Pros and Cons of Onshore, Nearshore and Offshore

When any company decides to outsource, one of the important decisions they need to make is where they wish to outsource. Some of the points to keep in mind while making this decision are:

• Cost Saving
• Cultural Difference
• Language Barriers
• Skill / Domain Expertise
• Manageability

Onshore:

In this, company outsources its operations in same country (or region).

As the services are outsourced to same location / region company faces no cultural, legal or language barriers; managing the work and even facility visit for monitoring is very easy and inexpensive. This option is preferred when company wishes to outsource highly sensitive service or product development to protect intellectual property.

On the flip side this option is not cost effective; also in some cases lack of required skillset also poses a problem and increases cost.

Nearshore:

In this, company outsources its operations to a country (or region) nearby.

As services are outsourced to nearby location, company faces minimum / negligible cultural, legal or language barriers;  managing the work and conducting frequent facility visits are easy and compared to offshore less expensive.

Though this option is more cost effective compared to onshore, it is not in par with cost saving offered by offshore. Not all nearshore destinations have developed skillset required by the companies; this may pose a problem when niche skillset is required.

Offshore:

In this, company outsources its operations to another country (or region) faraway.

As the services are outsources to faraway location, company has to overcome cultural, legal and language barriers; monitoring and managing work requires expensive trips .

On the good side, offshore locations have vast talent pool which can be hired at less cost. Some offshoring destinations which have been in this industry for considerable period of time have developed process and expertise to execute huge outsourcing projects and offer client in house system as part if the deal.

Another option which has gained momentum recently is opening captive centers in offshore locations. This offers companies to offshore work along with flexibility of selecting their own resources; implementing their work culture and ethics etc.

Early Contract Renewal

Renegotiating / Renewal of contracts are considered as a win-win scenario for both client and vendor. Considering today’s outsourcing environment, it is not a choice but a necessity. In long term (three years or more) relationships client’s business and technology needs keeps changing. Therefore it is advisable that both sides are flexible enough to modify the agreement over the life of the contract.

Clients view renegotiating / renewal of existing contracts as a highly effective strategy to revise / align scope, pricing and build a mutually beneficial relationship with vendor.

CLIENT CONSIDER FOLLOWING BEFORE RENEGOTIATING / RENEWING CONTRACT

1)       Pricing model

• Discrepancy between current market pricing and contract rates

2)       Operating model

• How effective is the current delivery model (near shore, offshore, onshore)
• Rate of delivery failure

3)       Scope of service

• Meets existing business needs
• Ability to meeting future / revised business needs

4)       Quality of service and risk

• Review quality of services / deliverables as per SLA
• Identify risks not covered in SLA

5)       Contract terms

• Flexibility provided as per terms mentioned in contract
• List of terms that are no longer relevant
• Incorporating new terms based on lessons learned / industry good practice

6)       Will insourcing or switching providers be trading one set of problems for another?

 

KEY REASON TO RENOGOTIATE / RENEW CONTRACTS

1)       Expand / change in scope because of new offering / needs

2)       Change / Clarity in pricing

• Fluctuating market conditions that may result in a client paying prices that are higher than current market rates
• Move from time and materials to a fixed-price model or vice versa
• Move to a pricing model that better represents a long-term relationship
• Adjust pricing because of added scope

3)       Realign both parties interests and strengthen relationship

4)       Technological innovations (such as grid and cloud computing) that may affect the effectiveness of an outsourcing agreement

5)        Clarify contract terms

• Regulatory changes (such as new privacy and security policies)
• Clarify some terms, considering the relationship grew deeper and more collaborative than original envisioned
• Restructure contract to allow for continuous growth without having to renegotiate the contract every time
• Establish new billing metrics regarding what constitutes an added resource cost (ARC)

