IT outsourcing is becoming a familiar concept for local enterprises, as more enjoy the benefit of cost savings from delegating certain IT operations to third parties. While the benefit of outsourcing is not limited to monetary returns, not many chief information officers see beyond that.
Shipment tracking portal CargoSmart Ltd., however, has a unique perspective in finding the benefit of outsourcing. Instead of aiming to lower its cost, outsourcing is the bread and butter of CargoSmart's business.
The company helps its clients to manage their shipment-cycles, which are handled by multiple carriers. The portal tracks and manages cargo shipments by relying on the sensitive shipment pricing and scheduling data provided by these carriers.
However being a wholly owned subsidiary of one of the carriers, Orient Overseas Container Line Ltd. (OOCL), CargoSmart's survival relies on its neutrality. Since the shipment data provided by other carriers, who are also OOCL's competitors, is sensitive and critical in the carrier business. To ensure its neutrality and gain trust from other carriers, CargoSmart turned to outsourcing as a "buffer zone."
"The main objective [of outsourcing] for CargoSmart is to protect shipment-sensitive data when serving our customers," said CargoSmart Chief Executive Officer (CEO) Steve Siu.
The company relies on outsourcing provider Hewlett-Packard Co. to run its daily IT operations. HP manages the datacenter and provides production, application and technical support, as well as operating the customer help desk. Not only is the shipment data unavailable to OOCL, but CargoSmart's IT team also serves as a secondary support when necessary.
"HP is responsible for all control access to the application production environment of CargoSmart--from physical, infrastructure (that includes network, database, application server, web server), data, and applications," said Siu. "Only if HP's application or technical support team requires second level support will CargoSmart provide the data to illustrate the case."
Meanwhile, CargoSmart focuses on the development and integration with other carriers to bring real-time shipment information online for its users.
"You can see the complexity of the operation, and it requires the outsourcing provider to commit to learn [about the business]...and treat our business as part of their business," he said. "There were terms in the contract to link the outsourcing provider's tariff with CargoSmart future business volume."
Finding the right partner
This successful relationship between CargoSmart and HP started back in 2001. Recalling the evaluation process, Siu noted the company was looking for providers that understand its business and IT requirements, particularly on the evolving cycle of new application releases and system/network activities.
He said a successful business application depends on how well it engages the business operation. No matter how detailed the listed user requirements during the conceptualization stage, when it gets to the actual coding stage, there are often changes or new requirements relating to other business units to be considered.
"Often the programmers have to second-guess the new requirements and the related impact to other applications," he said. "If they made wrong guesses, that's how bugs are created in the application."
If outsourcing providers do not understand the business, they could create more bugs when providing application support. "Development culture is essential in this process," he said. "If the culture encourages questioning at the development process, it is easier to bridge the gap between business and IT."
For HP, the bidding process in CargoSmart's project was not much different from other tactical outsourcing deals, which includes RFPs, proposal submissions and site visits, noted Cally Chan, country manager of managed services at HP.
Tactical vs strategic outsourcing
The major difference, according to her, is the evaluation focus. "The main difference is really between transactional buying and relationship engagement," said Chan.
For enterprises looking to purchase an outsourcing service, the evaluation is based on the providers' capabilities to fulfill a specific task. She said capability to deliver these tasks takes up 30 percent of the evaluation focus, while the remaining 70 percent is simply price.
On the other hand, in strategic IT outsourcing deals, Chan noted clients focus on building a relationship. These enterprises look not only at the capability to complete a task, but also the capability to be flexible in taking up other IT services to support changes in business environment or expansion in the system, said Chan.
"Business environments do change," said Siu. "Whether the provider is flexible enough to make that extra effort in supporting what is required to keep our business running is essential during the evaluation process."
He added that relationship-building is critical in strategic outsourcing. "Working as a team with an outsourcing partner is more than just SLAs and contractual management," said Siu. "Continual discussions are essential. Both parties have made very heavy investments and it is to mutual benefit that the relationship flourishes."
Beyond vendor-client relationships
Chan agreed. She said HP's relationship with CargoSmart is not much different from a marriage.
"There are, of course, ups and downs in this relationship. But it's the trust and common belief between the executives that make this relationship a successful one," she said.
Chan explained these common beliefs include staff management and corporate culture, which often determine the trust in this relationship.
"Staff turnover is common in this industry," said Chan. "But the way we manage our staff is important to minimize the impact on service quality, as well as to protect the insight held by the outgoing staff as they move to a new company."
The common belief also holds that both parties treat the relationship as a partnership, rather than a traditional vendor-client relationship.
