Emerging markets will play a “big role” in altering the business mix of medical device manufacturers, posits Jyotirmay Datta, Global Industry Head for Medical Devices for Wipro.

Medical devices include any and everything physicians and caregivers use to treat patients or deliver healthcare services. Surgical equipment, MRI scanners, pacemakers, stents, medication delivery systems, imaging and diagnostic equipment, and even hospital workflow management and archiving tools (e.g. PACS) fall into the medical-device category. Major manufacturers include GE, Johnson & Johnson, Medtronic, Philips, and Siemens.

Until the current recession, Datta notes most of these manufacturers enjoyed operating margins of more than 20 percent serving the developed world and successfully growing their business. “They had no incentive to seek new markets,” he explains. The current economic conditions, coupled with strong Asian competitors, changed that viewpoint. “Consumers now have less discretionary funds to spend on healthcare,” he explains. Government regulation is adding to the challenging business environment, he adds. The result: these manufacturers are under “keen growth and cost pressures in their home markets,” continues Datta.

The answer is clear. “These companies have to look at growth options elsewhere,” says the Wipro executive. Emerging markets, especially China and India but also Brazil and Russia, are adding one billion new patients into the global healthcare system “who are relatively untouched,” he estimates. He predicts these markets will “become increasingly important to the medical device manufacturers in the next three to five years.”

The challenge: devices that are affordable for emerging markets

In India, for example, healthcare currently accounts for just three percent of the gross domestic product, Datta says. “There’s enormous potential,” he believes.

However, there is one major challenge: cost. Datta, quoting from other studies, states members of the Indian middle class earn $4,500 per annum. Currently they spend about $6 per year for medical devices; in the United States consumers average $230 a year. “A medical device conceived and successful in America is not likely to sell in China or India as is,” he says matter of factly. Manufacturers either have to find a way to bring costs down or come up with different products.

Datta says they can do that by changing their research and development, their processes, and their technology. “They can’t just replicate what they are doing in the Western market if they are going to be successful in the emerging markets,” says Datta.

How Wipro helps medical device firms compete in emerging markets

That’s where Wipro comes in. Its consulting team can help medical-device manufacturers do just that.

Many of the major manufacturers already have set up plants in India. Wipro has the experience to help others set up supply chains in these markets. Ditto for their distribution systems and validated processes. Wipro is also capable of aiding them in brand building, “which has to be different.”

Currently Wipro is the one of the world’s largest third-party research and development services companies according to Datta. Wipro’s 18,000 engineers can aid the manufacturers in developing new, affordable products end-to-end.

One example is Wipro’s Telehealth Solution, a device that enables effective patient monitoring in remote places. It automatically captures vital data from various devices (like blood pressure monitors) and then transmits the data through wireless or wired connections to patient management systems. It has live video and audio for real-time patient-caregiver interaction. The Telehealth device can deliver quality care at an affordable cost to patients globally.

In addition, compliance to global requirements can be a challenge for medical device manufacturers. Legal scrutiny can be difficult in various markets. Wipro has a regulatory practice that is up-to-date with the latest policies from regulatory bodies and associations worldwide. Wipro’s knowledge ensures engineering specifications meet the requisite criteria.
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Finally, Wipro, a company having its roots in India, has a deep understanding of how to do business in Asia and the Middle East. “We understand the Indian market and can help companies gain a foothold in the Indian market,” he says. Indian’s population of 1.2 billion people “is a huge market for anybody.” Last year he says 50 percent of the $1.7 billion worth of medical devices Indians purchased were imported. But he predicts that should change by 2015. In the next few decades he expects the Indian appetite for medical devices to equal that of the United States and larger than any market in Europe.

Different routes to success

The Wipro executive reports there are several current strategies for success. Large players “with money and muscle” are setting up their own captives. Some medium-sized firms are forming joint ventures with local players. Some of the larger Indian companies are buying smaller European companies to enter their markets. “They are designing products for the Indian market and also selling them in their European market,” he explains. And some have partnered with Wipro itself.

Lower device costs can help make everyone healthy: consumers globally who can now afford the device and the manufacturers that make them.

In 2008 Interval International, a vacation exchange company based in Miami, Florida, realized it was time to replace its core applications that were now over 20 years old. The IT team developed a strategic plan calling for a rewrite using service-oriented architecture (SOA).

Why Interval outsourced

According to Marie Lee, Interval’s CIO, the vacation exchange company has “a highly skilled IT team” in place. Nonetheless, Interval decided to outsource pieces of this mammoth project for several reasons. One was to decrease overall development cost. Another was to augment staff. ”We needed specific technical skills for this project,” specifically Java Web services, she explains. Another reason to outsource was to quickly ramp up a development team.

Interval selected Freeborders primarily because it had experience successfully completing large projects. “We wanted to leverage their experience, especially in Agile development,” adds Lee.

In addition, a related company had used Freeborders’s ADM skills previously, so the service provider made the short list. “We chose them after they won a bake-off at a sister company,” recalls Lee.

How the partners structured the offshored relationship

Currently, Freeborders has three employees on site in Miami. A development team of 20 others work in China. Another five handle quality assurance in China.

At the outset, Interval spent three weeks working with members of the Freeborders leadership team to “familiarize them with our methodologies, tools, and systems and the way we work,” says Lee. Thereafter, the two partners created a road map around both people and standards.

Lee says the three on-site resources are “critical” because “they work with us to develop and ensure the right processes, structure, and tools are in place to effectively communicate and work with the team in China.”

Interval took the three Freeborders employees to Miami at the beginning of the engagement to participate in developing the architecture road map and standards. “During that time they became a key part of our technical team,” she notes.

At the same time Interval gave the trio extensive training in their business and the vacation ownership industry.

After the training, one of the on-site resources returned to China to train the Freeborders team there. Then he returned to Miami to spearhead the relationship.

Lee says the in-house team was “open to making changes to the way we work.” She says it didn’t take long for key members of her team and the Freeborders employees “to jointly work together to fix problems.”

The Miami staff was flexible. Lee says some of the IT staff rearranged their schedules so they were at the office at night allowing them to work directly with the Freeborders team in China.

To foster the feeling of teamwork deeper into the ranks, Freeborders routinely sends two or three of its team members to Miami for 90 days. Rotating people through the Interval offices “removes the cultural gaps, improves communication, and creates teamwork,” Lee reports.

