While Systems In Motion is not a “Rural Sourcing” company, being in the same overall market space helping enterprises with cost-effective domestic technology service capability, I’m proud and happy to see my friends over at Onshore Technology Services and Rural Sourcing, Inc. get prominent and positive press from CNN Money and CNBC.

The first link is a CNN Money article by Jennifer Alsever. Jennifer did a solid amount of research for this article including spending a couple of days discussing the various models with Systems In Motion.

The second link is a CNBC interview with Monty Hamilton, CEO, Rural Sourcing Inc. Great interview on how the US is beginning to develop really competitive and cost-efficient service delivery models to compete with the decade-old trend of investing in IT resources offshore. Worth checking it out.

Monty’s right that the new model for cost-effective and business-aligned domestic technology services is a very small sliver of the total global outsourcing industry. But so was was outsourcing to India, back in 1997.

Tags: Inshore Outsourcing, Onshore Outsorucing, Rural Sourcing

Gartner Research VP Frances Karamouzis recently wrote an interesting blog post comparing IT service costs between India and China. In her blog, she highlighted a number of key factors that make it difficult to generalize the answer to that question. There are too many variables – type of service, skills, supplier maturity, risk factors, etc. On the face of it, China’s labor costs are lower than India’s, but factoring the other issues that go into a total cost of outsourcing (TCO) calculation, the final analysis isn’t that obvious.

However, the fundamental question got us revisiting the same question in the context India and the US mid-west. Does offshoring to India save money? It’s literally the million-dollar question US enterprises, especially mid-sized companies have been asking. On the surface it can appear that offshore IT initiatives saves money, but very frequently hidden costs and challenges need to be managed can lessen or even negate these savings.

This is especially true for high performing mid-market companies that need to deploy new technologies quickly. In these circumstances, where the technology deployment initiatives tie closely to business, have to be necessarily iterative in nature and lack significant scale and stability, going global can actually end up being a drag on ‘time-to-value’, and ultimately result in higher TCO.

Sometime ago, Joseph W. Rottman & Mary C. Lacity from the University of Missouri, St. Louis completed an exhaustive, case study of a large offshore IT outsourcing engagement by a Fortune 500 company. The case study uses the pseudonym ‘Biotech’ to identify the company. Their study makes for very interesting reading. The study includes extensive data collection and individual interviews with stakeholders across the enterprise to drill down into the complex layers of the offshoring initiative.

Budget cuts at Biotech led to offshoring to reduce IT costs. Officially, the project was a success with total cost savings consistently reported in line with expectations, but only if measured in terms of total payouts to the supplier. Other than a comparison of payments, Biotech had no formal metrics to assess the effectiveness of the 21 offshored projects in meeting their overall goals.

Rottman and Lacity’s study created metrics to evaluate the projects in subjective terms. The participants gave an overall grade of C to C- to “the degree to which project objectives were met, budgets and schedules were met, and the quality of the delivered product…

What caused these low grades, if the project seemed on paper to be successful? Rottman and Lacity summed up their findings: “It is quite clear from our interviews that the projects sourced offshore were not as uniformly successful as the official PMO reports.”

Several factors led to problems with offshoring. A lack of social networks between Biotech IT employees and offshore suppliers was compounded by technical barriers including security concerns, bandwidth constraints and restrictions on access to production data and the code repository. Biotech has a culture they refer to as “sneaker-net.” In other words, employees and domestic contractors typically walk to each other to discuss projects and get clarification. Documentation processes were similarly informal, often consisting of personal notes and scribblings on white boards. Indian-based IT workers were left out of the loop on both the “sneaker-net” and informal knowledge transfer.

In addition, “Biotech’s project management processes and expectations were often incompatible with offshore suppliers….many participants that the offshore IT workers could not be relied upon to report that the project was behind schedule or that they did not understand the requirements.”

