Case Study: Crafting and executing an offshore IT sourcing strategy: GlobShop’s

Question

Case Study:

Crafting and executing an offshore IT
sourcing strategy: GlobShop’s experience
C Ranganathan1, Poornima Krishnan1, Ron Glickman2
1Department of Information and Decision Sciences, University of Illinois at Chicago, Chicago, IL, USA;
2The Glickman Group LLC, California, USA
Correspondence:
C Ranganathan, Department of Information and Decision Sciences, University of Illinois at Chicago, 2402 University Hall,
601 South Morgan Street, Chicago, IL 60607-7124, USA.
Tel: 312 996 2847;
Fax: 312 413 0385;
E-mail: ranga@uic.edu
Abstract
This teaching case discusses the decisions facing GlobShop, a global travel-retail
company, in its efforts to offshore a significant portion of its information technology (IT)
work. In response to the business challenges that arose due to the September 11, 2001
terrorist attacks, the company decided to outsource many of its IT activities to an Indian
vendor. This case traces the key decisions made by the CIO and the challenges that were
encountered during the planning and execution of the company’s offshore sourcing
strategy. These decisions pertain to the choice of tasks to be offshored, decisions about
the vendor and the nature of sourcing arrangement, managing the vendor relationship and
change management issues induced by offshoring. As GlobShop nears the completion of
its 3-year agreement with the offshore vendor, the CIO is faced with decisions regarding
continuing offshore outsourcing, extending the contract and related implications for the
future of IT organization at GlobShop.
Journal of Information Technology (2007) 22, 440–450. doi:10.1057/palgrave.jit.2000113
Keywords: offshore outsourcing; sourcing strategy; retail industry; IT outsourcing; vendor relationship;
outsourcing governance; offshoring decisions; change management
Introduction
In November 2005, Roger Deen, the CIO of GlobShop, and
his team of information technology (IT) Directors sat in a
conference room at the company’s headquarters in Boston
to discuss the imperatives facing them. GlobShop was a five
billion dollar firm that operated over 200 duty-free and
general merchandise shops in airports, hotel lobbies and
downtown locations across Asia, Australia, North America
and Europe.1 Being a niche player in the travel-retail
industry, the company’s performance swayed with changes
in air travel, tourist traffic and related economic events.
Since the events of September 11, 2001, GlobShop has been
engaged in a series of cost-reduction efforts, including
offshoring a significant portion of its IT work.
Roger was contemplating moving more IT work offshore.
GlobShop has been working with an Indian vendor,
Indo-Systems Solutions (ISS), to take care of application
development, support and maintenance of merchandising
and retail systems, and technical support for the company’s
IT infrastructure. These initiatives have helped reduce
IT expenses by over 35%. The business leadership
has demanded additional cost reductions and has suggested
that Roger examine the possibility of pushing more
projects offshore.
Within the next few weeks, Roger will have to decide
whether GlobShop should extend and renew its outsourcing
agreement with ISS. To reduce the risk of becoming ‘overdependent’
on ISS, the company has been mulling over
using multiple offshore vendors rather than exclusively
relying on ISS.
Another issue that needed Roger’s attention was the
future role of the internal IT function at GlobShop. If the
company decides to move more IT activities offshore, it
should carefully assess its implications for the internal IT
group. GlobShop had reduced its IT workforce by over 50%
and additional cuts could simply decimate the IT function.
With over 60% of the IT spending concentrated on offshore
activities, Roger wondered about the future steps.
Background
‘Duty’ is a generic term used to describe a variety of taxes
imposed on goods. Duty-free shopping enables international
Journal of Information Technology (2007) 22, 440–450
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travelers to purchase foreign goods at lower prices.
Merchandise such as liquor, perfume, tobacco products
that are subject to high taxes and duties are hot products in
duty-free stores. Duty-free shops are typically located in
international airports, selected hotels, tourist attractions
and other areas that are designated as ‘foreign trade zones.’
Founded in the 1950s, GlobShop sold foreign cars and
liquor in US military bases abroad. As the idea of duty-free
shopping picked up in Europe, the company opened stores
in selected European and Asian airports in the 1960s.
Spurred by the growth in international travel in the 1970s
and 1980s, GlobShop expanded its presence to airports in
Australia, New Zealand, USA and UK. Soon, the company
became a profitable player in the small but growing travelretail
market. Despite the entry of several global competitors,
GlobShop remained one of the leading players in this
niche segment. The company expanded into several
countries by acquiring smaller players. In the late 1980s,
the company opened large, duty-free specialty stores in a
few major cities in USA and Europe. These stores were
multi-department luxury retail outlets that carried a range
of items including tobacco products, wines, liquor, confectionary,
perfumes, jewelry, silverware, gift items, souvenirs,
memorabilia, travel goods and other products.
The Gulf War in 1991 severely affected international
tourism. Since airport retail formed a major portion of
GlobShop’s revenues, its sales slumped by over 15%. To
compensate for the losses, GlobShop closed a few specialty
stores and halted its expansion plans. As the business
picked up, GlobShop acquired some smaller players as a
means to enter additional countries. Soon, the company
was organized into 10 regional business units as a
decentralized set-up. However, acquisitions and expansion
left considerable diversity in business processes, managerial
practices, supply chain structures and systems across the
company. Dan Cwik, Vice President of Retail Operations,
elaborated:
Our organization was very diverse in terms of business
