McCaffrey UN ITC Roundtable VilniusFinal

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Travel-Nature

Published on March 14, 2008

Author: yilmar

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Offshore Outsourcing: The Challenges Facing The Eastern & Central European Offshore Software Industries :  Offshore Outsourcing: The Challenges Facing The Eastern & Central European Offshore Software Industries Marty McCaffrey Executive Director Software Outsourcing Research Vilnius,Lithuania December 3, 2002 ITC Regional Business Roundtable 2002 SOR Reasons to Quit:  Reasons to Quit Demands on IT have never been greater E-business solution demands ERP solution & integration demands Client server demands Migration demands Infrastructure, disaster recovery & business continuity demands Broad band access will create demand for a new generation of applications 68% of medium and large companies’ tech budgets are shrinking or remain flat Source: ComputerWorld 12-10-01 IT spending growth flat to 1 to 2% Reasons to Quit:  Reasons to Quit Software solutions are critical to both national and global competitiveness World wide shortage of 2 million + qualified software professionals in 2000 But currently ~6% IT unemployment rate The shortage will quickly return by 2004 Most companies do not have sound software engineering methodologies 1995 estimate - $81 billion in canceled S/W projects in U.S. Source: “Chaos” Report, Standish Group 1995 16.2 % S/W projects completed on time and on budget Source: “Chaos” Report, Standish Group 1995 U.S. CS, MIS, Computer Engineering undergrads approximately 35-40,000 per year 60,000 lawyers graduating each year! Slide4:  TINA There is no alternative (to outsourcing) Turning Lead Into Gold -2000 – Peter Bendor-Samuel TINA TOO There is no alternative to offshore outsourcing Marty McCaffrey, SOR, San Francisco, March 2001 Demand Exceeds Supply U.S. & EUROPEAN QUALIFIED IT SKILLS SHORTAGE :  U.S. & EUROPEAN QUALIFIED IT SKILLS SHORTAGE U.S. shortage estimated to be 400,000 – 800,000 IDC predicts the overall shortage of skilled IT professionals in Europe will grow to ~ 20% by 2002 2001 - Germany creates visas for up to 20,000 immigrant IT professionals per year Italy reports shortage of ~200,000 IT professionals (SMAU – Feb 2000) European shortage of IT workers is 1.6 million President, European Union, 2001 Japan shortage estimated to be 300,000+ 30,000 additional foreign IT workers permitted to reside in Japan by 2005. Government announced in November, 2000 How Bad Is It In the US?:  How Bad Is It In the US? Most companies do not have sound software engineering methodologies 1995 estimate - $81 billion in canceled S/W projects in U.S. Source: “Chaos” Report, Standish Group 1995 16.2 % S/W projects completed on time and on budget Source: “Chaos” Report, Standish Group 1995 U.S. CS, MIS, Computer Engineering undergrads approximately 35-40,000 per year 60,000 lawyers graduating each year! Expected impact of the skills shortage:  Expected impact of the skills shortage Inflated salaries Increasing staff turnover Higher operating costs Lower profit margins Loss of competitiveness Source: IDC London Loss of competitiveness! TINA TOO:  TINA TOO IT solutions are critical to the economic survival and competitiveness of today’s businesses Those that are deficient will either go out of business or be prime candidates for M&A KMART as an example “Long-standing IT woes played a contributing role in business problems that led Kmart Corp. to seek bankruptcy protection” CEO “tried to reverse years of constrained IT spending… in May 2000 announcing a two-year $1.4 billion investment … the most money the company had spent on technology in a decade” ComputerWorld, Jan 28, 2002 pg 1 CURRENT MARKET STATE:  CURRENT MARKET STATE U.S. Economic and IT Spend Slowdown 2001-2002 Major impact across all offshore countries India - NASSCOM 66% initial growth projection for 2001/2002 