A recent article in the Wall St. Journal consolidated reporting on a number of recent changes in so-called captive centers (IT or back-office services operations in India owned by non-Indian, usually US or UK, businesses).  While the leading sentence talks about “reversing a  a decade-long trend,” I think the article reveals a more complex picture.

The author points to three large financial services companies (Citigroup, AXA and Aviva) that have sold their entire outsourcing operation – facilities and staff – to leading outsourcing firms, for cash payments and multi-year contracts for services from those same facilities and staff with the outsourcing firm.  Two airlines, Delta and United, have made similar deals.  These are all examples of businesses in industries that have been hard hit by the global financial crisis and recession, and are desperate for cash infusions.  The deals are not shutting down their Indian operations, just shifting the ownership and management to an Indian outsourcing firm, typically one of the top 10 IT or BPO firms.  What’s not discussed in the article are two other benefits of these deals: first, the company no longer has any potential “offshore” profits which could be taxed under Obama’s proposed tax law changes; and second, the company reduces its political risk in the U.S., since it no longer has any Indian employees, just a contract with a vendor.  (The company may also reduce political risk in India, since it is sending revenue to a large India-owned company.) One could also argue that they have reduced their management workload, since they are no longer managing the Indian employees and services directly, but I suspect that on a day-to-day basis, there is not a lot of difference for project managers, and at the senior management level, they have  probably just traded some of their operation management to vendor management.

Another kind of situation is the example of a small biotech firm quitting most of its Indian presence and selling its facilities to a mid-sized outsourcing firm, along with signing a 10-person services contract for 18 months (probably for transition purposes only).  Small captive IT services operations are notoriously difficult to manage, and are often started with the idea that while they require an upfront investment, they will make sense financially over the long run.  If the business doesn’t grow as expected (common in this recession), or if the people managing the center quit, the company can be left with a money-losing headache.  It can make a lot of sense then to turn it over to an India-based services company that can integrate the facilities and staff into their operations.  Reducing the U.S. political risk can also be a factor, particularly if the company is looking for U.S. government contracts or funding.

In contradiction to the main story line, the article also points out that Everest, a leading outsourcing advisory firm, knows of four companies who opened new captive centers in the first quarter of 2009.  This suggests that there continue to be some benefits to the captive model, such as greater control, security & IP protection; establishing a geographic presence in another region, and potential cost savings.

The bottom line message, for me, is not that there has been a wholesale change in outsourcing strategies, but that the strategy about how to engage and manage services in India is always complex, and usually evolves over time.  These examples are great object lessons about the importance  of evaluating a number of factors, and considering a wide range of possible scenarios for both the environment and business model, in developing smart outsourcing strategies.

Recently we were talking with an American client about an upcoming trip to India to evaluate outsourcing vendors.  They are experienced managers, who have evaluated a number of vendors for different kinds of services for their business, and they have a well thought-out vendor evaluation process.  But they’ve never outsourced work to India, and none of them had ever visited India.  Alarm bells started going off in our heads.

We had two major concerns.  The first is simply managing the travel in India.  American and European business travelers are often challenged by the double whammy of a very different culture and an underdeveloped infrastructure.  The outsourcing industry is rife with tales of prospective clients who got off the plane in Mumbai or New Delhi and then turned around, without ever making it to the vendor campus, so much so that most vendors make sure that first-time visitors are met at the airport and are provided some kind of travel support, if not actually escorted to the vendor site.  A global outsourcing sales exec told me “I would never let a client travel to India on their own for the first time!”  Beyond the initial culture shock, there are any number of relatively small issues – canceled domestic flights, missed car pick-ups, phone problems, monsoon-related road closings – that are hard to navigate in India, and can result in travelers losing whole days carefully planned business agendas.