processes and practices. Different countries had different
ways to handle duty-free shopping. In some nations, a
customer could take duty-free products straight out
of the store. In some other countries, they had to buy it
in-store and get it delivered on the flight or at their
destination. Some countries supported the concept
of duty-free as well as duty-paid products. We had to
deal with different supply chain structures and retail
processes.
In the 1990s, Asian tourists, who had been targeted as the
focused customer segment by the company, represented a
high potential market. GlobShop was successful in attracting
and establishing its name among Asian travelers. While
this worked well initially, the changes in the global
economy in the late 1990s caused considerable hurdles to
GlobShop. In particular, the East-Asian economic crisis in
1997 created ripple effects in several Asian nations affecting
stock markets, currencies and exchange rates, subsequently
leading to economic recession. Triggered by these events,
international travel and tourist spending declined, creating
a snowball effect on GlobShop’s revenues.
Corporate restructuring
In 2000, a leading luxury retailer (Lux) bought a majority
stake in GlobShop. Lux owned several brands in wines
and spirits, perfumes, cosmetics, watches, jewelry, fashion
and leather goods. Through this acquisition, GlobShop
gained access to famous brands and premier luxury items.
GlobShop also had a new executive team. A troika of CEO,
CFO and CIO took over the management of GlobShop.
Their immediate task was to address the decline in corporate
performance. An obvious challenge was to reduce costs
drastically as well as improve profitability.
Instead of relying solely on airport stores, the management
sought to actively expand into sea-travel retail.
GlobShop acquired a cruiseline firm that operated port
stores as well as on-board ferry shops. However, revenues
from sea-travel retail formed only a small proportion of
overall revenues. Therefore, the executive team began to
aggressively pursue cost-reduction efforts. Proliferation of
retail operations at different regions highlighted the
growing need for more effective coordination of diverse
operations. The senior leadership at GlobShop heavily
debated on the merits and demerits of a centralized vs
decentralized business set-up. Roger explained:
Our airport retail is essentially a concession-driven
business. In such a business, one must re-win the
business every five years or whenever Government (or
an airport authority) commences a RFP process for retail
space. Decentralized operations allow all costs to be
added or eliminated with each win or loss. A centralized
structure has fixed costs associated with operations that
cannot be reduced 100% when business is lost. Therefore,
in a volatile environment, decentralized organization
gives us the flexibility to add or reduce our operations
and scale it according to business fluctuations.
A decentralized set-up also implied duplication of efforts
and lack of standard processes that ultimately increase the
operational costs. The leadership sensed significant savings
by centralizing a number of activities. As a result, the management
announced a reorganization by which GlobShop
would streamline its business processes and reduce
redundancies by adopting a major restructuring. This
meant redefining a number of operational and management
processes and centralizing them at the corporate level. Dan
Cwik, Vice President of Retail Operations, noted: ‘We had
duplication of systems, people and processes throughout.
We figured that we could consolidate a number of these and
do them in a common way. So, we decided to take the costs
out by standardizing and centralizing a number of our
processes. And it was clear that information technology was
the best route to achieve this.’
IT organization at GlobShop
IT operation at GlobShop was highly decentralized
(Figure 1). Each region had its own IT division that catered
to the local needs. A corporate IT group served the needs of
the global headquarters in USA, in addition to providing
shared IT services like email. Each of the 10 regional IT
divisions functioned independent of each other and was
Crafting and executing an offshore IT sourcing strategy C Ranganathan et al
441
headed by a regional IT Director who reported to the
President of the regional business unit, with a dotted
relationship to the corporate CIO. Each regional unit
funded local IT projects and operated under a distinct IT
budget. A natural outcome of such a decentralized set-up
was duplication of applications, services and technology
resources. Neal Parker, Director of IT, observed: ‘We had
several legacy applications that ran in different regions that
were expensive to maintain and couldn’t communicate with
each other. We had multiple versions of the same
application. Despite a corporate IT, the regional IT units
functioned independently. This resulted in many redundant
resources – infrastructure, software, hardware and people.
All these added to our IT overhead costs.’
GlobShop had several legacy merchandising systems in
the 10 regions. Each region also had a data center storing
unit-level sales information. Further, GlobShop had SAP
financials and Peoplesoft HR systems. For retail processes,
the company had two different point-of-sales applications
across the stores worldwide. GlobShop had a resource pool
of over 300 IT employees across the 10 regions.
Centralizing IT management
In 2000, in order to facilitate the corporate restructuring
effort, Roger was entrusted with the responsibility of
consolidating the IT organization. Roger’s mandate was to
spearhead the realignment of GlobShop’s regional IT set-up
into a global unit, along with associated changes in business
processes. A major IT reorganization would not only
facilitate streamlining diverse business processes and
systems worldwide, but also pave the way for significant
cost savings. Roger’s background was also particularly
suited for the reorganization initiative: he knew the
company’s retail business well and had seen how an
integrated operation could achieve efficiencies; he also had
