Outsourcing: economically viable for IT business

by Shanika Sriyananda

Imagine a situation where our young software engineers busy developing programs for the US market. While workers of a shoe manufacturing industry are giving final touches for shoes manufactured locally for the world famous Naiki shoe company. This is simply the meaning of outsourcing business, which will be the Buzz word for Sri Lanka to earn more in future.

The reason outsourcing is more economically viable is because the companies which are looking to cut costs to get higher profits give the order to another country which can do the same job at a much lesser cost.

Lets see the definition of outsourcing: It is the concept of taking internal company functions and paying an outside firm to handle them.

Does outsourcing help to save money, improve quality, or free company resources for other activities and it says that the outsourcing is the wave of the future in many countries.

Prof. Bandula Jayatilake of the Binghamton University of New York, who visited the country for a short visit in an exclusive interview with the 'Sunday Observer' said that it was interesting to see that the interest for outsourcing is growing but some of the Sri Lankan IT companies were not up to the required level to get into the outsourcing business.

Why we? If the transaction cost is more they will go to the market. It is not just buying and in the outsourcing business it is long term commitment from the vendor to provide service or the product to the client company for a certain period of time on given terms and fees.

Prof. Jayatilake, who was the only Sri Lankan who worked at the IT section of the Johnson Space Centre (NASA) as a programmer, program analysis and also as a program manager and involved in designing computer based programs for their space missions, is now an independent researcher in outsourcing.

He, who is in the field of computer science for more than 30 years said that though the country has the potential to go far in the outsourcing business still we are lagging far behind neighbouring India. "I do not see much difference and the same culture is still prevailing here when comparing the present situation in India. The interest is there", he said.

Prof. Jayatilake, arrived in the country after taking part in the 3rd International Conference on Outsourcing held in Germany said the Indian IT experts had taken part in the conference as their outsourcing business is progressing.

"The Indians are progressing in the field because they have a good collaboration between the universities, academics and the industry plus the help of the expatriate Indians.

They have been giving inputs since early days. When I was in Houston I know Indians used to meet and discuss what they can do to India to improve the IT industry", he said adding that in India the IT outsourcing is very well developed and supported.

He said that at one time India and Sri Lanka were at the same level in terms of what we could have done in outsourcing. But, according to Prof. Jayatilake, our country is far behind India in its outsourcing.

So from where should we kick start? "First, we should look into the capabilities inside the country to develop outsourcing and support the industry", he said.

According to Prof. Jayatilake, one main barrier is the missing link between the industry and academics in the sector. "One thing, I saw missing here is the good collaboration between the industry and the academics. They have to be developed together and that is where we can get rid of much difficulties.

When somebody is looking to give a job to an outside vendor they are really looking for the substance not just the marketing part. Also through penetrating marketing they see whether the vendor is really capable or not.

The other option available is to provide services at a low cost but here we should be able to compete with the countries that can produce them at a low cost", he pointed out. However, he said that the escalating prices of goods and rising wages and the high per capita would not enable us to compete at a lower cost.

Hopes can be kept in IT outsourcing and the experts predict that it could bring foreign exchange like foreign employment and other industries in the country. "

In those areas we are selling our resources directly abroad by renting or selling services to those countries. There our resources go out and send the money back. But outsourcing is something we should be able to produce something here at a very competitive price.

But the resources has to be good. The Indians and Chinese, who are the Asian leaders in the outsourcing business have developed their skills and capabilities not overnight but by paying lot of attention to the business", he said.

Prof. Jayatilake said that people were getting into the IT field but there was a question whether they were getting what was really necessary to reach that level." But in India the young IT engineers are getting into the field because the IT and other institutions are well developed and even the US companies are also looking to hire people from India.

On the other hand US students are coming to India to do their Summer internship because they are getting a good training and exposed to lots of good work. So either way we have to develop to that stage. The academics, institutions and industry together.

The institutions have higher responsibility to do advance research and think ahead. We do outsourcing or there will be no benefits for the country. We have to develop the IT anyway to a level that we can compete.

If you look at other areas like production outsourcing companies, for example like Naiki will give production to others for shoe manufacturing, similarly car companies outsourcing manufacturing of body parts. Not only IT but in other areas, companies are outsourcing research and development. They are not just looking for routine type of activities.

IT is the general outsourcing business and if we are to go ahead we have to look for the other sectors within the IT and need to develop the skills of those areas. Lots of activities are there in these areas but Sri Lanka first need to identify the area where the skills are available.

The most viable would be the areas like application development and system development , knowledge and business processing areas. In order to get into all these we have to have developed skills which can be used very effectively because companies look for the cost effectiveness as well as good resources.

"They are not coming just for the cost. If they are coming only for low cost the survival is very short. There were some companies which came only for the low cost and failed, he explained.

"If the country is to commence IT outsourcing business it is better to start with domestic outsourcing, where the government give contracts to local IT companies to develop programs. This may be the starting point and once they have shown their capabilities they can extend the services to other countries.

Then there will be a good basis for the experienced while on the other hand the country would benefit as the industry could generate direct employment opportunities". Prof. Jayatilake said.

What kind of a role can government play in promoting the business? "The government should be able to do something by giving proper directions. I think the government had thought about this some years ago but it was not directed properly or misdirected to that end", he claimed.

Prof. Jayatilake said that most of the activities will be more and more IT enabled and setting up of necessary IT infrastructure is essential. "We should be able to provide IT real capabilities, not doing IT just for image or impression management. Low cost is essential? this means the prices and wages should be stable and competitive", he said.

* What do companies outsource? *

IT outsourcing is one type of outsourcing.

Companies can outsource many different activities. If we consider some of the major activities of a company, any of the following can be outsourced:

Production, logistics (how the company gets its material and/or how the final product/service is delivered to the market), maintenance (after sales service), marketing, sales, IT, HR, accounting, Research and Development

Related to IT, a company may outsource (i) IT activities (directly as IT), (ii) Business Processes (BPO) (iii) Knowledge Process outsourcing (KPO)

(i) Outsourcing of HR, Accounting or any other business processes fall under BPO

(ii) Under direct IT outsourcing typically the following are the categories: Operations? Data Centers

Applications Development ? systems and software

Network typically network management and/or network infrastructures

Desktop support ? maintaining desktop systems (PC etc)

Helpdesk? providing user support

Hardware maintenance ? usually include all hardware (not just desktop support) (there are no hard and fast rules to say that above is the only way to look at this. A company may outsource a part of an above activity)

1. (iii) KPO ? outsourcing more knowledge intensive activities ? product design, research (fundamental research or applied research), product development, testing and improvement. This also includes activities that need knowledge of the business domain.

* Some of the implications (if we want to be significant players in the outsourcing arena) *

- Price and wages stability is important. I gave some anecdotal evidence (which I gathered while visiting India, i.e., prices of common food items are fairly stable in India when compared to that of Sri Lanka ? of course there is poverty, hunger and a big gap between rich and poor but those are other economic and social issues in India)

- Building trust through real substance is important (not just trying to boost up the image through marketing)

- Development of and sustaining local capabilities and skills is important

- More attention to education (higher studies) and research, more effective and better collaboration between educational institutions and industry; need to take a hard/critical look at the IT curriculums: just tertiary education, basic programming, or the ability to use applications is not enough

- Need to critically look (reflectively) at our own capabilities and skills and learn (Humility is important? ICT is not a status symbol or magic)

- Clients look for outcomes (reliable service, and good products); outsourcing is not just giving work to others; clients look for results and for them managing the vendor relationships/contracts is also important.