Systems In Motion’s Inshore service delivery creates tighter integration between internal IT and business stakeholders and the offsite teams, largely avoiding the pitfalls that Biotech experienced. Our US location relieves social networking and cultural concerns. In addition, small projects, which are typically difficult to outsource, are easily handled by SIM’s agile, scalable teams. Inshoring offers the best of both worlds: the per-employee cost saving of offshoring combined with the quality, timely delivery and project satisfaction of onsite works.

There was an interesting article on TechCrunch.com a few days ago that took the position that tech startups shouldn’t outsource product development.

While we generally agree that startups should steer away from outsourcing the core of their technology, we think that collaborating with a specialized outside team is very effective in accelerating time-to-market for products of companies of any size. System In Motion’s Inshore model, combined with our core product development expertise, especially in new technology areas like open source, social networking, mobility and rich web applications, is a highly cost effective way to accelerate product development and roll-out, without adding complexity to the delivery organization.

The article’s author, Vivek Wadhwa gives six reasons against outsourcing (which he actually confuses with offshoring). As we see it, an Inshore approach, where the outsourced development team is tightly integrated with the core engineering teams and working in the same time zone, mitigates all the challenges. Here’s a look at Vivek’s issues, and our take on each.

1. Communications and customer needs. “Locating R&D personnel away from customers limits the ability to develop innovative products…” That’s right. With Systems In Motion’s Inshore model, all personnel are located in the United States, in direct proximity to the company and its customers. The Inshore development team is much more aligned, culturally and demographically, to US customer base
2. Component Integration. “…members of a software-development team need to work closely together.” Exactly right. The Inshore approach leverages collaboration tools like Skype, Box.net, GoogleSites, Webex , and of course cars, trains and planes to seamlessly integrate development and test teams across the development lifecycle. Having product development in the DNA of the partner organization also ensures that teams are reading from the same page.
3. Management bandwidth. “It is a lot more challenging to manage diverse teams at multiple location and in different time zones than to manage them together.” In an Inshore development model, teams are co-located and offsite development happens within similar timezones, making program management and governance a much easier ask than globally distributed teams that iterate in 24 hour cycles.
4. Fewer developers can often produce more. “In the tech world, scaling up development teams doesn’t always lead to greater productivity.” Right. In fact, a flexible, dynamic team of bright engineering talent working together are far more productive than offshore teams. They don’t have to be all sitting in Silicon Valley.
5. Skills scarcity. “The specialized skill and mindset that tech companies look for are hard to find.” There’s no dearth of talent in the US. A scarcity in access to skills needs some investment and heavy-lifting in on-going training and workforce development – something Systems In Motion has committed to to, in partnership with state governments and local universities. The training investments in new technology product development is coupled with strong mentoring to build a highly capable and productive outsourced team.
6. Intellectual-property protection. “Employees often leave to start ventures that compete directly with their foreign employers, and the laws provide little protection…” . Not a problem for a domestic service delivery organization. In any case, Systems In Motion implements strict security processes.

Is Inshoring, then, the right model for outsourced product development? We think so.

So, the real question is the one around cost-performance. Despite the productivity gap, investment of management bandwidth, the sleepless nights and 75 different iterations, is globally distributed delivery still cheaper? The simple answer is NO.With an Inshore delivery center located in the mid-west, near some of the top engineering and technical schools in the country, with serious long-term unemployment challenges, outsourced product development is a whole lot faster, and as cost-effective as teams in Bangalore, Krakow or St. Pete..

Read the whole article here:
http://techcrunch.com/2010/04/17/should-tech-startups-outsource-product-development/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Techcrunch+%28TechCrunch%29&utm_content=Bloglines

and let us know what you think!

A recent article on nearshoreamericas.com looked at the burgeoning inshore industry as a way for companies, particularly small to mid-sized operations, to save costs and increase productivity in the wake of the US recession. This is a great overview on inshoring that also highlights a few lesser known benefits:

“When it comes to staying involved in your outsourcing operation, the onshore industry can’t be beaten. With your provider in the same country with the same culture and language, effective communication increases while cost of travel decreases….Onshore customers also aren’t bothered by many of the complications of offshoring – wage and price inflation, corruption, unstable political environments, high attrition rates, access to skilled bilingual workers, etc. There is a greater sense of security since the work is governed by US law. Data or software protection and intellectual property concerns are less of a hassle.”