an international background with significant work experience
in Asia-Pacific and North American regions.
Roger and his team embarked on an extensive study of
regional IT units. Detailed information on the IT resources,
applications and spending was gathered. Neal elaborated,
‘It was an eye-opener for us. We had over 250 internally
developed applications across the ten regions. These
applications had over 15000 objects such as programs,
databases etc and had over 5 million lines of code. We
dissected our IT dollars and precisely knew how much each
of the IT services cost us. We were spending much more
than what we ought to be.’ The analysis revealed that
GlobShop was spending over 60 million dollars annually on
IT. Reorganization would help them save more than onethird
of these costs.
Roger had extensive discussions with IT Directors and
business unit leaders at each of the 10 regions. Further,
Roger convened planning retreats and brainstorming
workshops that helped discover a number of issues. The
presidents of the business units were concerned that
the consolidation would distance the regional users from the
IT group. Moreover, centralization also implied a significant
loss of control over IT. Neal remarked: ‘There was a
lot of reluctance and resistance to give up local IT
resources to a global pool. They felt they won’t be any
longer able to walk to a programmer’s desk, make a request
and get it fulfilled on-demand. There was concern that
this was going to impede their ability to do what they
have been doing and also take away their control. There was
a tremendous amount of resistance.’ Roger highlighted
another issue: ‘We were largely running our IT departments
simply by managing-by-wandering-around model. Adopting
a global delivery model with a centralized set-up
required a very different set of competencies.’ However, the
high pressure to prune costs and the clear mandate from
the top helped GlobShop move forward with its IT
reorganization.
After studying the problems and issues, Roger proposed
a three-pronged approach for the reorganization. The
central idea was to consolidate the 10 regional IT units
into one global IT unit, with all of the IT operations
dispersed in two centers, one in Asia and another one in
USA. The new IT vision was to have ‘one global team
without boundaries, delivering acknowledged value and
exceeding customer expectations.’ The highlights of the
new reorganization were:
Centralized global IT budget: Under the new arrangement,
the funding for IT would be centralized. The
regional IT units would no longer pay for the IT services
Corporate IT
Development Analysts
Project Management Finance
Shared Services
Operations
Help Desk & Support
Infrastructure
Regional IT
(IT Directors)
Development Finance Help Desk &
Support
Operations
Regional Business
Unit (Presidents)
Retail Operations Finance
Figure 1 Decentralized IT organization.
Crafting and executing an offshore IT sourcing strategy C Ranganathan et al
442
directly but through corporate allocation and a chargeback
system.
Streamlined IT governance: Neal Parker, Director of IT,
commented: ‘We planned a new set of centralized,
formalized processes in place about how we were going
to manage our IT. Any major application development or
IT-related service request had to be centrally submitted.
It would be assessed, prioritized and resource allocation
be made accordingly.’ This implied serious changes in
the way different functional and regional units interacted
with IT. Further, all the IT initiatives would be classified
into three categories: capital initiatives, expense initiatives
and support related. While capital initiatives were to
be decided and driven by business, expense and support
initiatives would be handled by the IT unit.
Consolidation and standardization: IT operations at the
10 regional centers were to be consolidated into two
hubs, one in USA and one in Asia-Pacific. Twenty AS 400
systems operated at the regional centers would be
consolidated into the two hubs. Multiple instances of
the applications would be minimized and information
stored in a centralized data repository.
As a part of the reorganization, GlobShop decided to cut its
IT costs by outsourcing a part of application support and
maintenance. In November 2000, GlobShop hired an Indian
vendor, Indo-Systems Solutions (ISS), for on-site maintenance
and enhancements of the merchandising system.
The vendor’s responsibilities included documenting the
system, deploying its staff on-site in USA for technical
support and undertaking minor enhancements.
The journey offshore – formulating an offshore sourcing
strategy
Impetus for offshoring
The events of September 11, 2001 in New York severely
affected the air-travel sector. There was a sharp decline in
passenger traffic as several airlines cut back their flight
schedules. Movement of international tourists reduced
drastically (Figures 2 and 3). All the major airport retailers,
including GlobShop, were hit hard by the drop in passenger
traffic. This made cost cutting that much more imperative
for GlobShop. The company suffered a severe setback when
it was still implementing its reorganization. Dan Cwik said:
‘9/11 created havoc. Fewer passengers meant fewer dollars,
cash flow crunch, store closures, halting expansion. We had
to cut costs drastically. We realized we had to make some
radical changes.’ These provided the trigger for offshoring
IT tasks and realizing significant savings. Roger explained:
‘After 9/11, we looked down the barrel of having to
transform the way we run our business. We looked at
offshoring as a means to do that.’
Finding the partner
Roger and his team began by looking at potential offshore
locations and vendors. They assessed Canada, Eastern
Europe, China and India. Roger recounted: ‘I looked at
different geographies and at that time Eastern Europe was a
bit unstable. China was emerging but I had concerns about
IT protection and intellectual property issues. India was the
most matured segment with lots of players and a good
legal system in place.’ The team visited a few vendors in
India, including tier-1 vendors like Infosys, Wipro, other
smaller vendors, and decided to work with ISS. Explaining
