Selecting Applications for Offshore Outsourcing

Featuring Andrew Efstathiou by Jon Huntress, Editor, BrainStorm Group's - BrainStorm Bulletin.

Andrew Efstathiou is a Program Manager with the Yankee Group. His areas of research expertise include e-solutions integration, IT strategy, IT economics, professional services, e-sourcing, and enterprise-level technology strategy.

Andrew's presentation on "Selecting Applications for Offshore Outsourcing" also touched on application development, maintenance and support, and business process outsourcing. The chief benefit of outsourcing is lowered costs, but there are risks involved. According to Andrew, the type of applications that are best for outsourcing are those that offer the best near-term return. Long-term, mission-critical applications should not be considered.

There are four things the selection strategy should take into account:

• Business drivers (IT hardware and software are cheaper, but the skilled professionals who service them aren't)
  
• Technology enablers (legacy COBOL, Web Services)
  
• Service providers (>900 companies in the export IT market)
  
• Market scenarios (by local, geography, product expertise, delivery method)

Changes in the IT environment reflect many of the above changes. Four key trends in this area include Web Services, IP networking, utility/automation, and system modularity. These four areas can be further broken down to locate processes that can be outsourced. Andrew said smaller projects have a higher probability of success.

The future trend is toward Web Services and distributed computing. Grid computing balances IT supply and demand against the available resources. The dynamic of who owns the software and where it resides is changing. With service-based computing and storage, there is a shift from virtualization of resources to automation. Ultimately it will be services in support of applications. The goal is to offer data infrastructure and computing as a service, which will reduce the management cost of hardware.

The impact of Web Services means there will be more modularity, with blade servers able to shift application services quickly to support the services. Data will no longer be stored in just one place. Management for Web Services shifts to a "pool of resources." This will all be network-driven, because Web Services requires significant data transfer and inter-processor communication.

Web Services will change the way CIOs meet business needs. The bottom line, according to Andrew, is that new models for product and service sales and fulfillment from the industry leaders have led to the demise of the vertically integrated supply chain. Software vendors are shifting product development to the connection points of the inter-enterprise supply and demand chain. And because of the history of spending tens of millions with little or no return, businesses are now demanding ROI from their existing infrastructure, with minimal additional investment.

This means that CIOs, when evaluating application outsourcing, need to:

• Consider the trade-off between decommissioning and renovating
  
• Identify how application outsourcing maps into business strategy and technology trends
  
• Maximize cost reduction while minimizing loss of flexibility by leveraging integration technologies.

The business value for outsourcing has always been reduced costs, and the promise is for 20% nearshore and up to 40% offshore. Other advantages promised include:

• Easing application integration
  
• Giving business choices
  
• Gaining competitive advantage
  
• Improving efficiency - with faster implementation and time-to-market
  
• Increasing variable costs and reducing fixed costs.

Andrew said the reality of outsourcing is somewhat different, and includes:

• Increased on-shore management time and effort
  
• Increased application management difficulty
  
• Choice depending on availability
  
• Competitive disadvantage if performance is erratic
  
• Inefficiency if not deployed correctly
  
• Significant changeover costs

In selecting an outsourcer, a methodology needs to be followed. This includes a needs assessment, RFP development, vendor evaluation, contract negotiation and management presentation. Vendors should be scored on:

• Functionality - what is the focus of the vendor's offerings?
  
• Technology - what technology do they use?
  
• Vision - vendor's articulated technology roadmap
  
• Service and support - what is their rating?
  
• Experience - what projects have they done?
  
• Financial viability - what is their financial strength?
  
• Cost - what is the cost of the offerings versus the alternatives?

Andrew said the best opportunities for outsourcing are legacy systems destined for decommissioning in the next few years, and people-intense systems that are high-volume and low-value per transaction, such as call centers and mortgage processing.

The best growth opportunities are with offshore firms with differentiated capabilities such as Israel for security, India for call centers, and Europe for wireless. The new offshore centers are best for programming savings, while the established offshore centers are better for project management savings.

Andrew recommends that business needs and technologies should drive what applications are outsourced offshore. Generally, businesses should maintain integration skills such as Web Services in-house, while application skills such as maintenance and customization can be outsourced. Successful business partnering strategies will also necessitate cooperative outsourcing.

Andrew ended his presentation with some insights. Given the state of flux in the offshore IT services market, businesses need to re-evaluate vendor selection frequently, adding that the existing turnover of offshore clients reflects the difficulty of success for many engagements.