Jim Reesing, Executive Vice President, Global Accounts and Operations, Freeborders, says this relationship works because “there is a joint spirit of involvement.”

He also praises Interval. “We both invested in getting ready. Many buyers don’t want to take the time to map the processes or set up a governance process because they don’t see anyone writing code. And they certainly don’t want to pay for travel to China,” he explains. He appreciates that Interval “invested up front in getting the engagement off to the right start.”

Replacing the application in phases

The buyer chose to replace the applications in phases. The first phase included two pieces: rearchitecting its membership system, which keeps track of two million member families, and replacing a service desk application that its own call center staff as well as the resort developer staff worldwide uses.

“The Freeborders staff has a high level of commitment to the project,” says Lee. “When my staff works nights or weekends, Freeborders employees work right along with them.”

Outsourcing’s benefits

Lee says the key benefit has been reduction in development costs. “They are one-third less than what our staff costs,” she calculates. She appreciates the “agility in resource planning.” Freeborders is quick to ramp up when necessary.

The service provider is also able to find the special skills Interval needs. “We are able to tap into the right talent at the right price to support our buyers,” says Reesing. “This is critical when you have a project as large as ours,” the CIO adds.

The fact that they are 10 times zones away is also a benefit. “We now have a 24-hour IT development shop,” she reports. Interval staff routinely gives the Chinese assignments before they leave at night and expects to find the challenges resolved when they log onto their computers in the morning.

Outsourcing this portion of the project has made the company more “nimble” and accelerated the development time. Lee says Interval is equipped to bring new products and services to the market quicker, an advantage in the uber-competitive travel market. The CIO believes these new programs will enrich the vacation ownership experience and allow Interval to share services with other third parties such as its resort developer clients. “That should improve the overall user experience,” she says.

Outsourcing to two different suppliers is tricky but doable. But cutting your IT into six different pieces? Sounds like a guarantee for a migraine — but not for the Alliance Group, a large global provider of insurance and financial services. It has written an outsourcing policy that insures great benefits, including a return on investment of 20 percent.

As recently as 2007, two of its members — Fireman’s Fund Insurance Company and Allianz Life Insurance Company of North America — maintained separate IT departments. This was not the most cost-effective use of already strained internal resources.

Instead of ramping up with more internal staff at both companies, Allianz pursued an ambitious outsourcing strategy and brought on six suppliers for functions as different as help desk support and Web site management from 2003 through 2007. The goal: to save about $150 million in the next three years.

The lion’s share of the business went to IBM ($330 million over 7.5 years) and AT&T ($70 million over four years).

According to Oliver Bussmann, chief information officer for Allianz of America (AZOA), the parent company of Fireman’s Fund, both companies leverage IBM data centers in Argentina and Brazil for their mainframe and midrange computing as well as other IT services in Europe and Asia. “That’s good to know going forward that the data centers will remain there. But certain activities we can do remotely because we need only a network connection,” says Bussmann.

It also helps that they are in the same time zone, he adds, since Allianz is in California and staff can collaborate contemporaneously.

Many of these services were already available at Fireman’s Fund, and AZOA renegotiated the contracts to cover Allianz when it received appealing price/performance offers. The companies also combined their IT departments and created teams from the staff to interface with the respective suppliers.

A wealth of suppliers

To achieve the savings Allianz targeted, Bussmann says the two companies are sharing infrastructure and services to leverage scale and external staff expertise. There are joint service level agreements (SLAs) to guarantee performance. They also reorganized their internal staff into teams to support platforms, applications, and network infrastructure that’s common to both companies.

Bussman explains that the strategy works for several reasons. The first is savings. “We realized in doing internal and external benchmarking that we needed to control unit cost,” he says.

One way to do that is through economies of scale — the second reason the strategy works. By achieving greater scale, Allianz not only cuts its unit cost but also allows for business growth. Scale is especially important because Allianz is dependent on mainframes in both companies. Bussmann claims that a company needs its processors to achieve a critical mass of 3000 MIPS (millions of instructions per second) to operate at a level that keeps the infrastructure supported cost-effectively while still being cost-competitive with comparable companies.

Third, it also doesn’t have to rely on hard-to-get expertise in Silicon Valley to add talent to internal teams since the supplier supplies the needed workers. Finally, by negotiating SLAs, it can tailor them to the exact needs of both companies.

To ensure the suppliers meet the SLAs, Bussmann has a comprehensive scorecard he reviews with IBM every month. It records how well the supplier performed according to key performance indicators like system availability and response time to repair. “We have tools and statistics in place that we review with them every month; and if they don’t deliver as promised, they have to pay penalties,” Bussman says. He also has regular governance meetings with the IBM executives; they discuss actions IBM must take if it doesn’t meet its SLAs.

While IBM provides infrastructure management, data centers, desktop and help desk support, AT&T offers network-related services. It provides data communications as well as Voice over IP (VoIP), security in the form of network firewall management, local area networks, Internet Protocol telephony, remote access, and mobility management services. As with its other suppliers, Allianz negotiated SLAs to guarantee network service levels.

While IBM has first-line management of general structure and most applications, Tata Consultancy Services backs up IBM from offshore, performing any legacy system maintenance from India.

For its part, Accenture complements the larger suppliers by developing and maintaining new applications.

Two other suppliers offer hosted services: ACS hosts Allianz’s FileNet document management system from an offsite data center, while Hewlett-Packard hosts the two sub-companies’ Web sites offsite also. Strict SLAs are in place in any hosted environment, and the same is true here.

Managing multiple suppliers

Managing six suppliers could bring with it some migraine headaches. This is not the case with Allianz. Rather, says Bussman, the insurer now “has access to state-of-the-art technology and expertise. We can’t afford to support a big research department to find out the best technologies to use, so we rely on our suppliers.”

Due to economies of scale, Allianz has also achieved a major goal set out at the start of the outsourcing project: unit cost. It’s now quite competitive, claims Bussmann.

“We also have access to extra capacity and resources we might need,” he adds. “Sometimes you get requests to scale up components and systems and internally it takes much longer to find the expertise and execute,” he explains. “Our suppliers can configure and execute quicker. They have a bigger resource pool of qualified staff than we could have internally.”

He says “It’s much easier to monitor performance and delivery now. It’s a huge step forward” for both the computing infrastructure and network.