6)       Unsatisfactory service levels and quality issues

QUALITIES IN VENDOR THAT TRIGGER EARLY RENEWAL

1)       Flexibility

2)       Feeling of partnership and One team

3)       Honesty / Integrity

4)       Customer focus

5)       Overall performance

CLIENT ADVANTAGES: RENEGOTIATING / RENEWING

1)       Delivery aligned with business needs

2)       Avoid new vendor selection process

3)       No transition disruptions

4)       Delivery challenges are addressed

5)       Align cost with the market price

6)       Liberty to revise / add new terms in the contract

CLIENT RISKS: MIGRATING TO NEW VENDOR

1)       Service disruption

2)       Transition costs

3)       Loss of knowledgeable resources

4)       Complexity in managing multiple providers

Offshore Development Center (ODC)

The Offshore Development Center (ODC) is a business model in which company can open their own center in an offshore destination (like India, China, and Philippines etc.). This center is solely engaged in testing and deploying software solutions and applications for the company.

If implemented successfully this model provides greater visibility and predictability in the development process and also increases productivity and reduces operating expenses by leveraging offshore talent.

To set up an ODC in an offshore location many companies prefer to partner with a consulting firm based in the preferred location. This partnership helps the company to:

• Acquire space locally (at affordable and market rate)
• Liaison with local government for permissions and set up legal entity
• Infrastructure setup (software, hardware, internet etc.)
• Cultural environment
• Establish policies and procedures based on local norms
• Find relevant talent and perform first round of screening

 

Some challenges faced when running an ODC are:

• Communication: Due to time difference and language barriers company should ensure that they are able to understand and communicate their requirements to offshore effectively. If this is not addressed then ODC might not be very effective
• HR: Apart from general HR activities like resource remuneration, evaluation, appraisals, leave policy etc. company might have to monitor attrition and also hire niche skill resources on contract basis as and when required
•  Training: Company might have to impart company specific and domain knowledge frequently
• Security: Company will have to extent / implement some security norms to protect their intellectual property / confidential data
• Quality: Ensuring quality guidelines are set up, shared and followed

Outsourcing Destinations

1. India: Bangalore, Mumbai, Delhi, Chennai, Hyderabad, Pune, Jaipur, Chandgarh, Kolkata, Coimbatore, Bhubaneshwar, Thiruvananthapuram, Ahmedabad
2. Philippines: Manila, Cebu City, Davao City, Santa Rosa Laguna, Lloilo City, Bacolod City, Baguio City
3. China: Shanghai, Beijing, Shenzhen, Dalian, Chengdu, Guangzhou Canton, Tianjin, Xi’an
4. Brazil: São Paulo, Curitiba, Rio De Janerio, Brasília, Recife, Campinas
5. Mexico: Mexico City, Monterrey, Guadalajara
6. United Kingdom: Belfast, Glasgow City, Leeds Yorkshire & Humber
7. Russia: St. Petersburg, Moscow, Nizhniy Novgorod, Novosibirsk
8. Ireland: Dublin, Cork
9. Poland: Kraków, Warsaw, Wroclaw
10. Costa Rica: San José
11. Vietnam: Ho Chi Minh City, Hanoi
12. Czech Republic: Prague, Brno
13. Malaysia: Kuala Lumpur, Penang
14. Sri Lanka: Colombo
15. Chile: Santiago, Valparaíso
16. South Africa: Johannesburg, Cape Town
17. Argentina: Buenos Aires, Córdoba
18. Hungary: Budapest
19. Singapore: Singapore
20. Canada: Toronto, Halifax
21. Uruguay: Montevideo
22. Romania: Bucharest
23. Ghana: Accra
24. Slovakia: Bratislava, Ljubljana
25. Colombia: Bogota, Medellin, Bucaramanga, Cali
26. Bulgaria: Sofia
27. Estonia: Tallinn
28. Ukraine: Kyiv, Lviv
29. Paraguay: Asunción
30. Nicaragua: Managua

Source: http://www.cuti.org.uy/documentos/Tholons__Top_100_Ranking_2013.pdf?goback=.gmp_3736450.gde_3736450_member_223101821

 

