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March 16, 2005 


 Q&A: Lisle Technology Partners CEO Adarsh Arora on Offshore Outsourcing 3/15/2005
The mission of Going Global is to educate and inform Midwest technology companies on what local technology companies are doing internationally so other firms can learn from the successes of like-minded peers.

CHICAGO Ė Adarsh Arora is CEO and co-founder of Lisle Technology Partners, a early stage and middle-market technology consulting firm based in Lisle, Ill. The firm has worked with the portfolio companies of numerous Chicago and Silicon Valley venture capital firms.

Arora is active in the venture capital community and is a partner in the Idealflow Angel Fund where he reviews, advises and invests in software and Internet-based start-up companies.

Prior to Lisle Technology Partners, Arora created and nurtured two successful start-ups (Peritus Software Services and Vista Technologies) to maturity including an IPO that created a $500 million market capitalization. He has also been responsible for developing and managing offshore development teams for the last eight years.

Arora is active on the board of advisors of many technology start-ups, the Illinois Institute of Technologyís Rice campus and the West Suburban Technology Enterprise Center. He is also the president of TiE Midwest, which was founded in Silicon Valley and is a global organization to guide and mentor entrepreneurs.

Michael Muth: What started the offshore outsourcing explosion?
Adarsh Arora: IT outsourcing got started in the 1980s when a very clever consulting company called Tata Consulting Services started sending people to the U.S. to augment existing teams. People from India started to come over to learn how to develop software. By the way, TCS did an IPO a couple months ago.

The IT outsourcing explosion happened when I was with Peritus. Those were the Y2K days and it was critical to get resources wherever software renovation could be done. The earliest players from U.S. who got going in outsourcing were Motorola, HP and GE. Motorola now has between 4,000 and 5,000 people in 17 or 18 centers worldwide doing software development.

For these types of companies, the driver early on was the availability of best talent rather than cost. The Internet has obviously given an additional boost to the outsourcing phenomenon since itís clearly acting as the superconductor of knowledge transfer.

In my own company, if I looked four or five years ago at a software engineer in the U.S. and one in Bangalore, there was a discernible difference in terms of knowledge. That isnít true any more. Whatever is published here is instantly known there.

MM commentary: Generally, the Internet enabled the major file transfers required for this type of work. Prior to the 1990s, the only way to transfer data was by sending diskettes overnight. That certainly wasnít very cost effective.

MM: Who should be considering offshoring?
AA: One answer is that everyone wants to do it for cost reduction but you need to look at the type of projects. If a project requires lots of interaction, itís not a good candidate. It depends on the project and level of communication. If youíre designing a GUI and 10 people are giving their input, outsourcing isnít the best thing to do.

There are companies that can help you do SAP, CRM systems and other complex applications and then there are companies that are actually building serious IP out of India.

Start-up companies in Silicon Valley are pretty much required by the VCs to have an offshore center. Large companies like HP have figured it out and the start-ups have no choice but to figure it out. The problem is with the mid-size companies. They are reluctant to start their own centers and they need to figure out a strategy to identify high-quality partners in India.

In terms of the types of companies that are aggressive in outsourcing, financial companies and banks are the leaders. Technology companies are next (Microsoft is included here since they now have a substantial center in India). Of course, the phenomenon of BPOs is a story in itself. How the security risks of sensitive information can be handled effectively will keep many customers and vendors awake at night.

MM commentary: There is little question that the big guys are capable of and are outsourcing offshore. I diverge from Arora a little bit in that I question whether or not small- and medium-sized companies have the resources to seek out these kinds of relationships (at least here in the Midwest). I think itís safe to say that back-office functions are moving offshore before front-office applications.

MM: Why outsource? Why not? What are the risks?
AA: Cost reduction is the key driver for outsourcing. However, there are some risks that customers need to know. How do you find a reliable partner? I am fond of saying that if you look at the customer presentations of two Indian vendors, you might not see any differences.

Everyone claims they are level four or level five organizations and have all kinds of skills. Then the customer typically does a rational thing: picks the cheapest vendor and those are precisely the situations where the failure rate is very high. At that point, you have lost time and money and going after a vendor in the Indian court system isnít a realistic option.

The other major risk, which really isnít very well understood in the U.S., is a lack of senior developers available in India. There is so much growth so quickly that the attrition rates have become very high. As we know in the final analysis, itís the team that really builds complex software and high attrition rates can do major damage to a team.

MM commentary: The assumption is the quality produced offshore is the same as whatís produced onshore. While thatís not always necessarily the case, itís very difficult to do due diligence to find out whoís capable and whoís not. Again, the determination of success comes back to the people and relationships.

