HELP! I NEED SOMEBODY
But not just anybody. Outsourcing your Internet strategy is an increasingly attractive option. But CFOs must be careful not to throw the baby out with the bathwater.
By Adam Lincoln

Somewhere in the heart of Texas, there's a Thai expatriate who's feeling pretty pleased with himself. A few months ago, he won a hefty payment from The Nation Group, one of Asia's leading media conglomerates, for ownership rights to the web domain name Thailand.com. While details of the settlement are confidential, the new owners insist they did not succumb to the original US$5 million asking price. "Our negotiating skills are too good," claims Sermsin Samalapa, president and acting CFO of Thai Portal, the Nation subsidiary that was formed to build a business around the Thailand.com moniker.

Maybe so, but the deal is now ancient history for Sermsin and group chairman and CEO Thanachai Theerapatvong. Sure, they were intent on securing the perfect name for their venture, which came about after Sermsin boldly pitched the concept to Thanachai late last year. And it's safe to assume the enterprising expat is set for life. But bagging the right name was only a first step. Thailand.com wants to be the definitive web portal for Thailand, focused on five key areas: exports, travel, shopping, news, and business and finance. The bigger question concerned the next step: should the company draw on existing group resources and hire new staff with additional expertise; or outsource much of the development to an external party?

"We went through many hours of soul searching and debate," recalls Thanachai, who founded the company three decades ago. And rightly so. Outsourcing has never been as popular in Asia as other parts of the world, even though it would appear to be a panacea for regional woes such as skills shortages and lack of funds for investment in hardware and software. What's more, a sage, objective consultant can cut a swathe through the corporate politics that can paralyze a company bound by hierarchy. Perhaps for this reason, Asian business leaders have been especially wary of handing over too much of their operations to an outsider. But even in North America, Europe and Australia, where the big IT services companies make the most of their money, the term has a negative connotation. Typically, where cost cutting and retrenchment is high on the agenda, outsourcing has been seen as a sign that a company is struggling.

The rise of the Internet, coupled with a trend among companies to focus on core competencies, is turning that conventional wisdom about outsourcing on its head. Skills shortages and the pace of technological change mean few companies can make an on-line assault without outside assistance. Certainly, the increased speed of technology change has made CFOs more wary than ever of consenting to internal migrations to upgraded IT equipment and applications. Building an internal IT empire is passŽ. In its place: a complex web of relations with suppliers and customers.

"The web has taken outsourcing to a new level," says Daphne Tse, CFO at Bizipoint.com, a young but fast-growing e-procurement company based in Hong Kong. The numbers reinforce her view. According to US-based market analyst International Data Corporation (IDC), companies worldwide spent US$7.8 billion on Internet professional services in 1998. By 2003 that figure is expected to have increased tenfold, to US$78.5 billion. The impending large-scale adoption of Internet-enabled, wireless devices will further boost demand for networking upgrades, new enterprise resource planning (ERP) customization and expanded desktop services. As relationships between companies and their suppliers and customers become more intricate, there is growing acceptance that the most successful companies will be those that wholeheartedly embrace such relationships, and manage them best. While it still requires a leap of corporate faith, there is no shame in outsourcing anymore.

Business Thais

By March, the executive team at Thailand.com had finished its debate on how to get its business on to the web. It settled upon a 96 million baht (US$2.55 million) outsourcing contract with the Bangkok division of IBM Global Services, the increasingly e-business-focused subsidiary of the US computer giant. "We wanted to create a web portal of international standard and we couldn't find anyone in Thailand who could really do that," says Sermsin, who's been serving double duty as finance chief while the company seeks out a CFO. "We're not in Silicon Valley, so we brought that kind of talent to us." An indicator of the deal's significance: Thai Portal's start-up capital was 50 million baht - half the value of the outsourcing contract with IBM.

Content never posed an obstacle to the company's on-line ambitions. With the Nation Group as parent, Thai Portal draws on decades of experience in newspaper, magazine and book publishing, as well as radio broadcasting and cable television. And the company is not new to the web. Its flagship newspaper, the English language daily, The Nation, has been on-line for a few years and the group operated a proprietary news delivery service prior to that. Thai Portal needed help with the tactics of implementation, not the big-picture stuff.

As part of its contract, IBM provided the Thai company with most of its systems development and maintenance requirements. Thai Portal leases both its hardware and software from IBM, housing it at its office. The package includes an IBM RS/6000 Unix Server for global data hosting and storage; an application server for managing transactions; a DB2 database for video and data storage; web development and animation tools; a firewall for security; software for storage and fast searches of archive, video and audio data; and tools to prevent data overloads. On the service side, IBM provides web page design, installation, maintenance and performance monitoring.