“Dana Stiffler, Research Director for Global Business and Outsourcing at AMR Research, says that proximity is especially important for small to medium size firms that operate only in the US, since they can’t outsource on a large scale. ‘One thing that Indian and Latin American outsourcers never figured out is how to serve smaller companies. Their business model just doesn’t work for those clients. Whereas the onshore industry is relevant for SMBs since it dials down the level of complexity.’”

“Debashish Sinha, CMO of Systems in Motion, maintains that the onshore industry can be cost-competitive. ‘You can’t think solely in terms of wage rates, but total cost on an outcome basis’, he says. ‘Productivity of an offshore resource can be 25-50% less than a US-based resource. So while our wage rate may be higher, when you consider efficiency and hidden costs, we’re actually very competitive’. His point is helped by the appreciation of the Indian rupee this quarter (3.5% against the dollar).”

Read the entire article:
http://www.nearshoreamericas.com/u-s-sourcing-firms-reverse-offshoring-trend-3240/3240/

Facebook, Twitter, LinkedIn, YouTube, blogs, community forums. Every minute of every day, customers and prospects are on social media networks interacting with each other and with brands.

Companies that haven’t tapped into these networks are missing out on an opportunity to drive brand awareness and downstream revenues. Unfortunately, utilizing social media is often confusing and incredibly time-consuming.

To help companies leverage these networks, Systems In Motion has developed Social Media Integration Solutions that ensures a speedy time to market, better visibility, deeper audience engagement, reduced costs and less overheads, Business Intelligence and higher ROI from social media initiatives. Our flexible, scalable engagement model incorporates:

• Social Media Integration Framework - Manages content aggregation, publishing and monitoring across social media channels and aligns the tools with the specific nature of a company’s business.
• Enterprise Integration Services – Links social analytics with existing CRM and BI tools. Provides on-going support for content development and community building.
• Data Analytics and Decision Support Services – Manages, monitors and reports on multiple social media channels.
• Maintenance and Management Services – Utilizes our Inshore service delivery methods to cost-efficiently manage, maintain and update technology operations.

The foundation layer of our solution is the social media content publishing and monitoring technologies from Involver (www.involver.com),including their Audience Management Platform (AMP). Involver is the industry leader in social media and mobility integration and is used by leading companies and brands. The platform features:

• Pre-built connectors to leading social media networks
• Multi channel publishing and monitoring
• User Dashboard to monitor activity streams
• Integration to eCommerce and back-end content management systems
• Consulting and Professional services for customization, integration, deployment and maintenance

Customers and prospects are updating their Facebook status, Tweeting about the latest news, connecting through LinkedIn, posting YouTube videos, writing blogs and commenting on community forums. Every company should be doing the same.

To learn more about Systems In Motion’s Social Media Integration solution, visit www.systemsinmotion.com.

Tags: Facebook, Social CRM, Twitter

Planning for anti-offshoring legislation

In his State of the Union address this year, President Obama reiterated his position against offshoring: “…it is time to finally slash the tax breaks for companies that ship our jobs overseas, and give those tax breaks to companies that create jobs right here in the United States of America.”

It isn’t known whether Congress will pass this kind of legislation, but an article yesterday by Stephanie Overby on cio.com advised companies to prepare now for the possibility of anti-offshoring legislation. Overby says:

“Such regulations may come in many forms—from restrictions on the export of personal data to changes in tax law, grants and incentive programs, to various reporting requirements about where work is being done and by whom.”