the choice of ISS, Roger said: ‘At that time, ISS was a
medium-sized, yet growing company. I didn’t want to work
Index 100 = 1996
Asia economic crisis
EU abolition 9/11 Iraq War
SARS
Global economic recession
135
144
102
102 105
101 111
117
145
158
96
100 100
124 126 124
120
110
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Airport Sales Customer Potential
Figure 2 Major economic events and airport retail sales.
Source: Generation Group, Sweden.
In US$ millions
450 600 800 1,000 1,300
2,000
3,000
5,000
8,000
20,500
20,000
20,000
27,000
11,500
15,000
16,000
18,000
21,000
25,000
0
5,000
10,000
15,000
20,000
25,000
30,000
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2005
Figure 3 Global duty-free and travel retail sales.
Source: Generation Group, Sweden.
Crafting and executing an offshore IT sourcing strategy C Ranganathan et al
443
with any tier-1 Indian vendors because I didn’t want to be
so small that I was insignificant to them. I wanted to be a
meaningful client to the partner so that I could get the
attention I needed. Moreover, we were only starting out on
offshoring so I had to have the flexibility to change or pull
out when needed.’ Another factor that weighed in favor of
ISS was that it was a ‘hybrid’ offshore firm with presence in
both USA and India.
Testing the offshore waters
Initially, GlobShop outsourced only a small piece of
production support, in order to minimize risks and assess
the benefits from offshoring. After the events following 9/
11, GlobShop decided to extend its relationship with ISS to
hand over all of its production support for its merchandising
system and few retail applications. The basic idea was to
achieve a complete ‘follow the sun’ model for production
support where ISS began taking requests from data centers
and business users from around the geographical regions.
GlobShop entered into short-term agreements with ISS on
fixed-price terms as it learned about the vendor and
experimented with the best ways of making offshoring
work. There were some initial kinks that had to be worked
out. Neal remarked: ‘We found that the on-site resources
were not as effective working with our business partners as
we had hoped. So we sat down with ISS and talked to them
about that, and two things happened. They changed some
of the people and their process. And, we took more
responsibility for the relationship and adapted the onshore/
offshore model to work better in our environment.’ ISS
deputed Rahul Sharma as the on-site manager to coordinate
and oversee the projects at GlobShop. Rahul brought two
more managers from ISS to work on-site. These managers
acted as the liaison between GlobShop’s managers and the
offshore staff. These measures improved the working
arrangements between the two companies.
Satisfied with ISS’s performance in providing production
support, Roger decided to further experiment by focusing
on more value-added projects. GlobShop engaged ISS to
architect a data warehouse that would enable faster
reporting and provide business leaders with a view of
enterprise-level data. This project was very successful and it
helped win the confidence of business leaders. Roger said:
‘When we offshored production support, it brought
visibility and credibility from end users. When people
saw the results from data warehousing, we had the buy-in
from senior business stakeholders.’ He further elaborated:
‘When you try a new offshore sourcing strategy, the project
needs to be visible and to be meaningful to the
stakeholders. However, the project cannot be so important
that you are betting your entire business on it. That is very
risky. What we achieved through data warehousing
resonated throughout the organization and set the stage
for me to do a whole lot with offshoring.’
Laying the ground rules
Before completely embracing offshoring, GlobShop had to
have some basic tenets in place. Roger explained: ‘As we
started thinking about offshoring, it became clear to me
that we could do a lot with global offshoring that was
strategic in nature and not merely cost-oriented, like 247
productivity, costs moving from fixed to variable and the
notion of variable skills etc. We wanted to capitalize on the
strategic side of offshoringy therefore, we adopted an
‘‘and’’ philosophy. That is, we had to reduce costs and
improve productivity, quality, speed and agility.’ He further
cautioned: ‘Outsourcing does not mean transferring the
accountability of IT to a third party. Always, the global IT
will be responsible and accountable for the IT outcomes.’
Roger developed an additional set of principles for
offshoring. The focus was to be on the business outcomes of
the projects rather than on the specific activity offshored.
Rather than enforce competitive bidding for every project,
GlobShop would adopt a partnership approach to work
with a single vendor over a long term. Justifying this
approach, Roger remarked: ‘If costs were the only focus,
one can go with a bidding race among vendors. But if
offshoring needs to be strategic, then a partnership
approach is more appropriate. Partnership means treating
vendors as colleagues than as contractors.’
Designing the agreement
GlobShop and ISS had separate 90-day agreements for the
initial support and data warehousing activities. GlobShop
preferred these agreements to be on a fixed-price basis.
Neal explained: ‘We opted for a fixed-price model as the
requirements were specific and very straight-forward.
Payments to our partner were tied to specific milestones
and deliverables. We did not want any cost overruns or
unanticipated surprises.’ In November 2002, GlobShop
entered into a 3-year global offshoring agreement through
which ISS became responsible for selected new application
development and support. The companies entered into a
master services agreement (MSA) that enabled creation of
separate work orders or statement-of-work (SOW) for each
new project or extensions of ongoing projects (see Figure 4).
ISS’s responsibilities included analysis, documentation,
knowledge transfer, guided support and stand-alone support.
Neal elaborated: ‘The standard business and legal
terms that do not change over time were taken care of by
the MSA. Under the MSA, we did SOWs for each individual