Spend a lot to save a lot

Part of Bussmann’s multi-supplier strategy is having as many suppliers as required to keep the lead ones on their toes. “This promotes better quality of work through competition,” he explains. But his mantra for successful outsourcing is this: keep it simple. Allianz may have many suppliers, but each is best of breed and manages its own well-demarcated slice of the IT business.

These strategies seem to be working for him. While cost for all services is in the millions every year, Bussmann has managed to spend a lot of money in order to save a lot. He’s achieving an ROI of 20 percent overall.

Lessons from the Outsourcing Journal:

• Having multiple suppliers helps guarantee the best service, as the threat of competition promotes better quality of work.
• The best way to manage multiple suppliers is to have each one be best of breed and make sure the lines of business are clearly demarcated.
• To achieve savings, the suppliers involved should, if possible, share infrastructure, services, and SLAs to leverage scale and staff expertise as well as guarantee performance.

Creative Mailbox & Sign Designs is a manufacturer of mailboxes and signs that does $8 million a year in revenues and employs 65 personnel. It has three lines of business. The Residential line manufactures mailboxes and street signs for master plan communities; the Commercial lines does signage for office buildings; and the Department of Transportation line takes care of Department of Transportation signage for interstate and other highways.

It sounds like a simple enough business — design a sign, send the design to China, and have them make it and send it back in quantity. Jamie Harden, CEO of Creative Mailbox & Sign Designs, says it’s not that easy. “We had a relationship with a stamped aluminum outsourcer and manufacturer in China. We found quality inconsistency issues, poor communication, and lack of connectivity into their Asian organization,” he says.

Harden might convey specs and other data and instructions to the U.S. liaison but had no direct communication with the Chinese portion of the business. The result was miscommunication and mistakes, which cut into Creative Signs’ margins and held up manufacturing schedules. “We felt like we were buying a product instead of being in a situation where we could go through a more collaborative design process. It was not a real partnership,” says Harden. “No pun intended, but we often felt like something was lost in translation,” he adds. As a result, the company sought an outsourcing partner elsewhere.

Collaboration is key

Understandably, says Harden, “we were really looking for a service provider that would help us develop a partnership that would give us reliability, quality, effective communication, and good connectivity into Asia.” Harden’s company found exactly that when it phased out the existing outsourcing contract and teamed with BaySource Global in June 2006. The company used BaySource Global to manufacture mailboxes for distribution into its Residential market, and BaySource Global proved to be both consultative and communicative from the get-go. “From the beginning they went out of their way to understand our needs,” says Harden.

“We had e-mails and conference calls not only with David Alexander, president of BaySource Global, who runs the domestic side of things, but also with his partners in China; so we really had great connectivity right into that organization,” says Harden.

Creative Mailboxes has in-house graphics designers who come up with images of the product, which they send via the Internet to Alexander. His team takes engineering drawings and specifications, and drops them as CAD drawings into BaySource Global’s manufacturing program. This helps the Chinese supplier determine the tooling process, which is necessary to be able to get a quote, according to Harden.

If the buyer can’t provide CAD drawings, BaySource Global’s China team — all trained in professional CAD shops in China — can develop them for the client. BaySource Global then comes back with a proposal that states the tooling costs as well as the cost of the product. The supplier also provides a timeline, including how much turnaround time it will take from delivering initial drawings to providing a sample to finally delivering the product.

According to Harden, “We gave them the specifications but said, ‘If you can add any value to the process, feel free to offer it.’ So they came up with a few tweaks here and there to help us come up with a superior product. For instance, they designed a new latch for the mailbox and even went out of their way to find the paint we wanted to use.”

Basically, Harden adds, “As they were doing design, they were sending us pictures to see if it looked right. Sometimes what happens is you lose so much time to market because the manufacturer wants to just do a sample — with no pictures beforehand — and send that to you.” This is an advantage because if the sample is not right, the manufacturer has to repeat the new sample process.

The price is right

Harden readily admits that BaySource Global delivered “a quality product.” What’s more, the pricing was “extremely competitive.” By outsourcing to China, his company was able to keep design/manufacturing cost of each unit to just $8. Harden estimates that if he’d have attempted manufacturing in the United States, it would have cost twice that.

The lower cost also gives Harden’s company a healthy sales margin to work with since it sells the mailboxes for $30 a unit. Better margins obviously keep the company more competitive since it’s now also coping with a weak U.S. economy.

A one-stop shop

According to Alexander, his company takes over the project from the start. “All we need to understand is whether a customer has ever outsourced a product before or if it’s a product that’s currently something its procurement department is obtaining from a domestic distributor.” This gives BaySource Global a baseline from which to estimate its own and the customer’s needs.

The China office handles the specs, engineering drawings, and samples as well as sets cost targets and annual volumes and the like. Then, says Alexander, “we take that project and match it with a capable factory in China.”

BaySource Global therefore acts as a liaison between its customer and any of 50 factories it has bid on jobs. And Alexander acts as liaison between American customers and the BaySource Global Chinese operation.

The China team is manned with Chinese-speaking personnel as well as engineers. When BaySource Global visits the factories to explain the job and later to confirm that the factory is making products to the customer’s specification, the personnel have to talk to one another in the same language. “I don’t mean Chinese,” says Alexander, “so much as one engineer talking to another. Because of the specialized terms, it takes an engineer to talk to an engineer.”

For its efforts, BaySource Global nets a profit margin in the high single digits to low double digits. This keeps its services cost-competitive, particularly in an underperforming economy.

As Alexander is quick to point out, “More companies are doing business in China, so competition is increasing. The market will dictate what the costs will be. If we gouge a customer, we may lose them for good.” At BaySource Global, therefore, good business strategies dovetail with ethical business practices, a situation that is increasingly rare these days.

Lessons from the Outsourcing Journal:

• Customers that outsource manufacturing to China should have an outsourcing supplier there that understands Chinese manufacturing practices, expectations, culture, and pricing and how they differ from those in the United States
• Ideally the outsourcing supplier should be a company that helps the customer develop a partnership that gives the customer reliability, quality, effective communication, and good connectivity into Asia.
• The supplier should present the customer with designs throughout the design and manufacturing process to ensure that the sample that results is correct. Otherwise, if the sample is defective, the customer loses valuable time to market in the process of creating a new sample.

While the company didn’t have a choice to expand, it did have a choice about where. Powerbrace chose to expand outside of the United States because “domestic plant start-ups require meticulous planning, execution, and a lot of cash,” he says.