to 22% actual $7.65 Billion export industry (April 1, 2001- March 31, 2002) Top tier Indian firms had the largest growth in 2001/2002 Top 5 accounted for 55% of growth Top 10 accounted for 73% Great rates available today Effect of September 11, 2001 Attack Significant initial impact – primarily a reluctance to travel Next one year - sluggish Long term - people shortage will revisit us Remember - you are hiring skilled people Current Indian-Pakistani Confrontation:  Current Indian-Pakistani Confrontation There is a long history of minor wars December 13, 2001 – Indian Parliament attacked January-September 2002 Tensions rise; then subside Isolated terrorist incidents in Kashmir Everyday life in India pretty much normal May 11 & 31 U.S. State Dept. issues travel advisories July 22 –Travel advisory lifted Lessons Learned Thorough contingency plans required Business continuity and disaster recovery planning essential People resources need to be addressed Redundant communications available Put Things into Perspective:  Put Things into Perspective There is no alternative to India in the short to medium term (i.e., 2-4 years) India export industry grew by ~70,000 people in 2000 No other country or combination of countries have the skilled people, program managers, methodologies or infrastructure to match this growth What Kind of Projects Are Being Done Offshore?:  What Kind of Projects Are Being Done Offshore? Legacy maintenance Migration/reengineering New application development Client server applications development Multimedia development E-business / E-commerce /Intranet / internet / web ERP support and software applications integration Data warehousing / CRM development Embedded software development Software Application R&D IT Enabled Services (Call centers, Data Entry, etc) Data Center outsourcing MAJOR REASONS COMPANIES ARE CONSIDERING OFFSHORE OUTSOURCING :  MAJOR REASONS COMPANIES ARE CONSIDERING OFFSHORE OUTSOURCING Lower Costs, lower costs, lower costs Provides available skilled IT personnel resources Ability to rapidly ramp up/down Accelerate project delivery schedules Achieve higher productivity U.S. 7,000 loc/yr vs 16,700 loc/yr non-U.S. H.Rubin/Meta Obtain higher quality products Accelerate internal quality and process improvement Reduce the risks of software development Obtain fixed price contracts The only way to get the critical software technologies they need to be competitive GARTNER GROUP VIEWS:  GARTNER GROUP VIEWS Global sourcing and delivery will be the new IT paradigm for providing application solutions services. By 2005, 30 percent of G2000 companies will have a sourcing strategy encompassing nearshore and/or offshore solutions (0.6 probability). Through 2004, most U.S.-based ESPs will establish and/or expand their applications capabilities offshore in order to compete effectively on cost (0.85 probability). Gartner Symposium IT Expo, Orlando, Fl Oct 8-12, 2001 “On a scale of 1 (poor) to 5 (excellent), how would you rate your offshore provider?”:  “On a scale of 1 (poor) to 5 (excellent), how would you rate your offshore provider?” Satisfaction with offshore providers is high Average score 3.72 This is much higher than what they have found in assessing U.S. outsourcing satisfaction levels (Sample by Forrester Group of 20 - $1Billion dollar companies that outsource offshore) “The Coming Offshore Services Crunch” Forrester Group Sep 2001 OFFSHORE SOFTWARE OUTSOURCING ALTERNATIVES :  OFFSHORE SOFTWARE OUTSOURCING ALTERNATIVES Professional Services Customer’s Preference Not pure outsourcing On-site personnel Greater than 30% of offshore personnel Small cost savings Individual software project outsourcing Provides learning experience Administratively costly Uncertainty can cause considerable unease in workforce and loss of talent Off shore development center with dedicated personnel and resources Slide17:  VIDEO CONFERENCING VIDEO CONFERENCING US CENTER BANGALORE