Transformational Offshoring:

Why and How?

Prashant Halari

Patni White Paper

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September 2005

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 Table of Contents

Introduction ...............................................................................................................................................1
Transformational Offshoring: Why and How?.............................................................................................2
Key Benefits of Offshoring .........................................................................................................................2
Need for Transformation............................................................................................................................3
Offshore Engagment Process and Various Engagement Models .....................................................................5
Captive Unit ....................................................................................................................................... 6
Build-Operate-Transfer....................................................................................................................... 7
Offshore Development Center ............................................................................................................ 8
Joint Ventures .................................................................................................................................... 9
Selecting an Appropriate Engagement Model and Potential Offshorizables ..............................................10
Conclusion ..............................................................................................................................................11
About the Author .....................................................................................................................................12
About Patni..............................................................................................................................................12

Copyright  Patni Computer Systems Ltd., 2005. All rights reserved.

 INTRODUCTION
Over the years, organizations have adopted offshore options like Selective Offshoring
and/or an Offshore Development Center (ODC) with a focus on single/multi-vendor
approach. Todate, the predominant drivers for offshorization have been cost, quality,
easier access to technical talent, faster ramp-up and accelerated delivery. However, any
offshore strategy formulated around achieving these benefits has been adding little or
nothing when it comes to ensuring the alignment of IT with business. This is one of the key
challenges faced by CIOs today. Forrester estimates that 80% of IT budgets go into
maintaining existing applications leaving only 20% for new projects. Economic and
regulatory frameworks over the last few years have resulted in several challenges for
organizations. Such dynamic considerations have made it imperative for them to assess
the financial viability of their IT portfolio for effectively addressing the change in business
scenario as well as optimizing ROI on existing applications.

With most organizations’ applications being supported offshore, Business-IT alignment

becomes an important part of their offshore strategy. In addition, selection of an
appropriate offshore engagement model also becomes a key issue as organizations
traverse on the Transformational Offshoring Path. Traditionally, ODC has been widely
accepted as an offshore engagement model. Though ODCs have been successful earlier,
now organizations and offshore vendors need to critically evaluate other engagement
models (BOT/JV/Captive) as a part of their evaluation process.

Transformational Offshoring will involve significant change management at both the

organization and offshore vendor level. The offshore vendor should have the necessary
capability to understand an organization’s business process and methodologies to
implement the Transformation strategy from offshore in an effective manner.
Transformational Offshoring requires a certain level of maturity in an organization’s
business processes. If an organization’s business processes are fragmented and not
clearly defined, it will be difficult to transition them to offshore and expect the
transformation over a period of time. Transformational Offshoring requires the definition of
adequate metrics to measure the performance of application portfolio and overall offshore
strategy.

Effective Transformational Offshoring strategy is driven by:

§ Selection of an appropriate Offshore Engagement Model
§ Identification of transformational application candidates in the early stage of
offshore planning process
§ Identification of metrics (including ROI, Application-value) to be monitored
throughout the relationship
§ Addressing change management
§ Developing an appropriate transition and transformation roadmap.

This Paper discusses some of the biggest challenges faced by organizations in aligning
their applications to the business. The role of an offshore strategy in transforming those
applications so as to align them with their business while they are offshore is a central
theme of this Paper. The Paper also focuses on the methodology involved in defining
Transformational Offshoring strategy with a list of parameters that needs to be evaluated

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 to arrive at an appropriate Offshorization and Transformation recommendation, for each
application in their IT portfolio.

TRANSFORMATIONAL OFFSHORING : W HY AND HOW ?

Ever since the dawn of the new millennium, one industry that has witnessed realignment
and paradigm shifts is the global IT industry. What we are now witnessing is a much larger
phenomenon of the industry settling down to a new equilibrium. From a long-term
perspective, the Indian IT industry stands to gain. From a demand viewpoint, the size of
the offshoring pie is increasing - larger deals are flowing offshore, and more global players
have come to India to evaluate and finalize outsourcing relationships. We have seen many
examples of such companies in the past years, including IBM, PeopleSoft, Accenture,
among others.

KEY BENEFITS OF OFFSHORING

So far the key drivers for the majority of offshore engagements have been the desire to
reduce costs and improve the service quality. Using offshore locations with a lower cost
base is clearly an attractive option in the search for cost reductions.