Considering that the new company has yet to start generating much in the way of cash flow, Sermsin found IBM's offer to spread payments evenly over three years, in the form of 36 monthly payments, particularly appealing. "It's more convenient, compared to a chunk payment," he says. "It doesn't create any financial headaches for us." There's more money to be spent, however. With the launch of the site in June marking the end of phase one of the company's development, phases two and three now kick in. These will entail adding functionality to the portal, and installing ERP software from SAP and customer relationship management (CRM) software from California-based Siebel Systems.

The IBM experts also contribute in another important way: skills transfer. "We assign our people to work one-to-one with IBM people to ensure that knowledge transfer happens," Sermsin explains. Thai Portal's own IT team is about a dozen strong - much smaller than it would otherwise need to be. The in-house team works in areas such as web design, system administration and security. At various times, development of the front end has involved as many as 50 people, including the IBMers. In some instances, IBM itself has sub-contracted work to local Thai partner companies, or brought in extra talent from Singapore.

The expectation is that with time, the number of IBM staffers will be cut back, and Thai Portal's own people will be able to run with the ball more of the time. "The Internet changes very quickly, and if you're relying too much on outsourcing, there might be times when you can't keep up," Sermsin says. "Later on we'll be relying on IBM more on the systems maintenance side of things, but for application development, we're going to have to do it ourselves."

Buyer Beware

Evidence suggests Thailand.com is on the right track. According to the Hatchett Benchmark 2000 report, organizations that reap the greatest benefits from outsourcing are those that do it on a selective basis, as opposed to total outsourcing of IT functions. Selective outsourcing can lead to potential IT savings of between 20 and 50 percent, the US-based research company says. Conversely, IT organizations that are not selective about which processes they outsource end up costing 86 percent more than if the company did selective sourcing of the processes that offered the most savings.

Joe Sweeney, an analyst with Gartner Group in Hong Kong, agrees. Sweeney says that knowing when to hold on, and when to let go, should be a CFO's paramount concern. He says that depending on corporate goals, an e-business assault may comprise up to five main parts: strategic consulting, web design, web data entry, multimedia or front end programming, back end programming, and integration with existing systems. Some elements lend themselves to outsourcing more than others. And if it seems like every man and his dog are suddenly peddling web services, well, that's because they are.

The big five business consultancies, erstwhile computer hardware and software vendors, and countless smaller agencies are busy ramping up this component of their business. But the quality of services available can be patchy. Sweeney says he is most alarmed by the standard of web design companies in the region. "The majority are overworked and underskilled," he says. Worse, those that are not coping are dropping clients they don't consider high value - Sweeney says he has taken a number of calls from clients who've been told: "Your account is too small for us." He says: "That's an absolute disaster. If somebody drops you halfway through a project, you won't have the skills to pick it up in-house. You're screwed."

The only way to avoid falling into this pit is to do your homework - and then some. Sweeney recommends prospective outsourcers avoid the temptation to sign up with a self-professed 'one-stop shop'. Better to 'cherry pick' from a range of external options, and then hire a prime contractor to manage the project - by all means ask the project managers if they have better suggestions, but ultimately, you as the client call the shots. "If a services company says you should do it all with them, start to worry," he says. "There are very few that can do it all, cost effectively."

Sweeney is adamant that strategy can't be outsourced. Certainly, it can be worth seeking counsel from well-respected consultants. "An outsider can say things about managers and company structure that an insider cannot. But they're guiding you, they're not doing it for you," Sweeney says. Rather, an internal figure should drive the process from within - and all the better if a new position is created. "Companies that do this recognize that e-business crosses so many boundaries inside an organization, no single line of business manager should have responsibility for it."

As CFOs might suspect, the corporate IT chief is probably not the best candidate for the job. Typically their experience lies in implementation, not strategy. What's needed is a 'business process reengineering guru' who can function as an 'e-broker' - assisted, ideally, by someone with greater knowledge of technology. As projects arise, the case for and against outsourcing is judged on its merits. If the IT department is too busy or doesn't possess the requisite skills, an outside solution is sought. Just make sure the e-broker is a natural politician, Sweeney says. "They have to constantly smooth lots of ruffled feathers. They need to be more mature than some of the hotshots we see who are e-gurus suddenly."

Mustafa's Man in the Middle

One such e-broker is Mohamed Saleem of Mohamed Mustafa & Samsuddin, a bustling US$150 million-a-year shopping emporium in Singapore's Little India district. Having joined Mustafa in 1992, Saleem initially held responsibility for the store's audio and visual consumer electronics division. Then, in the mid-1990s, he was put in charge of the store's mail order catalog, a massive biannual publication that could run as many as 180 pages. The task was often dispiriting. Inevitably, information would be out of date before the catalog hit the presses and department heads would request changes right up to the last minute.

