Assessing the cost of Assessing the cost of Offshore Outsourcing: Offshore Outsourcing: Efficiency, Effectiveness, and Efficiency, Effectiveness, and RiskRisk

Todd Little

Efficiency, Effectiveness, and Efficiency, Effectiveness, and RiskRisk

Efficiency– The speed at which things are done

Effectiveness– The net value generated from activities

Risk– Major things that might happen to impact

Effectiveness or Efficiency

About LandmarkAbout Landmark

Commercial Supplier of Oil and Gas Exploration and Production Software

Users are Geophysicists, Geologists, Engineers

Subsidiary of Halliburton Energy Services

Integrated suite of ~60 Products

~50 Million lines of code

Some products 20 years old

Landmark Product SuiteLandmark Product Suite

Common Model Representation

Well data

Production data

Seismic data

Velocity data

Reservoir /Fluid data

Structural /Stratigraphic data

Common Model Representation

Offshoring the CEOOffshoring the CEO

March 11, 2007, 8:35PM

Halliburton to move headquarters to DubaiCEO Dave Lesar says the oil giant will maintain a Houston corporate office

By BRETT CLANTON

Copyright 2007 Houston Chronicle

Halliburton Co. surprised the energy world, members of Congress and the city of Houston today by announcing it will open a new corporate headquarters in the United Arab Emirates and relocate its chief executive officer there.

Financial DriversFinancial Drivers

Offshore outsourcing can Save 75% (multiple sources)

Offshore outsourcing can average 75% of cost. (Forrester)

Financial DriversFinancial Drivers

Country Cost Ratio relative to USUS 1.00Canada 0.85India 0.40Pakistan 0.25

Cost SavingsCost Savings

InhouseCost

SavingsCost % Savings

Cost Savings = Expected Cost Inhouse – Cost Offshore – Cost of Overhead

Expected Cost Inhouse = nn * cn

Cost Offshore = nf * cf

Cost of Overhead = nm * cm

Cost SavingsCost Savings

e

mcSavings

1%

nn

mmffnn

nc

ncncncSavings

%

e

mccc

Savings nm

1%

c = Cost ratio = cf/cn

e = Efficiency = nn/nf

m = Management Overhead factor = nm/nf

Our ExperienceOur Experience

e ranges from 0.10 to as high as 1.0– But is subjective and uncertain

m tends to run about 0.10 to 0.25

c from cost tables, 0.25 to 1.0

Sample Data for Pakistan Sample Data for Pakistan OutsourcerOutsourcer

  e m c Savings Comments

Development 0.40 0.11 0.16 33%  

Testing 0.27 0.04 0.18 16%  

Testing 0.60 0.06 0.19 59%  

Testing 0.60 0.05 0.19 60%  

Development 0.60 0.17 0.23 34%  

Development 0.64 0.17 0.23 38%  

Testing 0.80 0.06 0.17 72% High performance, low overhead

Development 0.56 0.13 0.30 23% Cost factor compared to Canada

Testing 0.40 0.10 0.20 26%  

Testing 0.60 0.06 0.21 55%  

Testing 0.20 0.05 0.27 -56%

Bad project. Cost factor compared to Canada and team lacked proper skills.

        33%  

RM Projects with TCS for 2007RM Projects with TCS for 2007

  e m c Savings Comments

Development 0.14 0.05 0.31 -152% SDS - needed domain help

Test 0.20 0.06 0.42 -141%General testing. Only smoke tests

w/o domain help

Development 0.20 0.10 0.37 -135%

Java development did not require domain, just understanding of systems

        -143%  

Risk adjusted SavingsRisk adjusted Savings

Risks– Cost– Value

Types– Technical Risk– Project/Business Risk– Political Risk– Outsourcer Risk– Security/IP– Financial Risks

Value Risks (Effectiveness)Value Risks (Effectiveness)

Lost Value due to Delays

Lost Value due to Quality

Lost Value due to Security

Lost Value due to Missed Opportunities

Technical RiskTechnical Risk

Does the outsourcing company have all the technical skills necessary to do the work?

Does the outsourcer understand the business domain?

Can the project requirements and specifications be defined to meet the capabilities of the outsourcer?

Quality of work

Project/Business RiskProject/Business Risk

Rapidly changing requirements amplify remote communication challenges

Lost opportunity from dialogue between business and technical people

Political RiskPolitical Risk

Is the supplier in a stable political regime?

Are there difficulties getting work or training visas in either direction?

Outsourcer RiskOutsourcer Risk

Is the outsourcing company stable and predictable?

Does high employee turnover put the project at risk

Security / Intellectual PropertySecurity / Intellectual Property

Theft of Intellectual Property

Risk of IP pollution

Export Compliance

Financial RiskFinancial Risk

Inflation

Currency variation

Portfolio Management and Dealing Portfolio Management and Dealing with Darwin (G. Moore)with Darwin (G. Moore)

Mar

ket

Dif

fere

nti

atin

g

High

Low

Mission CriticalLow High

Invent Deploy

ManageOffload

Create Change

Embrace Change

Eliminate Change

Control Change

Ad Hoc Agile

Outsource Structured

Project SelectionProject SelectionP

rob

abil

ity of

Su

cces

s

High

Low

Risked Cost of FailureLow High

Outsource Consider

Consider Avoid

Landmark’s Portfolio ConclusionLandmark’s Portfolio Conclusion

Location Project TypeUS internal development

Core business, mission critical, innovation

Canada Projects well suited to the skills of our Canadian teams, potentially including core business.

India Maintenance and enhancement projects of non-core business

Pakistan Maintenance and enhancement projects that can tolerate project risk, Testing projects where skills exist