Figure 1: Benefits Offered by Offshoring

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 As shown in Figure 1, the following are the predominant benefits of using offshore
services:
§ Cost savings
§ High quality standards
§ Flexible capacity
§ Accelerated delivery
§ Easier access to high-end technical talent
§ Handling of competitive pressure.

However, customers and vendors are also increasingly advocating the benefits of
improved processes and service quality as equally important reasons in the choice of an
offshore location. More flexible work practices and the exploitation of different time zones
can, for example, create 24-hour processes which were previously limited to certain parts
of the day. Access to highly qualified and motivated staff in some locations also assists in
the improvement of service quality. "They come for the price, but stay for the quality" is the
mantra, which many offshore providers currently like to use.

NEED FOR TRANSFORMATION

While the offshore benefits are being accepted across organizations there are certain
concerns related to the aligning of the IT portfolio with the current business processes.
Also, considering the fact that the applications are being supported from offshore, clients
feel that there is very little or no control left over their applications. This also raises the
concern as to how the applications can be aligned with the business remotely.

If we look at a typical application portfolio, at one end of the spectrum there are modern
applications that leverage and capitalize on the potential of the Internet, while at the other
end there are traditional, close-ended, legacy business systems. In the midst of this
technological diversity comes a surprising fact that more than 70% of corporate data still
resides on legacy systems. The challenge that technology and business leaders have to
address is the successful management and re-deployment of legacy systems to meet
tomorrow’s business needs while they are offshore. In this scenario, organizations need to
understand the impact of Legacy Applications to answer following application
rationalization questions:
§ What legacy applications do I have?
§ How many of them are being supported from Offshore? How are they performing?
§ Which applications support my most critical business processes?
§ How do these applications support critical business processes?
§ Who are the end-users?
§ Which applications have poor data, high maintenance requirements, and high
support costs?
§ What is the total cost of ownership?
§ How do applications impact the customers?
§ What redundancies exist across the application portfolio?

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 The following are the key drivers for Application Transformation:

Figure 2: Key Drivers for Application Transformation

Organizations thinking of moving away from legacy systems adopt a solution that meets
strategic business needs – while simultaneously evaluating the financial viability of the
espoused strategy. There are various options available to the organization when
metamorphosing from legacy systems to more contemporary platforms. The four key
options along with offshore leverage during each stage of application life can be
summarized in the following graph:

Figure 3: Offshore Leverage during Application Life Stages

As shown in the above graph, the offshore leverage during the life of an application ranges
between 30% and 80%. However, a plain vanilla application offshoring strategy introduces

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 breaks in the overall strategy as application moves from one stage to other. Also this
becomes as low as 0% during a stage when application is moving in the transformation or
a modernization stage. This largely happens due to loss of application behavior knowledge
in the previous stage and inability to assess the appropriate modernization or
transformation alternative in the absence of crucial application data (like number of change
requests received, application abends in the past, complexity of source code, and
application knowledge).

OFFSHORE ENGAGEMENT PROCESS AND

VARIOUS ENGAGEMENT MODELS
A typical Offshore engagement process can be diagrammatically represented as below.
As shown in this diagram it goes through three key phases:
§ Decision phase
§ Transition phase
§ Monitoring and managing phase.

Figure 4: Key Phases of an Offshore Engagement

As depicted in this process, transformation planning is one of the key stages, which helps
in aligning the application with current business needs. Also this alignment happens while
the application has been transitioned at offshore. Transformational planning stage in turn
identifies new projects (e.g. Reengineering or migration of existing application or
consolidation of existing applications) that can be executed from offshore.

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 There are a number of different ways of structuring an offshore arrangement for achieving
the offshore benefits and IT transformation objectives. The four main ways are:
§ Captive Unit
§ Build-Operate-Transfer (BOT)
§ Joint Venture
§ Dedicated offshore development center.