"If the clients are looking only for the best bargain, the vendors would realize that," she said. "We cannot provide a service without making a profit. But if the clients would consider our position, we can develop a win-win situation through trust."
Chan said that these pro-active outsourcing relationships are not common in Hong Kong. According to Gartner, it is also rare among enterprises around the world. The technology research firm conducted a worldwide survey with 945 individuals early this year on outsourcing.
It concluded that while strategic IT outsourcing can be an integral part of a company's long-term business success, most organizations resort to outsourcing as a short-term tactical measure to lower costs. The survey indicates more than half of the respondents identified 'controlling or reducing operating cost or improving efficiency' as the primary value they receive in outsourcing.
Many enterprises indicated access to skills and support for business transformation as the major purpose for outsourcing, but the discussions often lead to the cost savings they can achieve, said Mike Ettling, VP and general manager of Unisys' Asia Pacific outsourcing and infrastructure services.
"You see grand statements made about [business] vision and gaining flexibility," added Ettling. "But at the end of the day, it becomes a pricing-based discussion, often with deals closed based on unclear goals and expectations."
Moving to the next level
Nevertheless, as technology alignment with business becomes CIOs' top priority, Chan said more are exploring opportunities in strategic outsourcing.
For enterprises ready for their outsourcing partners to play a more strategic role, she suggested to first study their balance scorecards-a good tool to indicate the alignment between IT and business.
She noted it is common among local organizations that 60-70 percent of their IT teams are engaging in the daily routine. But the resources that keep the system running only contribute 30 percent value to business growth.
"Such mismatch between IT and business is forcing CIOs to re-evaluate their IT structure and outsourcing strategy," said Chan. "Even when CIOs like to restructure their IT teams, it's not easy to bring such a revolutionary shift in human resources."
Beyond monetary cost and benefit
In this case, the relative cost, meaning the cost to run the operation internally, is high. When making strategic outsourcing decisions, enterprises should look beyond the monetary cost they are paying the service provider, but instead, the relative cost of running the operation in-house, stated Chan.
Siu agreed. If enterprises seek monetary costs in outsourcing, the percentage of business administrative costs will determine the CIO's decision. He added enterprises with business administration costs of 60-70 percent of overall expenditure tend to have higher motivation for tactical outsourcing.
"The higher the percentage, the stronger the incentive to outsource operations, because a higher cost efficiency can be achieved," he said. "As a shipping company, our business administration costs take up only about 10 percent, but we decided to outsource because of the strategic value that outsourcing bring us."
While there is a trend that enterprises are breaking their scope of outsourcing into smaller scale and support by multiple partners, Chan said, there are still rooms for the provider to take up a strategic role.
For example, in infrastructure outsourcing, if the enterprises use a strategic outsourcing perspective, they are purchasing not only the service to maintain the infrastructure, but also adopting a change management practice from the provider to strengthen internal IT governance.
"Strategic outsourcing very much depends on how the management perceives their outsourcing relationship. Enterprises can take their outsourcing technology to the next level only when management perceives its outsourcing partner beyond the monetary costs and benefits," she concluded.
- IDG staff contributed to this article
Outsourcing across the border
When cost reduction continues to be Hong Kong enterprises' primary goal for outsourcing, China is often where CIOs seek vast supplies of low-priced talent.
"When making outsourcing decisions, Hong Kong enterprises tend to pick simple and labor-intensive jobs, like basic programs-coding, with the purpose of cost savings," said Greg Au Yeung, fellow of international affairs committee of the Hong Kong Computer Society.
With a vast supply of young and cheap software developers, China is becoming a popular location for software outsourcing, not only for enterprises in Hong Kong, but also around the world. According to market research firm Analysis International, China's software outsourcing market increased about 44 percent in the first quarter of 2006 to RMB2.6 billion (US$326.9 million), from the same period last year.
Au Yeung said when looking for an outsource provider in China, access to the talent pool is a major factor.
"If the outsourcing provider is located close to prominent universities, it's more likely they can recruit a higher quality of talent to support your business," he said.
He noted Beijing, Shanghai and Shenzhen are where most of the top universities are located. Also head of IT for a multinational bank, State Street Bank, Au Yeung said the company has an operation in Hangzhou mainly because of its proximity to Zhejiang University, which is ranked among the top three universities in the country.
Apart from access to cheap talent, local CIOs have additional incentive to outsource in China: location. Many software parks, hosting the outsourcing providers, are only a couple hours travel across the border.