Saleem knew there had to be a better way. The company had already made tentative steps on-line as early as 1993, with static web pages aimed at promoting the store's existence. From the beginning, his approach was to get the best help possible. "Most of our initial on-line development was outsourced," he says. "I just managed the show." The site, comprising ten to 15 pages of information, was hosted by a local service provider called Gatesoft Technologies at a cost of about S$6,000 (US$3,600) a year. To update information, Mustafa would send new brochures to Gatesoft for scanning and posting on the site - a clunky, if not uncommon, solution.

By September 1997 Saleem decided enough was enough. He spent a few intensive weeks trawling the web for inspiration, and found it in the form of Amazon.com and Dell. He was then able to convince his employer that the old product catalog should be ditched in favor of a web store that facilitated on-line purchases. Saleem's bosses gave him the new title of manager of electronic resources, and made him the liaison point between Mustafa Online and the traditional retailing business.

Its mail order business endowed Mustafa with a database of 400,000 customers, as well as expertise in logistics and fulfilment, but the company needed help with the technicalities.

After a thorough search, Saleem decided on a small player, Singapore-based Unicomp, to execute the project. They had a track record back to the late 1980s, and the price was right. In all, Saleem spent about S$60,000 (US$35,000) to get Mustafa Online off the ground. This included software from Microsoft; a server, scanner and three workstations from Hewlett-Packard; a network router from Cisco; and a Kodak digital camera. Services provided by Unicomp included integration of a SET (secure electronic transaction) payment gateway into the Microsoft software and development of the graphical user interface. In addition, Mustafa turned to National Computer Systems, SingTel's IT services company, for SSL (secure sockets layer) software for further protection.

On-line transactions went live in the first half of 1999, taking orders from as far afield as Britain. The months of May and June were particularly fruitful, but the joy was short-lived. Mustafa suspended web-based payments after suffering losses through credit card fraud. Saleem is reluctant to give details but he will say the problem lay with international purchases - the most lucrative segment of the on-line business. While the problems are not unique to Mustafa, the company is not prepared to tolerate any hemorrhage.

Currently, a product can still be ordered on-line, but payment must be made by traditional means such as a money draft or in person. Saleem spends quite a bit of his time in talks with financial institutions and government agencies, waiting for a security solution to emerge that he is comfortable with. "The [on-line] way of business is nice but at the moment the loopholes are too big," he says. "We're not blaming anyone: not the card companies, not the banks, not our systems developers - not even the customers. But all hands need to clap together to sort it out."

Saleem can't predict when Mustafa Online will reinstate on-line payments, but considering the money-making potential he expects that it won't be long. The company doesn't break out web-generated sales in its financial reporting; instead, they are combined with figures for the mail order business figures. Often, customers will come into the store clutching a printout of the website, which blurs the lines for revenue allocation. But the company's managing director, Mustaq Ahmad, has been quoted as saying the on-line business will one day reach 10 percent of total sales - or US$14-17 million annually.

In the meantime, there's a lot of other work to be done. Today, the website sells only 5,000 of the 100,000 products that the main store sells. The aim is to post about 25,000 products on the web. Saleem gets by with a tight ship of four, including a key programmer from Unicomp who switched to a staff position at Mustafa.

On this front, Saleem should count himself lucky: usually the brain drain works the other way. As Gartner's Sweeney points out, a downside to the do-it-yourself approach is that staff are easily tempted by the greener pastures of companies prepared to pay a premium for their newly acquired skills. "From what I can tell, the average time an IT professional stays in a company once they've got e-business on their CV is six months. You practically have to kidnap their family to get them to stay," he says.

Unfortunately, he's only half-joking. Ultimately, outsourcing is a people issue, and CFOs hoping to use it to cut e-business development costs will be disappointed. "The monetary costs are about the same - it's the timing that is quite different. It takes longer to do it yourself, one reason being that the hiring process takes so long," Sweeney says.

In the Internet world, this time lag is a matter of life and death. "First mover advantage is very important, because we don't think there is room for too many players in each market," says Bizipoint.com CFO Tse. If Bizipoint.com founder Jean Lee had not embraced outsourcing when she was just a one woman show with a business proposition, she would have sacrificed a crucial lead. "Lee realized that if she tried to hire the technical team all at once, first of all that would be difficult, and second, the team would be very green," Tse says. From a standing start last year, the company now employs about 30 staff, has signed up 4,000 member companies for its on-line marketplace, and is valued at US$55 million.

And would that have been possible without a helping hand from outside? Absolutely not.

Adam Lincoln is a senior writer at CFO Asia