Sandra Phinney, Writer

Offshore Opportunities Lure Canadian IT

by Sandra Phinney

Shortly after 9/11, Peter Thompson felt a sense of apprehension when he arrived at Toronto's Pearson International Airport to catch a flight to Romania.

Thompson had planned the business trip knowing that security measures would be daunting. He even triple-checked with the Canadian Embassy whose staff assured him that all he needed was a Canadian passport.

He anticipated a grueling interrogation in Romania, but his arrival proved to be a pleasant surprise. Unlike Pearson, there was no lineup, and the Romanian immigration officer was pleasant.

"He looked at me, looked at the passport, and 'whump' -stamped it and waved me through," Thompson says. "I don't think I broke my stride for more than half a second entering Romania to start a brand new company."

Thompson is president and CEO of RIS-the only IT outsourcing company in North America that focuses exclusively on supporting, maintaining and enhancing existing mission-critical applications for Global 2000 companies. With successful offices in Toronto, Calgary and Regina, nearshore work for U.S. clients represents about 15% of RIS's $40-million annual revenues. "We expect this number to more than double in the next 24 months," he says.

Part of the company's success story is its recent segue into the offshore. First, RIS conducted extensive research on options in India, but it soon became crystal clear that they were a a very small fish in a very big pond. "The market in India is incredibly crowded. When a company posts a job ad in the local paper, it's not uncommon to receive 7,500 replies," Thompson says. When they looked into doing business in China and the Philippines, management heard echoes of the scene in India.

As luck would have it, the offshore solution was right under their nose. There were several Romanian ex-pats on staff who thought the company could do quite well there. So RIS organized a "search and explore" trip to Bucharest, the Romanian capital. "What we found was an incredible desire-on the part of Romanian IT businesses and the Romanian government-to establish strong, long lasting ties with North American companies," Thompson says.

The Canadian consulate helped identify potential partners, customers, and contacts for office space and other requirements. Then, Thompson discovered a built-in bonus: the Romanian government offers attractive tax breaks for IT workers so companies can feel confident that newly hired personnel will stay.

In April, following a year-long pilot project, RIS officially opened their subsidiary office in Bucharest. "We are thrilled with the results, "Thompson says. "Great dedication, high caliber talent, and unquestionable cost savings. Plus, we've opened up an opportunity to provide services to Western European countries."

In spite of heightened debate among U.S. and Canadian politicians, offshoring is inevitable; private sector companies will look to offshore options to remain competitive, regardless of any political debate. According to META Group, offshoring represents approximately 20% of all U.S. outsourcing expenditures, a figure that is expected to rise at a compound annual growth rate of 20 percent through 2006. Gartner suggests that upwards of 80% of large U.S. enterprises will consider offshore and nearshore outsourcing options by 2004. In fact, according to Gartner, many potential enterprise customers won't even entertain bids from service providers unless they have offshore capabilities.

So, offshoring is clearly the wave of the future and Dmitri Buterin, president and co-founder of Bonasource, a Toronto-based ssoftware company, is riding the crest of that wave. In business just for four years, Bonasource specializes in complicated web portals: intranets, extranets, and information portals.The biggest chunk of their operation is centered in Russia.

"Our Moscow office now has 180 people," Butterin says. "Mostly software engineers, project managers, analysts. Russian engineers are some of the best in the world, especially when it comes to more complicated, non-standard projects."

Although Buterin recognizes that the most frequently cited motivator for offshore outsourcing is cost savings, he takes a dim view of this logic. He says too many people compare a developer's salary in Canada ($60-80K) with a counterpart offshore ($10-20K) then conclude that they can do development at a quarter of the cost. "This is so wrong! This only applies to the case when you already know down to every little detail everything you want to develop. IT Projects can be very involved. And some of them are initiated too hastily-without enough thought given to the business goals that are driving the project."

Buterin offers a few examples to make his point.

• How will people typically use the system? Will dealers search your catalogue by product name, price, or brand? Will they want to see the whole catalog all the time, or perhaps hide some categories? Will they need a function to make repeat orders?
• How can usability be ensured? If the system is hard to use, vast sums of money on training and marketing will be wasted, and, after an initial curiosity period, usage will drop off quickly.
• How will the success of the project be defined and monitored? Tracking systems are critical.

"My point," Butterin says, "is that development work-and its cost-is a very small part of the big picture of any IT project. In most cases 25 percent or less. This means that even if you do the development offshore, you are only saving on this part of the project. And if you do not do the offshore outsourcing right, hidden costs and problems will come back and bite you and you will end up with a much higher total project cost than what would have been done without an offshore component."

That said, Butterin says he believes that, if the whole project is properly structured and executed, there are attractive payoffs. Benefits include availability of highly specialized expertise. And, because offshore labor regulations are relatively non-restrictive and the labor pool of professional IT engineers is high, a quick ramp-up or ramp-down is possible There's also reduced development times due to a distributed development process. "When we go to sleep here, we submit tasks to our Moscow team. When we get up next morning our questions are answered, we have new mockups and prototypes, and new features in the system."

Like a long-long relative, offshoring is here to stay. IT companies would be wise to factor this reality into their business planning strategies.

Six Offshoring Tips for Success

• IT functions, like support and maintenance, need to start on-site and reach a certain maturity level before they move nearshore or offshore. Start with an on-site centric approach and strategize from there.
• Don't assess cost savings purely as a function of labour costs. Although labour costs in offshore countries may be as little as one-quarter of those in North America, you need to recognize the ancillary costs of things like executive travel time and local project management requirements. These items can add up quickly and, in some cases, negate the labour cost savings.
• Evaluate your internal readiness to go offshore. If your internal procedures are less than perfect, offshore outsourcing will be very hard to leverage. You need a well-defined process in place. Take a piece (small/pilot project) and plug in a carefully selected offshore resource. Work until happy with the result. Repeat and expand.
• Be sure to have clear communication processes and procedures, facilitated by proper systems. Email and fax is not enough-you will be buried in volumes of communication. Web-based Intranets (or similar systems) can be a huge help.
• Put a lot of effort into finding the right manager for the offshore office. The person must be knowledgeable, reliable, and have a good command of English.
• Establish solid operational procedures for the offshore office, including who is responsible for what. Checklists; templates; and standards are important. Everything has to run like a well-oiled machine to be effective.

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This article appeared in CRN Canada; Vol 4, Issue 6, 2004

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