Weber did not like the then-booming option of outsourcing to the Far East, specifically China, especially after 9/11. “China has reduced financial incentives to some of its industries to stimulate its own exports,” he says. “Coupled with the weakening dollar and oil’s explosive rise, all three factors dampen demand for imports from the region. That gave us cause for pause in deciding to build there.”

He briefly toyed with the idea of outsourcing the manufacture of some components but quickly discarded the idea due to the potential problems that many who did choose a Far Eastern manufacturing option have faced.

“Even at the $100 per barrel oil price, the gains manufacturers found from friendly foreign tariffs not long ago are greatly outstripped by very expensive energy and higher overall supply-chain management costs,” according to a May 2008 study, “Will Soaring Transport Costs Reverse Globalization?” by CIBC World Markets, a Canadian investment bank.

“It takes a lot of cash to build a supply chain to China and a lot of time,” adds Weber. “And with inventory in-transit for six weeks, there’s no flexibility to make changes if suddenly needed.” His deliberations led him to consider another option — Mexico’s Maquiladora program.

Simply-defined, Maquiladora is a corporate relationship for foreign — primarily American and Canadian — manufacturers through the Mexican government under the aegis of the North American Free Trade Association (NAFTA). Maquiladora firms can ship their Mexican manufactured goods out of that country at greatly reduced prices and, in some cases, without tariffs. Typically, these factories are located together on self-sustaining campuses in cities not far from the southern U.S. border. These campuses are in some ways modern-day company towns that remind one of America’s early industrial age.

But challenges lay there for Weber, too. He needed a service provider that knew the ins-and-outs of Maquiladora to help him negotiate the development of his facility. Then he needed the supplier to manage it.

After several years of study, in late 2004 Powerbrace entered into a seven-year contract with the Offshore Group of Tucson, Arizona, a Shelter Service Provider (SSP) of manufacturing and other comprehensive services for companies to establish and maintain manufacturing facilities in Mexico.

In addition to helping supply-chain-conscious American Maquiladoras, the Offshore Group provides an array of support services such as human resources, employee (and in some cases, family) medical services and benefits, payroll, accounting, logistics, facilities management and short-term warehousing just north of the border. “The service bundle allows our buyers to manufacture and ship for less,” says Steve Colantuoni, manager of Market Research at the Offshore Group. “We handle the day-to-day support.”

This benefits Powerbrace’s entire expanded ring obligations in ways Weber anticipated, like providing a better cost structure and keeping to its core. But it also produced benefits he didn’t expect. “We don’t concern ourselves with support services. We outsource all of the operational and support aspects including staffing of our Maquiladora operation to the Offshore Group.”

But his needs for highly educated employees and managers in 2004 required more talented Mexican manufacturing workers.

Provider listens to new breed of buyer and delivers

“Our large, heavy products are components of freight rail cars,” says Weber. “They cost a lot to move. So efficient supply chains are a big part of the cost equation.”

As Powerbrace entered the Maquiladora program, it was generally typified by lower-skilled, higher-turnover, simple-assembly workers. The labor force was becoming more sophisticated. But the trick for his provider was finding skilled workers who could use and understand highly-refined assembly robotic devices and other complicated systems. This required the Offshore Group to utilize some of the characteristics found in Recruitment Process Outsourcing (RPO) to fill the buyer’s acute needs.

“It wasn’t easy,” says Miguel Hernandez, general manager of the Offshore Group’s Saltillo, Mexico, manufacturing campus and employee services community, which includes a modern health center. “The workers were certainly here. But we had to focus on identifying, then attracting a better worker because of Powerbrace’s needs.” He says it took almost a year.

“They listened carefully and worked hard,” says Weber. “Many go to Mexico, set up a few assembly tables, and approach manufacturing in a generic manner. We, on the other hand, weld and fabricate steel into finely engineered systems. Training and employee retention are very important. Finding the right workers, hired and supported by the Offshore Group, is worth the extra effort.”

Weber notes that many of his Maquiladora managers and employees could hold similar positions in his U.S. manufacturing operations if there were an opening. “Saltillo has quickly attracted an abundance of mechanical engineers and others with advanced degrees.”

Much lower supply chain costs

According to the CIBC study, many North American manufacturers that outsourced to far-shore locations not long ago, due primarily to lower costs, now reap a lean harvest of financial headaches due to significantly smaller foreign government credits and higher supply-chain transportation costs from those distant shores.

Chinese exports to the United States, such as metal manufacturing and industrial machinery — goods with low value to freight ratios — typically command relatively high transport costs, according to CIBC analyst and co-author of the investment bank’s study, Jeff Rubin. “Their exports of these goods have slowed under the pressure of rapidly rising transport costs the past year.”

He adds that on a year-by-year basis, the total amount of high transport cost goods shipped from East Asia to the United States began falling for the first time in more than 10 years in 2008.

“Freight-sensitive Chinese exports to the United States account for 42 percent of their total exports, down 10 percent from 2004. If it were not for the dramatic transport cost increases, Chinese exports to the United States since 2004 could have grown as much as 30 percent,” he adds.

“Higher energy costs mean higher shipping costs,” Rubin adds. “At $150 per-barrel, every 10 percent increase in trip distance translates into a 4.5 percent increase in transport costs. Add transcontinental shipping from a West Coast port to the U.S. eastern seaboard, and a standard 40-foot container from Shanghai costs around $8,000. But in 2000 when oil prices were $20 per barrel, it cost a mere $3,000 to ship the same full container.”

Bill Golden, president of International Logistic Solutions, knows the shipping savings to Powerbrace’s Maquiladora plant compared to China.

“Using CIBC’s figures, the total cost to ship from Shanghai to the Eastern United States is $8,000. But to ship that same container from Saltillo, Mexico, to, say, Chicago, costs about $3,000; or the same as it did to send from Asia to the United States in 2000.

Having its cake and eating it too through outsourcing

Today, Powerbrace reaps significant benefits through Maquiladora’s manufacturing of quality components and lower shipping rates and cites the Offshore Group as the primary reason.

“We visited many SSPs throughout northern Mexico. Many offered a la carte services. But we wanted a full service provider and found they had a depth of experience in all SSP aspects.” He adds that Powerbrace is better insulated from many of the cost headaches plaguing other American manufactures that outsource to far shores.

