Chapter 27

Package and Vendor Selection, Outsourcing and Offshoring

27.1 MAKING THE BUY OR BUILD DECISION

When a new solution is required to resolve a business problem, there is often a decision to be made whether to build it internally or to buy a packaged product. In some conditions it is more cost effective to buy; in others it makes more sense to build the solution in-house.

The overall cost of the solution, whether it is built or bought, should include the cost of delivering the solution to production and the ongoing expenses of the solutions once they become part of business as usual operations. For example, a vendor might build a solution for a very low cost but the ongoing support and maintenance fees may be high. Equally an internal team might be able to deliver a solution relatively cheaply, but the entire team might need to be retained to support the solution in production.

The following are possible reasons to build:

• Costs: The cost of an internal development may or may not be lower than either the purchase of a software package, or the fees paid to external developers.
• Expertise: Depending on the nature of the product or system being introduced, there may be more expertise within the firm than there is outside the firm.
• Competitive advantage and intellectual property rights: If the firm requires an application that will give it some competitive advantage, it might not wish to share the intellectual property with a software vendor that could then sell the application to competitors.
• Resource availability and its affect on the elapsed time to bring the system or product into production.

The possible reasons to buy include the following:

• Business strategy: If the new system or product is not a core application, the firm’s internal resources may be better spent on core business software.
• Costs: If there are package products available that meet the business needs, costs may be lower.
• Time: If a packaged application exists, it is likely that it could be implemented in a shorter time frame.
• Generic solution: Many parts of the firm’s application architecture consist of elements that are needed by all firms in the same sector. For example, all LSE and SWIFT member firms need communications with the LSE and SWIFT, respectively, and all firms in all sectors need to perform bank and depot reconciliations. These bread and butter functions do not usually confer any competitive advantage on a particular firm, and as a result software vendors that specialise in building the necessary applications have evolved. These vendors usually have more skilled resources available in their areas of expertise than an individual securities firm, and are usually able to deliver packaged products for quick delivery.

The build or buy decision is a decision that needs to be answered early in a change project as it is fundamental to the approach of how change is to be delivered. The decision may be self-evident at the outset, in which case the reasons for the decision will be included in the project brief at the beginning of the project. In other cases the build versus buy decision will need research, in which case the project planning phase will include a task to evaluate the alternatives. Until such time as the project steering committee has considered the alternatives it may not be possible to plan the project any further.

27.2 VENDOR AND PACKAGE SELECTION

27.2.1 Introduction

The IT department is often involved in selecting vendors for IT products and services. It is usually solely responsible for selecting suppliers of PC and server hardware, networks and configuration management software. The department usually works alongside the user departments in selecting vendors of:

• Packaged application software such as order management systems, settlement systems and general ledger systems
• Outsourced innovation services such as bespoke software development
• Some outsourced production services such as a settlement/transaction processing service that has a high IT content. Outsourcing is examined in detail in section 27.3.

This section deals with the principles of vendor assessment for these types of products and services where the IT department will be working alongside the users. These activities are projects in their own right, and are normally managed using the project management techniques described in Chapter 26.

27.2.2 The seven stages of vendor selection and assessment

A vendor selection and evaluation project is usually divided into the following stages:

Form the project board and project team

In essence, this is the same process that was examined in section 26.3. The project team needs to consist of representatives from the relevant user departments and the IT department who have relevant expertise in the package or service being purchased, and who have the time to devote to the vendor selection process. Because this process may be quite time consuming, project team members may need to relinquish some or all of their other routine duties.

Specify requirements

In this context, the requirements are broader than the business requirements that were examined in section 26.5. The list of requirements is usually presented in the form of a request for proposal (RFP) that will be sent to a list of potential suppliers in Stage 5. An RFP is a statement of intent to purchase, followed by a list of questions covering all of these issues that can be sent to potential vendors for them to reply to in writing. Some firms use the terms request for quote (RFQ) or invitation to tender (ITT) instead of RFP.

Vendors will need to know the firm’s timeline and how the firm will make its decision in order to best match the vendors’ capabilities to the firm’s needs.