project. The logic was that the typical legal stuff got
negotiated once under MSA; however the CIO had the
authority to sign off on the SOWs – he could use different
staffing models, rate structures and service levels in each
SOW.’
One of the hallmarks of the GlobShop–ISS agreement was
the implicit gain-sharing incentives for the vendor. Rather
than sharing a proportion of the savings on a one-time
basis, GlobShop agreed to reinvest the savings from
offshoring back into IT, which could translate into
continued revenue generation for ISS. Given GlobShop’s
difficulties in expanding the IT budget or making
substantial IT investments, the strategy was to channel
the cost savings realized from IT offshoring back into newer
value-added IT initiatives. Roger remarked: ‘As ISS helps us
reduce our costs, we redeploy those dollars into other IT
projects. We are going to go back to ISS first to get
those projects done. This was a win-win situation for both
of us.’
Another noteworthy part of the relationship was the
flexibility to plug-and-play IT resources according to the
Crafting and executing an offshore IT sourcing strategy C Ranganathan et al
444
needs of IT initiatives. Under the global offshoring
agreement, ISS committed to maintain a talented pool of
offshore staff with retail and Globshop-specific knowledge.
Depending on the specific project requirements, the
company would have just-in-time IT resources. Neal
commented: ‘We get a well-educated, knowledgeable and
scalable IT team using a just-in-time global sourcing
philosophy where we get the best talent, as needed, quickly.
We don’t mind paying more for this kind of flexibility. We
are using fewer hours of the best available skills and
experience, rather than employing moderately skilled talent
full time and using only a portion of the available capacity.’
Under the 3-year deal, several IT tasks were offshored to
ISS. Apart from consolidation, maintenance and ongoing
support for core merchandising system, projects that were
given to ISS included support for the ERP modules and
point-of-sales systems, development of intranet site and
content management processes.
Executing offshoring – managing the change process
Within GlobShop, the offshoring effort was to be implemented
as a part of its overall IT reorganization. The
business impacts of the September 11 event forced the
company to adopt a more aggressive strategy and accelerate
its reorganization efforts. Senior management demanded a
faster reorganization and quicker results. The IT leadership
had to not only accelerate cost reductions but also cope
with increased demands from corporate management to
improve the speed and quality of IT offerings. Roger said:
‘When we came up with our strategy for global IT reorganization,
we anticipated a 36-month period for the
complete re-organization. However within weeks after 9/11,
business mandated drastic cuts across entire enterprise.
Our goal was accelerated to 9 months.’
Handling workforce reductions
Reengineering the old structure and accelerating the
consolidation was more difficult than initially anticipated.
An aggressive offshore strategy implied reducing a
significant portion of the IT workforce. Dave Blanks, an
IT manager, recollected the mindset that prevailed: ‘None
of it was comfortable. GlobShop was a great organization to
work for and we had people with over 25 years of
experience in the company. The decision to layoff had very
serious emotional impacts.’ GlobShop had to determine
how many people and whom to retrench, whether to carry
out the workforce reduction in multiple phases, and how to
communicate its intentions to the employees. The timing of
the downsizing was critical because GlobShop had to work
on transferring critical knowledge from affected workers to
other staff and the vendor. Roger elaborated:
A big issue that we faced was how to handle people
changes. We had to worry about perceptions of internal
staff, external stakeholders as well as the community.
Some managers wanted to do the layoffs in phases,
hoping that the business would turn around so that
future cuts can be avoided. Others opposed the idea
arguing that phased cuts will create lots of uncertainty
among remaining employees. We also wrestled with
‘telling-them-now’ or ‘tell them at the last minute’. There
was staff who had to be cut but whose knowledge had to
be transferred. We tussled with how to convince them to
stay for a specific time period.
Quick retrenchment was problematic as GlobShop did not
have a good documentation of its IT systems and
applications. Knowledge transfer was a serious concern.
Neal noted: ‘There wasn’t much documentation and a lot of
knowledge was in people’s heads, those who had been
around for a long time.’
The initial hesitations not withstanding, the company
communicated its intentions to accelerate offshoring and
reduce a significant number of employees. Over a period of
time, three out of four IT jobs were to move offshore. The
senior management took charge of the process to ensure it
did not turn out to be a very painful experience. Roger said:
‘open communication is very important. We were open and
honest with people about what we were doing.’ Commending
the senior management’s role, Neal remarked: ‘Our CEO
played a very critical role in how well he reached out to the
employees and communicated with them in this process.’
GlobShop’s management worked out a package for
employees affected by downsizing. A severance pay
structure was put in place. Another key element was
retention pay for the IT staff whose knowledge had to be
Master Service Agreement
Operating
Principles
SOW 1 SOW 1 SOW n
SLA 1 SLA 2 SLA n
Shared procedures and processes
between client and vendor
Broad, legal terms of
the agreement
Acceptance Criteria
Specifics of the work to be performed
Metrics Metrics Metrics
Technology and Business metrics for performance assessment
Figure 4 Structure of agreement.
Crafting and executing an offshore IT sourcing strategy C Ranganathan et al
445
extracted and transferred. Neal elaborated: ‘We had to
transfer the knowledge from people’s heads to either
another employee or to our offshore vendor. We significantly
increased their bonuses if they stayed for a time