“We aren’t there just to do business in Mexico, but to be the best,” he adds. “We insist on finding and retaining the best people, the best business processes, the best support services and the most efficient supply chain with the help of our provider.”

“Customers compliment our Saltillo service capability and products produced there,” he continues. “Many customers audit our facility each year and are very pleased. As our business grows, we are able to concentrate on expanding capacity without the burden of more layers of administrative support. The Offshore Group provides those, and we’re very pleased,” concludes Weber.

Lessons from the Outsourcing Journal:

• A Sheltered Service Provider (SSP) can help American manufacturers establish and maintain a Maquiladora presence in Mexico. Manufacturers can realize as much as 60 percent savings over the shipping from China. As more sophisticated American manufacturers look to Mexico, SSPs assume a larger share of support services that yield competent manufacturing professionals on par with their American counterparts.
• The Mexican manufacturing sector is shifting away from the traditionally held “low-end assembly” model and more toward degreed professionals, with the SSPs placing them with Maquiladora companies, thereby making supply-chain management and transport costs more consistent.

“Previously, we outsourced only on a need-to basis and did not set up our own offshoring centers,” says Clark. Senior management decided that providing travel product development, support, and maintenance from different geographies was the best way to meet its business goals.

Sabre, whose mission is to connect travelers with the travel possibilities, provides products and technology solutions for the travel industry. Sabre developed the first global distribution system (GDS) developed in the early 1960s; 30,000 travel agents, 400 airlines, and 35,000 hotels currently use it. Sabre also owns the Travelocity Web site.

In 2002, Sabre issued an RFP for offshoring some of its product development functions to India. The objective was to find a partner that supported its cost reduction goals, demonstrated an understanding of the travel industry, and had the cultural knowledge to support its Asia-based clients, explains Clark.

Sabre invited 20 companies to participate. Five made the short list. For the final evaluation, Sabre asked two companies to develop a pilot project solving a business problem. “NIIT Technologies demonstrated the domain and technology expertise to develop and support the products we needed,” Clark explains.

Today, engineers from NIIT’s Delhi and Mumbai centers build and test products for PNR, pricing, and ticketing that Sabre’s travel agency clients use. As the relationship progressed, NIIT moved to end-to-end maintenance. This includes interface systems support between core reservations and down-line systems. “We have become Sabre’s subject matter experts, especially as they add product functionality,” explains Lalit Dhingra, president, U.S. operations, NIIT Technologies.

Currently, NIIT has more than 220 people working for Sabre, which is one of NIIT’s largest U.S. clients in travel and transportation.

Building an offshore relationship

Dhingra says communication, trust, and transparency are key to developing a successful relationship. “Understanding Sabre’s business needs is our priority. With extensive travel industry experience, we can build solutions to meet each client’s unique product specifications,” he continues. Adds Clark, “We encourage the teams in the U.S.and India to work as one. We can only be successful if we work together.”

Before the offshoring relationship, Sabre maintained its documentation according to internal standards, which is often the case with in-house operations. “In an offshoring relationship, documentation becomes the lifeline for knowledge transfer between teams,” says Dhingra. Clark adds, “We documented the product knowledge of our Japan and Singapore travel experts based in Texas to better enable the teams in India.”

Clark admits dealing with the cultural differences “was a journey. We all have different communication styles. But once we started working as a team, the issue resolved itself quickly,” adds the NIIT executive.

Travel helped the relationship. Sabre management went to India and NIIT executives spent weeks in Texas. Clark says the initial visits helped each side “understand each other’s style.”

According to Lalit, within six months both teams had built a comfortable relationship.

Why this relationship works

Dhingra says both parties are “up front in their communications.” Each side has been flexible when needed. “We try to understand their organization and business objectives so we appreciate their issues and concerns. Then we reconfigure our processes so we have a win-win situation,” he explains.

If there’s a dispute, a conference call generally resolves the issue.

Business benefits

Sabre’s original driver was to cut bottom-line costs and introduce new products more cost effectively. Dhingra says NIIT’s clients have cost savings of 30-35 percent over a five-year engagement period. “The savings increase as the relationship matures,” he explains.

“We helped modify their products and migrated some of their mainframe products to newer technologies, which cut cost substantially,” he continues.

Clark says the relationship has been really valuable for Sabre’s focus in Asia. “Our main driver was cost reduction. But it is great to have our developers close to our Asian travel agency customers,” says Clark. She adds Asia is Sabre’s fastest growing region, and growth in India “is one of our focuses.”

Time zones have made a difference here. Sabre is based in Fort Worth, Texas and its data center is in Tulsa, Oklahoma. “Our main operations are in the Central Time Zone. Having a presence in Asia meant there was development support available in the same time as our Asian customers. Our Singapore partners said they were more satisfied knowing they could reach developers faster and solve issues in a timely manner,” she reports.

Outsourcing to NIIT gave Sabre access to skill sets it had difficulty finding in the U.S., like Internet and TPF skills specific to the travel industry

NIIT was Sabre’s first deep dive into strategic offshoring. Once the travel company become convinced of its benefits, it “aggressively adopted a global sourcing strategy,” says Clark. “Our goal is to have up to 50 percent of our development globally sourced.”

Sabre has since opened its own captive centers in Krakow, Poland; Bangalore, India; Buenos Aires, Argentina; and Montevideo, Uruguay for strategic in-house development work. NIIT is its only strategic partner with offices in Mumbai and Delhi.

About NIIT

NIIT Technologies is a public company and the IT outsourcing arm of NIIT Enterprise. Last year it had $500 million in revenues. It employs over 10,000 employees across 44 countries. The company does multi-shore application development, remote infrastructure management, and business process outsourcing. Buyers in the travel sector include British Airways, Virgin America, United Airlines, Sabre, Emirates, and Singapore airport.

Lessons from the Outsourcing Journal:

• Sabre offshored to cut costs and reduce risk by geographically spreading its product knowledge.

• It tested its offshore strategy with NIIT Technologies in India. The results were so successful it opened its own development centers across the globe for strategic work.
• Having a presence in Asia helped Sabre improved its customer satisfaction with Asian travel agency partners and helped its growth in India.
• Benefits include lower cost, shorter time to market for new products, and access to hard-to-find skills in the United States.