CENTER CHENNAI CENTER PUNE CENTER Hydrabad CENTER 1 x 64 6 x 64 2 x 128 TAIL CIRCUIT TO CLIENT SITE TAIL CIRCUIT TO CLIENTS’ SITE 1 x 64 1 x 64 3 x 64 1 X 128 2 x 64 1 x 64 1 x 64 1 x 64 1 x 64 US New York US LEASED CIRCUITS Worldwide Data+Voice & Video Network JAPAN UK 1 x 64 1 x 64 NEW SOFTWARE TECHNOLOGY PARK BUILDING:  NEW SOFTWARE TECHNOLOGY PARK BUILDING ODC – THE BEGINNING:  ODC – THE BEGINNING OFFSHORE DEVELOPMENT CENTER:  OFFSHORE DEVELOPMENT CENTER OFFSHORE SOFTWARE OUTSOURCING ALTERNATIVES :  OFFSHORE SOFTWARE OUTSOURCING ALTERNATIVES Professional Services Individual software project outsourcing Off shore development center with dedicated personnel and resources Joint venture with offshore vendor Wholly owned offshore subsidiary IT Enabled Services WORLDWIDE OFFSHORE CAPABILITIES:  WORLDWIDE OFFSHORE CAPABILITIES The Major Players India Ireland Israel India:  India India:  India World-Class Development Centers:  World-Class Development Centers World-Class Development Centers:  World-Class Development Centers World-Class Work Environment:  World-Class Work Environment World-Class Development Centers:  World-Class Development Centers The Offshore Outsourcing Industry: Crossing the Chasm :  The Offshore Outsourcing Industry: Crossing the Chasm Early Adapters Innovators Early Majority . The Chasm Late Majority The Laggards Approximately 2/3 of the Market Moore’s Revised Technology Adoption Life Cycle Crossing the Chasm by Geoffrey Moore India Eastern & Central Europe Indian Software Export Industry :  Indian Software Export Industry Source: NASSCOM 01-02 FY 2001-2002 $7.6 Billion INDIAN SOFTWARE EXPORTS BY COUNTRY “” NASSCOM FY2002 Software and Service Industry Performance :  INDIAN SOFTWARE EXPORTS BY COUNTRY “” NASSCOM FY2002 Software and Service Industry Performance U.S. biggest consumer - 63% Europe growing rapidly - Project NIESA Japan will be a bigger player in the future Deliverables in English USA / Canada Europe Japan Rest of the World Slide32:  Basic Management Control Process Definition Process Management Process Control Initial Repeatable Defined Managed Optimized Ad hoc Little formalization Tools informally applied to process Achieved a stable process with a repeatable level of statistical control Achieved foundation for major and continuing progress Level 5 SEI Levels Major quality and quantity improvements Substantial quality improvements Comprehensive process measurement Level 4 Benefits of SEI Years Engaged in SPI 3.5 (Avg) Cost of SPI/software eng $1,375 /yr Productivity Gain 35% /yr Early Defect Detection Gain 22% /yr Benefits of SEI Reduction in Time to Mkt 19% /yr Reduction in post release defect reports 39% /yr Business Value (savings/cost of SPI) 5:1 CAPABILITY MATURITY MODEL OVERVIEW:  CAPABILITY MATURITY MODEL OVERVIEW FUTURE CHALLENGES FOR THE INDIAN SOFTWARE INDUSTRY:  FUTURE CHALLENGES FOR THE INDIAN SOFTWARE INDUSTRY High growth rate (est. 35%/year) outstrips supply of experienced project and program managers High software professional turnover rate (2000 approached 30%) Tremendous increase in university graduates required to sustain growth rate 2008 - $57 Billion Market (IDC & McKinsey) 35%/yr 2008 $15 Billion increase 2008 - 200,000+ new software professionals added Increasing prices (But not right now) Jan 2000 – Attempt to increase rates 20% by Tier 1 Marketing and Sales reform Power Back-up Capability:  Power Back-up Capability Battery Back-up:  Battery Back-up THE CHANGING OFFSHORE MARKET:  THE CHANGING OFFSHORE MARKET The NEW Major Players India Ireland Israel Major U.S. Providers Accenture EDS IBM CSC Near Shore Mexico Canada Central America and the Caribbean OTHER OFFSHORE OUTSOURCING POSSIBILITIES:  OTHER OFFSHORE OUTSOURCING POSSIBILITIES Philippines Russia China Pakistan Brazil South Africa Eastern Europe/Central Europe Egypt Korea Malaysia Others KEY FACTORS FOR SUCCESSFUL OFFSHORE OUTSOURCING PROJECTS:  KEY FACTORS FOR SUCCESSFUL