS) has even invested ¬nancially in several of its own clients.

Case study GE in India

“India™s treasure is its intellectual capital,”
Jeff Immelt, Chairman and CEO of GE14
Among major US ¬rms, GE has been an offshore trend-setter.15 While large tech-
nology ¬rms, such as IBM and Intel, have been more active in offshoring their
software work, GE, a more diversi¬ed ¬rm, is an unusual case. This American con-
glomerate is one of the largest corporations in the world, with sales in 2003 of 133
billion USD and a 2004 market capitalization of 340 billion USD. GE has 31 sepa-
rate business divisions, in services, manufacturing, and high technology, each of
which is required to be one of the biggest in its industry. GE has been particularly
successful in its global immersive strategy, in which its international units cross-
pollinate each other in supporting cross organizational functions, whether they are
in IT, software R&D, back-of¬ce functions, manufacturing, or other technology
R&D functions, such as materials science.
108 Managerial competency



What really sets GE apart from other multinationals with signi¬cant offshore
operations is not the speci¬c activities GE performs offshore, but the company™s
multi-faceted strategic intent. Particularly in India, GE has leveraged not just the
country™s low labor costs, but also the talents available in its workforce. GE found
India™s workforce easy to integrate into the global organization “ a result of the
combination of India™s strong education system, British colonial heritage, and wide-
spread ¬‚uency in English.
GE was earlier and more aggressive in globalizing its internal operations (includ-
ing IT) than most large ¬rms. Jack Welch, the revered former CEO, is said to have
established the 70:70:70 rule; 70% of all IT work should be outsourced, of which
70% is to be outsourced to preferred providers, and of that, 70% should be at the
provider premises to reduce costs. It seems that many in the offshore industry
replaced the last clause with “in India”.
The 70:70:70 rule became part of GE™s performance review and became embed-
ded in GE culture. This goal has been copied, emulated, and pointed to by many
managers in the years since then. Even more important, GE™s executives and man-
agers, who learned the offshore strategy under the tutelage of Jack Welch, have been
hired into in¬‚uential positions at other important US ¬rms, and have implemented
aggressive offshoring strategies at these ¬rms. Kathy Lane, former IT chief for GE™s
oil and gas division, became CIO at Gillette, a US consumer goods manufacturer. At
her ¬rst managerial meeting at her new ¬rm, she inquired about the company™s off-
shore strategy. When the response was that there was no offshore strategy, she
reportedly used strong language to show her displeasure. Gary Wendt, former head
of GE Capital, founded a dot.com era insurance ¬rm and set up all back-of¬ce oper-
ations in India. While the insurance ¬rm itself collapsed, the back-of¬ce operations
were ef¬cient and productive enough to stand on their own, and eventually became
EXL, a successful IT-enabled services ¬rm.
GE™s odyssey is particularly noteworthy in India. As GEers like to tell it, they
have been in country for a century. GE entered India in 1902 to build India™s ¬rst
hydroelectric plant. But the period of interest begins much later: in the late 1980s
GE began to grow its operations in the country, declaring in 1992 that India was “a
priority country.” By the mid-1990s GE had several divisions with operations in the
country (services, manufacturing, R&D), making everything from medical diagnos-
tic systems to fan belts. Today the majority of GE™s businesses have a presence in
India, either through a joint venture, a wholly owned subsidiary, a strategic alliance,
or a business development and customer support presence.
The John Welch Technology Center was established in Bangalore in 2000 with a
facilities investment of 80 million USD including state-of-the-art laboratories and
recreational facilities, all in a university-like campus. The center is GE™s second largest
R&D center and the largest outside the US. Its director reports to the Vice President of
109 Offshore strategy



