Bala Subramanian, Vice President - Europe, ITC Infotech, considers the types of offshoring models and compares them.

During recent years, a number of countries have become offshoring destinations for IT and BPO services.

While India continues to be the preferred destination other popular choices are Eastern Europe, China and Latin America. Global multinational companies have been outsourcing and smaller midsize organisations are rapidly joining the bandwagon and adopting offshoring models.

A number of offshoring models are being considered and adapted which include staff augmentation, ad hoc project work, build operate and transfer (BOT) models and dedicated development centres. The key drivers are access to a larger talent pool, lower costs, greater flexibility to scale up and scale down quickly, quicker time to market and capacity to over-invest in critical activities or at critical times.

The first step should be to develop an internal business case for offshore outsourcing and creating a blueprint for possible offshoring activities ranging from the development of business applications, service, support and maintenance of IT infrastructure. Such blueprints are becoming cornerstones of customer’s sourcing strategies with an objective to introduce offshoring as a key element of their partnership model.

Three important trends are emerging in the offshoring strategy for 2011. The first is cost reduction, which seems to be an important decision to reduce application development and support costs.

The second trend is quality, where European customers have expectations to embed quality in the development process. The other trend is a partnership model with a flexible service provider who is willing to invest in future transformation initiatives as an alternate to traditional service providers.

With the primary objective being cost reduction as a trend in 2011, organisations should be aware of the hidden costs involved in offshoring strategy. The hidden costs are typically ignored when there is a run to select a partner for cost reduction with a combined goal of increasing productivity.

The business case that is created for offshoring should clearly articulate item-wise hidden costs so that the entire cost model is visible and expected returns are justified. The hidden costs typically include the additional infrastructure costs, travel costs, training costs, management and governance investments and expected investments in transformation initiatives.

Mid-size enterprises who are testing waters for the first time, can consider both a pilot approach and big-bang approach. Both approaches can yield good results if managed well, but initiating a pilot project seems to be a natural course of action for first time offshoring companies.

Sufficient planning and clear understanding of expectations are paramount to the success of pilot projects to ensure that the effort, money and resources spent deliver the expected results. A successful pilot project will pay for a long-term global delivery model and a strong focus on return on investment.

Again, as part of the offshore sourcing strategy, organisations should evaluate which offshore model to adopt. This can be pure single location offshoring, combination near-shore with offshore and follow the sun model. This will help to receive the intended value expected in the offshore outsourcing arrangement by concurrently adopting a combination of different models as per the need of the organisation.

To create a successful offshoring strategy, service providers should look for certain key pointers from customer organisations. The pointers include commitment from senior management, willingness to take risks and have the right mindset, a good mix of engagements ranging from development to support, good revenue and turnover, having an internal champion with a mandate to adapt offshoring strategy and long term commitment in terms of business.

Specifically in the UK and European markets, offshore services providers should be aware of HR regulations governed by labour and law. These regulations involve loss of employment due to outsourcing and changes to service provisions. Services providers should work with their legal departments closely to understand the risk and implications and costs involved. The costs can impact the overall business case.

Implementing a robust governance model is key to ensuring the success. The service provider governance team should work closely with its customer management teams to provide the right visibility and direction to the overall operations.

The governance structure should be built on the principles of providing direction, planning and monitoring, execution and optimisation. Customer relationships should demonstrate sound management, flexibility and trust and expected returns.