In addition to the functional and performance requirements that are gathered for any new application, the firm also needs to find out from the vendors:

• Whether the operating systems and databases that their packages run under are acceptable to the firm
• How support is obtained
• The costs of licence fees, support and implementation consultancy. Questions need to be framed in such a way that the firm would expect the vendor to provide detailed information about:

  – One-off capital expenditure for the right to use the package or service for a predetermined period

  – One-off capital expenditure for consultancy concerned with essential system enhancements and implementation project activity

  – Annual maintenance and support

  – Whether the amounts quoted include VAT or other local taxes, or whether these amounts are excluded from the quotation

  – Whether the amounts quoted include reimbursement of the vendor’s travel and subsistence expenses, or whether these amounts are excluded from the quotation.

Determine the evaluation criteria

In order to make a reasoned selection the most important (e.g. must-do) requirements must be articulated and the criteria must be prioritised and weighted to allow the suitability of the solutions to be ranked. For example, a firm that is considering purchasing a packaged general ledger system may, inter alia, have certain requirements concerned with the output from the system (see Table 27.1).

Table 27.1 Sample RFP requirements

Ref. no.	Requirement name	Requirement description
1.1.1	Real-time accounting enquiries	All account balances and account postings must be available for enquiry in real time
1.1.2	Export to Excel	All account balances and account postings must be readily exportable to Excel
1.1.3	Comparison of P&L balances to budget	The system should provide an enquiry that compares the balance of a P&L account to the budgeted P&L account
1.1.4	Comparison of P&L balances to prior period	The system should provide an enquiry that compares the balance of a P&L account to the same balance in the previous month and in the same period in the previous financial year

In an RFP, it is common to ask vendors to confirm whether or not their product meets such criteria. The RFP as presented to the vendor then looks like Table 27.2.

Table 27.2 Sample FRP questions as presented to vendors

The vendor is invited to complete column four according to a pattern. For example, the answer “3” means fully supported, “2” means partially supported, “1” means an enhancement is possible, and “0” means that support cannot be provided for this requirement. The vendor is also asked to insert whatever free text it wishes into column five in support of the claim that it has made in column four.

If the firm has received responses from two vendors with this pattern, then it needs to be able to compare them (see Table 27.3).

Table 27.3 Sample RFP answers

The responses can only be meaningfully compared if the firm has decided a weighting for each requirement. Let us assume that the weightings of these four requirements are as shown in Table 27.4.

Table 27.4 RFP weightings

Ref. no.	Requirement name	Weighting
1.1.1	Real-time accounting enquiries	3 – essential
1.1.2	Export to Excel	1 – desirable but not critical
1.1.3	Comparison of P&L balances to budget	2 – required, but not immediately
1.1.4	Comparison of P&L balances to prior period	3 – required, but not immediately

By multiplying the vendor response by the weighting, it is possible to produce a weighted average score for each vendor (see Table 27.5).

Table 27.5 RFP scores based on weightings

It is clear that, based on these very restricted requirements, vendor two’s package has the slight edge over vendor one’s package. Some RFP writers advise vendors of what the weightings are in the RFP, others keep the information private from the vendors. The argument in favour of advising the weighting to the vendor is that the customer is seeking a partnership with the successful vendor and wishes in general to be open and frank with it. The argument against is that if vendors know the weightings they will colour their responses – they will tell the prospective customer what it wants to hear.

The financial viability of the vendors and their access to skilled project resources must also be evaluated.

Identify companies and packages

Potential vendors may be identified in a number of ways, including:

• The use of internet search engines
• More specialised online directories – for example, if you are looking for a vendor who has consulting expertise or package products concerned with SWIFT connectivity, then the SWIFT Partner Solutions Directory (at www.swift.com) lists several hundred vendors under various searchable geographical and functional categories. Similarly, the London Stock Exchange’s website also provides details of a number of vendors that offer connectivity to its trading systems.
• Advertisements and editorial items in trade magazines
• Attendance at exhibitions and conferences
• Word of mouth – what vendors have your counterparties and competitors used? Have any of your project team members worked at other companies who have recently had to do the same type of evaluation? If you are looking for a services connected with a particular stock exchange or clearing house, does the exchange concerned have a list of suitable vendors that isn’t shown on its website?

