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NW Fusion: Wireless

          MARCH 2004


Welcome to the March 2004 edition of CAPTure, our monthly e-publication providing corporate executives, and the IT financial and procurement end-user community with cost savings ideas, first-hand information, and insight into the current best practices, results, and innovation in IT sourcing.

Seeing how Outsourcing has been such a hot topic of debate the last month, often times breaking new political boundaries, we offer some focus in that vain with a well thought out article from an Associate, G. Patrick (Pat) McGunagle, who has weathered through several instances and offers some good guidance.  As well, with the number of overwhelming responses we had in regards to our January CAPTure on Wireless Sourcing Best Practices along with the recently announced acquisition of AT&T Wireless by Cingular, we wanted to present some thought around the continuing impact that wireless will have in IT, along with an idea for potentially large savings on International LD calling on cellular telephones:

Outsourcing:  What’s a CIO to Do? -  As companies continue evaluating the competitive advantages gained with productivity improvements through strategic outsourcing, it is always good to gain outside views on past experiences, both successful and not so successful.  Offered in this article is an excellent quick history on the business drivers that led to outsourcing as well as suggestions in planning such outsourcing endeavors.  Both an IT and Sourcing executive can gain critical insights on some key rules of thumb.

How will “wireless” continue to impact IT infrastructure?  – It used to be “wireless” was thought of as a cellular telephone for the end user, and all those ugly towers covering our landscape.  Everyone understands in today’s world it is so much more due to the continued push of mobile applications and a more mobile workforce.  We offer some quick market landscape analysis of the continued evolution of this important technology along with some links to some very good places to go for quick reference that may be useful when determining future solutions.  We’ll finally offer a quick tip on some potentially significant savings for those companies that have a mobile workforce with international calling via their cellular telephones.

We hope the insights shared in this newsletter will assist you in your procurement efforts in IT-related categories. We appreciate your feedback, comments and requests for topics, including the posting of a success story you may want to share.  For more information, please write to us at info@captoveridicus.com   or visit us at www.captoveridicus.com-    

                                                                                                                  Robert Zitofsky - President, Capto Veridicus


Outsourcing: What's a CIO to Do?

 Until the recent comment by White House economist Gregory Mankiw that the outsourcing of jobs to foreign countries is “good for” the U.S. economy, a remark that ignited a firestorm of political recriminations, the outsourcing issue had pretty much become yesterday’s news. Yet there are some new wrinkles to the issue, evidenced in recent events and in the experiences of those who have taken the plunge, and these wrinkles will challenge any CIO or executive seeking to manage a successful outsourcing venture. The situation warrants a fresh look at the entire issue of outsourcing.

 With a Long Tradition in U.S. Business, Outsourcing is Still a Compelling Proposition for Improving Productivity

Moving production from higher-cost to lower-cost locations has been a fact of business life for centuries. In the 20th century, the manufacturing sector moved factories from inner city to suburbs, from suburbs to regional centers, and from regional centers to maquiladoras over the Mexican border.  Never politically attractive, the quest for lower manufacturing unit costs nevertheless improved productivity, enhanced quality, sharpened competition, and increased shareholder value. In short, it worked, and the mantra of “fewer people producing more goods and services” has been both the economist’s definition of productivity and the key to U.S. productivity throughout most of our history.

 Some 25 years ago, the services sector caught on and began outsourcing Information Technology and business processes overseas. Typically, the pioneers were financial services companies. Citibank is a case in point. It outsourced its processing and service centers from metropolitan centers to Sioux Falls, South Dakota in 1979; at about the same time, it turned to an Indian subsidiary to develop IT applications for its global branch network.

 In the last five years, however, a dramatic increase in services outsourcing has taken place—the well-documented migration to India and other Asian centers.  The reasons are obvious. Bandwidth is improved, reliable, and affordable. Call center technologies make it possible. Not to mention the fact that emerging markets offer a seemingly limitless supply of cheap, educated labor. With a labor force of 480 million, India produces 90,000 IT professionals and two million English-speaking graduates a year.  Indian wages are one-fifth those of the U.S., on average. The combination of an appropriate labor pool and lower wages makes outsourcing to India an attractive economic proposition for Western companies, which have eagerly moved IT development, investment research, financial accounting, claims processing, and client service activities to India—as well as to other emerging markets. These considerable attractions become only more compelling during periods of declining revenue and increased pressure on earnings.

So the jump to India, China, or the Philippines has been a natural, logical extension of the outsourcing principle. As with manufacturing, the aim is to improve margins through increased productivity and lower costs.  And, as with manufacturing, outsourcing works.

