Should Your Company Outsource?

Companies Have Sprung Up to Help You Decide

By Susan E. Kinsman

Many business owners built their companies on the premise that if they wanted something done right; they had to do it themselves. No more. The global economy is demonstrating that it doesn’t always pay to do it yourself and it could likely cost your company if you do.

That’s the logic behind outsourcing – hiring others around the world to do work that is not part of a company’s core business or competency. The practice has been embraced by businesses from large multi-nationals to small startups looking for a competitive advantage. And the trend has become so widespread in the last 10 years that federal and state governments in the United States are looking for ways to stem the flow of tax dollars and jobs offshore.

What aspects of a business can be outsourced? Just about anything, from information technology and communications network management to business processes, such as call centers, human resources and finance and accounting.

While information technology started the outsourcing trend, it’s the business process sector that The Outsourcing Institute, www.outsourcing.com., predicts will see significant growth in outsourcing business in 2005. The online neutral professional association cites projections by Gartner Inc., a market research firm based in Stamford, Conn., that business process outsourcing worldwide would grow from $112.9 billion in 2003 to $176.1 billion in 2008.

There’s a lot of money to be made in outsourcing and consulting services are one piece of the large pie. Gartner Inc. said worldwide revenue from information technology consulting reached $43.08 billion last year. Not surprisingly, companies that provide outsourcing services have branched into consulting to help prospective clients decide whether outsourcing makes sense for their company, what business functions would be best handled by others and what aspects of the business the company should continue to handle.

At the Source of Outsourcing

One of those companies is Wipro Ltd., of Bangalore, India, a leading provider of system integration and outsourcing services. Its Wipro Technologies division operates in 35 countries, including the U.S., where it has 421 customers, offering software development and business process outsourcing services, as well as management consulting and product engineering. It competes with the likes of IBM Global Services, Infosys and Tata Consultancy.

Wipro trades as WIT on the New York Stock Exchange, even though its chairman owns more than 80 percent of Wipro stock. The company’s profits rose 57 percent to $363 million for the fiscal year ended March 31, 2005. Sales totaled $1.87 billion, up 38 percent on the $1.35 billion from the previous year, according to Hoovers, Inc., the business research firm. Wipro’s outsourcing services to Western firms alone contributed $1.39 billion to sales, up from just under $1 billion in 2004.

Alan Pelz-Sharpe, a principal strategist and consultant, joined Wipro earlier this year and focuses on clients in North America, dividing his time between the company’s Boston and California offices. Wipro has more than 1,000 consultants after purchasing seven consulting companies since 2000, according to Bloomberg News. In April 2003, it paid $18.7 million for the 90-person NerveWire Inc., in Newton, Mass.

“We advise companies on global sourcing strategies, what they should outsource, how they can do it and the most efficient way to do it,” said Pelz-Sharpe.

With the demand for outsourcing and Wipro’s size, the company doesn’t have to go looking for business. It comes to them. “If a company comes in and says we want to cut costs, we take a step back and look at the organization,” Pelz-Sharpe said. The assessment can take a few weeks to a few months and cost between $35,000 and $130,000, depending on the size and complexity of the organization and what it is looking to achieve. Depending on what the consultants find, the estimated savings from outsourcing can range from 10 to 30 percent, Pelz-Sharpe said.

In the Northeast, the company has “very, very substantial clients” with tens of millions of dollars in contract sales. They include information technology, software and hardware firms, hospitals, medical service and device firms. But because of the negative publicity from the public over outsourcing, many companies prefer to keep that aspect of their business private, Pelz-Sharpe said.

Size Is No Object

“It’s difficult. People have to be sensitive to it,” he said of the negative reaction to outsourcing. Contrary to popular opinion, “we also recognize that there is a lot of job creation (as a result). Typically if we look at Boston and New Hampshire, biotech and smaller companies could never get a product to market unless they use the cost and time advantages” of outsourcing business to offshore business centers, he said.

Wipro works with all kinds of businesses, although historically its outsourcing work focused on information technology, software development and manufacturing companies, Pelz-Sharpe said. “A lot of work is getting higher up the food chain. We’re doing product development. Many technology companies in the Boston area are developing a concept and a design and almost everything else is done by outsourcing,” he said. Among its national and international clients are IBM, Sony, Cisco Systems and Microsoft.

The potential for outsourcing depends more on the nature of the business than its size, Pelz-Sharpe said, so there is no minimum-size company that could benefit from the outsourcing analysis. Wipro does a lot of work in India, Western Europe, North America and Japan and has a growing presence in China and emerging nations, he said.

Typically, companies consider outsourcing because they think they can save money or eliminate problems. The consultant’s assessment can point out any flaws in that logic. “The common deception is it’s going to be a lot cheaper. That’s not necessarily wrong, but it’s not always that simple.” Pelz-Sharpe said. “Yes, business costs in India are a lot lower, but you’re dealing with an office on the other side of the world. You are going to have to work as a team.

“Outsourcing for the wrong reasons, because the process is expensive or it’s a mess and you’re giving away the mess to someone else, doesn’t solve the problem,” Pelz-Sharpe said.

“Companies have to be honest about their strategy and where they want it to go. There are certain things that are core to your business that you should keep. You don’t want to give these things away,” Pelz-Sharpe said.

Reasons to Do It, or Not

“Outsourcing It: A Business Perspective,” on the company’s website, says common reasons to outsource would be to: reduce or control operating costs; improve company focus; provide access to additional resources; free up resources for other purposes; accelerate re-engineering efforts; accelerate migration to new technology; share risks; redeploy internal resources; enable quicker response to business drivers; and transform capital expenses and fixed assets to more flexible monthly business expenses.

Once the potential for outsourcing is identified, the next step is working out an agreement with an outsourcing provider. Wipro uses detailed service letter agreements for the business it takes on, spelling out the job and what the company expects to deliver. Complex legal and tax implications are also addressed.

The solution could mean bringing Wipro employees to the company’s site, or moving the outsourced business function to a near-shore or offshore location.

“We take on a lot of risk too. It can be substantial. If we take on programs or activities and find they are not as smooth-running as anticipated, at the end of the day you don’t want to take the financial hit. Nor do you as the client,” Pelz-Sharpe said.

.Another possible pitfall: “People don’t realize it’s a relationship; you’re not giving something away,” Pelz-Sharpe said. “If you’re outsourcing the wrong things, it may be difficult for the outsourcers to handle and the function may be difficult to bring back in [to the company,]” he said.

On the plus size, outsourcing can vastly improve quality by meeting international standards, a goal that “people find difficult to do here,” he said. “It’s hard for some people to swallow.”

And service can improve quickly. “The intensity takes some people by surprise, but we’re a global company and we can work around the clock. What we can do in a week to a month can be quite staggering,” Pelz-Sharpe said.

The company’s website provides detailed information about outsourcing and how a company can determine whether it is a candidate. Anything downloaded from the site is followed up with an e-mail from a company representative, offering more online topics or a business assessment.

Choosing an outsource partner is critical and some of the factors to consider, the company notes, are cultural match, commitment to quality, references and reputation, flexible contract terms; additional, experienced and available resources and price.

And while saving money may be the motivation behind outsourcing, it should not be the sole criteria in selecting a vendor. Wipro’s advice: “An outsourcing vendor cannot be selected based upon the lowest price. Both short-term and long-term goals must be realized to prevent outsourcing from becoming your worst nightmare.”