Outsourcing Agreement

After selecting a vendor client needs to start preparing for next big phase i.e. entering into outsourcing arrangement with the vendor. This includes penning down terms and conditions of both vendor and client.
Outsourcing agreement / contract should include, but not be limited to the following:

1. Terms and Conditions:
   1. The duration of contract should be mentioned.
   2. Detail payment schedule should be mentioned and agreed upon by both parties.
   3. Termination / Exit clause for both sides should be included.
2. Expected Service:
   1. Client should be very clear and specific regarding the services that they are expecting from the vendor.
   2. Timelines and milestones should be decided and agreed upon by both parties.
   3. Measurable goals and objectives of this venture should be clear and agreed upon by both the parties.
   4. Fluctuations in work depending on peak season, new ventures that client wants to implement during the course of contract etc. should also be considered.
   5. This might also get attached with another document like Service Level Agreement (SLA) which will have Key Performance Indicators (KPI) and metric to measure them.

   Note: SLA lays down expected performance standards in details, It has measurable metrics to identify weather desired services are provided or not, It also includes penalties in cases desired services are not met etc.

3. Warranty and Insurance: In outsourcing contract vendor will be expected to work on client’s site. In such as scenario there is possibility that any act / omission on vendor’s part may cause some damage to client’s property / personnel / data. As a contingency plan it is always advised to have warranty from vendor stating that any damage caused to client will be borne by the vendor. Similarly it is advised to have insurance policy to cover damages.
4. Disclaimers: This section covers clause like
   1. Vendor is not responsible for any indirect, direct or incidental damage caused due to use of third party software or service.
   2. Vendor will not be responsible for work or delay in timelines due to non corporations of personnel from clients end.
5. Force Majeure: This clauses excuse a vendor from liability in case any unforeseen event occurs which is beyond the control of vendor and which prevents vendor from performing its obligations under the agreement. Generally, Force Majeure clauses cover natural disasters and other “Acts of God”.‖
6. IP: It is essential to identify who owns the IP before transition starts. It is recommended that this is part of the agreement.
7. Rebaging: If client wishes to retain some of its personnel then it needs to inform vendor regarding it and gain its acceptance. Details of how this will be executed also need to be documented.
8. Sub-contracting: In case vendor plans to sub-contract then terms and conditions of same should be agreed by both parties and documented.
9. Security: Protection of client’s confidentiality, data and property should be covered in agreement. Penalties in case of failure should also be covered.
10. Governance: Methodology to create, manage and maintain the relationship between vendor and client should be mentioned.
11. Third Party Software: This should cover clauses like
    1. Who will provide L1, L2 and L3 support for the software (vendor / software company)
    2. Is the cost covered in the pricing or this will be additional cost to client (this includes license).

Rebadging

Whenever company outsources its services to new provider, they feel that they should retain some key personnel who are currently working on the said services (or have been part of building the current service). In such scenarios company enter into a contract with the vendor which states that vendor from their end will re hire the key personnel which company wishes to retain. This process of re hiring of personnel is called as rebadging.

Company View:

Thanks to outsourcing it is now vendor’s responsibility to ensure that that service is up and running all time. And to ensure that the vendor get proper know-how of the service they have asked vendor to re hire key personnel

Vendor View:

They will have to evaluate key personnel (which company wishes to retain) and re hire them as their personnel (i.e. personnel will be on vendor’s payroll and all management / grievances will be addressed by them). Evaluation will include interviews, back ground check salary negotiation etc.

Resource View:

In order to get rebadged they will have to send across their CVs to the vendor team, pass the interview and then renegotiate their salary.

In a nut shell resource will be doing the same work (in most cases) but now he/she will be working as part of vendor team and not part of company.