CAPTIVE UNIT
In the captive center model, the business sets up its own subsidiary offshore so that all
assets and staff are owned by the client business. The client then sets up its own
operations through hiring local staff and leveraging expatriate staff. This model has the
advantage of the client retaining ownership and operational control. Captive centers will
best serve clients that want to migrate core business processes offshore or technology
companies that want to establish IT development, support and maintenance in a multi-
shore structure. In general, the captive unit offers the following benefits to clients:
§ Control: Captive is an obvious choice if the company has a need to have total
control over the quality, timeliness, process, security, data privacy etc. of the
process in question. With a captive unit, companies will have the advantage of
offshore operations without the management challenges of working with a third-
party.
§ Risk: Captive is a strong choice if the company needs to aggressively manage
and retain control over their risk profile. Many firms that are regulated tend to
manage their offshore business processes in captive centers, especially for critical
business areas.
§ New Markets: With business going global, and countries becoming virtual
boundaries, there is an immense opportunity to leverage old investments in new
markets, utilizing local expertise and talent.
§ Talent: Skilled managerial resources can be leveraged and redeployed to the
various offshore locations. Business knowledge and experience with the
processes adds value to the second level managers who are usually recruited
from within the local marketplace where the site exists.

However there are certain issues that need to be addressed while operating the captive
centers. Broadly these issues are:
§ Higher Start-up Costs: Typical investments in infrastructure, hardware, software
and facility service provisioning require high initial setup costs. These costs are
usually significantly higher in building a captive center when compared to
outsourcing to a third party who can spread their costs and risks over a wider
client base. Also, while the client has to bear all the cost as it occurs in a captive
scenario, in a third party situation, the supplier can spread it over the terms of the
agreement. Thus, a client will need to have a larger amount of capital available in
order to invest in building a captive center.
§ Organizational Issues: From the organizational point of view, offshore captives
will challenge the staffing, style, and formal and informal information systems of
organizations that implement them. Specifically, human resource departments will

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 need to become more adept at managing disparate work forces and cultural
differences in communication and problem solving. The management will need to
develop policies and practices to incorporate a more flexible approach to labor
allocation. The management structure will need to support relationships with
offshore operations and assure that objectives, contracts, delivery models, and
measurement are aligned.
§ Process: Human interactions as well as IT systems and applications will need to
enable the dynamic allocation of workflow and support quality assurance.
Organizations will need to gain a level of comfort in relinquishing control over
previously proprietary applications and processes while implementing capabilities
that allow offshore processes to be measured and improved over time. Finally, the
disciplines of program and process management must address the advantages
and challenges presented when part or all of a project "moves offshore," and
managers must develop and disseminate best practices for achieving project
success as well as cost savings.
§ Infrastructure and Technology: Offshoring is greatly enabled by technology,
tools and the availability of communications bandwidth. However, the same are
also primary challenges. Replication of on-shore infrastructure is not the answer –
and there is a great need to understand the needs and constraints and implement
an optimized solution. Technology and bandwidth costs are a major part of the
total cost of offshoring. Latency in data transmission impacts performance and
should be one of the guiding principles for engineering the bandwidth and
selection of technology and tools.
§ Attrition Management: Organizations which offshore through a captive unit often
lack the ability to align the compensation structures with the overall industry
averages because of inadequate benchmarking and a lack of understanding of the
dynamics of the offshore workforce and resource management.
§ Transition Management: Transition planning and management is critical for the
success of a captive. This often requires expatriates to spend significant time at
the offshore location. The transition management also includes processes such as
portfolio assessment, training & knowledge transfer, recruitment & staffing,
benefits calculations.

BUILD-OPERATE-TRANSFER
Build Operate Transfer" or "BOT" arrangements are increasingly used in establishing
offshore centers, particularly in India. The client and supplier set up an arrangement,
through which the supplier is contracted to establish the operation, such as the acquisition
of facilities and staff, and then to provide the services for a defined period. At a point
where the center and services are properly established, management and ownership is
transferred to the client. Vendor who offers the solution usually makes the investments for
a BOT project. The commonly used instances where BOT is used are:
§ Work that is being offshored by an organization is core in nature and therefore
while in the initial stages the work is done in a set-up situation by a vendor,
thereafter it is pulled back by the organization into its own fold.
§ The organization wishes to commence business in a country where it does not
have any base at all. The organization would look at getting a local company to

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 de-risk its venture into the new country. The organization would tie up with a local
service provider to set up the project, run it for some time till the project stabilizes,
and then take it over from the vendor who has set up the project.

