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Global Sourcing Choices

Global Sourcing or a Global Delivery Model is a new way to think about how to sustain your strategic Information Technology investments. Global Delivery combines the best of in-house, onsite, offshore, and U.S. Onshore, to create a comprehensive IT services sourcing strategy. Multiple sourcing options allow an organization to diversify resources and consequently limit risks. The best Global Sourcing strategy keeps cost low while providing high quality results.

Embracing a Global Sourcing Strategy creates choices. There are advantages and disadvantages with each option that must be weighed when calculating how IT sourcing should be redistributed or allocated.

Gartner identifies changing conditions that have led to a pendulum swing from offshore-centric thinking to more considerations of onshore delivery options in the U.S. market—in essence, a more balanced and holistic view of global delivery.

Source: Gartner, “Market Trends: Providers Expand U.S. Onshore Delivery, Invigorate Investments in Low-Cost Domestic and Rural Sourcing”; Allie Young, Helen Huntley, Frances Karamouzis; May 23, 2013.

In-House as Part of Global Sourcing

Companies always have and will continue to operate some in–house teams. This may rise as companies begin to spend from profit and rehire. Companies will always also look to directly hire and retain the functional and business expertise that enables closer alignment with the business or the customer or both. By bringing more IT consulting in–house, companies open themselves up to significantly higher costs. Competition for these experts will continue to increase, particularly for those companies in metropolitan areas. This scarcity will continue for some years – the quantity of “IT related” graduates is still only marginally above 50% of its 2003 level.

Scale is significantly limited with in–house IT operations – a major challenge for a CIO, who is tasked with supporting a dynamic business through building an agile organization. This has to involve the use of a fluctuating sourcing model.

Compensation for in–house consultants will dramatically increase as the demand and supply imbalance becomes more acute. Turnover and instability will only add even more cost, negatively impacting ROI and constraining IT’s ability to support the business.

As one can see from the diagram, the demand for resources is growing while the supply has declined, and this imbalance has (and will continue to cause salaries to escalate).

Onsite as Part of Global Sourcing

Onsite staff augmentation can come from a variety of sources – national staffing agencies, global services companies, offshore companies coming onshore, or one of the many local “relationships” that you maintain. While there may be a variety of sources there is one uniform outcome: on-site resources will not only always be the most expensive option, but the rates will also always require greater investment than even the in–house alternative. The challenge is that they are all competing for and recycling the same people. This model is not adding to the talent pool. Consequently there is also increasing competition for H1B visas and the complexities and uncertainties they bring.

This just exacerbates the already acknowledged shortage of talent. Rates continue to rise and turnover and instability continue to mount as technology professionals consider competing offers and make only short-term commitments. As these contract staff contemplate their choices, multi-task, and move from job to job, the IT priorities of the company and overall ROI diminishes.

On site staff augmentation may always need to be a piece of the puzzle, but it’s hard to be see it as solving the long term challenge when new faces constantly remind you that the expertise you need is continually walking out the door.

As can be seen in the diagram, onsite staff augmentation (in whatever guise) will always be the most costly and short term solution –rates will always exceed all other resourcing forms (particularly internal costs).

Offshore as Part of Global Sourcing

Offshoring became synonymous with outsourcing and remains prevalent in the outsourcing of IT services. Pressure from Wall Street and private investment firms to lower cost, specifically wage rates, pushed much IT development, deployment and support offshore. This dynamic is changing. U.S. companies are now finding a more competitive workforce at home (in part) due to rising costs (see chart below) abroad.

Cultural and contextual misalignment lessen the ability to position creative solutions which reduce speed to market, constrain agility and reduce the ROI of offshoring models – all of which contribute to escalating “real” cost. The perception remains that offshore IT companies have unlimited ability to scale, but in reality the pool of qualified consultants is drying up and companies have resorted to recruiting from significantly less qualified sources to meet demand. According to a recent Gartner report: “Offshore talent issues emerge that compromise quality – With success and growth, opportunity in the Indian labor market soared, resulting in widespread country-level talent issues: rising attrition from revolving-door hiring, inconsistency in talent quality, unprepared workers, ineffective project management (due to time zone differential), and difficulties from language, cultural, and time zone challenges. Gartner inquiries on the topic of India’s rising rates and declining quality have been common.”

The “effective” (real) rate of offshore is now outstripping that of onshore – US-based technology center resources. A list of factors (not least the offshore model becoming a victim of its own success) is contributing – skills shortages, turnover, and inflation – for example. As offshore companies look to lesser-skilled resources to fill the gaps, the quality of service deliverables further decline, placing upward pressure on real costs, just as customers look for more value from these resources and relationships.

Many companies are heavily committed with significant offshore assets, infrastructures and resources. These should not and will not be abandoned. There remains a place for offshoring in a balanced Global Sourcing strategy. What we’re learning is that offshoring cannot be a strategy in and of itself.

Graphic Charts Offshore

Onshore as Part of Global Sourcing

During the 90s, IT services were focused on providing onsite consultants. This was brought about because rates were high, budgets were plentiful and services companies enjoyed some of the highest valuations of that era. The receding threat of Y2K and the following economic downturn meant companies were once again focused on cost control. At this time, IT services moved to a “Technology Center” model – with consultants NOT at the customer site, but instead working out of dedicated buildings that happened to be on the other side of the world. The onshore model is a “Technology Center” model – the consultants are offsite but not offshore.

According to a recent Gartner report, “U.S. onshore options for low-cost domestic and rural sourcing open new possibilities and reinvigorate investments in U.S. delivery for IT services, ranging from applications and infrastructure services to business process services and emerging technology solutions.” Source: Market Trends: Providers Expand U.S. Onshore Delivery, Invigorate Investments in Low-Cost Domestic and Rural Sourcing; Allie Young, Helen Huntley, Frances Karamouzis; May 23, 2013.

Onshore Technology Center based consultants are approaching being able to deliver the capabilities of the onsite consultant – at a clearly more aggressive price point. Domestic consultants offer consistent contextual understanding, empathy, and functional and technical competence that are both measurable and understandable. Modern tools enhance remote communication and understanding, and while not always eliminating the need for the onsite consultant, this model reduces the reliance on this expensive, yet coveted resource.

As can be seen from the diagram, the capabilities of onshore technology center based resources are rapidly approaching those of traditional onsite consultants…but at a significantly lower price point.

Graphic Charts Onshore