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Managing the Offshore Relationship

Effectively managing relationships with offshore providers can mean the difference between disaster and success.The key, according to experts, is to view service providers as partners rather than vendors.

"When you go in, you have to go into it in the spirit of partnership," says Charlie Cortese, managing director and head of outsourcing for Lehman Brothers. That's the bottom line when it comes to a successful offshore-outsourcing relationship, he says.

Cortese should know. Early this year Lehman Brothers struck a three-year outsourcing deal with India-based service providers Wipro and TCS. Despite a rigorous due-diligence period of pilot programs and vendor reviews, the real work had just begun for the investment bank.

A common misconception is that once the service providers are chosen and the contract is complete, the bulk of the work is done, notes Dushyant Shahrawat, a senior analyst with TowerGroup, a Needham, Mass.-based financial-technology consultancy. Although correctly choosing a vendor and developing a solid contract is critical, the importance of the institution's role after the first phase is often underemphasized.

"In reality, much of the effort begins after initiating the project," says Shahrawat.

Insiders suggest that some financial-services firms jumped on the offshore-outsourcing bandwagon too quickly and are struggling with their relationships. Issues have arisen as a result of insufficient direction, cultural differences, lack of communication, inadequate management of projects, and differences in the way projects are structured.

However, experts agree the most important problems stem from a relationship that is not well thought out before the deals are sealed. According to Ashok Vemuri, Infosys vice president and head of business development for Canada and Eastern North America, "The client should know what it wants from the relationship as well as from each project and communicate that clearly to the service provider."


"Lehman Brothers did it right. They took their time and did their due diligence. They didn't just blindly jump in to get there first, like some other firm's have," notes one executive from a large financial-services firm that is struggling to manage its own offshore-outsourcing deal. The executive requested anonymity.

Lehman Brothers reviewed as many as 15 different vendors, mostly in India. As part of that process, the investment bank did something that wasn't very common. It spent $8 million on 80 pilot projects with various vendors over a six- month period.

"We wanted to be sure that we'd get the benefits advertised before jumping into a long-term relationship," Cortese says. Those benefits include cost savings of 40 percent, quality differences and faster time to market. For Lehman Brothers, it came down to three vendors "who were in a class of their own," Cortese says. Those vendors were Wipro, TCS and Infosys.

"We reviewed the vendors ourselves, toured their facilities and got client references," he notes. Cortese points out that this due diligence is important because choosing the right vendor is the starting point of creating a lasting and successful relationship. In addition, the pilots allowed Lehman to get a taste of the relationship and were instrumental in giving the firm the confidence to proceed, he says.


It's not uncommon for any company to struggle with an outsourcing agreement, says TowerGroup's Shahrawat. "Financial-services firms are experiencing lots of pain in managing these projects," he adds. The truth is, it's difficult enough to manage a technology project onsite, and that difficulty is amplified when a project is being conducted on another continent.

After studying many of the relationships that exist between service providers and institutions, Shahrawat has found there are three issues that must be addressed when considering outsourcing: offshore best practices, governance and internal communication.

Shahrawat explains that offshore best practices can mean many things including: what type of offshore-outsourcing relationship makes sense; vendor selection - which ones and how many; how to conduct comprehensive due diligence and how to issue an RFP. He also says that the creation of effective service-level agreements is a very important part of best practices.

Cortese explains that Lehman Brothers didn't rush this phase. It spent time choosing the right vendors for its objectives, as well as ensuring that its expectations were properly aligned with reality. And, as a result, Lehman is achieving a 40 percent savings on development and is on track to achieve a $50 million run rate (or expected annual savings in three years).

In addition to the six-month pilot process, Cortese suggests some other basic points that should be considered when choosing a vendor. These include selecting vendors that are sizable and established, financially stable, geographically diverse and experienced.

In addition, they should be CMM Level-5 certified, which ensures they are mature companies with well-documented processes in place.

"These companies have taken development from an art to a science," Shahrawat says. Cortese agrees that this is one of the benefits to outsourcing, in India particularly. "They have a very stringent development process so projects come back well planned, well tested and on time," Cortese says.

This can also be where some conflicts arise between the U.S. client and the offshore provider. In the United States, programming is more of an art - every step isn't outlined. U.S. clients have to get used to the stringent process and both sides have to be onboard with a detailed plan, he explains.

Also falling under best practices is structuring the deal. Lehman preferred a structure based on fixed costs for projects rather than paying for time and material. That way, if a project took longer than expected, missing a deadline wouldn't cost the firm more money. Cautious about the agreement, Cortese made sure the contract was flexible by including exit and roll-over provisions. These provisions allow the firm to get out of the contract or extend it. Cortese was also careful not to put all of Lehman's eggs in one basket, which is why he chose to work with two providers.


After choosing providers and setting out goals, the next step is monitoring the project. Shahrawat calls this good governance. It includes contract management, developing a plan to cultivate internal-managerial skills that address offshore-management issues and creating a project-management office.

Infosys' Vemuri also emphasizes the importance of setting up a management office to oversee projects. The management office can consist of five or six people who measure the project's progress and redefine it, if need be. He suggests that this team be comprised of staff from both the client and the service provider to ensure that expectations are monitored and matched by both sides.

Lehman Brothers has created a project-management office and an outsourcing-steering committee to handle governance. Its five-person project-management office, run by Cortese, handles the contract, setting up the infrastructure in India, training Lehman and the outsourcer's employees, managing the growth of the outsourcing and making sure the firm delivers the $50 million dollar savings. In addition, the project-management office has two people stationed full time in India - one at each of the vendor sites. Cortese explains that for each project, on average, 30 percent of the team will work onsite in one of Lehman's offices, which could be in New York City, Jersey City, London or Tokyo.