Typically a BOT offers the following benefits to the client:

§ Infrastructure: In the BOT model, the incubator starts the relationship with the
incubated in the ODC mode, earmarking exclusive infrastructure resources such
as bandwidth, networks, systems and office space. It enters into a contract with
the incubated client for a pre-defined period with clearly labeled Service Level
Agreements.
§ Resource Pool: The BOT model provides seed resources across levels for all the
key functions in the technical and support arenas for jump-starting operations, for
instance, Project Managers, Project Leaders and Team Members along with
personnel from Quality, Corporate Communications, Human Resources, Finance,
Administration and System Support are provided by the incubator to the
incubated. It also undertakes project execution and management, and ensures
that the deliverables are on time and of the highest quality.

In short, the BOT model provides an opportunity to capture market share rapidly or
address a crying need in a short period of time, the advantage of not getting distracted
while setting up a new venture and being able to continue to focus on the organization’s
core competency, possibility of accessing best in class skill-sets, conservation of capital
expenditure, cost effective outsourcing during the initial period of build out and operating,
and reduced operating risk and knowledge retention when related to sensitive processes.
The main challenge in the BOT model is to do with transfer of employees from vendor to
customer's entity in the transfer stage, the transfer price and fair return to the vendor for
the efforts in the Build and Operate stages.

OFFSHORE DEVELOPMENT CENTER

An Offshore Development Center (ODC) is a dedicated development center, located
outside the client’s premises, solely engaged in developing, testing and deploying software
solutions and applications, most often in a country outside the client’s country. The
purpose behind an ODC is to take advantages of the technological know-how, cost
advantages or the reduced time-to-market.

The initial phase of setting up an ODC requires accomplishing the infrastructure set up for
the development facility, which would include setting up of the physical infrastructure such
as office equipment and development environment, besides the assignment of
professionals with relevant skill sets to the ODC based on the requirements of the client.
The next phase is very critical to the long-term functioning of the ODC. This phase deals
with setting up of a functional process, which will be implemented and improved upon
through out the life of the ODC. A detailed discussion is held with the client to decide on
the process to set up the communication protocol, operational efficiency/reporting
structure, specific roles and responsibilities assigned to specific personnel, project delivery
methodology, and the escalation procedures. The process of setting-up an ODC in India
has matured and Indian vendors as well as clients have been advocating for ODC as a

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 means to leverage offshore destination. As a part of the process, the following issues are
also being addressed in a structured way:
§ Protection of IP
§ Exit policy
§ Security and backup policies
§ Ramp up and ramp down
§ Risk management plan
§ Attrition issues
§ Cultural Integration
§ Transition/skill orientation
§ Change management system.

JOINT V ENTURES
A Joint Venture is a model wherein a client and offshore supplier may set up a joint
venture vehicle, which will predominantly service the client's business. The offshore
supplier brings the local expertise and service skills while the client brings its knowledge of
its existing business function and maintains greater management control. Both the client
and the JV partner share the risk and the revenues resulting from the operations. In
general JV offers following benefits to the client:
§ Easy transition of assets and staff and high service continuity during the deal and
transition phase.
§ The client has an influence over the resources, organization and strategies of the
Joint Venture and also has an option for buying the company so established.
§ Possibility of selling service and solutions in the open market and hence high
revenue creation.

However, due to the complexity of the engagement and the level of commitment required
from the client side as well the JV Partner, the following challenges are faced:
§ The negotiations at times can become sticky since both client and vendor control
the joint venture.
§ Knowledge transfer from vendor to joint venture partner is limited.
§ Consolidation and economies of scale are limited. Cost reductions are seriously
limited.