Insourcing

In lay man terms it is opposite of outsourcing. In this scenario companies try to bring back work under its own facility (in other words under its own management). However, before insourcing company needs to answer following question:

• Is insourcing in alignment with their business goals
• Reason why company decided to outsource in first place and what has changed since then
• Does company want to perform full in sourcing or just partial in sourcing
• Is the company ready (in terms of resource and skill) to manage its IT Operations. This also includes technologies / applications that company wishes to deploy / enhance in near future
• Has company decided on how they will execute transition and by which date
• One-time cost of insourcing and maintenance post transition
• Will the decision be accepted to all personnel

IT Vendor Visit (Does and Don’ts)

Vendor visit is an important aspect of vendor selection process. Apart from displaying their technical prowess, vendors also need to ensure that they give good impression of their companies. Some points to consider during vendor visit are:

Before visit vendor should:

• Know who all will be visiting the facility and what is their designation or field of interest (Like: Infra  Director will be more interested in Infra offering)
• Travel plan of the client’s team and if any transportation is required from their end
  • If transport is required then ensure that enough cars are hired to comfortably accommodate all client’s team members and their luggage (if required)
  • Ensure that drivers assigned to facilitate transportation knows the address and most convenient route
  • Send agenda beforehand so that client know what to expect and can ask for additional items that may be of more interest to them
  • Know dietary preferences of all visitors if snacks / lunch / dinner are to be arranged
  • Ensure all logistics details are taken care of like
    • Booking conference rooms
    • Speedy access for client at entrance
    • Internet access for client during session. They might also plan to introduce their company and what they are looking for
    • Inform everyone in facility the time and date of client’s visit
    • Arrange customized gift for client

During visit vendor should:

• Ensure that someone is there to welcome client when they arrive
  • Preferably someone who has been coordinating with client
  • Ensure that entry process in the vendor’s premises is seamless
  • Follow the agenda and try to stay on time
  • Presentation should be as per clients requirements and not a generic one
    • Inclusion of questions asked by clients during  previous correspondence is a definite plus (i.e. “We will get back to you” category)
    • Introduce their company and its achievements; But enough focus should also be given to what client is interested in
    • Enough time should be spend on topics that interests clients so session is fruitful for them
    • Ensure that internally one person is not dominating the whole session or people are cutting off each other
      • It might create an arrogant impression to client which is not good
      • Escort client to their car 

Post visit vendor should:

• Write a mail and thank client for their time and interest in their company
  • This helps build relationships
  • Send across any addition information requested by client
  • Send across follow up mail for next steps 

IT Outsourcing Models

There are many ways a person can slice and dice various outsourcing models. This is my way of doing the same:

1. Time and Material

In this model client and vendor agree on per hour rate and track the number of hours worked by maintaining a timesheet. This timesheet is reviewed and approved by both parties and payment is made to the vendor.

In some instances vendors insist of fixing some minimum hours of work so that they can cover their base cost.

Some challenges faced in this model are:

• Tracking of timesheet may be tedious if many resources are working on this model
• This model is best for project where lots of factors are uncertain / unknown. However, making commitment of fixed cost to the vendor may cause losses

 

1. Staff Augmentation

In this model companies hires a temporary resource to fill specific role or handle over load of work. Once the task is finished the resource is released.

Generally, companies have tie up with independents contractors or companies which assist them in hiring resources. It is the most cost effective and simple way to address support deficiency in any organization.

However, this model might cause some liability for the company like:

• Ambiguity in quality of work
• Challenges in managing resources (e.g. creating contracts)
• Process standardization
• Knowledge Retention
• Accountability for delivery remains

 

1. Captive

In this model company makes strategic decision to create its presence in the lower cost location and conduct work there as a part of its own operations. The resources hired are part of the company and not by a vendor.

The company retains full control of infrastructure, resource, legal and administrative processes.  They can set up their own processes and quality standards.

On the other hand setting up a captive in an offshore location can be a very tedious process as company has to:

• Setup legal entity in that country
• Clear various legal formalities
• Acquire office space and set up entire infrastructure
• Follow local rules and regulations while hiring of resources

In some case companies hire an external vendor in an offshore location to set up captive for them, this is often referred to as Managed Captive. In this model company has full control, but the liability of acquiring of space, setting up infrastructure and managing day to day administrative work is vendor’s responsibility. Vendor at times also assists in short listing potential candidates before company actually interviews them.