Corporate Research. In 2003, it housed 1800 engineers and scientists, performing tasks
for the entire range of GE™s businesses. The center generated 95 patents within 3 years
of its opening. Originally envisioned to perform R&D only for GE Plastics, the mission
was later expanded to many areas, including advanced mechanical engineering, mate-
rials, imaging, micro- and nano-structures, chemical engineering and modeling, poly-
mers and synthetic materials, e-engineering, IT, and e-commerce. “This was the natural
location for us to go outside the US,” said Scott Bayman, President and CEO of GE
India. “It is very dif¬cult to get this kind of critical mass in any other country.”16
IT offshoring evolved in several directions in the Buy-versus-Build continuum.
The ¬rst was large-scale outsourcing to three of the major Indian providers, TCS,
Satyam, and Patni (GE has a 7% stake in Patni). Each of these ¬rms provided GE
with dedicated centers labeled Global Development Centers and Global
Engineering Centers. These were situated in India™s major cities: Mumbai,
Bangalore, Hyderabad, Delhi, and Chennai. In each of these centers, the providers
maintain separate buildings, often built speci¬cally for GE. In each there are sepa-
rate security systems and separate networks. In each there are provider employees
tasked full-time to GE activities. All of these centers report to GE™s global CIO.
GE has experimented with various collaboration strategies over the years. For
example, part of the relationship with Satyam was a joint venture, formed in 1998
to provide engineering design, software development, and system maintenance. In
2003, Satyam sold its interest for 4 million USD after GE exercised its option to
purchase. In parallel, GE began to build its own green¬eld IT centers at three Indian

iGate
Birlasoft
(42%)
(50%+; Eq)


Quest
Indus
(Eq)
Satyam Captive centers
(13%) in software, R&D, ITES

Patni
TCS (41%; Eq)
(19%)
Wipro GE
Med. Sys.
(100%; Eq)


Figure 5.4 GE™s centers and partnerships with Indian providers. Percent indicates GE™s share of
the provider™s revenues where known; Eq indicates a GE equity-based partnership.
110 Managerial competency



locations, Bangalore, Delhi, and Hyderabad. The combination of GE-owned centers
in addition to multiple suppliers has helped GE™s bargaining power. Every 3 years
GE renegotiates contracts and squeezes its many providers on costs.
In total, GE-India software activities grew tenfold from 600 software developers
in 1995, to 6500 software developers in 2002, and on to 8000 software profession-
als by 2003. By 2003, half of GE™s IT staff were based in India, some of them work-
ing in captive GE centers run by the third-party providers. The IT helpdesk with 800
employees was also based in India. GE claims that its offshore IT operations have
attained such high levels of quality that some customers are not even doing accept-
ance testing. Driving all this was cost: GE was relentless in cutting costs in its IT
operations, lowering its IT budget to a relatively low 2.5% of revenues in 2003. The
reported cost savings in 2002 were 600 million USD. Gary Reiner, GE CIO at the
time, was said to be “bullish” on offshore.
One of GE™s largest divisions, GE Capital, also began building and growing its
ITES in India. From its establishment in 1997, GE Capital International Services
(GECIS) has grown to become the largest shared services17 environment in India,
with revenues of 350 million USD. The services provided to other GE divisions and
external customers include everything from high-value IT services like ERP and
Oracle database consulting, IT helpdesks, data mining and modeling, to consumer
and commercial collections, and even insurance underwriting services. By early
2004, these IT-enabled Services centers housed 12,000 workers in eight centers dis-
tributed between Gurgaon, Hyderabad, Bangalore, and Jaipur. Its operations were
estimated to be saving GE 340 million USD a year. Savings went beyond opera-
tional ef¬ciencies and included undisclosed savings from cash ¬‚ow improvement.
By the end of 2003, an estimated 10“12% of GE™s global workforce was in India
(if outsourced units™ staff are included). GE alone accounted for 8% of all Indian
software exports in 2003.18 By mid-2004, a GE executive, Steve Morrison, GE™s
director for Global Delivery Centers, recast the now-famous 70:70:70 rule and said
that GE should target 80“85% of its IT work to be offshored.19
Yet, GE™s remarkable growth in India may be slowing.20 Jack Welch™s successor
as CEO, Jeff Immelt was focused on China, not India. In a lyrical response to
Welch™s 70:70:70 rule, GE created an ambitious China policy called the “three 5s”
in which, by 2005, the ¬rm would have 5 billion USD in sales in country and source
5 billion USD. On top of that, GE became more concerned with business continuity
risks in India (stemming from the new geopolitical risk landscape after September
2001). Finally, GECIS, one of GE™s success stories in India, was said to be bloated,
with higher costs than more agile independent IT-enabled services ¬rms in India. As
a result GE entered into a lengthy period in which it was discussing selling off
GECIS as a whole, or in pieces. This culminated in late 2004 with the announce-
ment that GE will sell 60% of GECIS to a US-based consortium.
111 Offshore strategy