Send requirements to potential vendors

The RFP can then be sent to the vendors identified in the previous stage. If you have identified a very large number of potential vendors, then you might want to consider sending an abbreviated version of the RFP at this stage, and using the results of that exercise to form a short-list of vendors to whom you will send the full RFP. The abbreviated form of an RFP is usually referred to as a request for information (RFI).

As well as asking the functional questions you should also ask the vendors to provide you with at least three suitable customer references that you can follow up in stage 6. A suitable reference site is an organisation that is using the same package product or outsourced service in the same industry and geographic region as you intend to use it. If you are selecting a vendor for a bespoke development, then a suitable reference site is a company in the same geographic region as your own for whom the vendor has recently worked on a similar project.

You should also ask the vendor to supply you with a copy of its latest audited accounts, and a draft contract for the service or product to be provided.

Evaluate vendors and packages

In stage 3 you will have already identified the criteria that you are going to use in this stage. Vendors should be evaluated against those criteria using all of the following as evidence of the vendors’ ability to deliver and commitment to your company and its project.

Quality of the answers to the RFP questions

• Have all the functional, volume/performance and technical questions you asked been answered in detail, or were the answers woolly and vague? Did the vendor seek clarification from you about any of the questions? Are the answers satisfactory?
• Has the vendor confirmed that it is able to deliver to you on a timely basis?
• Have you now got a clear idea of the level of investment that is needed to purchase this service or package? Is the vendor’s quote within your budget?

Product demonstrations

If you are selecting a packaged application, then it is essential that you have at least one demonstration of the package – preferably more than one – and that you ensure that the right project team members and other key personnel are able to attend. It is a good idea to ask the vendor to demonstrate using sample transactions or scenarios supplied by your organisation.

If you are selecting a vendor for an outsourced bespoke development, then that vendor should be asked to demonstrate something else that it has developed for another company in a similar space.

If you are selecting a vendor for an outsourced service, and part of that service involves supplying your company with, say, transaction entry software, then make sure that this software is demonstrated to you at this stage.

Evaluate the vendors’ key people

By this time you will have had several meetings with the vendors’ key personnel. Ask yourselves the following:

• Do they act in a professional manner? Are they punctual in attending meetings and do they return calls promptly?
• Are you satisfied that they have sufficient domain expertise in the areas that they are working in? Have you met functional and technical experts, or just members of the sales force?

Evaluate the vendors’ financial status

A qualified accountant should evaluate the vendors’ audited accounts and raise any concerns. If there are any concerns, then raise these with the vendor directly and tactfully and consider their response.

Review the contract

Review the contract to see if the terms of the supply of the service are acceptable. Note that depending upon what type of product or service is being purchased; the contract may not be a single document, but many documents. Appendix 2 describes the common types of documents that apply to various types of purchase.

Take up references from other users

It is essential to take up references from the reference sites that you requested in the RFP. This is especially true if you are commissioning bespoke developments or outsourced services, where there is a limit to what you can learn from product demonstrations; but it is still necessary to take up references when you are purchasing a packaged product.

Be very wary of any vendor who cannot supply you with at least three references that you think are relevant; unless you are purchasing from a start-up company where you may be the first user of the service or product. If this is the case, then the principals of the company should be able to supply you with personal references from previous employers or business associates.

When you take up references, follow these guidelines:

• Visit the reference site – don’t just take up references by phone or email.
• Ask questions about the following:

  – Functional: Does the product, bespoke development or service that they use do what the vendor said it would do? Does it do what you expected it to do? In what way has it improved the process in your company?

  – System/service performance: Does it handle the volumes that you expected it to?

  – Vendor performance: Did the vendor deliver on time and within budget? Are helpdesk calls usually resolved satisfactorily and promptly?

• Be reasonable when you make a reference visit – the person who is seeing you is busy and is doing you a favour – don’t take up too much of this person’s time.

Negotiate and place orders

By now you will have identified the preferred supplier. You now need to negotiate contracts.