period to productively transfer the knowledge they had.’ In
addition, GlobShop also offered career transition assistance
through a third party by which the employees could
identify and apply for appropriate positions in other
organizations.
Reflecting on his actions, Roger believed that these
measures greatly helped the transition process: ‘I personally
met with everyone who was going to leave our company.
We told people well in advance that layoffs were coming.
The employees, though discontent, were happy that we told
them the truth. In addition, we gave them some runway and
also provided significant support for them to find new jobs.
That was key – to be honest and open, and offer additional
support.’
Soon after the announcement of layoffs, a number of
offshore-implementation issues demanded management
attention. These issues concerned many elements of
governance process between ISS and GlobShop and the
day-to-day working arrangements.
Improving vendor relationship and governance process
When ISS was entrusted with the responsibility of
production support for core merchandising systems, ISS
sent its personnel to each region. These people spent
several weeks on-site, learning and documenting the
processes, systems and related issues. GlobShop’s IT staff
worked closely with ISS’s personnel to enable easy knowledge
transfer and transition. Rahul Sharma, project
manager from ISS, commented: ‘Tracing and documenting
the entire set of systems was tedious and time consuming,
but was necessary for us to take over the production
support. GlobShop was very co-operative and offered full
support.’
Roger took specific steps to help overcome the cultural
and social differences between the offshore staff and the
global IT team. Specific training sessions were conducted to
impart an understanding of multiple cultures and value
systems and ways of addressing cultural differences.
Workshops on diverse teams and teamwork were also
organized (Figure 5 presents a snapshot of outcome from
such a workshop). An analyst commented: ‘We had
diversity experts who taught us how cultures vary and
how to recognize and work with such differences.’
The relationship between GlobShop and ISS expanded
significantly. From a transactional mode, Roger wanted to
forge a tighter partnership so that ISS could play a more
proactive role in providing value-added services as well as
in identifying newer IT opportunities. He created teams
called the ‘communities of practice’ (COPs). The COPs
consisted of core project participants drawn from the
business, IT and the offshore vendor. Roger explained:
‘Each COP is made of different entities with specific areas of
focused expertise, and all COPs are integrated by the
GlobShop IT management team, to contribute interdependently
towards accomplishing overall business goals.’ There
were two fundamental objectives behind the formation of
COPs: (1) To ensure that the offshore vendor is completely
infused into GlobShop so that the vendor works as a mere
extension of GlobShop’s IT unit. This implied that the
offshore vendor personnel were treated as internal colleagues
rather than as external contractors. (2) To bring the
technology, user and vendor personnel together.
Commenting upon his role in the COP, Rahul (Project
Manager, ISS) said: ‘Through the communities of practice, I
got a seat at the table where GlobShop made key ITbusiness
decisions. I felt I belonged to GlobShop.’ When the
COPs were initially set up, considerable concerns were
expressed about the changed roles of the vendor. Rahul
recollected: ‘I was invited to top-level meetings and saw
many people wonder what I am doing in that meeting. I
sensed a silent uneasiness.’ However, as GlobShop’s
executives started seeing some promising results, the idea
of COPs gained quick and widespread acceptance. The
COPs also helped change the mindset of the vendor. Rahul
remarked: ‘We had to re-orient ourselves and see what we
could really do to improve the bottom line of their business.
If we were on some sales-mode trying to simply sell our
solutions or services, they’d have thrown us out.’
Onshore/offshore management structure
In the initial days of their relationship, working arrangements
between GlobShop and ISS were largely informal.
However, as ISS took over the maintenance of a significant
portion of GlobShop’s merchandising system, the two
companies decided to develop a more formal structure
for working together. The structure provided a more
coordinated way for the business users, GlobShop’s IT
staff, ISS’s on-site specialists and the offshore team to work
together (Figure 6). The two companies also agreed on a
common set of principles for onshore/on-site/offshore
staffing. Neal explained:
The ratio of onsite/offshore/onshore staff varies on each
project as we progress through the different phases of
the project lifecycle. The appropriate team ratio for a
project is arrived by jointly taking into account the cost,
services, project needs and effort. For any new work, we
typically start with a larger on-site staff that slowly
transitions offshore as the requirements of the project
become more stable.
For most maintenance projects, ISS followed a typical
sequence: analysis and documentation, knowledge transfer
and service phase. While more on-site staff was required in
the analysis phase, this staff was transitioned offshore as the
knowledge transfer and learning improved. The offshore
team became more independent in the service phase. For
some of the early application support and maintenance
projects, 30% of ISS’s staff was dispersed on-site with 70%
offshore. Gradually, most of the application support
projects achieved on-site to offshore ratios of 10% to
90%. For application development projects, the on-siteoffshore
ratio varied from 60–40 to 30–70.
Initial results from offshoring
Within 18 months of the global sourcing arrangement,
GlobShop reduced its IT expenses by 35%. As planned, the
Crafting and executing an offshore IT sourcing strategy C Ranganathan et al
446
IT organization at GlobShop was reorganized and consolidated
in two locations – one in USA and one in Asia,
with an extended offshore team located in India. The global
