The future of IT outsourcing in Thailand?
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Today's article provides an update on the progress of the outsourcing industry in Thailand.
An interview with Suras Lertpoompunya, a Thai manager dealing with outsourcing at IBM Thailand provides essential, and sometimes surprising, background information.
For example, if large Thai companies outsource, this does not mean Thai jobs are going to India.
IBM has a policy of doing work outsourced from Thai companies in Thailand
With this policy, outsourcing probably brings a net educational gain to Thailand, from Thai staff gaining experience with the latest technologies and business practices.
Large companies in Thailand currently avoid outsourcing because they are afraid of backlash from labour unions.
Education and the acquisition of necessary workforce skills remains the most fundamental problem with developing a Thai outsourcing industry.
For further reading, check out the Outsourcing Section of the Business and Economics Library and an earlier article: Selling Thai outsourcing to Japan ?
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What other outsourcing markets lie beyond IT outsourcing?
2. How big is a "large outsourcing deal" according the article?
3. What is holding back large Thai companies from outsourcing more?
4. How do mergers and acquisitions provide new opportunities for outsourcing?
5. Is the decrease in the Thai outsourcing business in recent years permanent? Why or why not?
6. What statistical evidence of increased efficiency in companies that outsource?
7. What accounting effect does outsourcing have on a firm?
8. Does the corporate Chief Information Officer become more or less important? How does his work change?
9. If Thai companies outsource with IBM does that mean this work will be move from Thailand to soms other country like India?
10. What is the major obstacle that has to be overcome in order to get more outsourcing work from the US and Europe?
11. What well-known companies in Thailand have chosen IBM as their outsourcing partner?
Bangkok Post Article: November 29, 2006
SERVICES / MORE GOVERNMENT HELP SOUGHTOutsourcing sector alive and well
DON SAMBANDARAKSAThe outsourcing industry is alive and well, despite rumours to the contrary, and our government needs to redouble its efforts on education if Thailand is to take a slice of the lucrative outsourcing work that is headed towards Asia, according to Suras Lertpoompunya, General Manager of IBM Solutions Delivery subsidiary.
Speaking to a small group of journalists, Suras said that outsourcing of IT projects was just the first step. Already many Thai companies are looking at business process outsourcing and even business transformation outsourcing.
However, Thailand was still lagging, especially in large deals (more than 20 million baht), as the attitude of large corporations towards outsourcing was still quite negative. Small companies can make a simple business decisions based on return on investment, but large corporations need to deal with labour unions and their image as an employer, meaning the decision whether to outsource or not is often more political.
That said, Suras said that mergers and acquisitions was a major accelerator for the newly-merged companies to consolidate and at the same time outsource their shared IT resources, cutting down on redundancy.
Suras said that the outsourcing industry is not in decline, as some have suggested, but has merely suffered from a speed bump in the last couple of years. A study by Stern Stewart of 27 companies showed that companies that chose to outsource enjoyed a 5.8% rise in stock prices and 62% of those companies' stock prices outperformed the market index.
The most immediate effect is that outsourcing turns assets (equipment, data centres) into expenses. This means a change in accounting as equipment is no longer depreciated over a number of years.
The role of the CIO remains as important if not more important when overseeing outsourced projects. For instance, when outsourcing security, establishing policies must remain with the organisation.
Suras said that virtually 100% of the outsourced work taken on by IBM remains in Thailand and that we should in fact be a net gainer for the global outsourcing business. "A Thai Java programmer is cheaper and more cost effective than one in India," he said.
However, a lack of qualified graduates and IT workers means that Thailand is not getting as many jobs from the US and Europe it should.
What Thailand severely lacks are project leaders and system architects, who need to be brought in to manage the larger projects.
This year, Suras and his team have taken on 50 third year university students on internship programmes so that they will gain real-world experience. Suras said he hoped most Thai graduates would leave university with a grasp of Java and Web programming, adding that in the west, many leave university with up to 50 IT certifications.
IBM Solutions Delivery has 1,300 staff in Thailand and, in line with global trends, contributes roughly half to the profits of IBM Thailand. This year, 100 of them received ITIL certification on IT best practices.
Asked about services oriented architecture (SOA) and how it was helping organisations achieve agility, Suras said that it was definitely the future but that the fundamentals of SOA still needed to mature further.
Today, many are stepping towards SOA and implementing SOA-centric elements, but he disagreed with certain analysts' visions that SOA would soon mean automatically generated code and same-day delivery of new business processes.
Suras said that contrary to popular belief, many of his projects were implemented using Sun and HP hardware, as it made sense to continue using what their clients had invested in. He said that while IBM did not always have the cheapest solutions, such as the industry's cheapest helpdesk implementation, when taken together, he was certain IBM solutions deliver the best value for money for the entire project over the life of the agreement, often stretching up to 10 years.
Some names that have chosen IBM as their outsourcing partner include Kasikorn Bank, Boots, Visteon, Singapore Airlines, Tanachart Finance, Daimler Chrysler and the Ministry of Labour.
"Getting these clients to allow us to use their logo was almost as hard as winning the contract," he joked.
By far the largest is Kasikorn Bank's agreement, which covers a comprehensive deal lasting for 10 years.