Suggestions offered to mitigate risk

1. Modify the “change in laws” provision. George Kimball, an attorney in the San Diego office of Baker and McKenzie, says the clause should “…provide for a process of consultation and adjustment that might lead to relocation of operations, equitable adjustment of charges, or in extreme situations, termination if future legislation prohibits, restricts or taxes offshore operations so severely that they cannot practically or economically continue.”

This clause leaves the question of what the company would actually do up in the air and offers no strategic solutions. The existing contract would essentially need to be renegotiated, a lengthy and expensive process. Companies could lose significant money while scrambling to come up with a plan.

2. A benchmark clause in the outsourcing agreement to cover changes in cost and service as a result of legislation.

Of course, benchmarking is expensive, needs to be conducted every year and takes months to complete.http://www.cio.com/article/29102/Outsourcer_Benchmarking_The_Sanity_Clause

3. Choose providers with a large US presence in case operations are forced onshore. “It’s important to remember that this will not be just about price, but also about migration risk,” says Edward J. Hansen, a partner in Morgan Lewis and Brockius’s business and finance practice. “It may be preferable to pay a little more for a domestic provider to re-solution than to have to migrate [to a new vendor].”

Though this solution is the most proactive, it still gambles against legislation and puts the financial and logistical impact in the future.

A better idea?

Complement your global sourcing strategies with an ‘Inshore’ operation. Including Systems in Motion’s domestic service delivery alternative as a part of your strategic sourcing options ensures the ability to dynamically rationalize operations with changes in market conditions – whether driven by politics, policy, or market drivers like escalating costs and attrition in the global arena.

Systems In Motion’s Inshoring model is a scalable and flexible model for developing an agile, highly trained domestic resource pool that can be more productive—at a sustainably competitive price point— than a globally distributed team.

An added advantage? Investing in workforce development in the US today creates a greater sense of community, re-builds a local consumer base, and establishes the foundation for identifying and growing the future IT leaders needed to retain America’s technology advantage.

http://www.cio.com/article/582863/Outsourcing_Prepare_Now_for_Anti_Offshoring_Legislation

Interesting article in the Healthcare News about Blue Cross Blue Shield of Michigan deciding to keep IT jobs local by investing in an Inshore IT delivery center. More and more companies are beginning to look around in their backyard and realizing that the US is after all still a very strong destination for global sourcing, especially for US enterprises with a largely domestic customer base. Kudos to GAry Harvey and the BCBS Michigan team for their progressive viewpoint on the business and social value of Inshore sourcing.

http://www.healthcareitnews.com/news/michigan-insurer-keeps-it-jobs-local

On January 09, 2010 the US Customs and Immigration Service (erstwhile INS) issued a memorandum clarifying the meaning of employer-employee relationship in H-1B visa adjudication. This memo goes out to all field officers (including embassy personnel and customs/immigration officers at entry points into the US).

The memorandum is titled: “Determining Employer-Employee Relationship for Adjudication of H-1B Petitions, Including Third-Party Site Placements:  Additions to Officer’s Field Manual (AFM) Chapter 31.3(g)(15)(AFM Update AD 10-24).” and has an associated set of Q&A .

The first Q&A query that the USCIS handles is whether the memorandum establishes any new rules (“Does this memorandum change any of the requirements to establish eligibility for an H-1B petition?”) and goes on to respond to the rhetorical question with a “No.”

Okay. So what’s the deal? If it doesn’t change any requirements, why put out a new memo?

The Inshore Blog thinks that this memo, sent out to all field officers, clarifying the meaning of employer-employee relationship is a signal to ensure that both letter and spirit of current immigration law is being strictly followed. In order to do that the memo goes very specifically into examples of what would constitute appropriate employer-employee relationship, and what would not, especially as it relates to Third-Party site placement. The memo is worth reading and internalizing.

A couple of passages from the document highlight the key issue the USCIS is trying to get across to their field officers.