Case lessons
GE™s offshore cost savings have been staggering. But, unlike many other ¬rms that
have taken the passage to India, GE leveraged offshoring strategically. GE utilized
several of the strategies noted earlier in the chapter. Most importantly, GE™s
approach was a “global immersive strategy” in which sourcing of IT was but one
part of a broad menu of knowledge and service activities. The company seized on
the availability of engineers and scientists in India in a wide variety of speci¬c dis-
ciplines to build its large ODC as well as its second largest R&D facility. It diversi-
¬ed its technology base globally using its Indian centers. It integrated its Indian
centers with those of the rest of the organization. It also fused its many knowledge-
based functions successfully: software, R&D, and ITES. Since the 1990s, GE has
taken activities that many companies would view as non-core, back-of¬ce functions
and rolled them into world-class operations in India that set the standards in ef¬-
ciency and processes for the entire corporation. GE used offshoring as a justi¬cation
to re-engineer processes far away “ to start from scratch with a fresh approach and
less political hindrances. Such re-engineering is more dif¬cult to do in the US
because costs are much higher. Finally, GE has gained new revenues from offering
its services to third parties, from selling various units, and from equity relationships
that it had built in India.




Concluding lessons

Align your offshore strategy with broader corporate business strategies and global sourcing


strategies.
Numeric goals for “how much to offshore” may be useful as incremental goals in achieving


a cost-reduction strategy.
Examine the six unique strategic goals for leveraging offshoring that go beyond mere cost


reduction: attaining speed, agility, and ¬‚exibility; using talent for innovation; building global
networks for knowledge sharing; technological diversi¬cation; deeper localization; and new
revenue generation.
Keep in mind the three strategic perils of offshoring: losing core competency; forgetting the


broader strategic goals; and losing advantages in proprietary knowledge and code. And
don™t forget the risks and extra costs discussed in Chapter 2.
The Buy-versus-Build-versus-Hybrid continuum now offers more choices for strategic


collaboration. Particularly, choosing the Build option, once in the purview of large ¬rms is
now accessible to small ¬rms as well.
6 Offshore legal issues
By Rebecca Eisner*



Before you learn to play a new game, you probably ask some questions. What are the
rules? What is the objective of the game? How do you win? What are the best strate-
gies? How do you avoid being thrown out of the game?
Business is like a game. Every business person who embarks on a new business deal
needs to ask questions to get the information they need to make the right decisions.
Some of the questions will be about business and ¬nancial issues, and others will be
about the rules. You need to understand the rules, and how to play within them. You
also need to understand the key risks, and the solutions to mitigate those risks.
In this chapter, we begin with an introduction of seven key legal areas where rules
affect your offshore business. Next, the discussion moves on to deal structures, risks
and risk mitigation through contract provisions. This chapter focuses on “what” you
should be concerned about, not necessarily “how” you can address it. “How” you play
the game and play within the rules is beyond our scope.1


Key legal considerations in offshoring

Seven of the key offshore legal issues are as follows: intellectual property (IP) protection;
labor and employment rights; export control restrictions; privacy and data transfer restric-
tions; government approval of offshoring; taxes; and currency conversion exposure.

IP protection
The laws protecting IP rights vary from country to country. They are like a patchwork
quilt, with holes. This makes it hard to protect IP rights in offshoring arrangements.
When software and materials are written in the offshore country, and then sent around the
world for use or commercialization, the laws of several countries may apply. Regrettably,
the patchwork quilt of international laws regarding IP can leave you cold and exposed.
Software that is written in India is subject to different laws than software that is written
in the US. For example, software and business method patents are not recognized in many
jurisdictions, such as India, Russia, and China. Rules governing ownership in developed
technology and “works made for hire” often differ. In the US, a customer may rely on
* Eisner is an attorney at Mayer, Brown, Rowe & Maw LLP, USA.
113 Offshore legal issues


the “work made for hire” doctrine to become the exclusive owner of developed technol-
ogy, but under UK law, no similar right exists. Some countries do not protect trade secrets
(e.g. unlike the US, where the Industrial Espionage Act which makes it a criminal offense
to steal trade secrets, there is no statutory protection against theft of trade secrets/con¬-
dential information in India). Software piracy is rampant in most offshore countries.
Some international treaties and conventions, such as World Trade Organization“

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