The offshoring of enterprise apps has followed the now familiar lets walk-before-we-run
pattern of global sourcing. What began with the augmentation of staff programming
resources is escalating into more sophisticated levels of outsourced application
development, integration, compliance work, hosting, and application monitoring.
The trend toward offshoring of enterprise applications is significant for
corporate IT departments eager to relieve the backlog of demand for new
enterprise-resource-planning and customer-relationship-management suites;
to consolidate disparate legacy applications; or even to improve software
Managing Offshore has learned the pace of adoption of these globally
delivered services is picking up—ever so quietly. The action mostly flies
below the radar screens that scan press releases, Securities and Exchange
Commission filings, and even vendor briefings. A case in point: We spoke
to several customers recently who asked not to be quoted on the subject.
To move beyond the anecdotal level of analysis, we teamed up with Peerstone
Research, a firm that specializes in studying enterprise applications,
to examine the experience of 100 U.S. corporate IT and business managers
who are offshoring one or more enterprise apps.
Whats happening offshore? The Managing Offshore/Peerstone study
identified activities in four main areas:
In the study, we asked the managers why their organizations are sending
a portion of their enterprise app portfolio offshore. The top five responses
||Cut cost of software work
||Cut our head count in U.S.
||Do more work in same time
||Finish software work faster
||Improve software quality
The study shows that cost savings, speed, and quality are key drivers of
the offshoring model. But an even more nuanced view of these activities
highlights the business imperative of shifting IT funding away from application
maintenance (running in circles) to the creation of new, revenue-generating
applications (getting ahead).
Yet theres another macro business technology concern—standardization—that
could help fuel growth in this area in the next several years. The standardization
movement is not just about consolidating disparate platforms to reduce redundancies
and licensing costs; theres the perpetual question posed by C-suite executives
regarding the necessity of building and maintaining differentiated back-office
enterprise application services in light of the increasing availability
of more off-the-shelf components and vertical-industry specific applications.
We thought about calling this report The Quiet
Storm. While a growing number of U.S. companies engage offshore
outsourcers to help with maintenance, integration, new development,
and a range of infrastructure services for enterprise applications,
it turns out that very few IT executives want to go on the record
about it. To move beyond the anecdotal level of understanding, we
asked our friends at Peerstone Research, a firm that specializes in
the study of CRM and ERP markets, to help us field a study on the
offshoring of enterprise applications. The interviews were conducted
via the Web this summer based on a questionnaire we developed in conjunction
with Peerstones director of research, Jeff Gould, the former editorial
director of CMP Media in Europe.
On the other hand, saving money is always good. The basic truth is that
these survey respondents are going to ERP offshoring/outsourcing to cut
costs, not to drive growth or make their customers happier, contends Jeff
Gould, Peerstones CEO and director of research. The indirect benefits
(competitive advantage, profitability) that some users report are basically
all downstream consequences of cost cutting.
But then theres the running-on-empty school of thought, advanced by Cognizant
Technologys John Beaumont, VP of ERP: What seems to happen is that
the ERP platform has reached a plateau and they dont have the bandwidth
to approach future projects.
Of course, both of these gentlemen are right. Some offshore outsourcing
providers, eager to build up their practices in this potential multibillion-dollar
service area, are accepting deals with relatively modest profit margins,
were told. The higher-margin offshore development opportunities in enterprise
applications entail building processes and custom code for business intelligence
and customer analytics—some of which may cross over into business-process
How It Begins
Once engaged, a provider such as Infosys or Cognizant sends a team
to the customers site to conduct a form of application portfolio triage.
It begins with a requirements definition, says Kakal Chandrasekhar,
head of enterprise solutions at Infosys. We need to do a scoping of the
project and stakeholder interviews on site, he says. But after that, its
a combination of onshore and offshore.
For its part, Keane likes to start an engagement after the completion
of an application portfolio assessment, which can take two to three months,
and cost from $200,000 to $500,000 or more depending upon the complexity
of the undertaking and the number of business units involved in the analysis.
Payback for this investment is a no-brainer, says CEO Brian Keane,
because there are often opportunities for consolidating software (and thus
server) licenses and other administrative redundancies.
As you might expect, some of the most successful offshore projects begin
as vanilla implementations. The vendors prefer to take ownership of efficient
enterprise applications but stand ready to transform, rewrite, or replace
troubled ERP or CRM software as needed. Sometimes, customers seek help from
an outsourcer when the task at hand seems too enormous to go it alone. Most
of our systems are online transaction based, says Cognizants Beaumont.
If customers go from a batch environment, its normally a big delta between
where they are today and where they need to be with a skill set.
In enterprise apps, there are few complete departmental lift-outs where
nearly every employee assigned to related tasks is absorbed by the outsourcing
firm. The employees who specialize in lower-level maintenance may find themselves
with pink slips, but the programmers that possess valuable business-process
knowledge generally are kept on to interface with the offshore team or to
focus on entirely new applications.
Watch Out For This
Where is the offshoring of enterprise applications headed in the next six
to 18 months? Infosys Chandrasekhar predicts that a significant amount
of the R&D money will go to India. In my view, the whole of the ERP
ecosystem is shifting offshore in some way, he says. Chandrasekhar contends
that Indian programmers are either directly involved in coding significant
aspects of Oracle, SAP, and PeopleSofts ERP applications
or delivering significant feedback.
The major Indian outsourcing firms are building hosting resources in the
United States and overseas aiming their guns squarely at business once exclusively
earmarked for EDS and IBM Global Services, among others. While
the major Indian firms may make a dent in the application maintenance and
development businesses, the hosting of high-volume transaction systems in
the United States seems more like a long-term intention than something likely
to sweep across corporate America any time soon.