Offshore development centers (ODCs) and global development centers (GDCs) are offshore development facilities owned and operated by offshore vendors dedicated to the IT services needs of remote clients. ODCs perform a variety of tasks including application development, software maintenance, product implementation, and application management, acting as a virtual extension of client's IT development and maintenance departments while leveraging the expertise and infrastructure of the offshore partner. This relationship allows both the vendor and the client to focus on their core competencies. It frees the client from the complications of setting up its own facility offshore, freeing precious management bandwidth from tasks such as manpower recruiting and human resource management, skills and expertise development, regulatory approvals, cultural adjustments, and infrastructure building. The client realizes ongoing benefits including lower management overhead during the operating life of the ODC, commiting a minimum volume of business, which will be outsourced every year to the partner.
When global organizations adopt such business models, a key element to success is considering their vendors as partners in their overall value chain.
The India-based offshore development concept was pioneered by Tata Consultancy Services (TCS) in the early 1970s and was perfected in partnership with customers such as General Electric, American Express, and Prudential Insurance as it has gained wider acceptance across various industries. This delivery model has been very successful in the financial services industry: large financial institutions like Standard Chartered, ABN Amro, ING Group, Bank of America, BankOne, Merrill Lynch, Morgan Stanley, and Lehman Brothers have embraced this model, are realizing substantial cost savings, and are able to provide superior, quality solutions to their businesses in a shorter time. The Swiss Depository, Sega Intersettle, developed its large settlement system with TCS in India. Given its broad acceptance with a variety of clients, the ODC model has also become a vehicle for consolidation and diffusion of best practices among various clients in the financial services industry.
Today, most of the global system integrators have an offshore development center in India. In the aftermath of the terrorist attacks that occurred Sept. 11, 2001, many Indian offshore IT services firms have also created development centers outside India for business continuity reasons. For example, these firms have established development centers in Hungary, Uruguay, Brazil, China, and Japan. These centers, apart from serving as an alternate center to service customers in a business-interruption situation, also provide the necessary local knowledge in terms of the local language, culture, and business practices. Thus these centers help serve global clients worldwide.
Evolution of the ODC Concept
For many IT and business decision makers, the term offshore development once meant contracting out low-end labor-intensive tasks to developing countries to reduce costs. Although the ODC concept was initiated around a cost-reduction model, it has evolved into a service delivery model focused on quality and time-to-market advantages for organizations to architect, design, develop, and maintain large applications. The offshore development approach has progressed beyond IT solution delivery to IT-enabled services such as business process management.
Global outsourcing centers gained greater momentum during the last 10 yearsespecially in performing Y2K remediation as well as in the Web-enabling of legacy systems during the Internet boom. The model worked well and extended itself to outsourcing of application maintenance and production support of large portfolios of business-critical legacy application software. Today, several corporations are doing the majority of their software development work, including large chunks of product customization and deployment, at GDCs.
While the focus during the initial years of the ODC relationship is often cost reduction, as the client-vendor relationship matures, the value focus shifts to complete "technology consumption management," where the vendor takes complete responsibility for providing "technology freedom" to its customers. This entails playing a key role in the future IT architecture decisions and ensuring continuous improvement at optimal cost with the goal of yearly reduction. It also ensures the client organization's product and services are technologically current by leading and supporting the client's legacy systems transition and decommissioning initiatives.
For specific customers, ODC vendors are also setting up Centers of Excellence (CoE) that cater to the global needs of customers in a particular application or technology area. For example, for a U.S.-based financial services firm involved in leasing, TCS has set up a CoE for its customer relationship management applications. The CoE has not only developed the necessary skills and methodologies in the chosen technology area, it has also developed the necessary methodologies that would help the customer to consolidate the customer database and provide the sales force with effective online access to vital customer information. This large, complex, global deployment of the CRM system was done with a core CoE team that set up a product lab in India and created the standard deployment templates. The core CoE team supported the global team that moved from site to site to assess requirements and perform configuration, end-user training, and early support activities.
Why Companies Choose the ODC Route
The primary advantages of global delivery centers to clients include:
- Availability of a skilled work force: India offers a large number of very well-trained, English-speaking, engineering and computer science graduates at approximately 40%50% less cost compared to their counterparts in the U.S. and Western Europe.
- Process Arbitrage: The large Indian companies have perfected the model through mature, stable, and repeatable processes externally assessed and certified by ISO and/or the Software Engineering Institute (SEI). The processes for the entire life cycle of software development as well as the so-called soft issues like cultural training sessions for associates and customer personnel are well defined and customized to suit the customers' needs.
- Consolidation advantages: By outsourcing to GDCs, customer organizations have been able to consolidate their IT work across the globe and in doing so have realized major cost savings through application retirement (shutting down multiple applications performing the same business process in various geographies) and server consolidation (re-platforming applications on a standard technology stack enabling reduction of maintenance costs on hardware and networks).
- By providing an onsite/offshore mix of human resources, IT service organizations are able to provide continuous coverage and a larger time window for development, thereby affecting their time to market.
- In a world where technology is changing rapidly, one must ensure employees have the right skills to adopt new technologies. In a knowledge-intensive society like India, finding employees with the right skills and training them often requires less time and cost, thereby enhancing the ability to adopt technology more quickly.
When global organizations adopt such business models, a key element to success is considering their vendors as partners in their overall value chain. The cost reduction, downsizing, and the accompanying organizational change must be managed very carefully. Ideally, vendors of such services help the client in leading that change. Successful vendors have not only helped their customers realign but also have helped overcome the problems of downsizing by realigning constantly to deliver what the customers are requiring. It is fundamental for the organization to overcome this transformational discomfort in order to create dynamism, capability, resilience, profitability, and quantifiable shareholder value.
ODCs face a variety of challenges including communication, culture, infrastructure, political concerns and business continuity plans. IT services firms that can overcome these issues with effective training and back-up plans such as global delivery centers will succeed. India has made substantial investments in infrastructure development that will be advantageous to scaling up to meet customer demands.
From the initial predominance of application outsourcing, the current trend is moving toward infrastructure and business process outsourcing. Recently, what began as a labor arbitrage has moved toward optimization and digitization of a wide range of business processes.
Global development centers are preparing to provide application services where in-house products can be hosted and provided for customers worldwide. TCS recently implemented this concept using its proprietary banking solution to customers outside India. The engagement model is transaction-based, limiting the risk of initial investment in IT products from the bank's perspective and improving TCS margins by sharing the risk. For more information on specific case studies on how financial services organizations have benefited, see www.tcs.com/0_case_studies/ index.htm#financial.
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