Global outsourcing demands a new mind-set

Picking up where I left off last week, did Kana, a CRM company with $80 million in revenues last year, actually reduce costs by turning to a software development company, HCL, in Uttar Pradesh, India?

The short answer is yes, but not on a 4-to-1 ratio as might be indicated by the fact that for every one dollar Kana would have paid for coders in the United States, it spent twenty-five cents in India.

As you may recall, Brian Kelly, executive vice president at Kana, told me that the company had to create new roles to manage the outsourced development model.

In the first 12 to 18 months, Kelly says Kana didn’t actually save any money. But Joe Murphy, head of North American outsourcing at Sapient, says that’s also due to the fact that Kana was not looking to reduce R&D spending. What the company wanted was to get more done for the same amount of money — which, Kelly tells me, was accomplished. Now, in the 18 to 48 month time frame, Kana expects to see a 20 to 25 percent savings in real dollars.

Long term, IT will need to change its research and development and PLM (product lifecycle management) processes to adapt to this outsource model, say both Kelly and Murphy. IT will need to refocus its skills on business analytics and strategy.

The ability to negotiate a change request will be of equal importance to technical skills, if not more so. And, though ultimately you may want to treat the outsource firm as your engineering team and you may want that process to be transparent, there will be new tasks to delegate, with time zone and language barriers thrown in for good measure. If you can’t walk down the hall, you need new processes to make sure things get done. From what I can tell, this is not something the computer science schools currently focus on.

If your enterprise is building or modifying its own custom enterprise applications, as opposed to designing new products, then a second layer of complexity is added, says William Brown, vice president of distributed delivery for the Americas at Cap Gemini Ernst & Young. Now you have your own end-users telling you what to build.

But at the same time, IT is getting squeezed by upper management to do more with less. Truth is, you are probably not going to get any more price advantages on your hardware leases, leaving you with, say, 20 percent less money in your budget to get the same job done. The pressure to outsource increases.

Measuring the business benefit of outsourcing for a company like Kana is easy. Its cost structure is more flexible. The company can adjust R&D expenses as needed.

“If we foresee the need in next three quarters, we dial up the resources or we can dial it down and not affect the payroll,” Kelly says.

Brown estimates that penetration for outsourcing in the enterprise is maybe 15 percent and that the “huge awakening” on how all of this is going to be managed hasn’t even happened yet.

IT will need to learn to “segment,” Brown says. In other words, companies will need to categorize their business users’ requests, then parcel out those responsibilities based on how they can best be accomplished, whether in house and off site.

Next week, in part three, I’ll talk to the outsourcers in Bangalore, India and Minsk, Belarus, and their customers.