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SELECTING AN APPROPRIATE ENGAGEMENT MODEL
AND POTENTIAL OFFSHORIZABLES

The selection of an appropriate Engagement model and devising an effective

transformation strategy is the key to a successful relationship. Broadly, organizations and
vendors should evaluate the following parameters to come-up with an appropriate
transformational offshoring roadmap and potential offshore candidates:
§ Turn around time required: Low turn around time requires high sense of
ownership. The timely delivery can have long-term business implications.
§ Requirement clarity and stability: High requirement clarity reduces dependency
on own resources. It also helps in ease of transformational offshoring.
§ Level of user interaction required: High user interaction requires faster and
robust access to information. Cultural diversity is inversely proportional to the level
of interaction required.
§ Application complexity: Highly complex applications require long-term planning,
skilled resources and high costs.
§ Degree to which application is aligned with current and future business
needs: High alignment of applications with business processes require low
technological and cultural gap.
§ Nature and number of resources: Availability of adequate resources with right
skill-sets reduces the dependency. It also helps in executing short-term projects.
§ ROI: Cost of initiating and managing the relationship in a given Offshore
engagement model and benefits delivered (in the form of cost arbitrage, better
quality application leading to lower maintenance cost, better aligned application
and productivity benefits) will be key to a final decision to offshore in a particular
engagement model.

As shown in the following diagram, selection of an offshore engagement model would

depend on two key parameters: Level of control required and Size of operations.

Figure 5: Level of Control and Size of Operations of Offshore Engagement

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 In addition, there are other parameters like: knowledge about geography, required process
maturity, strategic needs and long-term business focus, economical feasibility that will
drive the decision to select a particular offshore engagement model.

CONCLUSION
A study by Mckinsey Global Institute shows that the potential cost savings from a typical
offshoring engagement will be in the range of 45 to 55%. Offshoring with a focus on
transformation will add another 15 to 22% in the total cost savings. Setting key objectives
for an offshorization strategy and performing a detailed analysis of business and IT
practices, IT portfolio and need for business/IT alignment will help in identifying an
effective offshore engagement model and potential list of offshore candidates. Based on
these key objectives, organizations should assign weights to each evaluation parameter
and identify the fitment of a particular offshore engagement model in their scenario. This
will result into a best-fit offshore engagement model and potential offshore candidates,
based on which a detailed cost-benefit analysis should be performed and a final decision
should be taken. Subsequent to this, the client and offshore vendor can focus on
application and knowledge transition and ongoing management of relationship with the
help of a structured Vendor Management Team (VMT) or Offshore Program Management
Office (PMO). Organizations deciding to go offshore should also plan for change
management in the internal IT department and the way IT and business (end-users)
interact with each other.

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ABOUT THE AUTHOR
Prashant Halari is a Technical Architect working for Patni Computer Systems Limited,
India with key focus on Application Offshorization, Application Modernization and
Application Portfolio Management. He has a core research background from IIM,
Ahmedabad, with key focus on “Implementing IT Strategy in an Organization”.

He has been instrumental in developing Assessment Methodologies to map business

requirements/limitations to appropriate BI and EI frameworks. He has also developed an
ROI model to compute returns for investment made in technology implementations like EI
and BI. At Patni, he leads the Offshore Advisory Center and is involved in developing
guidelines for setting up a transformational offshoring engagement model. He has also
developed a ROI framework, which helps clients in estimating the returns on an
Offshorization initiative.

Prashant even co-authored a book titled Migrating to .NET: A Pragmatic Path to Visual
Basic .NET, Visual C++ .NET, and ASP.NET for Prentice Hall PTR, USA. (ISBN-0-13-
100962-1).

ABOUT PATNI
Patni Computer Systems Limited (BSE: PATNI COMPUT, NSE: PATNI) is a global IT
Services provider servicing Global 2000 clients through its industry practices in Insurance,
Financial Services, Manufacturing, Telecom, Retail, Media & Entertainment, Energy &
Utilities, and Logistics & Transportation; and through its technology practices.

With an employee strength of over 10,000; multiple offshore development facilities across
eight cities; and 24 international offices across the Americas, Europe and Asia-Pacific;
Patni has registered revenues of US$ 326.6 million for the year 2004.

Patni's technology focus spans enterprise applications, embedded technologies,

e-business, business intelligence & data warehousing, and RFID. Our service offerings
include: application development, application management, business process outsourcing,
infrastructure management, product engineering, verification & validation, process
consulting, engineering services, and IT governance.

Committed to quality, Patni adds value to its client's businesses through well-established
and structured methodologies, tools and techniques. Patni is an ISO 9001:2000 certified
and SEI-CMMI Level 5 organization, assessed enterprise wide at P-CMM Level 3. In
keeping with its focus on continuous process improvements, Patni adopts Six Sigma
practices as an integral part of its quality and process frameworks.

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