Tubbydev

Offshoring dos and don’ts
silicon.com
Bundeep Singh Rangar

Do pay for talent… Don’t bet the house…

Offshoring may be the right option for your company, but for the project to be a success you’ve got to do it right. Bundeep Singh Rangar, COO at venture capital firm Ariadne Capital, offers some words to get wise.

The SWOT analysis of my first major project involving offshore software development in early 2000 can be summed up like this: strength – I saved my company £500,000 by spending 30 per cent of what the project would have cost in the UK; weakness – the system delivered didn’t quite look like what I had envisioned; opportunity – the learning experience made the next several projects easier; threat – I had more grey hair at the end than when I started.

My position was interim CEO for a Yellow Pages business. I was responsible for transforming it to an online business and keeping IT costs down during the transition was a big consideration. There was simply no other way to do so than by having software developed and our data entry done at a low-cost offshore centre.

The trick was to ensure that nothing was ‘lost in the translation’. Tell a programmer in Europe the software he’s constructing should look like a fine building – and he’ll come back with the equivalent of the Eiffel Tower. Tell the same thing to an Indian programmer – and he’ll come back with the Taj Mahal. Both are beautiful buildings – just very different.

At Ariadne Capital, we consider offshoring a good option for companies with at least 15 per cent of their cost base dependent upon IT services. That’s usually enough of a critical mass to justify the increase in capital expenditure for setting up an offshore partnership and the additional operating costs for logistics and communications.

Given my experience managing offshore development as well as advising FTSE 100 companies and high-growth start-ups on their offshore development strategies, here are a few tips to help prevent offshoring from becoming an insurmountable mountain.

Cover your Achilles heel
The biggest reason for an IT offshore development project to fail is the Western company not being sufficiently prepared for it. Choose projects and departments that are not going to threaten existing staff. The offshore facility should be a way to scale operations, not politicise them. Get project managers who are accomplished at delegating tasks, monitoring workflow and policing and communicating with external suppliers. Start with a small project that is low-risk before betting the house. Actually, don’t bet the house – your core competence and mission critical elements are almost always best kept onsite.

Talent is king
Tata Consulting Services and Infosys Technologies Ltd, among India’s largest IT services companies, had one million job applicants each in 2003 – and offered jobs to fewer than one percent of them. That’s a Darwinian filtering of talent if you’ve ever seen one. The people working in top IT services companies in India and China aren’t just smart – they’re super-smart. Your desire to access this superior talent across the world should be a big motivation to offshore. The fact that you’ll experience lower churn than in the UK is a bonus. The fact that you’ll pay less for the work is an additional bonus.

Peanuts attracts monkeys
Since you’re paying less than what you’d pay for a comparable skill set in Europe, don’t be a tightwad. If you only go for low cost (i.e. less experienced and lower skilled workers), you’ll end up paying a high price in the end. Choose a partner company and personnel for their quality, not just their price. Offshore companies come in all shapes and sizes. If you pay peanuts, know what to expect.

Real goods differ
Offshore outsourcing is not the cost reduction panacea for all types of manufacturing. Take, for instance, businesses which create ‘real’ parts or products as opposed to software or services. As you plan for the transfer of parts and products currently manufactured in the UK to offshore facilities, they will often be estimated to have lower unit costs. However, the total cost of ownership (TCO) may actually be higher than manufacturing them in the UK since the goods have to be physically packaged, transported and delivered. TCO will have to include capital expenditure as well as the ‘landed costs’, such as freight, duties and insurance.

It’s the people, stupid
The best protection against failure is not an airtight service-level agreement or the latest remote workflow management product. Neither will help when you find out your software isn’t ready just a day before expected delivery. Build a relationship with your supplier so that open and frequent communication is de rigeur. If you can, eventually build your own subsidiary. Find someone who understands the local milieu to advise you on choosing the best local supplier or partner with whom to build a lasting business relationship.

There’s a reason why Edmund Hillary partnered with Tenzing Norgay. You need help finding your way to the top of the mountain – and your way back too.

Bundeep Singh Rangar is COO of Ariadne Capital.
Ariadne Capital is a leading investment and advisory group, which helps companies access capital, manage M&A transactions, build management, secure customers and incorporate innovation.