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------------------------------------- BrainStorm Bulletin e-newsletter of BrainStorm Group December 5, 2002 -------------------------------------
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INTRODUCTION and San Francisco
Summary
==================================================== BrainStorm Group's eBusiness Integration and Nearshore & Offshore Outsourcing Conference held recently in San Francisco was a great success. We thank our sponsors and supporters in 2002! This success is especially noteworthy during this tepid economy and period of trepidation on the part of most business executives. Economic news and forecasts continue to show slow (if any) growth. Nevertheless, I observed a decidedly upbeat mood among the conference attendees. Of course, most came to the conference working on existing or pending IT projects and needed some help with sources, direction, and access to the many conference sponsors. Gregg Rock, President of BrainStorm Group, made the opening remarks of the conference and reminded everyone not to overlook the networking possibilities. BrainStorm conferences offer attendees the opportunity to have one-on-one sessions with the presenters, and most took advantage of this unique opportunity. As a fun example of some creative networking, Gregg Rock shared that the Sunday before the conference started, he found himself next to a woman who turned out to be the wife of the owner of the New England Patriots. They were playing Oakland that day and staying at the Hyatt Regency Airport – our event venue. When she discovered that BrainStorm Group was a Boston company, she gave Gregg four tickets on the 50-yard line for the game. It just goes to show that you should always find out who is in the seat next to you; you never know when a prime networking opportunity is knocking. The Legacy Transformation tracks along with the Business Process and Web Services tracks gave attendees the tools they needed for their own projects and plans. Of course, any integration project involves all three areas, and the drivers are cutting costs and gaining efficiency with existing IT infrastructures. Cathy Hotka of the National Retail Federation told me before the conference that retail is spending money on IT currently, because they know they have to in order to stay competitive. The Wal-Mart lesson has been learned. Wal-Mart is the No. 1 retailer in the world, and they got there because of a superb IT infrastructure that allows them to rapidly move in any direction they want to go. They can see sales data in near real time. One example I heard was that in the days after 9/11, they saw American flags selling in very high numbers. Wal-Mart quickly placed huge orders for more, grabbing most of the domestic production. Wal-Mart knows what is selling and what isn’t, so they can have sales on slow-moving items or move the inventory where it will sell. Cathy also said that most retailers don’t really know what items they should put on sale; in many circumstances, they have items on sale that would have sold just as well at the standard price. This doesn’t happen at Wal-Mart. If an item is selling well, it is seldom marked down, and the managers can see how everything is selling on a daily basis. Wal-Mart is thriving, while K-Mart is not, and Montgomery Ward and others in the space are history. The main reason for this discrepancy is Wal-Mart’s excellent Information Technology that allows quick responses to market conditions and shoppers’ needs, while keeping costs down. This strategy works especially well in a slow economy. I sat at the Retail table during the “Birds of a Feather” luncheon and listened to attendees from several retailers. While they are trying to emulate Wal-Mart’s success, one person told me that they sometimes refer to the giant retailer as the “death star.” Another thing that an agile retail IT infrastructure allows for is accountability of store merchandise. One common type of consumer fraud is to steal an item from a store, then bring it back for a refund. Many retailers don’t have enough information from the sale or the item itself to determine if the return is legitimate. Now, more stores have the ability to know where that particular item came from, even if it was from another of their stores, and if the sale was a proper sale. Any decrease in shoplifting losses adds to the bottom line. Ken Vollmer of Giga told me that we probably won’t recognize the business landscape in ten years. The companies that do IT right will thrive. As for the others, the crystal ball is cloudy. It reminds me of what a carriage maker must have been thinking when he first saw a 1903 curved dash Oldsmobile drive by. Web Services continue to generate a lot of interest and many companies and organizations are making them work, including the US Marine Corps, who gave a case study presentation in San Francisco. Many Web services are inexpensive and easy to deploy. I also spent time at the Nearshore/Offshore Outsourcing Conference while in San Francisco. Businesses increasingly see outsourcing as a way to cut costs and concentrate on their core competencies. More business processes can be outsourced now, and the quality of many offshore vendors is exemplary. One Indian company can even guarantee that it will bring in a project within 10% of its estimate. This is exceptional, considering that IT projects traditionally go over budget two- or three-fold, to say nothing of the number of IT projects that are cancelled before they are deployed. While outsourcing is an attractive alternative; it is by no means an easy thing to get into. Ian Hayes of Clarity Consulting and Bill Martorelli of Giga Information Group ® both pointed out that a great deal of effort has to go into the planning and initial preparation for an outsourcing project. Goals and objectives have to be clearly stated and constantly referred to. “Set it and forget it” is a recipe for failure in outsourcing. The attendees in San Francisco were aware of this and wanted to find out how to work a successful venture. Several of the presentations in San Francisco covered how to get into outsourcing for both nearshore and offshore. We will be covering these presentations in future issues of this newsletter. San Francisco was a very successful conference and we look forward to kicking off our 2003 conference series next April in Chicago.
