Table of contents

CeBit 2004: Optimistic but careful

CeBit 2004 in numbers

The state of the German IT sector

Focus on SMEs and compliance

Technology trends 2004

Going off-shore: it is a trend but sometimes a bridge too far

Off-shore outsourcing: it is a trend but in Europe sometimes a bridge too far

This was also the conclusion of the Automatisering Gids (a Dutch IT weekly) regarding the Dutch market readiness and acceptance on moving IT operations off-shore. This was also reinforced by our hands-on experience at CeBit. "Offshoring", "Global outsourcing", "Global sourcing" are fashionable terms. Nevertheless, small-, medium sized IT companies know little about going off-shore.

Several companies (small, medium and large ones) had been approached to investigate their opinion and knowledge on off-shore outsourcing as well as to learn about the information sources they are using to prepare for a strategic decision on global sourcing.

Key questions:

Is the company already outsourcing IT operations off-shore?

If NOT:

Was there any discussion at management level on the possibilities on off-shore outsourcing

Was there any decision made

What is the level of knowledge on the subject

Is the off-shore outsourcing process known

Is there any information source used

If YES:

How was the decision made

How was the off-shore partner found

How was the partner evaluated and selected

What is the outsourced work

What are/were the major problems

How is process monitored

If the company had decided not to outsource (or does not have intentions to outsource): What is the reason.

General remarks

The large majority of the companies approached were small-, medium sized (up to 500 employees). All of the companies offered software solutions of various kind.

As a result of a sluggish IT sector in Germany, the recent labor market (labor union) unrest regarding off-shore outsourcing in the US and UK (with a high profile media coverage) the word “off-shore outsourcing” is not quite acceptable for a number of companies. They rather talk about “global sourcing”.

Often company representatives refused to express their opinion on the subject and even refused to give a business card. Others requested complete anonymity.

English language is still a major difficulty among German companies. Even though 25% of the visitors (125,000) to CeBit were foreigners (of which 28,000 from Asia).

Key findings

Most of the companies do not have off-shore outsourcing operations or they do not plan to move operations off-shore in the short term:

A few of the companies had discussions at top management level on possible off-shore outsourcing operations, but for various reasons these discussions were not followed up by any actions.

Most of the companies would like to learn more about off-shore outsourcing. Companies do not have enough information on the outsourcing process, advantages and disadvantages of outsourcing, the countries and they anticipate that it is very hard to find a suitable partner.

Most companies emphasized that they have a very highly integrated process of creating software which would be difficult to break down into tasks to be outsourced without increased communication and project management. After trying to clarify this statement it turned out that (a) they would find it excessively difficult to create detailed enough specifications for the outsourcing partner and (b) often the top management of the company is personally involved in writing the software and making decisions on highly technical questions on a daily basis.

The fear of loosing control over the process and quality issues are a major concern.

Often there is no distinction between low added value and high added value tasks and activities within the process of creating software.

The fear of different culture (corporate and social) is quite high.

Interestingly companies with 50 – 100 software developers feel that they are too small for off-shore outsourcing. It is seen as an opportunity for large global companies with international experience and local contacts.

Most of the companies design, develop and market their own product or a range of products. They have felt that (a) most of their software development takes place in very small increments based on customer requirements which would not be suitable to outsource and (b) the product and the product maintenance is extremely complex to be outsourced. They have felt that new product development, re-engineering and large projects are the most suitable for outsourcing.

A few companies have plans to market their products globally. For this they would need local partners (localization, sales, support, maintenance) but before that they want to have a pilot implementation in the country.

A few companies have or had off-shore operations;

In some cases the relationship failed to produce the required results. Here the key reason mentioned was cultural and language differences.

In other cases the relationship is working well. Interestingly the companies mostly have a partner in Central Eastern Europe.

Partners were find in two ways: (a) recommendations from an existing partner or (b) following the well tried route = going to India

Mostly there was no formal evaluation process but rather trial projects.

Cost advantage amounts to 40 – 60%

Conclusions

Companies do not know enough about off-shore outsourcing at large and do not have enough information. However they are quite open to learn.

Off-shore outsourcing is seen as the game for the large global companies most suitable for large projects and/or new product development

Possible labor market unrest is seen as a major issue

The fear of loosing control is very high. Companies are not aware of strategies to minimize risks and maximize ROI and value creation.

Off-shore outsourcing is not seen as a long term but rather a possible very short term strategy which carries many and too high risks.

Companies are not accustomed to the idea of going off-shore to the other side of the world. They would rather opt for a near-shore strategy (Central-, Eastern Europe).

In-country outsourcing is till possible as companies in the former East-Germany are still cheaper than the one in the West.

The level of awareness of off-shore IT outsourcing grows, not least because of extensive press coverage of late.

The landscape of off-shore IT outsourcing is changing. The opposing force of the moment is labor market concerns while the driving force is to improve business value with reduced IT budget.