IT staff shrank 43% in the first year, and 59% in the second
year of MSA. The legacy applications that resided in over 24
AS400 machines in 10 regions were consolidated into one
machine and the support work was moved offshore.
GlobShop conducted a user satisfaction study that showed
an improvement from 2 to 3.5 on a 5-point scale since they
started offshoring.
Commitments
Listening
Inform
Feedback
Share Knowledge
Priority Order
Give honestly
Accept with grace
In the moment
Frequent
Positive
Constructive
Individual
Organizational
Face to Face
Phone
Email as appropriate
Pro-active
Freely given
Co-operation
Accept with grace
Give credit
Affirmation
Support
Team work
Value diversity
Trust
Benefit of doubt
Be inspirational
Strive for excellence
Take ownership
Share responsibilities
Understand
Leverage
Blend
Value styles
Trustworthy
Trusting
Understand others
Early involvement
Continuous Improvement
Understand your role
Understand the processes
Challenges & course correct
Share priorities & goals
Work within the organization
Gain commitment
defined
Understand purpose
& direction
Understand priorities
& outcomes
Communications
Text
Relationships
Organisation
Blame
Don’t
Embarrass
Say one thing &do
another
Confrontational
Defensive
Agree & Align
Learn
Challenge
Be proactive
Be Positive
Collaborative
Empower
Respect
Be Patient
Have fun
Celebrate success
Be compassionate
Take vacations
Do’s Then to be understood
Seek first to understand...
Behaviour
Active
Figure 5 Enhancing global teamwork: snapshot of output from workshop.
Source: Internal company records.
Crafting and executing an offshore IT sourcing strategy C Ranganathan et al
447
Expanding the relationship
Enthused by these results, GlobShop decided to
award additional projects to ISS under the broader MSA
(Figure 7 presents the key IT responsibilities at GlobShop).
ISS studied a number of IT opportunities and suggested
new initiatives for GlobShop. Subsequently, ISS was
asked to work on several projects – development of
GlobShop’s internal and external web sites, improving
the technical architecture, site performance, navigation
and content management processes and also performing
infrastructure tasks. As a value-added service, ISS
created a web-based knowledge management system
about GlobShop’s systems that was required for ongoing
maintenance and support, and a web-based task management
system to capture detailed project activity. The
information captured from these two systems enabled
GlobShop to better assess the offshore projects. The
number of ISS staff who worked on GlobShop’s projects
also trebled.
Taking stock and moving forward
As GlobShop neared the end of its 3-year sourcing
agreement with ISS, Roger confronted several serious
questions. Should GlobShop continue to move more
value-added IT work offshore? Should it renew its
agreement with ISS? The company had managed to weather
economic storms and gained incremental revenue growth.
The company had plans to streamline its global supply
chain and implement some advanced EDI solutions. It also
needed to work on migrating from legacy environment to
more advanced platforms.
Pleased with the offshoring results thus far, the senior
leadership at GlobShop was willing to move newer IT
projects offshore. Dan Cwik, Vice President of Retail
Operations, remarked: ‘I am very impressed by our
offshoring experience and I think it is a very good solution
to have our IT work done in India. Offshore outsourcing
helps us focus on exactly what our business is – global
travel-retail. I don’t believe doing this work internally is
going to make us more competitive.’ Sally Curry, Vice
President of Finance, expressed similar sentiments: ‘In the
volatile environment in which we operate, our main task is
to focus on improving our retail business. That means
ISS Offshore
Delivery Manager
IT Directors
Project Managers
IT Staff
ISS On-Site
Coordinator
ISS Project
Managers (On-site)
Business Users
Analysts /
Developers (On-site) Project
Manager
CIO
ISS
Offshore
Team
Figure 6 On-site/offshore management structure.
Global IT
Operations
Global Support
Local
Support
Vendor
Offshore
GlobShop
IT
Orgn
Projects
Global
Apps
Global IT
Management
Vendor
Devt
ITBusiness
Align.
Servers
Desktop
User Req. Mgt
Maint &
Enhance
App Support
Adhoc Queries
Reports
Variable Resources
Specialist Expertise
Security
Network Mgmt
S/W Licensing
H/W
S/W
Upgrades
Design
DB & DW
Business
Relationships
Contracts
SLAs
Reviews
Business
Strategy
IT Purpose
Direction
Management
Projects &
Enhancements
Budget
Strategy/Vision
Partnerships
Communiques
Policies/Procedures/
Standards
App. Profiles
IT Performance
Reviews
Change mgmt
Development
PC
Figure 7 Key IT activities at GlobShop.
Crafting and executing an offshore IT sourcing strategy C Ranganathan et al
448
expanding geographically and into other travel-channels to
buffer against economic events, improving efficiency in
operations and streamlining supply chain. Information
technology, while obviously an important part of our
operations, can be handled well by our offshore partner.
Each dollar that is saved from offshoring can be reinvested
in our business.’
However, a section of executives believed that despite the
success of offshore projects, entrusting the responsibility of
critical projects like supply chain initiatives to an offshore
vendor is ‘too risky.’ Roger noted: ‘We have a few projects
in our pipeline that are quite critical in nature, for example,
advanced EDI linkages with vendors. Some business
colleagues have expressed apprehensions about giving
these projects entirely to our offshore partner. We are still
debating what should be retained internally and what
should be offshored.’ Some of the IT managers wondered
whether increased offshoring would simply erode their
relevance in the company. Neal argued: ‘This can be very
risky. You’re talking about more offshoring and that may
place our mission critical tasks with the external vendor.
This could also mean further layoffs and reduction of our
IT group. So, what is our future?’
Over the past few years, ISS has grown to become one of
the leading offshore vendors in India. Its clientele has
expanded to include top retailers and several Fortune 1000