Jon Huntress |
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| ================================================= FROM THE ANALYSTS: Offshore and Nearshore Opportunities: State of the Art in Strategic Global Sourcing Featuring: William Martorelli, Vice President, Giga Information Group by Jon Huntress ================================================ William Martorelli is Vice President at Giga Information Group® and an accomplished IT industry research analyst. His primary areas of coverage include utility-based computing, managed services, business process outsourcing, ASP/application hosting, and Web hosting. Prior to rejoining Giga, William served as Vice President of Enterprise Services Strategies at Hurwitz Consulting Group, where he covered the IT services, outsourcing and business process outsourcing markets. The promise of the offshore market is qualified software developers, architects and project managers from geographies where labor is significantly less expensive, but quality remains high. William began his talk by saying that global sourcing has become an IT imperative, largely because of the cost pressures put on IT organizations today. Companies need to save money but still receive high quality. Offshore outsourcing offers that opportunity. The main drivers for global sourcing are cost savings and containment, skills shortages, and special requirements. The choices today are myriad, with new opportunities popping up all the time. India dominates the offshore outsourcing market because of high quality, no language barrier, and most of their companies have a local presence. Labor costs currently hover between $22 and $35 an hour. These firms also offer a wide skills base and are competing head-on with the Big Four consulting firms and top-tier systems integrators. They offer:
Indian firms are becoming known for having a very high level of quality. Indian developers are historically more meticulous in documentation, release planning, testing, and metrics during development. There is an increasing acceptance in the US of the Indian vendors. This is due to several factors: well-publicized Global 1000 engagements; the tier-one US vendors like IBM, Accenture, and PWC endorsing Indian vendors; low cost, and a higher acceptance of remote workers and telecommuters. The benefits of Indian quality are increasingly recognized as quality becomes more important to US organizations. India’s software export market grew about 50% a year between 1996 and 2000. In 2001, the industry grew 20% while exports grew 23%, and export revenues were $7.68 billion, which is still a small percentage of the overall IT consulting market. The work was equally split between offshore and onsite with 63% of this revenue coming from the US. William mentioned that emphasis on offshore usually only mentions the top five firms, but there are 270 Indian firms that have offices in the US which offer an extremely wide variety of services. Other offshore markets are China, Philippines, Eastern Europe, and Egypt. The Nearshore countries are Ireland, Northern Ireland, Canada, and Mexico. US firms are also getting into offshore offerings through partnerships in order to meet the competition. William said the whole future of IT consulting is now being decided. There are three global sourcing models. The first is going completely offshore, that is, hiring an offshore firm to do everything. This is viewed as the most risky option for Global 1000 companies. The second model is for an offshore vendor to bring resources onshore through H1B Visas or the equivalent. The third model is a combination of offshore/onshore, which places analysts, architects, strategists and project managers onshore, while the programmers work offshore, often 24 hours a day. This “transparent model” is seen as the most effective and most projects use this model. William said it is important here to pay attention to your own “comfort level” and use a model that satisfies your requirements while addressing the risks inherent in any outsourcing venture. The offshore sourcing risks include:
Risk analysis is the first step to take. The benefits must outweigh the risks in order to proceed with any project. Contingency planning is critical for all offshore vendor relationships. Increased security and documentation are necessary, along with network redundancy and contract provisions. In selecting a vendor, the first step is defining your needs, and then creating vendor selection criteria. Researching the market is a daunting task, and should be done with a reputable third party resource. This is the most critical part of making a global sourcing project a success. When you issue an RFI/RFP, vendor responses will quickly reduce the number of candidates. William said it is also important to visit the vendor facilities and interview engagement managers, project managers, developers, and architects. The critical success factors are:
William added that many of the attendees’ questions would be answered in the upcoming presentations and panels. You can hear William’s talk and view his slides at BrainStormU.com. ====================================== Ten Critical Questions to Ask Before You Outsource Before you hand over