 New Twists: The Shift to Third Parties, New Types of Players.   

Some interesting shifts are already evident in the outsourcing of services. It’s true that, for decades, multinational financial services companies have shuffled their internal IT development and outsourced their operations to countries where they‘ve had a longstanding presence. A new wrinkle is the shift to third-party outsourcing companies—specifically in the emerging markets.  Jump-started by the Y2K rush to convert and test code, the number of companies outsourcing has soared over the past three years, and the pace of the shift has rapidly accelerated.  

 In 2003, according to Nasscom, India’s software services trade association, 285 of the top 500 U.S. companies placed work with Indian companies, up from 125 just three years ago.  New U.S. outsourcing companies, including many of  the big computing and consulting enterprises that have shifted their business models toward becoming alternative service providers and business process outsourcers for Western corporations,  have arrived on the scene. By dropping anchor in India and other emerging markets, they are able to take advantage of lower cost environments, and they are competing head-on with such large on-site Indian outsourcing providers as Tata, Wipro, and Infosys.  IBM, for example, is hiring more than 4,000 employees in Asia this year, in addition to its 6,000 Indian employees.  Accenture has 4,800 Indian employees, and is expanding the scope of its tech services to include business process outsourcing.  With 800,000 service jobs in India today, a number expected to grow to two million by 2007, this is a relatively small footprint. 

 Some New Wrinkles. 

Some new wrinkles are emerging as these Western behemoths appear on the scene.  Attrition rates have increased to 12 to13 percent per annum at the Indian outsourcers. Despite higher wages at their Western counterparts, the rate has reached 25 percent—one quarter of all new employees leave after only one year.  As this writer has experienced across the United States, Europe, and Asia, in countries where banking, insurance, and investment firms have all converged to low-cost regional centers, competition for each others’ skilled employees or managers quickly ensued, and higher wages and retention bonuses soon diminished the labor savings originally projected to justify many of the relocations. 

 Could a similar rise in attrition negatively impact recently developed outsourcing relationships?  Might it negatively affect the value of outsourcing as these companies compete for skilled labor and balance the cost of career pathing with replacement costs?  The average age of an Indian engineer is 26 years old.  Most U.S. executives want programmers with eight to ten years of experience and with some degree of expertise.  Such “career programmers” have yet to emerge in India, where most seek management jobs after four or five years.  Unless these local Indian or Western companies can provide meaningful career opportunities for their local employees, they can expect high attrition rates to be a normal part of doing business.  This may become hugely problematic where continuity is visible to the buyer of outsourced services.  Time will tell.

 But attrition isn’t the only risk. Political instability lurks under the surface.  Outsourcing call center operations to Charlotte or IT development to Dublin is somehow easier for corporate conventional wisdom to swallow than outsourcing to the Middle East or Central Asia.   The quest for the next, cheaper frontier is inevitably associated with new unknown variables, including political risks that have to be factored into any considerations of business continuity

 New Rules, New Responsibilities. 

Beyond these risks, offshore IT development and business process outsourcing will likely carry more constraints and reporting requirements in the future.  Nearly 100 bills aimed at keeping jobs in the U.S. have been introduced in 30 state legislatures as well as in Congress.  At the state level, pending bills would require state contract work to be done in the U.S., and prohibit the transfer of confidential information overseas.  Legislation in both the state and Federal hopper would require call centers to disclose their locations to consumers.  Finally, at the Federal level, there’s a bill pending that would restrict the number of foreign workers allowed to enter the U.S. to perform jobs previously done by Americans.  As of this writing, one bill has been passed by Congress and is scheduled to go into effect in fiscal year 2004.  It requires private companies that bid for certain types of work currently performed by government employees to remain in the U.S.. 

 Compliance with these restrictions will be a challenge, and the financial impact of negative consumer attitude on a brand or franchise reputation is unknown.  Will a consumer care if his tax return is prepared in India?  Will he care more if he has to pay several thousand dollars to a top New York accounting firm for this return, instead of paying only a few hundred dollars to H&R Block?  Is he concerned that his financial information is transmitted to a third party in India?  Where is the value-added relationship?  Does it shift?  Will outsourcing particular functions affect client retention?  Certainly Dell and Lehman Brothers Holdings were concerned enough by negative customer and employee reaction to move dozens of call center and help desk jobs back to the U.S. Senior management must at least acknowledge, if not resolve, these critical considerations before choosing to outsource   .

 New Complexity. 