"The software park's location and its distances from the business operations are essential," said Au Yeung. He noted that the MTRC chose to outsource its back-end IT development in Zhuhai partly due to its location. "In case of emergency, it'll take them only a few hours to get to the outsourcing site."
Buying talent not experience
"For many local CIOs, talent or resources buying is often the purpose of outsourcing, so proximity of the universities becomes a factor," said Darren Tan, associate director of consulting at Gartner. Instead of buying resources and talent, the essence of outsourcing is to purchase a provider's output, which includes its capabilities, experience and sometimes even corporate culture and governance policy.
"[In this case] China still needs some time to become a mature outsourcing provider like its counterpart India," said Tan. When multinational corporations (MNCs) with mature IT shops seek for outsourcing partners, they look for track records and experiences similar to themselves. "Therefore many MNCs continue to turn to the big players in China as their outsourcing partners."
"We see China with a lot of facilities in outsourcing," added Mike Ettling, VP and general manager of Unisys' Asia Pacific outsourcing and infrastructure services. "So there are cheap and plentiful datacenters to utilize but they cannot offer the process and best practice for any advanced ITO/BPO."
Nevertheless, Tan noted China has a much steeper learning curve than India.
"China will need to go through the same process as India to build that experience and track record to become a mature provider," he said. "But the country will take a much shorter time to mature, as India has paved the learning path."
When outsourcing turns in
While China remains to be a mature outsourcing partner, many Hong Kong firms tend to expand their scope of China strategy in a different approach, said Au Yeung.
"Enterprises on a smaller scale outsource the fundamental work to Chinese outsourcing providers," he said. "But larger enterprises simply set up their own back-end IT shop in China to take full advantage of the vast supply of talent at a lower price."
He noted Orient Overseas Container Line (OOCL), Citibank and State Street Bank are a few of the enterprises doing insourcing in China.
"But as outsourcing becoming more mature, companies are also expanding their outsourcing spectrum to include more strategic work," he added. "Chinese providers have great potential in offering more strategic roles in outsourcing, particularly with the commercialization of nascent technologies."
Since China is known for its academic research and development, Au Yeung said enterprises could take advantage of these technologies for business growth at a lower price.
He quoted one example: the use of human engineering, which includes the study of human habits and eyeball-placement in website design and development.
"By making good use of this nascent technology to increase the usability of the website or reduce the number of clicks for its users and customers, enterprises are generating more strategic value from their Chinese outsourcing providers," he said.
"Hong Kong enterprises should not limit their outsourcing in China to the low-cost routine tasks-if companies are looking for cheap and low-business value sub-contracting work, many booming Southeast Asian countries like Vietnam [please refer to page 20], can provide even cheaper services." he concluded.
- IDG staff contributed to this article
Top 10 list for due diligence in China
Due diligence is an important step in any outsourcing project, but particularly important in China, where quality ranges. Gregory Au Yeung, fellow of international affairs committee of the Hong Kong Computer Society, shared his tips for due diligence in China.
1 Creditability check-Make sure the company has a sound financial background and a well-established corporate structure.
2 Research work-Do your homework to research on your provider's background, in addition to its certification, also find out its reputation within the industry.
3 Location-It may not be the only indicator, but the location of the provider is a guide of its creditability. If the service provider is located at the software park run by the Central government, it's more likely the company has a higher quality. Just like if a financial institute is located at IFC, it's more likely to be a legitimate and quality company than locating, say, at Kwun Tong.
4 Employee's background check - Request for resumes of employees, especially the key personnel. Their background and experience is important to ensure the provider has the capabilities to support your IT team.
5 Specific SLAs-Make sure service levels are specific and measurable to avoid finger-pointing when expectations were not matched.
6 Project management structure-Study the outsourcing team structure and the metrics for monitoring and measuring the performance.
7 Walkthroughs-It is a good idea to walkthrough with your outsourcing providers to find out how project is carried out. A specific step-by-step software development process or infrastructure maintenance process is helpful when making decision.
8 Data security - Ensure your sensitive corporate data is handled securely, find out where are the servers placed, what is the providers' security policy to ensue client's sensitive data won't be shared by another team within the same outsourcing house.
9 Corporate governance enforcement-Ensure the corporate governance or data security policy is not only established, but enforced. Information leakage is common in China; sometimes sensitive corporate information can be eavesdropped by others in the lift, where people tend to share casual conversation.
10 What if?-It is not necessary to define all the specific details in handling emergency or special situations. But it is a good idea to set different scenarios and discuss with your provider how some of these emergencies will be handled.