1. IFCLA Conference 2010
Managing Risks when Offshoring Services: Including
a Practical Indian Experience
Helsinki, June 10, 2010
Sajai Singh
Partner and Head of Technology
Practice
J. Sagar Associates
advocates & solicitors
Delhi | Gurgaon | Mumbai | Bangalore | Hyderabad

2. Offshoring
Offshoring describes the relocation by a company of a
business process from one country to another—typically an
operational process, such as manufacturing, or supporting
processes, such as accounting
Types/Kinds of Offshoring
 Production Offshoring
 IT Services Offshoring
 Innovation Offshoring

3. Offshoring from Europe

4. Offshoring as a Business Model
The continuous globalization of the economy has lead several
enterprises to adopt Offshoring as a business model because of
the following benefit factors :
 Access to cost-effective services
 Can concentrate more on core business
 Increase in profits, productivity, level of quality, business
value, business performance
 Can gain access to specialized, expert and skilled services
 Faster deliveries to customers and improved customer
satisfaction
 Benefit from time zone advantages
 Helps organizations gain a competitive edge in the market

5. Motivation factors for Offshoring

6. Positive Impacts of Offshoring

7. Destination for Offshoring

8. Offshoring
Strategy
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9. Key Observations
 Majority of outsourcing companies have corporate-wide
offshoring strategy
 Offshoring of highly skilled innovation activities is new
strategic imperative
 Service providers are adapting offerings to meet new
demands
 Small and medium businesses are increasingly offshoring
 Offshoring continued to grow despite downturn

10. New Strategy - Offshoring of highly
skilled innovation activities
 Engineering, research & development, product design,
software development
 Key drivers: growth strategy; speed to market; domestic
shortages of qualified personnel
 Main magnets: labor costs; talent availability; high levels
of expertise
 Most common concerns: service quality; employee
turnover; operational efficiency; loss of managerial
control; data security
 Flows to India: Scandanavia (65%); US and UK (50%)

11. Service Providers adapting Offerings
 Smaller service providers are specializing in product
design, engineering, and R&D
 India faces challenges due to wage inflation and worker
attrition
 Russia and the Middle East (e.g., Egypt and Jordan) are
emerging new knowledge center clusters
 Canada, Mexico and Central America are increasingly
popular destinations for product development
 Companies prefer captive delivery model in China and
other countries where IP protection is weak

12. SME’s Increasingly Offshoring
 Offshoring is no longer the domain of Fortune 1000; it has
been embraced by SMEs
 SMEs find it difficult to compete for highly qualified
domestic talent
 Time to market is important driver for SMEs
 SMEs are more adept at identifying and accessing new
geographic talent clusters (e.g., Brazil, Egypt, Sri Lanka)
 SMEs are sophisticated users of web-based collaboration
tools and prefer specialized service providers

13. Offshoring Growth continued despite Slowdown
 Those who have already offshored; aggressively planning to
expand offshored activities
 Many have aggressive plans to initiate new offshoring
initiatives
 Companies with existing offshored activities seek
improvements by revamping internal processes, provider
selection, performance monitoring, best practice sharing
and renegotiating provider terms
 Some plan to spin off captives to monetize assets in
exchange for long-term service contracts

14. Offshoring to
India
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15. Benefits of Offshoring to India
 India offers many advantages that make it the favorite of 82%
of US software export market (Nasscom)
 Large pool of computer literate and English speaking
professionals
 Well recognized Information Technology skills
 Wide gap between personnel costs in India and developed
countries
 Work practices largely comply with ISO and SEI CMM standards.
Three out of every four SEI-CMM 5 companies worldwide are
located in India
 Quality standards meet the approval of the world. India
exports software to more than 95 countries
 India has a stable political environment and pro-IT government
 Reliable satellite and submarine communication links facilitate
good broadband connectivity with the rest of the world

16. Weathering the Economic Storm
 US Offshoring needs recently reduced by:
- Decrease in corporate growth initiatives
- Reduction in domestic labor costs due to unemployment
 Concerns for Indian Vendors:
- Focus solely on back-office operations
- Lack of client diversification
• Major Indian technology companies get at least 50% of revenue
from the U.S. and 20-30% from Europe
• Majority of revenues are from banking & financial services sector

17. Weathering the Economic Storm
 Offshoring continued to grow in the areas of R&D, product
development, media, health care, utilities, engineering
(ESO) and legal (LPO) outsourcing
 Opportunities for Indian offshoring firms during the slow
down:
- Acquisition opportunities in the US and Europe at low cost
- Acquiring laid-off technology talent from financial services
sector
- Acquisition of niche outsourcing companies / vendor
landscape consolidation
- Time to focus on integration work and standardization
- Flexibility in contract ‘term’ & other terms