Where IT development is concerned, outsourcing presents an added burden of complexities. The fact is, IT development is tough enough; outsourcing it overseas may just exacerbate the difficulties.

 Can anyone deny that the landscape of IT developments in the U.S. is littered with failed projects?  Over the past 20 years, only a handful of IT projects have been on time, on budget.  Most have either been abandoned, written off, truncated in scope, or compromised in functionality. Their expected benefits didn’t materialize, or their expenses exceeded budgets and forecasts. 

 Yet everyone knows what it takes for successful development, wherever it occurs: clarity of purpose in business requirements, discipline in controlling scope creep, precision in defining functional specifications, and good governance.  One needs to establish success criteria and carefully define business expectations, timeframes, and accountabilities.  When all of this is correctly managed, application development is straightforward, whether performed in-house or by a third party in India

 As happens more often than not, however, one or more of these requirements is not met and disaster looms—typically in the form of iterative prototyping with various analysts and users in order to get acceptance.  Throwing requirements “over the wall” and getting usable code back simply doesn’t happen in the real world.  Add in time zone differences, varied interpretations of expectations, cultural differences, unanticipated re-work and travel requirements that can often strain budgets and timeframes, and you may overburden an already demanding challenge. 

 ValiCert, a security software firm, is a case in point. ValiCert had high expectations when it began shifting development work to Infosys in 2001.  In a recent Wall Street Journal interview (March 3, “Software Firm’s Lesson in India: Some Jobs Can’t Be Exported”), SVP David Jevans recalled optimistic projections that the company would “cut the budget by half here and hire twice as many people there.”  Working round the clock in two geographies and 14 time zones apart, ValiCert planned to deliver new software faster and better.  The reality was, however, that Indian engineers omitted features Americans considered intuitive.  U.S. programmers, accustomed to chatting informally with colleagues over cubicle walls to get things done, spent months detailing written instructions for their Indian counterparts, delaying new products.  “Things we could do in two days would take a week,” according to ValiCert’s U.S. product team leader.  Re-creating its operation in Bangalore, the technology center of India, ValiCert discovered its rent was no cheaper than the space it paid for in its Mountain View, California site amid the office glut in Silicon Valley.   After several struggles, programmers who had worked around the clock for days on one project quit, jumping to other jobs in Bangalore’s vibrant market.  Of nine people from the original team in mid-2000, only three still work for ValiCert. 

But there is a happy ending.  After several iterations, a change in the way work is divided between California and India, and a 2003 merger with Tumbleweed, another California-based company with engineers in Bulgaria, the company has found success.  Outsourcing doesn’t inherently make things worse, but it does present an added layer of project complexity that needs to be anticipated and managed.

 What’s a CIO to Do?

New layers of complexity, new rules of responsibility, political uncertainties, attrition: all these are new aspects to what remains a traditional but potentially powerful productivity tool. So what must the CIO or other senior decision-maker keep in mind when planning to outsource, especially to an overseas location? Essentially, the answer is to stick to basics. Here’s what I mean:

 Don’t Forget to Re-Engineer.   

Outsourcing a business activity without first improving it through re-engineering misses several opportunities, e.g. cost reduction through streamlining,  changing or eliminating an inefficient process and seeking quality improvement, This can result in paying a third party to maintain a poor process.  So, the first step in outsourcing—wherever you outsource to—is to Know What You Are Outsourcing and Be Sure to Maximize Current Business Process Value First.

Don’t Forget the  “Know Your Customer” Rule.  

The most important and least frequently followed rule is to remain customer-centric.  Many companies look at the cost of a call center and measure the success of outsourcing to another party by the reduction of those costs.  Often, however, the call center representative’s “face time” with the company’s customer is greater than that of the sales force.  The customer’s call can be an important source of competitive intelligence.   Losing the “voice of the customer” by not capturing the reason the customer calls is an opportunity cost that can exceed any unit cost savings.   Are there flaws in the company’s products or processes that are causing the client to call?  Building in this knowledge of the customer’s needs and expectations, then recycling that knowledge into innovative product and system developments are key determinants of client retention and profitability.  In our world of commoditization, pressures on costs, pricing, and rapid innovation, excellence in customer management is the last frontier of differentiation.

 Know What You’re Trying to Accomplish and How You’ll Measure It. 

Finally, when deciding whether to farm out development or business activities to a third party, consider what you’re trying to achieve and how you’ll know when you’ve achieved it.  This knowledge requires a clear shared vision across the enterprise and agreement on a scorecard that will track the progress and success of the effort—a level of attention and detail that may not be given when these activities are performed in-house. 

