CHAPTER 5

Outsourcing

5.1 Introduction

Let me start with the definition of “outsourcing” as I have seen this and have experienced it myself within IBM Global Services.

Outsourcing in my experience is moving operations to low-wage countries. These are generally countries in the Far East (such as India and China) and South America (including Brazil).

Outsourcing is also performed in former Eastern bloc countries such as Bulgaria, Poland, and Slovakia, which are in Europe. Because these countries have become members of the European Union, this makes it relatively (!) easy to work in different countries within the European Union without too much hassle.

5.2 Challenges

In itself it all seems pretty simple but the “transfer” of work to other countries is more difficult than you would think in the first instance. The following is a list of topics which you can think of:

1. Language. Working with people who speak a different language is not easy. Firstly, the intelligibility and then the accent/dialect on both sides. From my own experience, I know that a conference call with (a group of) people from India can be difficult. This means such a meeting not only takes considerably longer but also could cause issues due to misunderstanding each other.
2. Culture. In some cultures it is hardly possible to say “no” to the other person. As a result, you’ll have to continue to ask for the status of an activity, for example, good in picture (especially delay). As a project manager, you run an extra risk and here you need to be extra alert.
3. Working Together. Collaboration with people in India from the Netherlands and China requires that one of the parties, and sometimes even both parties, work outside the usual local office hours. This often fits the supplying party itself. This may, however, have adverse effects on their private lives and it is possible that the people have to work from home at certain times in which the question is how good is the reliability and quality of their local Internet connection.
4. Legal. Especially when outsourcing of “sensitive private information,” as with public authorities, great caution needs to be exercised! It’s not just legally allowed to store such data on environments outside the home country. Within the European Union, there are agreements but outside the European Union, this is an extra challenge! Think of the American “Patriot Act” with American government legal access to all data which are stored in environments which are operational within America. Think about the American National Security Agency (NSA and Edward Snowden).

   If you as a supplier of services to a public authority take as a starting point that you service clients from other countries this should be transparent for the client. However, you need to have this arranged very well in advance to prevent great risk. Firstly, legally and secondly in terms of costs because the cost model is entirely different when you perform services in a relatively expensive country such as the Netherlands.

   In some countries it is not allowed by law to store sensitive personal information on storage systems outside that particular country!

5. Location. One option is to bring the activities to the people (“offshore”) and the other option is to bring the people to the activities (“landed resources”). The latest has not only a number of important benefits (such as access to client network being much easier to regulate) but also a series of additional challenges. This includes arranging, for example, work permits, housing (with insurance for damage to property), and initial reception/guidance (does this person alone or with family?). Don’t underestimate the consequences of a culture shock. In addition, a travel allowance for this person will also need to be agreed to by both in the country where he/she currently is working and also in this person’s home country.
6. Transition Costs. The cost of a transition project (the assumption is that the services are being transferred one-on-one to the delivery center [DC]) should also be taken into account. The cost of such a project will be considerably higher if this is the first client of course.
7. Additional Human Hours. These are the costs that the original organization needs to spend on building up and managing the contacts with the DC. This includes knowledge transfer as well. These could be considerable costs at “normal” hourly rates!
8. Costs. The DCs are “cost centers,” which means that all costs are charged to the requestor. In addition to the hourly rate costs many other additional costs other than purely the “human” costs, which are not included in the hourly rate, will be charged such as:
   1. Cost of the computer that the person is using.
   2. Office expenses and associated facilities.
   3. Internet connection. This is probably a shared connection but beware of the client requirements for security, for instance, as well.
   4. Software licenses.
   5. Health insurance.
   6. Telephone costs (in particular because of conference calls, it may not be possible or not be allowed to use Skype).
   7. Training (can also cost extra time for the party performing the outsourced “activities”).
   8. Transfer of knowledge (also costs extra time for the party providing the outsourced “activities”).
   9. When multiple people perform activities, a manager must be appointed, which, including all facilities, will also be charged additionally.
   10. In several countries, the standard work week is 44 hours and not 40 hours. This means 10% extra in charges. Keep this in mind in the planning of activities of these people.
   11. Travel expenses. This is especially the case when a person works with the client and goes home once every two months, for example.
   12. Housing. This is applicable when the person works in the country of the client. An insurance for damage to the house and related material is added. This might sound a bit strange but I’ve seen damage caused by people who had no idea how to use (what we consider to be) standard equipment in Dutch houses and kitchens. The landlord was not “amused” . . .
   13. Support (in case of problems). Think of contacts with local governments, filling out forms in the local language, cultural issues, local food, etc. This could be 24/7 hours.
   14. Per diem. This is applicable when the person works in the country of the client.
   15. Visa. This is applicable when the person works in the country of the client.

What is rather often forgotten is the cost of man hours by the supplier within the framework of arranging all kinds of issues and guiding the people and that are “normal” hourly rates!