Price

The vendor may be prepared to reduce the price that was quoted in the response to the RFP. In return for concessions on price it will usually ask for something in return. Typically, vendors will ask the customer to cooperate in publicity about the latest sale; they will usually ask that you agree to them issuing a press release mentioning your company’s name – additionally they may ask for you to cooperate in producing a case study to be published in the trade press.

Contractual terms

The contract may not be a single document, but many documents. Appendix 2 describes the common types of documents that apply to various types of purchase.

27.3 OUTSOURCING AND OFFSHORING

27.3.1 Outsourcing

Definition and concept

Most organisations have never been totally self-sufficient; they have traditionally subcontracted functions such as cleaning and building maintenance, and relied on subcontractors of many kinds to assist them to cope with peak demand. Publishers have traditionally purchased typesetting, printing, and fulfilment services from external firms, and in the securities industry safe custody services have been traditionally provided by custodians, CSDs and ICSDs – virtually no securities firm in the developed world holds securities in the strong room in the course of normal daily operations.

The use of external suppliers for these essential but ancillary services might be termed the baseline stage in the evolution of outsourcing. In the 1990s, as organisations began to focus more on cost-saving measures, they started to outsource those functions necessary to run a company but not related specifically to the core business.

One definition of outsourcing is “The delegation of non-core operations from internal production to an external entity specialising in the management of that type of operation”. Another definition is “The strategic use of outside resources to perform activities traditionally handled by internal staff and resources” (the italics in these definitions are the author’s).

A non-core operation may be further defined as any part of the business that doesn’t:

• Generate recurring income
• Increase the value of the business
• Secure the income and value of the business.

Outsourcing differs from simple subcontracting in that it usually involves the substantial restructuring of the customers’ business activities, often including the transfer of staff from the customer to a specialist company (the provider) with the required core competencies. Management control of and decision making within the outsourced function is either transferred to or shared with the outside supplier. This requires a considerable amount of information exchange, coordination and trust between the two parties. Deciding whether to outsource a particular activity, which supplier to outsource it to, and how to manage the transition is therefore a substantial change programme involving one or more projects and needs to be managed using an appropriate project management methodology. This is particularly true if the programme involves transferring staff to a new employer.

One of the key decisions in an outsourcing programme is deciding which part of the operations are “non-core” and are therefore suitable for outsourcing. For example, XYZ Investment Managers describes itself as a fund manager. It defines its core business as:

• Winning investment mandates from customers such as collective investment schemes, charities, trusts, insurance and pension funds
• Selecting the investment strategies to meet the customers’ investment goals
• Executing transactions that align with those goals.

However, once the customers have been signed up, the investment strategies determined and the transactions executed, then XYZ needs to employ operations personnel to settle the transactions, accounting staff to account for them, IT staff to select and manage the systems that play a part in making the investment decisions and process the trades, HR staff to manage the people and building management staff to manage the property, etc.

It is argued that all of these activities are “non-core” operations, and that some or all of them would best be delegated to an outside supplier whose own core competence lies in the management of one or more of these activities. This will leave XYZ’s management free to concentrate on its core activities without the distraction of managing the non-core activities.

Almost any non-core activity may be outsourced, some examples are shown in Table 27.6. As far as IT activities are concerned, the table distinguishes between two forms of outsourcing:

• Innovation outsourcing is outsourcing the research and development of products, in particular the development of new business applications.
• Production outsourcing is outsourcing the maintenance and support of hardware, networks and IT applications that have already been developed

Table 27.6 Examples of outsourced activities

What is a non-core operation? A case study

This case study comes from a different industry, but its probably the most dramatic example in recent years of a major business failure where outsourcing played a role.

This case study raises the following issues that any firm considering outsourcing part of its operations might want to consider:

Benefits of outsourcing

Despite the dramatic warnings of the Railtrack case study, many companies have benefited from successful outsourcing arrangements. The benefits of outsourcing are:

• Specialisation: Providing a higher quality of service. Activities are usually outsourced by a non-specialist company to a specialist company. The specialist should be in a better position to:

  – Recruit specialist staff as it can provide them with more career opportunities

  – Enable specialist staff to share problems and expertise

  – Leverage the experience gained with working with other customers to the benefit of the new customer

  – Replace outdated technologies and working practices.