Historically, IBM, EDS and CSCformed the top tier of the IT outsourcing suppliers. They offer a broad spectrum of technology services in a global setting. The contract size sets them apart from the Tier 2 suppliers, who tend to focus on specific areas. Examples of this group include AT&T Solutions which focuses on network management, ACS and Marconi who concentrate on IT infrastructure, and ENTEX which specializes in desktop solutions.

After a long and sustained period of dynamic growth, the traditional IT market has reached maturity. Although there will be pockets of rapid growth, overall I expect this market to grow about five percent this year.

That number might increase to as much as 10 percent if the economy spirals into a recession. Historically IT outsourcing has grown as the economy slows. When profitability becomes a challenge, buyers focus on restructuring and cost savings. They view outsourcing as a necessary strategic tool to accomplish these corporate goals. In this case, IT outsourcing will be influenced by the rhythms of the economy and faces a brighter future.

In addition, the new Bush administration is more inclined to pursue outsourcing as a way to improve the operation of the federal government. I predict increased growth in federal government outsourcing. And state and local governments will follow suit. The trend toward government outsourcing will continue as the industry builds success stories.

Internet and Ecommerce-Based Outsourcing

Outsourcing’s second segment is Internet and ecommerce-based outsourcing. Last year the market saw explosive growth in this sector, which was driven by the huge infusion of venture capital. The wealth of capital served as a magnet attracting a horde of new entrants.

These new companies had a business plan which based their profitability on economies of scale. Because the business plan required a large roster of customers to make the numbers work, vendors offered extremely aggressive pricing. Too aggressive, as it turned out.

At the same time, the Internet euphoria ruled the stock market during the first half of the year. Then investors shunned these stocks during the second half. Some ASP stocks lost as much as 90 percent of their value from the March high.

This aggressive pricing stance along with a surfeit of suppliers has created a shaky situation for some ASPs. 2001 will see a significant consolidation in the ASP market. ASPs that focus on point solutions will have the best chance of surviving. The strong ASPs will raise prices to survive and thrive. The weaker firms will have to join hands to avoid becoming casualties of the shake out or simply fail.

That said, 2000 proved that the ASP model is a viable way of doing business. The consolidation will winnow out the weak, not discredit the system.

The ASP model is viable because the reason buyers outsource in the Internet space is different than the motivations for traditional IT outsourcing. Speed to market is the driving force behind ecommerce and Internet outsourcing. Buyers outsource so they can have their Internet-based capabilities up and running as soon as possible.

In addition, the Internet outsourcing solution is not as permanent as the traditional IT offerings. Today companies don’t want to spend millions of dollars and take a year to implement an IT solution that they will have to replace in six months. They want the best available right now. The flavor of outsourcing in this space is different.

Because the need to join the ecommerce fray is so great, buyer demand will underwrite continued heavy growth in the Web-enabled market despite the temporary risks. But the fear of vendor failure will hamstring that growth somewhat until the stable and profitable vendors emerge. In fact, I predict this year buyers will evaluate a vendor’s profitability and longevity during their outsourcing selection process.

The inherent risk of doing business with a company that may fail gives an advantage to the established traditional IT vendors. They need the help because they have been relatively unsuccessful in this space so far.

Breakthrough Year for BPO

Hidden behind the surge of interest in the Internet is another important trend: the rise of business process outsourcing. The drive to BPO is happening because companies now believe outsourcing is an essential business tool.

2000 was a breakthrough year for BPO. Last year the big transactions happened in the BPO space. Big companies like Nortel, General Motors and Bank of America embraced the concept and signed multi-year, multi-process, multi-country contracts valued at over $1 billion.

I expect BPO to continue to grow as companies realize they can’t be good at everything. I see no limit to the depth of the BPO value proposition. When a company outsources an entire process like human resources or finance and accounting, the supplier can become accountable for true business results. There is less interdependence between buyer and supplier. Suppliers can assume more control, leveraging their economies of scale, process expertise and access to capital more effectively. I predict every non-core process will have a wealth of BPO providers eventually.

I believe BPO outsourcing will enjoy rapid and explosive growth this year. Gartner Dataquest estimates that BPO will have an annual growth rate of 21.21 percent for each of the next five years. The firm estimates BPO revenue worldwide will reach $543.5 billion by 2004.

And these are still the early days of BPO outsourcing. I believe revenues will eventually level out above† $1 trillion.

This year some BPO providers and ASP vendors moved from the far ends of the spectrum to meet in the middle. They created a new hybrid, the business service provider. I define BSP as a service provider that offers scalable BPO services through the Internet. BSP appeared on the landscape because buyers wanted their ASPs to take over the entire process, not just the applications. BPO providers wanted to control the applications to improve the process. The BSP provides the total solution.

Going Global

This year a significant amount of growth will take place outside of† North America. I see outsourcing surging in Asia, Australia, Europe and South Africa. Globalization is taking place in all three areas of outsourcing. Some of the best BPO thought leadership is coming out of Europe, especially from PricewaterhouseCooper’s London operation.

What do these trends mean for vendors? I believe the traditional IT players will have to get into the BPO and the Internet space. Their size and profitability will be an advantage. But they must learn to focus on an impermanent solution which is different from their traditional mindset. So far Tier 1 and Tier 2 companies are starting to succeed in their moves in this direction.

A much more difficult challenge awaits the IT vendors who move into BPO. Their branding centers around their ability to deliver technology. Buyers, however, want process expertise. These vendors have to prove they can deliver the process and not just technology. To date these vendors have not been able to overcome this buyer distrust.

The specialized IT vendors have fared better. ACS, for example, has been successful in crossing this chasm. It will complete over $1 billion in BPO transactions this year. It became a leader in BPO by creating a completely different division and running it separately from its core business.

The difficulty the big boys are having entering the BPO arena has created an opening for new pure play entrants like Exult and LeapSource.

Buyers in 2001 face a tremendous untapped opportunity for value by outsourcing their business processes. In today’s competitive environment they need to focus on process expertise, not elegant IT solutions.

Lessons from the Outsourcing Primer:

• The traditional IT market has matured but may grow if a recession occurs.
• The ASP market will consolidate this year.
• Successful ASPs will raise prices this year, eschewing the aggressive prices of their early days.
• The major transactions occurred in the BPO space last year. BPO currently offers the deepest value proposition for buyers.
• All markets will enjoy an increase in business from global buyers. Thought leaders are also coming from abroad, especially from Europe.

