Strategic CIO // IT Strategy
11:00 AM

Small-Scale Offshoring

Smaller companies have shied away from offshore outsourcing because of the risks. Here's how some are making it work.

Hologic Inc. CIO David Rudzinsky knows firsthand the challenges and opportunities that offshore outsourcing presents for midsize businesses. A $229 million-a-year medical-device manufacturer based in Bedford, Mass., Hologic is hardly a mom-and-pop shop. Still, it's several steps removed from the large multinationals that typically use offshore-outsourcing services.

With little experience managing outsourcing and limited clout with its services provider, the company's first offshore project, in 2002, failed. What went wrong? Hologic hired Oracle's services organization at a fixed price to move legacy data from a number of systems into an Oracle database. Oracle suggested moving the work offshore to a subcontractor, Indian services provider Patni Computer Systems Ltd. "They were trying to lower the costs," says Rudzinsky, who agreed to the offshore subcontracting even though it wasn't part of the initial contract.

Offshoring success took two tries at Hologic, CIO David Rudzinsky says.

Offshoring success took two tries at Hologic, CIO David Rudzinsky says.
Before long, "it became apparent they didn't have much experience with data migration," Rudzinsky says. After numerous late-night teleconferences and E-mail exchanges, Rudzinsky feared the project would fall drastically behind schedule and demanded that Oracle repatriate the effort, which it did.

A large company would be a lot less likely to find itself in a similar situation because of its access to scores of lawyers to review contracts, experienced business-technology professionals to manage engagements, and serious pull with providers thanks to multimillion-dollar engagements. But stories like Hologic's are cautionary tales for smaller businesses, not reasons to steer clear of a programming resource that actually offers advantages that go beyond cost savings. Offshore outsourcing runs 40% to 60% less than domestic services, by most estimates.

Hologic has gone back to the offshore well and contracted with Data Intensity Inc. in Waltham, Mass., to use programmers in Russia for another data-migration project and with Sierra Atlantic Inc. in Fremont, Calif., to use staff in India for a packaged software implementation. Those projects are going smoothly, and now Rudzinsky deploys the top talent in his limited IT staff to work on higher-value projects. "Instead of sticking my guy in a cube all day to write code, he's interacting with people, he's solving business problems, and adding value in a different way," he says.

According to InformationWeek Research's most recent Priorities survey of 100 small and 100 midsize companies, 9% of small businesses and 6% of midsize businesses say implementing or increasing offshore outsourcing was on their radar for this year. Elance Inc., which offers tools to help small and midsize businesses procure IT and other services, reports that about half of the more than 60,000 companies that are regular users of its Web site procure IT work from contractors in India, Russia, and other offshore locations. The site's users run the gamut from law firms to real-estate agencies to medical offices, says president and CEO Fabio Rosati, a former head of strategic consulting at Capgemini. "It's a very diverse mix," says Rosati, whose company is growing at more than 20% per year.

Small and midsize software companies, like their larger counterparts, not surprisingly have been among the early adopters of the offshore services model. Ajit Nazre, a partner at Silicon Valley venture-capital firm Kleiner, Perkins, Caufield & Byers, says tech's next blockbuster company likely will be one that used offshore IT labor to get off the ground. Kleiner, Perkins helped turn Amazon, America Online, and Sun Microsystems into technology industry giants. "If you only have $100,000 and you can spend it on three man-months [of IT labor] in the U.S. or 30 man-months in India, what would you do?" he asks. Less than five years ago, few of the launch companies backed by Kleiner, Perkins used offshore workers. Now, nearly half are looking to India or China for IT help, he says, and for more than just traditional IT work such as application development and testing. They're also turning to India for product development and early-phase marketing using online tools such as WebEx meetings from WebEx Communications Inc. "They're exploring new grounds," Nazre says.

Commendo Software was pleased with the offshore outsourcer that helped test its software, says CEO Reynaldo Gil. -- Photo by Angelo Wyant

Commendo Software was pleased with the offshore outsourcer that helped test its software, says CEO Reynaldo Gil.

Photo by Angelo Wyant
One of those explorers is Commendo Software Inc., a startup that sells software that lets PC users store and access interactive Web content, such as games and business presentations, even if they're offline. "Our business plan wouldn't be viable in today's market without offshore resources," says Reynaldo Gil, CEO of Commendo. That's been particularly true ever since the dot-com bust, Gil says. Before that, venture capitalists were happy to throw money at small and midsize businesses, hoping to find the next eBay or Yahoo. Now, with private capital considerably scarcer, most startups need to get things right on the first go. "You can no longer come out with something that's shaking like a newborn deer," Gil says.

That's why Commendo turned to Sierra Atlantic, the California services provider, which has a technology center in Hyderabad, India. In addition to software development, it provides advanced testing services in a virtual lab environment. That allowed Commendo to test its software on 15 major enterprise platforms under dozens of user scenarios. "That knocked three maintenance releases out of our product," Gil says. It also gave Commendo confidence in its product before demonstrating it for its first major customer, concrete industry giant Cemex S.A. of Mexico.

Smaller companies--even more so than larger ones whose brand names are resumé magnets--need access to the specialty skills and fast turnaround times that offshore providers offer. For one thing, they're "more susceptible to business peaks and valleys," says Gartner analyst Frances Karamouzis. "The flexibility that an offshore provider can give them in terms of going up and down as needed is a big benefit." For another, their full-time IT staff tends to be characterized "by a few people who are chief bottle washers but might not have highly specialized skills," she says.

That rings true with executives at the Inc. The private Los Angeles company, which operates an online bridal registry and publishes a glossy brides' magazine, is moving to a new IT platform. As part of the effort, it sought to hire a number of Java programmers. "We were having trouble getting people in the door to interview," says CIO and operations VP Greg Franchina. The company, which has 120 employees, managed to hire just two developers during a six-month search.

So Franchina last year turned to Cognizant Technology Solutions Corp. to augment his internal development staff. Cognizant maintains a head office in Teaneck, N.J., and operates development centers in Bangalore, Chennai, Hyderabad, and several other tech hubs in India. Franchina says Cognizant was immediately able to provide WeddingChannel with the programming resources it needed to port to a new IT platform and application server. WeddingChannel expects to complete the IT transition by the first quarter of next year. And Cognizant's offshore capabilities cost about a quarter of what a domestic service provider would charge, Franchina says.

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