MM: How long would it take a local firm to find an offshore outsourcing partner?
AA: At least six months. Which one are you going to pick? There are more than 1,000 software companies in Bangalore alone. How do you check references? How do you figure out if their methodology will work for you?

I put together a presentation for the Chicagoland Entrepreneurial Center discussing this issue. I do know for a fact that several cases where the strategy of ďlet us go after the cheapest vendorĒ has cost companies serious time and money. The point here is that for many working directly with offshore outsourcing partner is neither practical nor advisable.

That is why we put together what we do at Lisle Technology Partners. In our model, we are a U.S. company and we do the delivery. Of course, we have our own center in Bangalore, but as far as the customer is concerned, he gets most of the benefits of offshoring without the headaches involved.

MM: How long would it take you to find them an offshore outsourcing partner?
AA: We prefer that the customer provides us with the development work. If a customer prefers to work directly with an offshore vendor and they seek our help, we can refer them very quickly to quality vendors. This is because we are constantly analyzing whatís happening there and our key people in Bangalore are constantly hiring for ourselves.

MM commentary: One advantage of working through an intermediary like Lisle Technology Partners is that you can save lots of initial time. They also have the advantage of knowing the Indian landscape better than most and they can get a much better deal for you faster. The tradeoff is slight mitigation of the cost advantage and loss of some control, which happens in any outsourcing arrangement.

MM: With no workday overlap, how does one collaborate?
AA: You have to have a couple of things. There are small overlaps in the morning and late at night. We take full advantage of that. At one level, itís not different than working with someone else in Seattle. Psychologically, itís a tough nut to crack if you are 10,000 miles away and donít understand the culture. For us, thatís not an issue.

In terms of collaboration, we have a software system that tracks all work assignments, all changes and all status updates. This system is used by everyone. Itís even installed at the customer site so the customer is kept fully informed of the progress.

MM commentary: It goes without saying that conference calls and Webex presentations are used extensively.

MM: Is language an issue in working with outsourcers?
AA: In China, English language is an issue. Language is an advantage for Indian firms. Still, you have to be careful about how something is stated. For example, any time I hear from India that there is a ďsmall problem,Ē I know that Iím about to be hit with a large problem.

MM commentary: Even though English is commonly spoken in educated India, itís still more British English than American English and miscommunications do occur.

Michael Muth is managing director of GATA, an international business development consultancy that helps technology companies build international partnerships. He can be reached at mike@intlalliances.com.
Click here for Muthís full biography.

Previous Columns:
Q&A: CECís David Weinstein, Kapil Chaudhary on International Experience (3/1/2005)
Q&A: CECís David Weinstein, Kapil Chaudhary on Internationalization (2/22/2005)
Q&A: Brian Briggs of Acclaro on Whether to Outsource Localization (2/8/2005)
Q&A: Brian Briggs of Acclaro on the Complexities of Localization (2/1/2005)
Q&A: Brian Briggs of Acclaro on International Localization Services (1/25/2005)
Q&A: RPXís Robert Okabe, IECís John Janowiak on Global Events (1/11/2005)
Q&As: FastRootís Terry Howerton, Doug Cogswell of ADVIZOR Solutions (1/4/2005)
Q&A: Opportunity Internationalís John Kamperschroer on Partnerships (12/21/2004)
Q&A: Opportunity Internationalís John Kamperschroer on Technology (12/14/2004)
Q&A: Opportunity Internationalís John Kamperschroer on Innovative Financing (12/7/2004)
Q&A: IEC Senior Director John Janowiak on Trade Show Realities (11/16/2004)
Q&A: International Engineering Consortium Senior Director John Janowiak (11/9/2004)
Q&A: Founder John Lee of Chicagoís Hostway on Web Site Localization (11/2/2004)
Q&A: Founder John Lee of Chicagoís Hostway on Growing Globally (10/26/2004)
International M.B.A. Guide to Moore School of Business, Thunderbird (10/12/2004)
Your International M.B.A. Guide to Northwestern, Loyola University (10/5/2004)
Entrepreneurís Guide to International M.B.A. Programs in Chicago (9/28/2004)
Q&A: Prairie Angels Founder Bob Okabe on Diction, International Cities (9/7/2004)
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Q&A: Prairie Angels Founder Bob Okabe on Managing U.S. Subsidiaries (8/24/2004)
Q&A: Origin Ventures Founder Steven Miller on Investments, Angels (8/17/2004)
Q&A: Origin Ventures Founder Steven Miller on the Canadian Way (8/9/2004)
Q&A: CPCP Founder David Baeckelandt on Multilingual Importance, Mentoring (8/3/2004)
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Q&A: CEO Terry Howerton on Why Chicago, Ukraine Made FastRoot (6/22/2004)
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