While some third-party placement arrangements meet the employer-employee relationship criteria, there are instances where the employer and beneficiary do not maintain such a relationship. Petitioner control over the beneficiary must be established when the beneficiary us placed into another employer’s business, and expected to become part of that business’ regular operations. The requisite control may not exist in certain instances when the petitioner’s business is to provide its employees to fill vacancies in businesses that contract with the petitioner for personnel needs. Such placements are likely to require close review in order to determine if the required relationship exists.

In the above paragraph, the USCIS is clearly stating that if the H-1 petitioner does not have exercise control over the personnel, they will not be meaningfully engaged in an employer-employee relationship. The document further refers to a supreme court ruling for clarification:

we consider the hiring party’s right to control the manner and means by which the product is accomplished [bold in original]. Among the other factors relevant to this inquiry are the skill required; source of the instrumentalities and tools; the location of work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party, the extent of the hired party’s discretion over when and how long to work; the method of payment; the hired party’s role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party.

Finally, the memorandum takes a specific example of an H-1B “Job Shop” (commonly known as a body-shop):

Third-Party Placement/”Job-Shop”

The petitioner is a computer consulting company. The petitioner has contracts with numerous outside companies in which it supplies these companies with employees to fulfill specific staffing needs. The specific positions are not outlined in the contract between the petitioner and the third-party company but are staffed on an as-needed basis. The beneficiary is a computer analyst. The beneficiary has been assigned to work for the third-party company to fill a core position to maintain the third-party company’s payroll. Once placed at the client company, the beneficiary reports to a manager who works for the the third-party company. The beneficiary does not report to the petitioner for work assignments, and all work assignments are determined by the third-party company. The petitioner does not control how the beneficiary will complete daily tasks, and no proprietary information of the petitioner is used by the beneficiary to complete any work assignments. The beneficiary’s end-product, the payroll, is not in any way related to the petitioner’s line of business, which is computer consulting. The beneficiary’s progress reviews are completed by the client company, not the petitioner.

[Petitioner Has No Right to Control; No Exercise of Control]

The above effort at clarifying the employer-employee relationship is important in establishing field guidance on when to appropriately approve or reject a new H-1B visa or renewal application.

If finally taken seriously, this memorandum forces visa and immigration officers to scrutinize H-1B visas to employer-employee relationships and deny visas to any contractors that are working in a supplemental staffing mode with US enterprises (where they are effectively employed by an US enterprise, except for where their payroll checks come from).

Effective enforcement of this rule has been long overdue.

The question now is — will H-1 staffing companies find another technicality to continue to circumvent the spirit of the immigration law, or will this memo finally force the field officers to focus on enforcement. But more importantly, what is the implication of this memo on US enterprises where these H-1B staffing contractors are a critical part of the team? How are they ensuring service delivery continuity now and for the future?

Tags: Immigration, USCIS

Patrick Thibodeau’s article on Systems In Motion captures the essence of the Inshore operating model very well. Must read article available here.

Couple of points stand out.

SIM is the latest IT firm boasting a domestic business model designed to compete with offshore providers. SIM, though, has a different approach than the oft-used strategy of running operations in rural locations and home offices. SIM is focusing instead on strong employee training and development programs and on creating streamlined processes.

This is one of the primary reasons why Systems In Motion’s onshore services can create cost-efficiency while still retaining a significant ability to scale across different areas of technology and services.

In addition, Patrick is right that the start-up team from Systems In Motion could have potentially been successful in building an offshore service business, but really does the world need another offshore company?

The executive team includes CEO Neeraj Gupta, previously an executive at Patni Computer System Ltd., in Mumbai, India, and Debashish Sinha, the chief marketing officer who had held a similar post at HCL America Inc., the Sunnyvale, Calif.-based division of HCL Technologies in Noida, India. Michael Parks, the chief delivery officer, is former CIO at Virgin Mobile USA, and executive vice president in charge of IT operations at Wells Fargo & Co.

This team could have easily created an outsourcing company based offshore with offices in the U.S. While such a strategy has proven successful for many IT services firms, “I don’t think the world needs another offshore company,” Sinha said.

