In the presidential election just concluded, one of the points of contention between George W. Bush and John Kerry was offshore outsourcing by U.S. firms, which has mushroomed in recent years. Kerry contended the Bush administration made it too easy for companies to outsource jobs to lower-paid overseas workers.
Even with the re-election of President Bush, offshore outsourcing will continue to be a hot-button issue, fed in part by retailer participation. Among about 100 chief information officers from retail companies (mostly outside of food retail) polled at the National Retail Federation's NRFTech conference in August in La Jolla, Calif., two-thirds said they devoted some portion of their IT operating budget to offshoring, with 40% saying it represented up to 10% of that budget. (See box, Page 42.)
Food retailers may be slower to employ offshore outsourcing, as well as outsourcing in general. In SN's 10th annual State of the Industry Supermarket Technology Report, published in February, three-quarters of respondents said they outsourced 25% or less of their IT responsibilities. "It probably has something to do with the complexity of the food business and the attention that core processes require," stated Janet Hoffman, partner in New York-based Accenture's retail practice. "But this is the exact reason why [outsourcing] makes sense. Food retailers shouldn't let technology be their day-to-day job."
Not all of them are. Scarborough, Maine-based Hannaford Bros. and Salisbury, N.C.-based Food Lion, both divisions of Delhaize USA, have turned to offshore outsourcing provider Infosys, Bangalore, India, to supplement their existing IT staff.
At NRFTech, Terry Morgan, CIO and senior vice president of information technology, Food Lion, described his company's offshore outsourcing efforts, reportedly noting that Food Lion sought to supplement what it was already doing in-house, rather than to simply cut costs.
A similar need prompted Bill Homa, CIO and senior vice president, Hannaford, to begin outsourcing offshore in 2000. "Without the help of Infosys, we would have had to postpone large projects for years. We would have suffered as a result," he said. "A lot of the projects that we outsource are so large that we don't have the resources available to develop them on our own. We're able to deliver more systems, and our existing employees are freed up so they can work on the type of [IT jobs within Hannaford] that they enjoy most."
After cost, this kind of flexibility is a common motivator of retailers when it comes to outsourcing, according to Gopal Devanahalli, head of sales for the retail CPG unit of Infosys. "If you have a food retailer that has a large piece of work that needs to be done, it's difficult for it to scale [its number of employees up and down]," he said. "You can have that flexibility, offshore, at a very low cost."
Hannaford realized that large application development projects do make excellent outsourcing candidates, said Homa. "With larger projects, the interactions that need to take place between Maine and India are minimized. Most of the communication takes place within the group [in India]."
Hannaford's outsourced application work specifically pertains to supply chain activities, "largely due to the dearth of supply chain packaged solutions available to retailers," Homa noted. In addition to large application development projects, Hannaford trusts Infosys to handle some business process consulting, software process consulting, enterprise architecture services and technical training, according to Infosys.
In the past, most of Hannaford's outsourced work has been focused on writing software code, rather than on core business development that requires retail industry knowledge. Today, however, Infosys is doing some design work as well, Homa said.
Indeed, many of the projects Hannaford outsources to India now involve the transfer of proprietary knowledge. "There is a little fear that goes along with the knowledge that the things we do could get into the hands of the competition, but that is probably inevitable," said Homa. "The benefits of outsourcing far outweigh the downside. Also, we're fairly open about what we're doing anyway. Making it public doesn't mean that others will be able to duplicate it."
According to Accenture's Hoffman, many offshore outsourcing providers promise to keep proprietary information confidential from other retailers. For their part, providers are working toward strengthening their specialized industry knowledge base to improve their value proposition. "We hire people who have worked in the food retail industry for years," said Mani Subramaniam, principle consultant and head of the retail vertical for Wipro Technologies, Bangalore, India. "We attend most major industry conferences, and we talk to analysts and look for different trends."
As a result, Wipro is able to offer specialized services surrounding category management, promotions effectiveness, demand forecasting and inventory planning. The offshore outsourcing provider has four supermarket clients in North America and Europe. Like any U.S. company using offshore outsourcing services, Hannaford has been able to leverage lower wage rates abroad. According to AMR Research, Boston, and Infosys, offshore labor rates are 30% to 40% of the pay for a comparable person in the United States. On top of that, Hannaford is able to keep its total cost of ownership down as a result of the offshore relationship. "Applications developed by Infosys require no rewriting, and maintenance is easier. So it's saving us money over time," said Homa. "It's astounding that you can get this type of quality."
Four years after Hannaford's offshore relationship began, Homa is comfortable taking a more hands-off approach with Infosys. There is currently one Infosys representative in Maine for every five in India. Homa communicates project requirements to Infosys' representatives stationed in Maine, who act as liaisons with Hannaford's Infosys project team offshore.
Although his management role in the relationship has tapered off, Homa has confidence in Infosys' ability to deliver quality work. "Our relationship with Infosys is phenomenal," he said. "They make sure the requirements that users specify are delivered. Applications work the first day that we turn them on without any bugs. It's unbelievable that a system that required 55,000 hours of offshore labor can work flawlessly."
Homa's confidence in offshore work was echoed in comments made by panelists at NRFTech, noted Dawn O'Brien, senior director, retail systems, NRF, Washington. Nonetheless, she observed, the NRF CIO poll taken at the show revealed that two-thirds of respondents still consider "ability to control the effort" the largest obstacle to offshore development.
Initially, Hannaford was also apprehensive about sending IT functions halfway across the world. So it established a "mitigation strategy" that involved taking baby steps, beginning on site. "There is some perceived risk associated with offshore outsourcing. It's a big step for retailers to take," said Homa. "We started off slowly with one [Infosys] person on site. Then we added a couple of people offsite [in India]. We dipped our toe in the water. I would advise other retailers to start off this way."
CIOs on Offshoring
What percentage of your company's IT operating budget is for offshoring?
1%-10% of budget: 40%
11%-20% of budget: 10%
21%-30% of budget: 7%
More than 30% of budget: 10%
None: 33%
What is the largest benefit of offshore development?
Cost of project: 67%
Scalability of offshore resources: 19%
24x7 development: 8%
Quality of work: 6%
What is the largest obstacle to offshore development?
Ability to control the effort: 67%
Perceived domestic job loss: 22%
Public/customer perceptions: 8%
Security and risk concerns: 3%
Based on a poll of about 100 retail CIOs.
SOURCE: National Retail Federation, Washington.
Tips on Outsourcing
Whether done stateside or offshore, there's more to outsourcing than just handing off the work. In addition, there's more to a good outsourcing firm than low cost.
As part of its study "Driving High Performance Outsourcing, Best Practices from the Masters in Consumer Goods and Retail Services Companies," Accenture, New York, surveyed companies that have been outsourcing a major business process for at least two years. These companies shared the following tips for maximizing an outsourcing arrangement:
Incorporate business outcomes as a performance measure from the outset of the arrangement.
Look for an outsourcing provider that brings a wide set of skills and strengths, and a long-term track record of delivering results, in addition to competitive pricing and commitments to cost reductions.
Give as much attention to performance measurements and the quality of your relationship with the provider as you do to the contract.
Use risk/reward provisions as incentives.
Use active governance to manage the outsourcing relationship for maximum performance.
Assign talented executives with optimizing outsourcing arrangements.
Be clear about objectives. Cost, process improvement, and the ability to focus on the core business are the most common among veteran outsourcers.