• Specialisation: Enabling cost reduction. The specialist should be in a better position to:

  – Undertake “joint developments” for all its customers at a lower cost per customer

  – Use its bargaining power with key suppliers

  – Cover absence of specialist staff without resorting to hiring temporary staff

  – Move some operations offshore.

• Focus on core activities: The firm that has outsourced its non-core activities is now able to concentrate on the management of its core activities, in particular:

  – Improving customer relationships

  – Improving the quality of their core business activity

  – Extending the range of services offered to its customers – innovation.

Possible disadvantages of outsourcing

Not all outsourcing programmes deliver all the expected benefits. Common issues include:

• Information security and intellectual property: Offshoring involves the transfer of intellectual property to the supplier. When an activity is outsourced, sensitive information about customers, staff, investment decisions and positions, the firm’s own financial position and its own intellectual property are passed to third parties. The exact nature of the sensitive information that is passed on depends on the type of activity that is being outsourced. Such information can be misused, and in an extreme example could be used fraudulently.
• Is the decision to outsource reversible? When an activity is outsourced, the employees that used to carry out the activity either leave the company (often to become employees of the service provider) or are redeployed within the company. If the company wanted to terminate the outsourcing arrangement at some time in the future and bring the function back in-house, then hiring an entire replacement team might be difficult.
• Work, labour and the economy: Outsourcing – more specifically offshoring in this context – became a popular political issue during the 2004 US presidential election. The political debate centred on outsourcing’s consequences for the domestic workforce. Democratic US presidential candidate John Kerry criticised firms that outsource jobs abroad or that incorporate overseas in tax havens to avoid paying their fair share of US taxes during his 2004 campaign.
  

     In the UK, offshoring decisions that involve the creation of large numbers of jobs in offshore centres and/or the loss of large numbers of jobs in the domestic economy sometimes generates negative press comment. Some firms are concerned that outsourcing customer focused and visible activities such as call centres may drive customers away. At least one major UK retail bank has run a TV advertising campaign promising customers that all call centre calls are answered by its own employees in the UK.

• The quality of the service fails to live up to the customer’s expectations: There are a number of reasons why the service that is delivered might fail to live up to the expectations of the management, staff and/or customers of the company that has outsourced its operations. Many of these problems are preventable, and the techniques and procedures to prevent them are discussed in other chapters in this workbook. They include the following:

  – Outsourcing the wrong activity: One of the Railtrack problems.

  – Poor project management: Managing the transition to outsourcing is a complex project. It needs to be managed using an accepted project management methodology such as PRINCE2 or PMI.

  – Poor selection of vendor: The chosen vendor does not, in fact, have the expertise or resources to carry out the functions.

  – Inadequate service level agreement: The SLA either doesn’t cover the real requirements of the service or it defines unrealistically high or low levels of service.

  – Communication: The SLA has not been properly explained to staff or customers – therefore their expectations are not the same as those of the service provider. They are unsure of what to do when something goes wrong.

  – Inadequately documented systems and working practices: When an operation is outsourced, then the systems that are used to support it may or may not change but the working practices always do. There will need to be different procedures for escalating and resolving problems. It is important that the staffs of both companies are provided with comprehensive documentation and training in how to use the systems concerned, how to work with normal and exceptional workflows, and how to escalate and resolve problems.

  – Existing systems and working practices are unsuitable for outsourcing: In an extreme case, it could prove to be the case that the customer’s existing systems and working practices are so company specific and so antiquated that they are basically unsuitable for outsourcing in their current form. In such a case the outsourcing programme should have allowed for the replacement of some systems and workflows before the operation was outsourced. Both parties should have recognised this problem before taking the decision to outsource.

  – Inadequately documented development requirements: This is a particular problem when commissioning software developments that are to be outsourced to an offshore location for the first time. The customer may have had no experience in this method of working before, and the fact that the users can no longer raise or resolve queries by meeting the developers informally and at short notice may come as a culture shock. For a large outsourced development to be successful there needs to be very clear and precise documentation of requirements, and very clear procedures for raising queries and raising change requests.