18. Green Outsourcing
 Environmental concerns are creating a green revolution
worldwide
 Green IT: reducing the harmful environmental impacts of
computing
- Inside vendor organization - increases savings in energy costs
- Outside IT as an enabler
- Opens market for energy efficient products
 NASSCOM Initiative:
- Making IT Green – from obligation to opportunity
- Making ‘Green’ happen through IT – cloud computing, video-
conferencing, etc.
- Making Green Warriors - employees adopt green lifestyle
 Dell Policy – “Go Green”
- Delivering energy efficient projects
- Assisting companies in becoming green

19. Risk Management
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20. Barriers met on Offshoring Activities

21. Risks and Barriers faced when Offshoring
Some of the major barriers faced when offshoring may be
categorized as:
 Operational Risks
 Strategic Risks
 Composite Risks
 Miscommunication
 Public Resistance
 Security and Data Integrity
 Wage Inflation

22. Managing Operational Risk
Operational Risks can be minimized by the following means:
 Create joint knowledge repositories and deploy collaboration
mechanisms
 Have a well defined Risk Matrix
 Proper Transition Management
 Good monitoring and controlling

23. Managing Strategic Risk
Strategic Risks can be minimized by the following means:
 Build Transition Service clauses into the contract
 Use multiple suppliers
 Retain residuary capacity
 Monitor and Control the Offshoring activities, on a stricter
basis

24. Managing Composite Risk
Observe the Extended Organizational Form (EOF):
 The EOF bridges the strengths of both organizations by letting
the providers employees report to the buyer’s management
 It allows companies to exert operational and strategic control
over their offshore operations without having to carry the
expenses on their balance sheets
 In difficult times it provides a compelling rationale for
offshore services

25. Risk of Miscommunication
The following risks associated to miscommunication may be
minimized;
 Language barriers and cultural differences can increase the
risk of miscommunication
 Same words and expressions holding multiple meanings in
different cultures

26. Other Risks
 Public resistance - Pressure from labour unions, anti-globalists
and some political figures may attempt to block the offshoring
process
 Security and data integrity- At times the management by
staff in another country may be perceived or inherently less safe
than that is managed on a domestic basis
 Wage inflation – The increasing demand for offshore services
may dive the wages up thereby nullifying the benefits of
offshoring

27. Enterprise Risk Management
 Enterprise risk management is a process, effected by an
entity’s board of directors, management and other
personnel, applied in a strategy setting and across the
[extended] enterprise, designed to identify potential events
that may affect the entity, and manage risk to be within its
risk appetite, to provide reasonable assurance regarding the
achievement of entity objectives.

28. Suppliers The Extended Enterprise
Contract
Manufacturer
Intermediaries
Customers
Customers
Extended
Enterprise
ITO
Contractor
s
BPO

29. Enterprise Imperatives

30. Key Offshoring Compliance Risks
 Antitrust/Competition Law  Industry Guidance/Regulations
 Codes of Conduct  Money Laundering
 Codes of Social Responsibility  Permanent Establishment
 Customs/Import  Product Safety/Recall
 Data Protection/Privacy  Professional Codes
 Employment  Records Management
 Environmental/Climate Change  SOX/Listing Requirements
 Export Controls  Security Breach
 FCPA/Bribery  Trade Sanctions
 Foreign Investment Controls  Transfer Pricing
 Foreign Exchange Controls  VAT/GST

31. Reducing Risk …
High
Controls, Communication
Impact and Monitoring
Low
Low High
Likelihood

32. Requires Good Governance

33. Disaggregating Compliance Responsibilities

34. Other Risks to Assess in India
 Geopolitical Factors
- Infrastructure Issues
- Regulations for vendors
- Legal environment
- Political stability
 Manpower Quality
 Business Value
- Training and travel costs
- Time concerns
 Intellectual Property Protection
- Theft by employees, hackers, errors, negligence or espionage

35. Mitigating Risk in India
 Conduct Due Diligence
 Complete a Risk/Benefit Analysis
 Negotiate a thorough Contract – flexibility is key
 Create an Emergency Response Plan
 Perform Routine Audits
 Learn who is performing the work and where the work is
being done
 Remember cultural barriers (i.e. Indian vs. American
communication of “yes” and “no”)
 If possible, travel to India to observe facilities and meet
face to face
Future for Indian Vendors
 Increase in work related to customer strategy
 Become experts in transforming businesses, not simply being a
passing sourcing entity

36. THANKS FOR YOUR ATTENTION…
Sajai Singh
Partner and Head of Technology Practice
J. Sagar Associates
2 Frontline Grandeur, 14 Walton Road, Bangalore 560 001,
Karnataka, India
Telephone # (+91-80) 435 03627
Facsimile # (+91-80) 435 03617
Mobile # (+91) 98450 78666
Email : sajai@jsalaw.com