OFFSHORE OUTSOURCING PROJECTS The LITTLE ones that become big ones The Relationship the Client Chooses A partnering relationship requires a long term win-win engagement Cross-cultural issues Communications Even U.S. Families Can Have Communications Challenges:  Even U.S. Families Can Have Communications Challenges What can you expect when working with a partner : - from another country? - from another culture? - with another language? Key Customer Due Diligence Questions:  Key Customer Due Diligence Questions Company management and financial soundness Vendor business knowledge and technology Quality and process initiatives institutionalized Risk management and disaster recovery Vendor cross-cultural initiatives R&D and Training investment Company pricing REALITY OF OFFSHORE OUTSOURCING:  REALITY OF OFFSHORE OUTSOURCING “IF YOU BUILD IT THEY WILL COME” NO! Slide43:  Tomasz Mroczkowski, Erran Carmel, and Nivien Sale www.american.edu/academic.depts/ksb/mogit/centraleurope March 2002 The most significant, liabilities that need to be overcome include: Reputation and trust Cultural and linguistic distance Geographical ignorance by Western partners Providers need to improve their capabilities in Project management English competency Knowledge of Western business culture. “Opportunities and Barriers to Integrating Central Europe into the Transatlantic Information Economy” “Opportunities and Barriers to Integrating Central Europe into the Transatlantic Information Economy”:  “Opportunities and Barriers to Integrating Central Europe into the Transatlantic Information Economy” “…the sad paradox is that most Central European governments have proactive or passive policies that support and frequently subsidize traditional sectors of the economy such as agriculture, mining, steel - while they lack sufficient policies and programs that would be oriented towards the industries of the future, such as IT and high technology. The explanation of this paradox is simple: traditional sectors have powerful lobbies with strong political representation.” “Opportunities and Barriers to Integrating Central Europe into the Transatlantic Information Economy”:  “Opportunities and Barriers to Integrating Central Europe into the Transatlantic Information Economy” “Our findings should become an urgent call for action by Central European governments, business associations, and private sector leaders if the region is not to be left out of the international race for the global market for IT services.” Tomasz Mroczkowski, Erran Carmel, and Nivien Sale Requirements for Offshore Success:  Requirements for Offshore Success IT talent Low labor costs Competitive quality telecommunications infrastructure World-class software project management and development capabilities Favorable business climate, political and economic stability English language fluency Business experience Low staff turnover World-class marketing and sales (in the U.S.) GOVERNMENT – INDUSTRY PARTNERSHIP IS ESSENTIAL:  GOVERNMENT – INDUSTRY PARTNERSHIP IS ESSENTIAL Government must provide certain essential and basic fundamentals Tax Incentives & Holidays World-class Infrastructure Education Investment Favorable Business Environment Favorable investment environment Government must fund the industry marketing and branding initiatives Entrepreneurial companies need to devote their capital in growing and promoting the company – Don’t ask them to fund the marketing Look to Ireland and India FINAL COMMENTS:  FINAL COMMENTS There are great business opportunities in the offshore outsourcing market The Eastern and Central European countries have the essential building blocks to succeed But there obstacles to overcome Other countries have overcome them Thank You:  Thank You And Good Luck In Your Outsourcing Endeavors! Marty McCaffrey Software Outsourcing Research Martymccaffrey@attglobal.net 831-444-8989

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