Sure enough, a dispute arose. When the buyer’s attorney began to file a lawsuit in Manhattan, the supplier’s attorney discovered the contract did not specify New York as “the sole and exclusive” jurisdiction. In Israel, all cases involving Israeli companies must be tried in Israel unless the contract specifies the sole and exclusive jurisdiction is elsewhere.

So the American buyer had to litigate the case in Israel. The litigation costs skyrocketed because the American attorneys had to set up shop in Tel Aviv. And now they had to play by someone else’s rules, which included learning the rules.

How do buyers protect their interests when they outsource crucial functions to offshore vendors? That may be the 10 million dollar question for American buyers.

Outright theft is the first concern. Protecting your intellectual assets is one of the major difficulties in outsourcing offshore, points out Franklin Blackstone, a lawyer with the New York firm of Arter Hadden. This becomes a real worry for companies who are providing original source code or a proprietary process to their outsourcing providers.

Handling International Disputes

Blackstone says outsourcing to companies in Asia is even more difficult because that culture views software ownership differently than businesses in the United States. “We view their actions as stealing our intellectual property. But that’s not how they look at,” says Blackstone. For example, Chinese law does not recognize business patents.

His advice: Have your attorney check out the local intellectual property laws that govern the supplier’s actions.

Before signing an outsourcing contract, Blackstone says buyers should have their attorneys also check to make sure the vendor’s country has signed the Berne Convention. This body of law governs intellectual property; its participants agree to recognize the existence and the ownership of intellectual property and not to use it in an unauthorized manner.

The best way to protect your intellectual property is to write all your concerns and demands into the outsourcing agreement. State those demands strongly. “You have to make it clear this code is yours,” says Blackstone emphatically.

Buyers must also include how disputes in the outsourcing contract will be handled. Important questions to ask before entering an offshore contract include:

• Whose laws are governing the dispute?
• Are U.S. laws enforceable in the dispute?
• Where will the dispute be adjudicated?

International Arbitration

Offshore outsourcers often don’t want the dispute resolved in the U.S. judicial system. Blackstone says one successful dispute technique is to agree in advance to submit the dispute to an international arbitration group. London, Brussels and Geneva are popular places for multinational arbitration.

If the supplier is uncooperative, the attorney suggests checking to see if it has an American subsidiary. If it does, put pressure on that unit. Fortunately, this business entity must conform to U.S. law. If the buyer receives a judgement against the offshore outsourcing provider, it can enforce that lien against the outsourcer’s U.S. assets, according to the attorney.

Another method of protecting buyer rights is to demand a performance bond. The attorney also advises paying the supplier in U.S. dollars instead of its local currency so the cost is clear.

Blackstone says buyers should never pay the bulk of their outsourcing fees up front. Instead, he suggests loading the majority of payment into the back end after the vendor has delivered the work satisfactorily. This ties performance to payment. “The outsourcer can violate the agreement with impunity if you pay in advance,” says the counselor.

An Offshore Horror Story

He cites the case of one company that outsourced it Y2K updating to an Indian firm. All the outsourcing vendor had to do was change the dates in the source code. The American firm paid most of the outsourcing fee in advance.

The American company sent its source code to India. The Indians performed the work and brought the new code back to the American company to test. Unfortunately, the Indian company wrote bad code which included a bug; this infected the original source code making the application unusable.

The Indians refused to accept responsibility for the problem. To make matters worse, they refused to share the original source code with the buyer. The American firm made its first mistake by not keeping a copy of its original source code. And it should never have paid for services until they were done according to the its standards.

To resolve the issue, the American company put pressure on the Indian developer’s U.S. subsidiary. Finally, the offshore group agreed to fix the code. But the American firm ended up paying double for the job.

Immigration Issues

The final legal issue is immigration. If the offshore vendor wants to send staff to the buyer’s site to install software that only they know how to install, the buyer will have to work with the Immigration and Naturalization Service to secure the proper visas. Blackstone says most companies don’t think about this until the specialists are ready to get on an airplane. However, these visas can take months. ‘Think ahead’ is his sage advice.

Lessons from the Outsourcing Primer:

• Write all protections into the outsourcing contract. Be clear and forceful so there are no misunderstandings.
• Protect your intellectual property or proprietary process.
• Do not pay the offshore outsourcer in advance. Instead, pay the bulk of the fee at the end of the contract after the work has been performed to your specifications.

President of Michael F. Corbett & Associates, Ltd. and producer of the annual Outsourcing World Summit conference and exposition, Corbett was instrumental in shaping the direction of outsourcing in its early, critical years. His forecasts for the year 2000 center around four main points.

Debate

With an increasing number of Internet-enabled applications at the center of outsourcing solutions that are going to the marketplace, Corbett predicts an interesting debate will take place this year. The question is how much on-the-ground support at the buyer’s location will be required for an application that is out on the Internet? How much of the value will require intimate involvement at the customer’s site, and how much value can be created and delivered through the application on the Internet?

Duplication

Corbett believes that over the next two years we will see other regions of the world begin to come forward with value propositions similar to India. “Whether it be offshore programming, offshore construction, offshore design, offshore accounting, or offshore medical records processing, we will see providers around the world trying to duplicate the success that we see in India,” he says. He believes companies will focus on the Middle East, Eastern Europe, and some areas of Asia to try to take advantage of the Indian model.

Delivery

“I think that ASPs as an alternative model for delivery of the technology and supporting activities around the business processes of an organization is probably going to be the single most important thing we will see in 2000,” says Corbett. Although ASPs are focusing now on mid-size companies, he says that large deals involving such functions as human resources (HR), procurement, and finance are just as applicable to large companies. “There will obviously be some slower movement among the larger companies because of the perceived value of the investment in the infrastructure they already have in place,” he explains. “It remains to be seen where the ASP model ends up on its move up the company-size ladder.”

ASPs may also change the dynamics of the big players this year, he says. The Big Five will continue to develop and advance their positions, as will the big IT providers. “But this business model is going to play in a very large way in this arena,” he comments. “This year we may see some new players come out of the woodwork into the forefront?folks like Oracle and SAP.”

Corbett says this will be the year of emphasis on HR and that this phenomenon is particularly due to the tight labor market. HR is a competency that aggregates expertise, enormous economies of scale and capability, and it can be leveraged across a breadth of companies?and that is what outsourcing is all about, he says.