firms. In 2004, Rahul Sharma and two of ISS’s on-site
project managers were promoted and transferred to other
ISS clients. Some of GlobShop’s IT staff felt that ISS was
diverting its ‘star employees’ and resources to more
prestigious clients. Neal said: ‘We had some new managers
[from ISS] but I felt it wasn’t like our old team. These new
guys also had a steep learning curve. They were no match to
the group we had earliery. There was also an instance
where we had to request them [ISS] to replace one of the
[ISS] managers.’ Dave Blanks added: ‘These [Rahul and his
team] people were very valuable. They knew our business,
systems, formed good relationships with our managers and
users. It cannot be replaced very easily.’ Roger wondered if
GlobShop would continue to receive the ‘special treatment’
it got from ISS.
Another issue that worried Roger was the extent of
GlobShop’s reliance on ISS. The company has become
critically dependent on ISS for many of its IT operations.
Some of the GlobShop managers felt it risky to work with a
single offshore vendor and preferred to spread the work to
multiple vendors. Larry Katz, Manager at the Global Data
Center, argued:
When we started working with ISS, we wanted to be able
to pull out [of the relationship] anytime. We didn’t want
a situation where we became too dependant on them
[ISS]. But now, I fear our dependence has reached a
critical level. They [ISS] have grown big and can do
without our account. For us, it may not be possible to live
without them. I think it will be better to work with a few
vendors so that we can spread the risks.
Neal was also concerned: ‘We don’t want all our eggs in one
basket. The offshore market has grown. We can definitely
shop around for other vendors. There are others who are
competent as well as cheaper.’
The Vice President of Finance, Sally Curry, had an
alternate viewpoint:
I don’t think working with multiple vendors will be costeffective.
It is going to drive our overheads up. We are
happy with what we got from ISS – Why not just continue
with them? It is going to be very expensive to find new
partners, help them learn, transfer all the knowledge. We
cannot afford that.
A larger issue that was looming in Roger’s mind was the
future of IT organization and its relevance in GlobShop. If
GlobShop continued offshoring more value-added and core
activities, what purpose would the internal IT unit serve in
future? It might simply be a matter of time before the entire
IT function was farmed out.
Note
1 The authors have prepared this case solely to provide material
for class discussion. The authors do not intend to illustrate
either effective or ineffective handling of the managerial
situation. The authors have disguised the names and other
identifying information to protect confidentiality.
About the authors
C Ranganathan is an associate professor in the Department
of Information and Decision Sciences at the University of
Illinois at Chicago. His current research interests include IT
outsourcing and offshoring, IT and e-Business strategies
and business value of IT. His academic recognitions include
the best doctoral dissertation award and the best teaching
case award at the International Conference on Information
Systems, and best paper awards given by the Society for
Information Management. His work has been published in
journals such as Communications of the ACM, Decision
Sciences Journal, European Journal of IS, Information &
Management, IEEE Transactions on Engineering Management,
Information Systems Research, International Journal
of Electronic Commerce, Journal of IT, MIS Quarterly
Executive, among others. He holds a doctorate from the
Indian Institute of Management, Ahmedabad, and a
master’s degree from BITS, Pilani (India).
Poornima Krishnan is a doctoral student in the Department
of Information and Decision Sciences at the
University of Illinois at Chicago. Her research interests
include outsourcing governance, offshore outsourcing
management, IT service management and quantitative
research methods. She has published and presented her
work in conferences such as International Conference on
Information Systems and Academy of Management Meeting,
among others. She has also worked in industry in
different business/IT roles prior to entering the doctoral
program. She holds an MBA degree from Narsee Monjee
Institute of Management Studies, India.
Ron Glickman is the Senior Vice President of global quality
processes and integration at UTI Worldwide. Glickman was
most recently responsible for the retail and hospitality
Crafting and executing an offshore IT sourcing strategy C Ranganathan et al
449
vertical at Cognizant Technology Solutions. He has over 30
years of experience in information technology management.
He has held senior executive positions, including the
office of CIO, in firms in USA and Asia-Pacific. He has been
instrumental in numerous IT initiatives to achieve operational
efficiencies, enable business growth and derive
competitive advantage. He has been a speaker at several
executive forums and conferences. Glickman holds a BBA
from National University and an MBA from the University
of Southern California.
Crafting and executing an offshore IT sourcing strategy C Ranganathan et al

Questions:

1. What factors led to GlobShop's decision to offshore significant portions of its IT infrastructure to India?
2. How well did GlobShop manage the change process after making the decision to offshore?
3. Was the decision to offshore successful? Defend your answers.

Explanation / Answer

Answer 1.

Since GlobShop was mainly a travel-retail industry,

And there were many changes in air travel,ourist traffic and related economic events that led to hampering company’s performance

Thus,

Since the events of September 11, 2001, GlobShop has been

engaged in a series of cost-reduction efforts, including

offshoring a significant portion of its IT work.

And for cost reduction they are outsorucing in india, for their application

development, support and maintenance of merchandising

and retail systems. Which india can do more cheaply.

These initiatives have helped reduce IT expenses by over 35%

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