How successful is outsourcing?

A number of research companies have surveyed chief information officers in various industries and countries about the success of outsourcing projects. In 2005, the Gartner Group surveyed 200 European companies. Gartner concluded that 55% of those businesses with outsourcing contracts have renegotiated the deal.

One in eight contracts had even been renegotiated within the first 12 months of their operation, Gartner found, while only 23% of companies said they did not expect to renegotiate their contracts.

But only 6% were planning renegotiations to rescue existing deals, which Gartner said confirmed its view that relatively few companies are actively looking to bring outsourced services back in-house.

Half of survey respondents highlighted lack of flexibility as the biggest issue leading to renegotiations. Cost reduction was another key area, with two in five saying they paid too much for their outsourcing.

27.3.2 Insourcing

Definition of insourcing

In this context, insourcing (internal outsourcing) occurs where a company sets up an operation to carry out work that would otherwise have been contracted out. Insourcing often involves centralisation of activities that have previously been dispersed across a number of business units and geographical territories. For example, a firm currently has securities settlement operations in every one of its European offices (Amsterdam, London, Frankfurt, Madrid and Paris), each reporting to the local office manager who is also responsible for sales and trading in those centres.

Using the insourcing model, the securities firm would set up a single settlements division reporting to its own manager. The settlements division would centralise all activities in one location. This location could be in one of the cities where there is a sales and trading office or it could be in an offshore location.

The settlements division would treat all the sales offices as customers, in exactly the same way that an outsourced operation would have done. It would charge them a fee for its services, and would expect to recover its costs through this fee.

In other words, the settlement operation has been outsourced, but the provider of the outsourced service is part of the same company as the customer.

Advantages of insourcing over outsourcing

• Centralisation of the activity provides the opportunities to create:

  – Economies of scale

  – A centre of excellence for the activity being insourced.

• The retention of “institutional memory” – i.e. the collective experience, ethos and know-how of the team.
• Goals and vision are shared with the customer business units.
• Continued employee loyalty and Improved career path.

Disadvantages of insourcing over outsourcing

• Unless insourcing is accompanied by offshoring, it presents fewer opportunities for cost saving due to high employment costs in major financial centres.
• Outsourcing offers more opportunities for radical change to systems and working practices. With the insourcing model, there is a danger that the firm carries on doing things in the same way that it has always done them.
• An external outsourcing organisation has the opportunity to learn from other similar engagements, and introduce industry best practice. The opportunities for an insourcing unit to make such changes are far more restricted because of its more limited experience of the industry as a whole.
• Senior management may continue to regard the insourced operation as a cost centre, therefore it may have difficulty getting budget approval for radical developments.

27.3.3 Offshoring

Offshoring is defined as the movement of a business process done at a company in one country to the same or another company in another, different country. Almost always work is moved due to a lower cost of operations in the new location. The reasons why the costs are lower usually include more than one of the following:

• Lower salary rates in the offshore location
• Lower infrastructure costs in the offshore location
• Lower tax rates in the offshore location
• The offshore location may have a weak currency compared to the onshore location
• Possible availability of government grants and other incentives to set up business in the offshore location.

Offshoring is usually – but not always – associated with outsourcing, but it is of course possible to outsource without offshoring and to offshore without outsourcing. Some large banks and other companies have formed wholly-owned subsidiary companies in India and the Philippines to carry out business processes for their parent company – these companies are therefore both insourcing and offshoring.

Classic offshoring

When we hear the term “Offshoring” we usually think of a business process being moved from, say, the UK or the USA to India or the Philippines – several thousand miles and several time zones away. This is classic offshoring, but there are forms of offshoring that have a different model.

