Research Publication Date: 24 September 2009
ID Number: G00170172
Evaluating Rural Sourcing in the U.S. as an Alternative to Offshore Outsourcing Helen Huntley
Rural sourcing offers cost, marketing, language and cultural benefits, making it an attractive alternative to offshore and other onshore models for some organizations. This tutorial helps CIOs and sourcing managers understand lower-cost domestic (LCD) sourcing, and how they can effectively evaluate and compare it to offshore and other onshore sourcing models. This will enable them to choose the most appropriate sourcing model for their IT services requirements. Key Findings •
In rural outsourcing — or LCD onshore sourcing — external service providers (ESPs) establish offices in domestic rural locations to combine the value of a local provider with the advantage of lower-cost labor outside large metropolitan areas.
•
LCD sourcing is still an immature and marginal trend in the U.S. It is, however, promising, because it offers tangible and intangible benefits around cost, compatibility (working in the same language, business culture and time zone), corporate social responsibility and data privacy regulations.
•
Regardless of the location of service providers, providers are more likely to engage in projects of short duration when they have established relationships with clients.
Recommendations CIOs and sourcing managers should: •
Understand the concept of LCD sourcing and how it differs from other onshore and offshore delivery models.
•
Develop a sourcing strategy and build a business case for the total cost of sourcing, to make sound outsourcing decisions.
•
Adopt Gartner best practices when evaluating and selecting LCD sourcing models and providers. Also pose questions about organizational characteristics, type and scope of work, and cost, which are specifically related to the rural sourcing model and their unique requirements.
•
Focus on building win-win, long-term relationships with providers, whether the organization opts for onshore or offshore delivery models.
© 2009 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction and distribution of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although Gartner's research may discuss legal issues related to the information technology business, Gartner does not provide legal advice or services and its research should not be construed or used as such. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The opinions expressed herein are subject to change without notice.
WHAT YOU NEED TO KNOW Gartner uses the term "LCD onshore sourcing" to refer to rural sourcing, which is the term most often used in the media. LCD sourcing is a type of onshore sourcing, but it differs from the traditional onshore model in which ESPs in urban or semiurban areas deliver IT services (see "Q&A on Ruralsourcing, Ruralshoring, Farmshoring, Homeshoring and Homesourcing").
ANALYSIS
Context Enterprise buyers of IT services have more choices than ever before when considering outsourcing IT services to save money, improve service or gain access to specialized skills. Not only can they choose from a range of ESPs and offerings, but they can also select providers that deliver these services from offshore, nearshore and onshore locations in urban and rural settings, where labor rates are often price-competitive.
Analysis This Gartner insight will help U.S. organizations to evaluate their options, better understand rural delivery and make the most appropriate sourcing decision for their businesses.
The Differences Between Rural Sourcing and Other Onshore and Offshore Service Delivery Models LCD onshore sourcing is a cost-effective alternative to the offshore model and onshore service provision from urban locations. IT ESPs in rural areas can pass on the lower cost of wages, living costs and real estate in these locations to customers to provide a cost-effective alternative to the offshore model. However, labor arbitrage could lead to urban development in rural areas, which may equalize costs over time. Cost is not the only potential advantage of LCD sourcing. It also offers additional benefits: •
Corporate social responsibility (CSR): Some organizations have CSR policies that require them to use a certain percentage of local suppliers, while other U.S. enterprises want to create and support local job creation during the recession. However, LCD sourcing may negatively affect policies about environmental responsibility if ESPs are clearing and building on rainforests or prime agricultural land.
•
Intangible benefits: Enterprises can link their decision to move work to rural locations to a "Buy American" marketing campaign.
•
Data privacy regulations: Some government agencies and companies that work with classified data must keep all operations within the U.S. to comply with the country's data privacy and intellectual property laws.
•
Language, business culture and time zones: LCD sourcing ensures that the work is done in complementary time zones, with staff who understand U.S. business culture and speak American English, which can facilitate communications and minimize operational challenges.
Traditional and offshore ESPs have and are establishing delivery centers in urban and semiurban areas in the U.S. to tap into local markets, but this trend does not qualify as LCD sourcing.