 Outsourcing doesn’t relieve management of this responsibility; on the contrary, the responsibility is, if anything, greater.  What’s the objective:  Lower cost?  Improved quality?  Speed to market? Customer service?  All of the above?   Have you benchmarked yourself with others inside and outside your industry?  How have you defined success?  Is the definition shared by your seniors?  Will your customers see the change as an improvement?   Often, expectations are incompatible. 

 So far from being yesterday’s news, outsourcing is a potent weapon in the CIO’s productivity arsenal—if its evolving challenges are well understood and if it is undertaken with careful analysis and the right approach. Done right, outsourcing can bring the productivity improvements, quality enhancements, competitive advantage, and added shareholder value that have long been its hallmarks.

 About the AuthorG. Patrick McGunagle is an experienced financial services executive who led large-scale IT and operational outsourcing and re-engineering activities in the United States, Europe, Asia, and Latin America.  He has pioneered back office innovations in banking, insurance, and brokerage operations consulting with firms engaged in or considering business transformation.  For more information regarding this article, or to reach Mr. McGunagle, write to info@captoveridicus.com or gpm@aol.com .

How Will "Wireless" Continue to Impact IT? 

For those of us that were around when what we called “wireless” was a bag phone the size of a small suitcase, it has been an amazing evolution and its scary to know that we are just scratching the surface in what many believe will have tremendous impact on a furthering of productivity gains for many years to come.

 I think we all know what a BlackBerry is, yet I was astounded to learn that as of just a few months ago, there were only over 1M units out there?  How many of us personally had a network setup in their home even 2 yrs ago?  A social barometer for many kids these days isn’t who has a pc at home, but who has a wireless network router for access in any room, along with a device for messaging.  I personally now have a cellular phone with internet access/ a camera/ and email integration; a wireless network at home;  wi-fi built into my laptop; a wireless data card in case I don’t have access to a landline, ethernet, or wi-fi; a wireless keyboard and mouse; a GPS system……..where does it stop?

 For the business enterprise the impact will be most felt in how IT designs its infrastructure and how to ensure its clients (both internal and external) can securely gain access to applications and information.  I am stunned constantly as to how many new enterprise initiatives are now including questions and topics related to wireless.  Think about it:  Voice and Data, Cellular, LAN, Application integration into wireless, Security, CRM access via wireless, Intranet/Extranet access via wireless.  For those in IT Procurement……..this isn’t an anomaly or trend, but a fact.

 “Wireless” is going to continue to change the competitive landscape of telecommunications vendors, force paradigms in costing of infrastructure, and challenge the best minds in security - thus enabling access to information only AT&T commercials dreamed of 15 yrs ago (remember those!).  The biggest obstacles for true adoption are probably standards being accepted by the mass marketers/producers, security, and of course cost.

 There are now specific trade shows for wireless and mobility, magazines dedicated to this topic, and a slue of companies ready to take you over the threshold.  We offer the links to the left as resources in mining through the clutter and which we have found useful in researching during sourcing initiatives.


How About Some Cellular Cost Savings!

 On a cost savings note, we offer a unique idea for those of you who are trying to minimize your cellular costs relating to International outbound dialing, which can be outrageously high, and is often overlooked as a point of negotiation.  Based on recent analysis we have found the average savings is at least 50% off the rates most Fortune 500 clients get in their cellular contracts today.

 We have access to a solution that in essence is the following:

  • Everyone in your enterprise dials a single US access number (most just put it as a speed dial)
  • The user gets a dialtone and enters in the international number they want to reach plus # (can even program a speed dial for the most frequently called int’l numbers)
  • That’s it!!  Because the enterprise is contracted with the solution provider with a database of its mobile numbers, there is no need for anything but dialing the initial access number.
  • Corporate IT gets a single invoice electronically which can then be cost allocated back to the user or dept.
  • There is no term or minimum revenue commitment

 A demonstration of the service via webinar will take place on Thursday, April 1st at 2PM EST.  To sign up send a request to intlcelldemo@captoveridicus.com.  Please provide your name, company, phone number and email to receive the instructions.  Information on the service can also be requested at the same email if you can’t make the webinar.

Coming Up:  Look for the launch of our featured “procurement message board” where participants will be able to anonymously post Q&A on best practices and success strategies in IT procurement.

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© 2004 Capto Veridicus, LLC.
This work is unpublished, and unauthorized reproduction is prohibited. All rights reserved.