The outsourcing-steering committee is chaired by Cortese and comprised of Jon Beyman (Lehman's CIO) and four of Beyman's direct reports.


Communication is the next important issue that is essential to a relationship and, more importantly, a partnership.

Shahrawat believes management must effectively communicate the goals of the outsourcing arrangement to internal staff. To be successful, internal staff must understand that this is the new strategy for the firm and that they must accept working on projects with their new partners, he says.

Vemuri agrees and adds that the program-management team has to be culturally sensitive to the backlash around outsourcing. He believes it's important to communicate that these arrangements are not necessarily about replacement but about acquiring the right set of skills and achieving a level of quality.

Vemuri adds that communication is important in a number of other areas. For example, clear goals must be set out and understood by both parties. In addition, "There has to be an attitude of openness and true partnership. There are going to be some mistakes - what matters is how quickly they are rectified. We're not only sharing information but also risks and rewards," Vemuri says.

Cortese says that Lehman has experienced some communication problems, which have been rectified. For the most part, the issues stemmed from the complex interactions between two cultures that this type of outsourcing demands.

He explains that outlining specifications, including deadlines, and reviewing them is very important. "The nature of the culture is that it is non-confrontational. You'll hear 'Yes,' a lot and get very little push back." He explains, "You have to be careful about what they're really agreeing to and what they're just being polite about."

In addition, Cortese says language and accent issues can come up in areas such as help-desk communication. "Here, the language becomes very important to the success of the project." Cortese explains, "Their communications style is a little awkward by American standards," noting that in India people use British English. The difference can result in some peculiar phraseology. For example, he says, when you call the help desk a person from India might ask you, "Do you know your name?" rather than, "What is your name?"

He adds that some people's accents are better than others and are better suited for the help desk. As a result, the investment bank now has one Lehman person stationed at both sites to personally help with hiring.

The Concept of Captive Sites

Outsourcing agreements are still predominantly being used for development of applications that need little knowledge of the securities space. The next phase is trying to extend these relationships so the outsourcer can handle more specific business applications.

To this point, Lehman has outsourced approximately 100 applications including call-center functions and support, as well as back-office and corporate functions related to the programming and maintenance of systems. Specifically, Cortese offers database-administration support, help desk and distributed-operations support as examples. At this point, no mission-critical applications are being outsourced. "No, not at all," answers Cortese when asked. "Certainly not right now."

However, he says that Lehman would one day like to develop these types of applications in India, only not necessarily with its partners Wipro or TCS. He says Lehman is considering what he calls "extending the outsourcing model" by creating a small captive site. By a captive site he means an India-based, Lehman-run office where the firm would hire locals to work directly for the investment bank.

This arrangement, Cortese believes, would allow Lehman to have talented programmers develop quality-trading applications for both equities and fixed income at a lower cost.

Why not just use the existing service providers? He explains, "Certain groups (within Lehman) would feel more comfortable if they were working with Lehman employees (on these types of applications)." He says that when it comes to proprietary applications, outsourcing becomes a trickier issue.

In addition, some secondary issues come into play. For example, it is easier to obtain visas for employees of the company rather than a vendor's employee. There is also a high turnover rate among the service-providers staff and most programmers are junior-level.

Lehman would not be alone in its pursuit of a captive site. Goldman Sachs announced just last month that it planned to open a captive site in India. The initial goal is to hire 250 people by the end of this year, but ultimately Goldman is planning an office for 1,000, according to an industry source. A Goldman spokeswoman did not return calls seeking an interview.

The captive-site model could allow financial-services firms to achieve lower costs without compromising control. In addition, Lehman believes that it can offer better pay, which will further motivate programmers and improve retention rates. Cortese adds that for these mission-critical applications, domain expertise and lack of turnover is critical.

Some people believe that the captive-site model will be the next phase in outsourcing. However, one executive from a large investment-management firm doesn't think this is the solution for everyone. He says that large firms may choose this route but medium and small firms won't have the luxury. He believes that some firms will create captive sites, but will eventually sell them to a service provider or create a shared utility by partnering with several securities or investment firms.

Infosys' Vemuri agrees, "Some of the early movers will set them up just like GE did. We'll see a lot of (firms) with global presence doing it. However, a lot of financial-services companies won't want to because they don't understand the market in India and don't want to get involved with complications of setting up shop in India."

Even so, he says he doesn't see this as a threat to Infosys. "It's an extension of the partnership," he explains, noting that he's been asked by some of his clients to help staff a captive site, though he declines to name them.

"As part of our relationship, we help them set up infrastructure, set up processes, give them perspective on how to work in India, manage from one part of the world to another part of the world. We think it is good for the industry and market."

Lehman's Deal


Total IT staff: 2,000

IT Budget: $700 million

Outsourced Staff: 400

The Deal

Contract Length: Three years

Start Date: March 2003

Service Providers: Wipro and TCS in India.

Savings: Expecting to ramp up to $70 million annual savings after three years, currently at a $50 million run rate.

Contract Structure: Structured deal based on discounts which increase as Lehman hires more staff for projects.

Percentage of Projects Being Outsourced: 18 percent Projects: About 100 projects, including: Database administration, help desk and distributed-operations support.


- 10 percent by end of 2004 (200).

- Of the 10 percent, 35 percent (70) are consultants.

- Some are finding other positions within the company.

Managing Offshore Partnerships

Three Essential Components

  1. Offshore Best Practices
  2. Good Governance
  3. Communication

Structured Oversight Requires:

  • Steering Committee: Charged with setting clear objectives for the relationship.
  • Project-Management Office: To act as the operational control house for the project.
  • An Offshore-Liaison Office: To handle the tactical elements of the relationship such as project delivery, quality control and status reports.
Source: TowerGroup, Dushyant Shahrawat, Senior Analyst

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