Publication Date: 24 September 2009/ID Number: G00170172 © 2009 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
Page 2 of 7
Offshore providers, such as Wipro, HCL Technologies and Tata Consultancy Services (TCS), have set up delivery centers in the U.S., and traditional providers, such as CSC, IBM and Capgemini, have established onshore centers in the country. However, these ESPs do not usually move into rural locations. Offshore ESPs that have established offices in the U.S. may, however, attract new clients that are hesitant to outsource all or some of their IT service requirements offshore, as well as clients that must comply with limits on what services they can send offshore. Client organizations should also evaluate this onshore delivery model, because it can offer clients: •
Access to the local talent pool and subject matter expertise for onshore roles
•
A springboard for future offshoring to cost-effective locations
•
An opportunity to see the ESP demonstrate its solutions locally
•
Fewer and shorter time delays from a reduced need to apply for work visas
•
Coverage during North American business hours
Advice: •
Base your business case for LCD sourcing or other onshore delivery models on a comprehensive evaluation process to identify which delivery model will deliver your IT service needs most cost-effectively and at the lowest risk.
•
Verify that the ESP is domestically owned and not simply domestically based, if your focus is on choosing a domestic provider.
•
Understand your enterprise's CSR policies, your technology and data privacy needs, as well as the pros and cons that LCD sourcing and offshore outsourcing can deliver.
•
Evaluate the provider's CSR policies to ensure that they are compatible with yours.
•
Assess the effect that an LCD sourcing provider may have on the environment.
•
Favor ESPs that are redeveloping brownfield urban sites over those that are clearing and building on natural ecosystems or farmland.
Frameworks That Compare Offshore, Nearshore, Rural Sourcing and Other Onshore Delivery Models Gartner does not recommend using one specific decision framework to choose among offshore, LCD sourcing or other onshore delivery models, because, like any key sourcing decision, this is a complex process involving many variables. Instead, Gartner advises clients to follow best practices to develop a sourcing strategy, build a business case for the total cost of sourcing, and evaluate and select ESPs. A key factor that sourcing managers must consider in any decision framework is the availability of skills in rural areas. LCD providers will need a local labor pool and will find it difficult to relocate many skilled resources from other areas. The U.S. Research Triangle Park in North Carolina started this way and developed into the technical hub that it is today. CIOs and sourcing managers need to understand their enterprises, what they can tolerate, what work they want performed, what value they expect to gain from outsourcing and how they would like a prospective ESP to deliver services (customized or standardized). They must understand these points before evaluating and selecting an ESP and where the work will be performed. Publication Date: 24 September 2009/ID Number: G00170172 © 2009 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
Page 3 of 7
Advice: •
Analyze your sourcing needs, models, delivery options and business case when developing and refreshing your sourcing strategy.
•
Answer these questions to help you to decide whether offshore or rural outsourcing is most appropriate for your business: •
•
•
Organizational characteristics: •
How well does your organization work with individuals from different cultures?
•
Is your enterprise risk-tolerant or risk-averse?
•
What is the corporate appetite for change — cautious or nimble?
Type and scope of work: •
Do you have frequent changes to work in progress?
•
Does your business require or expect significant IT interfacing?
•
How much on-site presence do you require?
•
Are your specifications clear, concise and consistent for each work effort?
Cost: •
What do you want to pay for the service?
•
Which pricing models will best suit your needs?
•
This list is not exhaustive, but includes questions that have proven to be most relevant when comparing offshore and LCD onshore sourcing.
•
Apply best practices to evaluate and select ESPs, which should include a thorough assessment of their market capabilities.
•
Ensure that the provider has access to a core critical mass of skills in the particular rural area, and make this a prerequisite for evaluating and selecting an ESP.
•
Evaluate the ESP's ability to align its services to your requirements, as well as its financial viability and maturity in the market.
The Importance of Established Vendor Relationships for Short Projects Organizations may find it difficult to outsource short projects to any ESP, regardless of its location — onshore, nearshore and offshore. ESPs will not consider two-month projects a viable start to a client relationship. For example, Indian offshore providers competing in a competitive global landscape are increasingly striving to win large deals and are less likely to take on short-term project work. Client organizations that have little experience with offshore outsourcing and are weak at defining specifications for the work are even less likely to find a willing ESP for short-term project work. The complexity, viability and likely success of projects requiring less than two months of development time depend largely on whether or not the involved parties have an established ongoing relationship. Onshore, nearshore and offshore ESPs are more likely to take on short projects from clients with whom they already have established ongoing relationships. Formalized Publication Date: 24 September 2009/ID Number: G00170172 © 2009 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
Page 4 of 7
communication and working processes and rapport often characterize established relationships, which increase the likelihood that the provider will perform the work effectively to deliver expected outcomes. Advice: •
Avoid focusing exclusively on cost when selecting ESPs, and look to build long-term win-win sourcing relationships with strategic providers, whether in offshore or rural domestic locations.