sensitive customer data and mission-critical operations to a third party,
make sure you ask and know the answers to these ten critical questions. Dr. Michael Clark is Executive Director of the US-India Business Council (USIBC). The USIBC's membership includes over 70 companies like GE, AIG, and Boeing. More than half are in the Fortune 100. The Council is the leading voice of American business on all matters related to US-India trade and investment. India has many attractions for the IT services trade. As the world’s fourth largest market, India is an English-speaking, rule of law country (as opposed to China, which is relationship-based), and has an engineering base twice the size of the US. The drawbacks to doing business in India include its internal market, infrastructure, and manufacturing. India has a highly regulated economy with most activities licensed and controlled, which adds to the cost of doing business and hinders outside competition. Their infrastructure and manufacturing areas are also weak. But these drawbacks have not impacted the IT market for sourcing, which bypasses most of the above problems. Michael said that 80% of GE’s internal back-end currently is processed through India, with 100% projected in two years. He also made the rather surprising statement: IBM can be considered to be an“…Indian company with a global brand and a global distribution system.” At this time, some business processes are being sourced to India, and that trade is growing in complexity, but much Business Process Outsourcing (BPO) is still too complicated to consider for outsourcing. Some R&D is being sourced to India now as well. In general, the types of services outsourced to India have been steadily increasing in variety and complexity and there is no reason to think this will not continue well into the future as software becomes more integrated, functional and standardized worldwide. The drivers are cost, quality, flexibility, speed of execution, reliability, stability, and security. There are extra initial costs for anyone just starting to go offshore, depending on the size and complexity of the project. Starting a new venture half way around the world is not a small venture. The quality in India is becoming well known; in fact, it is becoming the world standard because India’s engineering talent is world class. Michael said there is a sign outside the GE facility in Bangalore stating, ”Trespassers will be recruited!” Michael emphasized the reliability of India sourcing, and noted they are not seeing failures. In fact, many venture capitalists are insisting on India sourcing as a condition for providing capital. Michael said that despite the challenges of the India/Pakistan relationship, India is still a very stable place. Post 9/11, everyone is at risk, but Americans can feel secure in India. The types of companies outsourcing to India are:
What it takes to make it work are careful analysis, due diligence, a massively detailed plan of execution, and a willingness to invest. Strong documentation processes (SCICMM), monitoring, and verification are also needed, along with a robust security/CBO plan. Managing operational risks now include addressing the regional issues in India, which include terrorist threats to business operations, the conflict with Pakistan, religious and ethnic conflicts, and the general anti-globalization and anti-Western activism. To counter this there are four dimensions of security:
Local physical security in India is strong, and has the support of local governments. India has weak product laws, but strong copyright protection, (although weak enforcement). Communications are secured by robust cyber-security systems and extensive penetration monitoring and external testing. For continuation of business operations, they have routine daily and monthly testing of business-critical processes along with external off-offshore data and systems back-ups. They also have scalable, secondary support staff. In the area of best practices there is some controversy, based on what the term means. Michael said that if you define “best practices” to mean a detailed set of industry-wide guidelines for Indian IT services and BPOI service providers, India doesn’t have this. But if you define “best practices” as strong industry-centered norms and expectations from the client side, then India does indeed have them. In summary, Michael said that outsourcing to India offers exceptional advantages to US companies. However, it isn’t cheap or easy to get started. While India is a stable and secure supplier, there are important risks to consider. The burden is on you, so be prudent in making your choices. Risk is inherent in all business decisions and outsourcing to India is no exception. Do the research, and remember that the environment is more than just the technology. Michael closed with the statement that in our post 9/11 world, everyone is at risk, but don’t let universal vulnerability keep your business from losing that competitive edge. You can hear Michael’s talk and see his
presentation by logging on to
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