Near-shoring

Near-shoring implies relocation of business processes to (typically) lower cost foreign locations, but in close geographical proximity. Some common examples include:

• Shifting United States-based business processes to Canada or Latin America
• Shifting London-based operations either to a lower-cost European country such as Hungary, or to a lower cost part of the UK such as Northern Ireland
• Shifting German-based operations to countries such as the Czech Republic, Poland or Hungary. These countries have a competitive advantage over their counterparts in the “classic” outsourcing countries such as India and the Philippines because German is more widely spoken in these nearshore locations.

Near-shoring is usually more expensive than classic offshoring, so it is usually chosen as an alternative to classic offshoring when any of the following factors become important:

However, the near-shore centres do not, in general, attract a high proportion of “innovation outsourcing” work. This is because new application development usually needs a very large number of man-hours, and the “classic” offshore locations have a significant competitive advantage over the near-shore locations in terms of personnel and premises costs.

Best-shoring

The best-shoring concept is that some services need to be delivered in a location close to the customer, while some other services do not. Best-shoring involves tailoring specific customer care needs to locations that are best suited for these functions. It allows the customer to save on the cost of domestically sourcing the work, while at the same time removing the inflexibility of using only one offshore location.

Many of the world’s leading consultancy companies, such as IBM, Accenture, as well as many of the large Indian outsourcing companies, have invested in facilities in “Near-shore” locations such as the Czech Republic, Hungary and Northern Ireland, so that they can offer their clients the advantages of best-shoring.

Comparison of each model

Classic offshoring is usually the lowest cost option. In the major offshore centres such as India and the Philippines there are very large numbers of highly skilled personnel available for all kinds of work at very competitive rates. The range of work undertaken is extensive, ranging from production activities such as call centre functions and simple transaction processing to investment research to innovation activities including research and development and large-scale software development and business process re-engineering.

The classic offshoring centres have a considerable competitive advantage in innovation activities because of the very large numbers of people that large development projects often require. There may, however, be problems associated with time zone differences and travel costs, cultural barriers and the classic centres do not always have access to resources that can communicate in European languages other than English.

Near-shoring is usually a higher cost option than classic offshoring. German companies often offshore call centre and customer focused activities to Poland, Hungary or the Czech Republic, where there are pools of resources with German language skills; US companies often offshore to Canada or Mexico and Japanese companies often offshore to China for similar reasons. Northern Ireland (itself of course part of the United Kingdom) sets out to attract call centre and transaction processing work from the rest of the UK.

The advantages that the near-shore centres offer are lower travel costs, fewer or no time zone differences and fewer or no cultural barriers. The types of work that the near-shore centres undertake include call centre functions, work of any kind that requires frequent travel to the customer, and more complex transaction processing – work that perhaps involves a strong customer focus or regulations-driven reporting element. The near-shore centres have not gained a significant share of the innovation outsourcing activities market.

Best-shoring attempts to offer the benefits of both the classic and near-shoring approaches. While it is more expensive than classic offshoring, it is a highly flexible way of outsourcing a wide range of activities, but is, by design, fragmented – the customer may be dealing with service providers in many locations. As a result, this method is only suitable if a large number of functions are to be offshored. Both the customer and the service provider need a management structure capable of handling this fragmentation.

27.3.4 The impact of outsourcing and offshoring on the IT function

A decision to outsource and/or offshore a substantial part of the firm’s activities radically changes the role of the IT department. If, for example, the development, testing and support of all new business applications is contracted out then the future role of IT is largely concerned with supplier management which includes:

• Monitoring suppliers’ compliance with service level agreements
• Liaising with the supplier
• Negotiating charges for new or changed services
• Monitoring the total value of the deal
• Reviewing the deliverables against overall objectives
• Managing data protection and security issues
• Integrating different applications and services provided by many external vendors.

Contract management is a distinct role in the IT department, but not every IT professional will be well suited to it. Firms need to identify the team that will provide these services and provide any necessary training in good time.

The performance of outsourced services needs to be monitored against objective criteria and problems need to be resolved as they occur. Benchmarking should be used to compare the service quality and value for money achieved through outsourcing with objective standards and best practice in other organisations.

In this scenario, while the IT department is no longer responsible for design, development and the early stages of testing it is still responsible for more tactical or strategic elements such as defining business specifications, change control, programme management and acceptance testing.