The second challenge is more subtle, but of more importance when you are considering potential long-term vendors, and that is being able to evaluate vendors across the cultural differences.   Americans with limited outsourcing experience can easily mis-read what they are seeing.  Once visitors get past the views of roadside poverty, they may be so dazzled by a gleaming new campus that they will not question other aspects as thoroughly as they should.  Or they may misinterpret elements: they may not realize that a beautiful building in the suburbs means employees will spend hours commuting on company buses (car ownership is still quite low in India), and a more dingy-looking city building may be a better choice for certain kinds of work.  They may be put off by the poor accent or shy presentation of one manager, and not be able to properly appreciate the level of expertise or client service skills.  On the other hand, they may be overwhelmed by cultural differences and overlook clues that indicate issues that will come back to haunt them later on.   Western clients often focus questions on electricity and internet back-up, which virtually all reputable vendors have covered, and then neglect to ask for a more detailed review of employees’ education levels, which is a much harder area for foreigners to evaluate and can have a big impact on service quality. And so forth.

If you are an outsourcing buyer, and have stories about what you wish you had done differently in your vendor due diligence site visits, I would love to hear them.   Please email me directly.

I heard another story of failure with a software development team working from India for a client in the U.S. yesterday.  Mulling it over this morning, I am struck by the number of factors racked up against this team ever succeeding in the first place, yet the interpretation of the American client focused on only one element – that the team was based in India.

What I heard was not as simple: the vendor was pushed on the development manager by a new senior exec, and was resisted by the local development team; the vendor had no formal QA processes; the vendor was a very small company, seems to have had challenges with recruitment and retention, and their team wasn’t consistent from one week to the next; etc.  These challenges were intensified or aggravated by the team working across cultural differences, language differences (Indian English is not the same as American English), and time zones.  However, most of these challenges could, and in fact, often do, occur with locally-based vendors,  too.  In my view, this is less an “offshore outsourcing” failure, but a project management failure and a vendor failure, aggravated by the challenges of working with a globally distributed team.

Efforts earlier on to ensure buy-in from the development organization and properly vetting the vendor could have possibly prevented this meltdown.  These are two standard change management elements in any significant project which, at least in hindsight, appear to have been given short shrift.

In addition, all parties in any global project need to ensure that core project management elements are both fully implemented, and adapted for a global team.  Some of the basics include:

• Project structure. Spell this out in detail: team members, roles, responsibilities, reporting structure, and time commitments, by project phase.  For a global team, it is essential to document these expectations and to have initial in-person meetings for key team members to build relationships with one another.
• Communications. Design a communication plan that specifies regular communications across multiple communication modes and parties (in person, video, email, phone, IM; individual, team, stakeholders), and addresses all project elements, including project deliverables, financials, relationship, and strategic value.
• Shared understanding. Ensure that all team members, across all locations, understand the project’s end user needs, the work process and methodology, and how to use the work tools (e.g., code repositories, wikis or KM applications, ticket systems, QA software, etc.).  This will require an upfront investment in training and should include some co-location time, to enable team members to understand organizational culture and values.
• Appropriate infrastructure. In IT projects, this typically includes computers, servers, internet, back-up power, security, etc. Don’t forget the “soft” infrastructure of adequate communication channels, travel support, HR policies, training, etc.

These are standard elements in any project management or consulting methodology, but they are frequently neglected, particularly when small businesses are involved, as being “overkill.”  When these aren’t in place, the project is likely to fail, with financial and reputational losses for both client and vendor.  All too often, I see companies start offshore engagements with a focus on the rates and the contract, when the attention really needs to be on sound change management practices.

One of my business partners,  Matthew Sullivan, has just published an article on the trend of globalizing legal services, both through legal process outsourcing (LPO) and shared service centers.   The article appears on Phil Fersht’s Horses for Sources blog, one of the leading blogs about the outsourcing industry and business globalization in general.

In the article, Matt argues that the growth in the globalization of legal services and the LPO industry is likely to continue and pick up steam in 2009 (and beyond).  The primary driver is reducing the cost of legal services, particularly as the volume of e-discovery work increases dramatically.   In addition, several barriers to outsourcing legal services work have come down: recent legal decisions have allowed legal services outsourcing (with some conditions), a number of solid pure-play legal services and diversified outsourcing service providers have emerged, and both clients and vendors are able to leverage broad knowledge about how to effectively manage US-India business processes to the legal services arena.

Matt has a unique perspective on this: he’s a US-trained attorney who worked for an IT outsourcing firm in India for two years.  There are already a couple of comments and questions on the post, and I’m sure he’d welcome more.