Through the efforts of people in low-wage countries, the hourly rates also vary greatly and should also be taken into account. For example, additional local management and infrastructure costs. Another option is to fly the people from low-wage countries to your country to run the project. However, in this case, in addition to the hourly rate, travel and accommodation also need to be included. These can be substantial. The arrangements made should also be taken into account, especially for people coming from outside the European Union, as far as a work permit. Arranging such permits will lead to additional costs.

5.3 Access to Client Environments

In case tasks are outsourced to DCs, special attention needs to be paid to access networks of the client by the DC staff if applicable. The client in this context could be not only the company outsourcing its own tasks but also the client of the company which is outsourcing tasks.

An example could be when application maintenance or data center management is outsourced. In order to perform the tasks, the DC staff needs access to the network of the client. In this case you need to be extra careful!

You need to meet with network, data communication, and security specialists in advance with the aim to determine possible solutions including costs and getting the solution implemented. Involving the client in this process as soon as possible is better than confronting the client with the facts after the decision has been made. You also need to take the security regulations of the client into account! This can cause heavy damage to the client relationship.

Rather often a special dedicated and isolated (virtual) network for that particular client is arranged. In case the same DC staff is working on several client accounts, a shared network infrastructure is required to make life not too complex for the DC staff.

For particular clients, such as banks, an additional security requirement could be applicable. This could be a controlled access special room. In this room, the computers have access to the client network.

Beware of these additional costs!

5.4 Tips

Below you will find some practical tips based on my personal experience gained in practice in the context of outsourcing services:

1. Outsourcing would be profitable when it comes to a long time period, for example, more than five years. Short periods of a few years are usually not cost-effective in particular because of the high preparation costs.
2. Evaluate regularly, for example, every two years, the extent to which the outsourcing is still profitable. Wages and costs of the people in low-income countries are also on the rise (10% per year is no exception).
3. Consider the options to bring work to the people or the people to the work. Both options cost considerable time.
4. Realize that data communication connections in the Far East for instance are “load-balanced” on which you have no influence (connections to the United States via Japan or Australia use both routes, for example). If it became apparent that the bandwidth is insufficient to operate effectively then additional bandwidth will be needed. Who is going to pay for these extra costs is just one question (is this in the cost model of the supplier for instance?). Another challenge will be the lead time to have the change implemented, which is outside the control of any party (except the data communication supplier of course but don’t think you have a direct power to change their priorities).
5. Organize workshops about each other’s culture. This motivates the people with growth and mutual understanding.
6. In any case, as a project manager or manager travel a few times a year to the DC and work there a couple of weeks. It is also advisable that the counterpart of the project manager or the manager of the DC does the same. Of course, these costs must be budgeted.
7. The preparation of intercompany agreements and documents of understanding, in other words, the contractual arrangements between the supplier and the DC, is work for specialists. Have the right people in the supplier organization. Use these contracts as the source for drafting the contracts with clients so that the whole chain is taken into account.

   Avoid special/alternative arrangements with clients as much as possible (this also gives extra cost, which is detrimental to the efficiency of the outsourcing services).

8. Determine in advance which type of data access will be available for the people from the DC. If this is “sensitive personal information” then you will have to take additional measures, such as obtaining permission from the Ministry of Justice, for instance, or maybe this is not allowed from a legal point of view.
9. A project can extend past a year. It is quite common that salary increases occur on January 1. This means that the hourly rates of the people in the DC also will rise. This affects the project costs.
10. Hold regular conference calls (preference is video conferencing so you can see the nonverbal communication, most human communication, and you also get to know each other better and faster which is crucial in the context of cooperation) and take into account time differences. When time differences of more than 8 hours occur then one of the parties has to work outside normal working hours to attend meetings. An option could be to switch so one time party A works in the normal working time and the next time party B works in the normal working time and vice versa.

    Document what has been discussed and agreed upon in minutes of meeting and share them with each other (this is actually “just” project management).

11. Keep all national holidays of the different countries involved central so that everyone involved can see this. Add this to each other’s (team) calendars so that there is a better understanding for each other.
12. Agree to a communication management plan with each other.
13. Certainly in the beginning of a new working relationship, it is important to monitor closely and get to know each other (and understand). You could consider having daily contact during the first weeks of a new cooperation.
14. Make explicit and measurable working goals with the people of the DC and measure this, especially in the beginning, regularly so that you can adjust in time. You might think of an agile-like approach.
15. Try to make arrangements with the employees in the DC about “commitment” in order to avoid suddenly disappearing after a training period if they can get a better job somewhere else.
16. Do not use the trick to convert a “business or vacation” visa to a work visa as this can pose many problems for everyone involved! Look closely when the person concerned will have to carry out activities in different countries! It is often possible to attend meetings or education in different countries but not to be able to work in different countries! This is especially true for people outside the European Union.
17. Use a common project file that is accessible by both parties (and test this before it’s actually put into service).