 

1. Service Level Agreement (SLA)
   1. Project Based

In this model company outsources a project to a vendor based on Service Level Agreement (SLA). Vendor is accountable for execution of project and to meet the defined outcome. Company from its end will only monitor the project and ensure that key deliverables and milestones are met.

It is a collaborative model which benefits both company and vendor.

 

1. Managed Outsourcing

This is the best mode if the goal is to gain long term benefits. In this model company outsources end to end responsibility of a business unit / tower to a vendor. Vendor is accountable for the deliverable / outcome.

This model is generally for 3 – 5 years; however in some cases it may be more depending on the company and vendor. Scope of outsourcing is very clearly defined with stringent SLA. Company acts as a reviewer with added responsibility of budget tracking and contract management.

Choosing a correct vendor is very important otherwise company will be stuck with the vendor for 3 years and not get the desired benefits.

Now a day most company adopt updated version of this model in which they outsource to more than one vendor. This model may provide more advantages, but managing multiple vendor may prove to be tedious process.

 

1. Transaction Driven

In this model company is charged as per actual number of transactions. Classic example of this is BPO.

Early Contract Renewal – By Tina Nebhnani

Renegotiating / Renewal of contracts are considered as a win-win scenario for both client and vendor. Considering today’s outsourcing environment, it is not a choice but a necessity. In long term (three years or more) relationships client’s business and technology needs keeps changing. Therefore it is advisable that both sides are flexible enough to modify the agreement over the life of the contract.
Clients view renegotiating / renewal of existing contracts as a highly effective strategy to revise / align scope, pricing and build a mutually beneficial relationship with vendor.

CLIENT CONSIDER FOLLOWING BEFORE RENEGOTIATING / RENEWING CONTRACT

Pricing model

• Discrepancy between current market pricing and contract rates

Operating model

• How effective is the current delivery model (near shore, offshore, onshore)
• Rate of delivery failure

 Scope of service

• Meets existing business needs
• Ability to meeting future / revised business needs

Quality of service and risk

• Review quality of services / deliverables as per SLA
• Identify risks not covered in SLA

Contract terms

• Flexibility provided as per terms mentioned in contract
• List of terms that are no longer relevant
• Incorporating new terms based on lessons learned / industry good practice

Will insourcing or switching providers be trading one set of problems for another?

.

KEY REASON TO RENOGOTIATE / RENEW CONTRACTS

Expand / change in scope because of new offering / needs

Change / Clarity in pricing

• Fluctuating market conditions that may result in a client paying prices that are higher than current market rates
• Move from time and materials to a fixed-price model or vice versa
• Move to a pricing model that better represents a long-term relationship
• Adjust pricing because of added scope

Realign both parties interests and strengthen relationship

Technological innovations (such as grid and cloud computing) that may affect the effectiveness of an outsourcing agreement

Clarify contract terms

• Regulatory changes (such as new privacy and security policies)
• Clarify some terms, considering the relationship grew deeper and more collaborative than original envisioned
• Restructure contract to allow for continuous growth without having to renegotiate the contract every time
• Establish new billing metrics regarding what constitutes an added resource cost (ARC)

Unsatisfactory service levels and quality issues

.

QUALITIES IN VENDOR THAT TRIGGER EARLY RENEWAL

1. Flexibility
2. Feeling of partnership and One team
3. Honesty / Integrity
4. Customer focus
5. Overall performance

.

CLIENT ADVANTAGES: RENEGOTIATING / RENEWING

1. Delivery aligned with business needs
2. Avoid new vendor selection process
3. No transition disruptions
4. Delivery challenges are addressed
5. Align cost with the market price
6. Liberty to revise / add new terms in the contract

.

CLIENT RISKS: MIGRATING TO NEW VENDOR

1. Service disruption
2. Transition costs
3. Loss of knowledgeable resources
4. Complexity in managing multiple providers

By Tina Nebhnani

(A Sourcing Guru since Oct 2009)