Development

An ever increasing focus on how to develop leadership skills within organizations is an extremely important issue for 2000, Corbett believes. “I think next year we will see that the skill set associated with outsourcing is not a skill set that needs to be embodied in just a few executives who are responsible for specific initiatives. I think we will find that the skill set around creating and managing outsourcing and outside relationships is becoming integral to what every manager and executive is doing.” He predicts that, by the end of year 2000, the typical executives will be outsourcing 20% of their operations. “This means that it really has become an integral part of the executive’s job,” says Corbett. “so leadership and management skills will receive a growing amount of attention during the year.”

Deductions

Corbett thinks relationships are going to be a key concern for 2000. He states that we will see companies structuring a shared services organization, then structuring it into a separate business entity, then spinning it off. Corbett notes increasing use of joint ventures (JV) by firms such as Ernst & Young as well as PricewaterhouseCoopers.

The JV model creates a new third party business entity that provides services back to at least one of its JV partners and, over time, provides those services to other organizations as well. “I think there will continue to be movement in that direction,” states Corbett, “because everybody is looking for creative ways to create value as they form relationships.” He adds that the key driver for the JV model is not alignment of risk and rewards; for this can also be accomplished within the contract structure by tying the supplier’s reward to the business achievement for the customer. “There are lots of ways to create alignment of interest. I think the key driver to the JV model is to build an organization that will grow and move beyond the strict definition of the expectations that might have been set in an initial contract.”

“If there is any area of the world where I am seeing new interest in outsourcing,” comments Corbett, “it is Asia. We just did an event in Hong Kong that covered the Asian market, and it received a great deal of attention, as well as corporate sponsorship.” He points out that there is a new consortium in Japan. “On the customer side, a lot of focus will be on redeveloping Asia. On the provider side,” he adds, “I think we are going to see a lot of regions in the world come forth with value propositions that try to duplicate the success that we see in India now. Besides the Middle East and Eastern Europe, I think we will see this happen in Asia.”

ING Baring Securities, part of the global ING Baring Bank, deals with trade settlements and provides derivatives to financial companies. The company takes advantage of changes in the market conditions, so all service functions have to react quickly. The user base is extremely demanding, and all problems received are critical. Those factors add complexity to the delivery of help desk services.

“We wanted to centralize,” said Fretwell, chief information officer, Asia, “and we needed to do it fast. We looked at various ways to do that.”

Considering the Options

The company considered external recruitment and training of a new team, making changes in the existing internal resource, and outsourcing. Outsourcing, they decided, was the fastest way to bring in the experienced personnel they needed. “An outsourcer could recruit people who are trained,” said Fretwell.

ING Barings selected Digital (now Compaq) as their vendor, based primarily on the supplier’s ability to provide the right people and on their flexibility. The original agreement reached two years ago was to provide help desk applications support in Hong Kong. The relationship has expanded to include provision of those services in Japan and Singapore, as well as operations management services, firewall and security and computer maintenance and support services, as needed, in each location. The additional agreements, according to Fretwell, evolved from Compaq’s initial success in providing help desk support in Hong Kong.

“One of the reasons for rolling out in slow stages was for us to get an understanding and appreciation of outsourcing, how the vendor/client relationship would work,” said Fretwell. “That has enabled us to really enhance the program each time, before we rolled it out to outsource.”

Flexibility — An All-Important Factor

A key factor in vendor selection was flexibility. “We found they were an organization who were very open to adopting some of our own styles and working with us to project our own culture, rather than bringing a fixed solution,” said Fretwell. “We had our existing security policies and methodologies of working that we needed to maintain. We didn’t want this to be a huge culture shock for our own internal staff.”

The company also had concerns about the impact of outsourcing and what it would mean to internal functions. “We clearly wanted to demonstrate that outsourcing wasn’t going to change any existing business roles,” said Fretwell. “If anything, it was going to enhance career opportunities.”

For two years now, ING Barings and Compaq have maintained a good working relationship. Part of that success may lie in the steps the customer took initially. They identified the services they wanted, including what was expected from the first day and what they expected to occur over the first six months or one year. They specified that their existing security procedures would not be compromised. In fact, the outsourcing group still does not have access to certain elements of the network.

“Digital/Compaq was flexible enough to adapt to that,” said Fretwell. “This is a partnership. Unless Digital/Compaq were in a position to adopt our methodologies, the structure wasn’t going to work.”

Meeting the Challenges

The main challenge facing the relationship was acceptance on two fronts. Users were accustomed to placing a phone call and having a support engineer appear at their desks. With the new system, they had to provide more information about the problem, so the correct team could be sent. Then there was the question of the internal staff learning to work with people who were not part of their own team. “The internal staff gaining the trust of the outsourcing group and the outsourcing group gaining the trust of the internal group was very important,” said Fretwell.

Another glitch was in management. Hindsight has shown Fretwell that the company did not build in enough internal management control in the beginning. “We were under the misapprehension, to a certain extent, that this was going to solve all our problems immediately,” he said. “We didn’t necessarily allocate the management for that function among our internal staff. That gave us some problems initially, and we had to make some changes there.”

There now exists a regular dialog between outsourcing and internal management groups, and all of the teams are located in the same building. The outsourcing team is made fully aware of the customer’s strategies, direction goals for achievement, and the drivers involved.

Another part of the learning curve has been understanding that solutions in one location cannot be moved across countries without some adaptation. The solutions must accommodate the cultures and working practices of the company where they are implemented.

Preparing for Success

Fretwell said that any executive considering outsourcing should be aware that it is not the solution to all problems. “You have to work very hard internally to make outsourcing work,” he said. “You need to be very sure what the problems are that you’re trying to overcome with outsourcing and to be clear on what metrics and measurements you are using to assess whether you’ve been successful in outsourcing.”

He paints a rosy future for global outsourcing.†

“It has huge potential as the market for IT staff becomes tighter ” said Fretwell. “As technology changes at a faster pace, you need to have a flexible organization that can accommodate that change, and outsourcing is far more flexible than an internal support staff.”

Lessons from the Outsourcing Primer:

• Outsourcing can deliver trained personnel quickly.
• Rolling outsourcing out in stages offers the opportunity to enhance the program.
• Flexibility is a major factor in creating partnership.
• Internal and end user acceptance can be a challenge in implementing an outsourcing program.
• Strong internal management is essential.