Resource Center
How to do it right - Setting Up An Offshore Development Center
- Executive Summary
- Background
- What is an ODC
- Benefits of an ODC
- Guidelines for Vendor Due Diligence
- Establishing an ODC
- Summary
- Sources
As offshore outsourcing plays an increasingly strategic role in a company's operating model, and as offshore vendors have become more closely integrated within an industry's value chain, companies are establishing more strategic relationships with their vendors. Setting up an ODC (Offshore Development Center) is one of the operating models used in these strategic partnerships. This paper will describe what an ODC is, what the benefits are to an organization of the ODC model and due diligence required when setting up a ODC with a supplier organization.
IT Outsourcing actually commenced in the late 1980 's. CIO's such as Kathleen Hudson at Kodak helped capture public attention by making outsourcing a viable and serious business strategy. Her goal was to "plug into the wall and have data come out." The business has grown to such an extent that a recent McKinsey report revealed that out of a potential US$300 billion business, offshore outsourcing providers have only captured 10% of the growth. Research and consulting organizations such as McKinsey predicts that IT services will be offshored in greater numbers. (1)
Indeed, many financial institutions and IT organizations have taken to outsourcing their IT work offshore. Their requirements include straightforward tactical support, such as software testing and application development, to more strategic support, such as the establishment of an Offshore Development Center (ODC) which encompasses a variety of service offerings.
In simple terms, an ODC is made up of a dedicated team of programmers and developers who have been hand picked to complement the customer's skill set and culture. This customized team works exclusively on behalf of the customer at the service provider's site or their own captive site in a secure environment. The infrastructure and security can be designed to meet the customer's specific standards and specifications, and may include co-branding. Indeed, the closer the synergy between an ODC and an organization's own IT/development department the better. The ultimate goal is for an ODC to be a seamless extension of an organization's IT department.
Cost Savings
Cost savings can range from 30-60% depending on the type of work
and scale of the ODC. In major offshore markets such as India and
China significant reductions come from the lower cost labor,
training and recruitment. Additional savings can also be made by
the customer at home with a reduction in capital expenditure.
Increased Speed
ODC's operating in a different time zone speed up development time
considerably particularly if a 24 hour work day can be established.
For ad hoc projects that require a quick ramp up and ramp down,
ODC's can prove beneficial as well as resources and space can be
quickly mobilized. neoIT, a leading global services consulting firm
stated that more than half of globalizing client organizations
state that reduction in time-to-market was the primary objective
for globalizing services. Shorter product life cycles, greater
competition and faster return on investment are all market factors
fueling the need for increased development speed.
Availability of Skilled Talent
While not so visible to a company? bottom line, an important value
proposition is the availability of talent. This is becoming an
increasingly key factor in selecting the right outsourcing
destination due in part to the labor market saturation in popular
outsourcing destinations such as India. A quick look at recent
numbers of Computer and Information Technology graduates reveals
China to have by far the biggest talent pool (315,537), compared
with India (112,000) and the US (137,437). (2) Customers should
look closely at vendor location and future availability of skilled
resources when setting up their ODC.
Guidelines for Vendor Due Diligence
Since an ODC plays such a strategic role in a companies operations, conducting thorough due diligence on your vendor is critical. The questions below give some guidelines for the types of aspects that customers should examine when choosing a vendor as an ODC partner.
Strategic
- Does the vendor understand the company's business goals andobjectives?
- Is there clear understanding and buy-in from senior management as to the objectives of the ODC?
- Are the short and long term ODC objectives clear?
HR
- Is the right management in place to manage the ODC operations?
- What safeguards are there to ensure the continuity of the ODC's key resources?
- Is there a process for staff transition planning?
- How is the ODC staff motivated?
- Does the company offer any guarantees on staff attrition?
- How is the ODC recruitment process conducted?
Flexibility and Customization
- "What degree of flexibility in terms of staffing does the ODC vendor offer?" With how much notice can you ramp up or ramp down FTE?
- Can you interview and select the ODC Project Manager and other key team members?
- Is it possible to review the team at any time in the relationship?
- What is the minimum number of heads to set up an ODC? What level of flexibility is offered once the ODC has been established to ramp up or down?
- What is the ODC workspace like? Can this be tailored to your needs?
- Is co-branding allowed?
Communication
- How does the vendor manage transnational communication?
- What is the standard of English proficiency at every level within the ODC?
- What communication methods are used ie. video/conference call, email, status reports, msn or proprietary messaging tools?
- How frequent is the communication?
IP Protection
- Is the vendor a pure service provider, or are they a product company as well? Pure service providers do not have any interest in customer's product IP; choosing a product company with similar product types has higher risk of IP related issues.
- What security measures are built into the infrastructure? Look out for items such as 24/7 CCTV cameras, access levels, biometric door locks, secure phones, printers, faxes, disabled computers etc.
- Is the security system regularly audited?
- Does the company follow any internationally recognized system and process? For example, CMMI Level 5 and ISO 27001 procedures. Vendors with international certifications typically have a modern view of IP protection.
Systems & Processes
- What systems and processes are in place to ensure on time/on budget delivery?
- What measurement and metrics are in place to align the operation of the ODC with corporate goals?
- What quality management tools are used?
Lastly, cultural compatibility is an area often overlooked but equally important when selecting the right partner. A fit in terms of mindset, competence, communication and collaboration cannot be underestimated.
Typically an ODC is set up in phases. Figure 1 is an example of a typical approach to setting up an ODC.
At the end of day, for an ODC to operate as an effective strategic partner, the most crucial element is the nature of the relationship. Relationships between ODC's and their clients must be based on a two way interchange. For some organizations this may require a change in thinking as the relationship has to move from a transaction oriented one to a relationship oriented one. This shift in attitude and recognition of a "marriage" type relationship will ensure that an ODC is not only a high value proposition in terms of time and cost savings but also in strategic thinking.
1) 2005. New in Hi-Tech, The McKinsey Report, 18 April.
2) 2005. Duke University Ciber/Archstone Consulting Study