•
Develop your demand management competency, so that you can accurately forecast your sourcing requirements. This will enable your ESP to more easily and quickly meet your demand for the delivery of short- or longer-term IT services.
Due Diligence Practices That Help to Evaluate Rural Outsourcers to an Offshore Outsourcer CIOs and sourcing managers should apply the same due-diligence process when evaluating rural outsourcers as they would when assessing offshore ESPs, because this can help to minimize potential deal risk and even failure. A robust due-diligence process would involve validating the ESPs' financial stability, delivery capabilities, proposed pricing, standardized processes and delivery model. When considering rural outsourcers, CIOs and sourcing managers should tailor evaluation criteria about skills, methodologies and standards, as well as their on-site/off-site delivery models. Advice: •
Evaluate the rural outsourcer's network of skilled workers in the region where it can tap into resources or its colocation center facilities.
•
Assess the level of technical skills and supporting local infrastructure that the rural outsourcer has access to in that area.
•
Determine if the rural provider has a shared development methodology or is simply tapping into pockets of discrete labor.
•
Evaluate whether the ESP has a critical mass of technology skills in the area, because this will help to ensure lower-cost labor throughout the life cycle of the deal. If talent is concentrated in small pockets, it may be expensive to aggregate.
•
Ask the ESP how it plans to conduct engagements to determine if it would deploy resources on-site or conduct all work in rural locations. The selected delivery model could affect price and the quality of services.
•
Evaluate offshore and rural outsourcers' project management expertise, communication and knowledge transfer processes, as well as the length of most of their engagements.
•
Check the references for all potential ESPs to more accurately identify the potential pitfalls of working with them.
The Long-Term Sustainability of Rural Sourcing Rural areas offer a more-attractive quality of life and lower cost of living than urban areas, but technology (and skilled) jobs are often few and far between in these locations. This has traditionally pushed graduates and experienced professionals to migrate to urban areas to find
Publication Date: 24 September 2009/ID Number: G00170172 © 2009 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
Page 5 of 7
work. The emerging trend of LCD sourcing could help to draw skilled technology workers back into these areas in the U.S., especially with high rates of unemployed technology workers in cities during the recession. Nevertheless, rural outsourcers will need to work with industry, government and tertiary institutions to retain knowledgeable skilled resources. This will require ESPs to establish partnerships with colleges and universities to stimulate interest in computer science and related fields. They will also need to work with government and local industry to encourage infrastructure development in rural areas. This will pave the way for the long-term viability of the LCD outsourcing business model so that client organizations can balance CSR, service quality and cost to achieve sustainable business outcomes locally. Advice: •
Take advantage of the many available sourcing options by evaluating and comparing LCD sourcing against other onshore and offshore models. This will help you to ensure that the organization selects a sourcing model and an ESP that best meets its IT service requirements.
Key Facts •
LCD (or rural) sourcing is an emerging trend in the North American IT services industry.
•
Examples of pure-play LCD service providers include Rural Sourcing, CrossUSA, Alpine Access and Saturn Systems.
•
The trend of LCD onshore sourcing is likely to take hold in other countries or regions where national and rural IT infrastructure is becoming more developed.
RECOMMENDED READING "Q&A on Ruralsourcing, Ruralshoring, Farmshoring, Homeshoring and Homesourcing" "Impact of the New U.S. Administration on Indian Offshore Services" "How to Balance Outsourcing Excellence, Innovation and Cost" "User Survey Analysis: Economic Pressures Drive Cost-Oriented Outsourcing, Worldwide, 20082009"
Publication Date: 24 September 2009/ID Number: G00170172 © 2009 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
Page 6 of 7
REGIONAL HEADQUARTERS Corporate Headquarters 56 Top Gallant Road Stamford, CT 06902-7700 U.S.A. +1 203 964 0096 European Headquarters Tamesis The Glanty Egham Surrey, TW20 9AW UNITED KINGDOM +44 1784 431611 Asia/Pacific Headquarters Gartner Australasia Pty. Ltd. Level 9, 141 Walker Street North Sydney New South Wales 2060 AUSTRALIA +61 2 9459 4600 Japan Headquarters Gartner Japan Ltd. Aobadai Hills, 6F 7-7, Aobadai, 4-chome Meguro-ku, Tokyo 153-0042 JAPAN +81 3 3481 3670 Latin America Headquarters Gartner do Brazil Av. das Nações Unidas, 12551 9° andar—World Trade Center 04578-903—São Paulo SP BRAZIL +55 11 3443 1509
Publication Date: 24 September 2009/ID Number: G00170172 © 2009 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
Page 7 of 7