Vocabulary (in discussion above)
outsourcing - (See Wikipedia on outsourcing and offshore outsourcing)
offshore - in another country, in a foreign country
is alive and well - still very much exists, not dead or disappeared
rumours to the contrary - people are now saying the opposite of what is claimed
redouble its efforts - increase effort a lot
lucrative - very profitable
business process outsourcing - hiring a service provider outside of a company, to perform som function like call centers, human resources, accounting and payroll outsourcing (See Wikipedia)
business transformation outsourcing - a term that IBM uses to mean services that "go beyond the limited role of trimming costs and make outsourcing a strategic element in business transformation" (Definition Source; See IBM on business transformation outsourcing and IBM India)
return on investment (ROI) - comparing earnings on a potential investment to alternative uses of the money, to see if the investment is worth making (See Wikipedia on rate of return)
labour unions - an association of workers to maintain or improve their wages and working conditions (See Wikipedia on trade unions)
mergers and acquisitions - "the aspect of corporate finance strategy and management dealing with the merging and acquiring of different companies" (See Wikipedia)
redundancy - duplication, the same function or job is already being done by someone else (so it is a good candidate for elimination)
a speed bump - a small bump in a road or parking lot to prevent cars from driving fast (if you drive fast over the bump it will hurt your car)
depreciation - the way that assets with finite lives lose value over time, in accounting (See Wikipedia)
depreciated - the value subtracted from the value of an asset as it ages
a CIO - a Chief Information Officer, the high level corporate manager who oversees computer and network operations and policy in a corporation (See Wikipedia)
cost effective - makes or saves a lot of money compared to the costs involved
internship - when an intern, an advanced student or recent graduate, gets real-world practical training in a company or government, for a short period of time, for example a "summer intern"
IT certifications - most successful IT certification programs are "oriented toward specific technologies, and are managed by the vendors of these technologies. These certification programs are tailored to the institutions that would employ people who use these technologies." (See Wikipedia)
IT best practices - (See Wikipedia on best practice)
services oriented architecture (SOA) - It design using web services, "an SOA environment, resources on a network[1] are made available as independent services that can be accessed without knowledge of their underlying platform implementation," examples of web services include YouTube video sharing/streaming, Wikipedia, Google's Writely word processor and spreadsheet (See Wikipedia)
SOA-centric - centered on SOA, using SOA as the main strategy
agility - the ability to think, act, and adapt quickly and intelligently
mature - fully and completely developed (no longer growing)
implementation - the actual doing of something that is only planned
comprehensive - thorough, covers everything needed, includes everything needed
Answer Key:
1. What other outsourcing markets lie beyond IT outsourcing?
a. Business process outsourcing
b. business transformation outsourcing
2. How big is a "large outsourcing deal" according the article?
MOre than 20 million baht.
3. What is holding back large Thai companies from outsourcing more?
They have to "deal with labour unions and their image as an employer." These political factors prevent them from outsourcing more.
("...the attitude of large corporations towards outsourcing was still quite negative. Small companies can make a simple business decisions based on return on investment, but large corporations need to deal with labour unions and their image as an employer, meaning the decision whether to outsource or not is often more political.")
4. How do mergers and acquisitions provide new opportunities for outsourcing?
when companies merge they consolidate their IT resources and can often "outsource their shared IT resources, cutting down on redundancy."
5. Is the decrease in the Thai outsourcing business in recent years permanent? Why or why not?
No, outsourcing is not in permanent decline. The increased financial performance of companies that do outsource will eventually push others to make more widespread use of outsourcing.
6. What statistical evidence of increased efficiency in companies that outsource?
Financial performance and return on investment. The stock prices of companies that outsource have risen compared to those who don't.
("A study by Stern Stewart of 27 companies showed that companies that chose to outsource enjoyed a 5.8% rise in stock prices and 62% of those companies' stock prices outperformed the market index.")
7. What accounting effect does outsourcing have on a firm?
It turns balance sheet assets into expenses on the profit and loss statement. Depreciation for IT equipment no longer has to be calculated.
("The most immediate effect is that outsourcing turns assets (equipment, data centres) into expenses. This means a change in accounting as equipment is no longer depreciated over a number of years.")
8. Does the corporate Chief Information Officer become more or less important? How does his work change?
There is no change in importance, but the nature of his work changes to setting policy, for instance, secutiry policy, rather than directly overseeing operations.
9. If Thai companies outsource with IBM does that mean this work will be move from Thailand to soms other country like India?
No, IBM has a policy of outsourcing work from Thai companies in Thailand. This means that there will probably be some knowledge transfer, in leading edge business practices and technology, from IBM to the Thai staff of IBM.
10. What is the major obstacle that has to be overcome in order to get more outsourcing work from the US and Europe?
Education and work experience. Thailand needs more "qualified graduates and IT workers." IT certification and knowledge of IT best practices, of the kind that IBM Thailand provides its staff, is needed.
An obvious part of this solution would be to allow skilled European and American IT professionals to work and live freely in Thailand, so they could share their skills. Nationalist policy imperatives, however, probably preclude this kind of forward-looking policy.
11. What well-known companies in Thailand have chosen IBM as their outsourcing partner?
Kasikorn Bank, Boots, Visteon, Singapore Airlines, Tanachart Finance, Daimler Chrysler and the Ministry of Labour.