Instead, the SIM management team is using their offshoring experience to make a case for keeping work onshore.

The Economic Times in India published a terrific article about Systems In Motion and the Inshore Services operating model that provides US enterprises with a cost-competitive alternative to their global sourcing strategy. The main points of the article appear to be the following:

1. Systems In Motion has built a cost-efficient domestic IT services model that competes with offshore services on price, scale, quality, flexibility and business alignment
2. In some US locations like Michigan, the level of unemployment, coupled with the size of the current student population is creating the potential for significant talent development and acquisition by US enterprises and outsourcers
3. Stan Lepeak disagrees that this is going to be anything more than a niche market
4. Senior official from Indian tech firm believes that when the economy rebounds, everyone in the US will go back to those high-paying jobs.

You can read the whole Economic TImes article here.

Without delving into the opinions published in the article (which, ultimately, will only be proved or disproved over time) we’d like just get a couple of facts clarified.

In the article The Economic Times states:

In 2004, at the height of the American presidential campaign dominated among other things by offshoring and a jobless recovery, HCL’s

Vineet Nayar set off a firestorm with a comment that American graduates were not employable.

As trade unions seethed and politicians fumed, two men looked at the reaction the comments had caused and wondered if there was a business opportunity.

Since offshoring was considered a purely Indian phenomenon and sensing a backlash to the process in the years ahead, Debashish Sinha and Neeraj Gupta two IT industry executives in the US began quietly working on an alternative that would appeal to many companies and the political establishment.

It took them five years to come up with a concrete plan and get investor funding. System In Motion (SIM), a Michigan-based start up, launched few months ago plans to challenge the traditional offshore outsourcing market leaders by delivering low cost services from locations such as Ann Arbor.

Actually, Vineet’s comment was made to an NYC audience and reported in BusinessWeek last year (not in 2004), and had very little to do with triggering Systems In Motion. Though some of the ideas for the Inshore operating model did come from a whitepaper written by Conscient Partners on behalf of the IT Association of America (now TechAmerica) in 2006.

Also, the Economic Times article says:

“There are 7-8 Fortune companies including Ford, GM and Chrysler, almost 3,12,000 students are available within 75 miles and the unemployment rate is nearly 30%. If you add the local incentives and Michigan becomes a globally competitive location,” says Gupta, an IIM-Calcutta and BITS Pilani graduate. Gupta, who headed Patni Computers’ global sales and marketing until last year, is the chief executive of SIM.

Yes, there are 312,000 students within a 75-mile radius of Ann Arbor, MI and there are several large enterprises headquartered there, making Ann Arbor, MI a very powerful destination from an IT services sourcing perspective. The above statement would be entirely accurate if the Economic Times had just got Neeraj’s Alma Mater correctly as the University of Alabama (home to Mark Ingram, 2009 Heisman Trophy winner) instead of BITS, Pilani (home to many peacocks and Girdhari’s).

Finally, there’s a minor clarification on Systems In Motion’s view of wage and cost escalations in India. The Economic Times article suggests:

“We were seeing wage inflation in India, and around 20% wage inflation in the US,” says Gupta. For some of the top Indian tech firms, hiring local workers in the US had indeed picked momentum. “What these companies are doing is developing the top end of the pyramid, they will never spend time on developing the bottom, they cannot have their entire pyramid in the US,” says Sinha.

In reality, Systems In Motion believes research from several sources that suggest that wages in India will continue to escalate by double-digits over the next 3-5 years, while wage inflation in the US remains flat. As such, over time, the US workforce is likely to become more competitive against the Indian labor pool, not less.

Otherwise, this is a great article and well worth a read.

Please do visit www.systemsinmotion.com for more information, leave us a comment here, or join our conversation on twitter at www.twitter.com/systemsinmotion.

Tags: Debashish Sinha, Domestic Services, Inshoring, Mike Parks, Neeraj Gupta, Outsourcing, Systems In Motion