The art of successful offshore outsourcing

Eric Michlowitz, former vice president of strategic services at WorldChain, a provider of hosted supply-chain applications, says that a truly successful outsourcing initiative will produce advantages beyond mere cost savings. Michlowitz, who had managed WorldChain's relationship with Sierra Atlantic, an offshore service provider with programmers in India, left WorldChain after it was acquired by Optum last month. He is now an analyst of military supply chain issues at Booz Allen Hamilton. Michlowitz has held a number of executive positions in IT and says guidelines and lessons learned at WorldChain apply in many situations.

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"When you are in a company with demand variability, outsourcing provides burst capacity," Michlowitz says. Companies do not want to spend money to hire extra people to ramp up quickly on projects only to have excess staff when things get slow, he notes.

After a company has set the goals and expectations for an offshore venture, the selection process becomes the next crucial step to success, according to both users and service providers. "It's no use using good people for the wrong purposes," Michlowitz says.

Many client companies look for service providers with credentials such as the CMM (Capability Maturity Model)-level certifications developed by Carnegie Mellon University's Software Engineering Institute. But that's not a guarantee that a provider did not experience staff turnover after the certification was granted.

"You also have to check customer references and see how responsive the companies are in their sales process," says Russ White, CEO of First Index.

First Index ended up selecting Epam Systems -- a services provider based in Lawrenceville, N.J., with programmers in Russia, Hungary,

and Belarus -- over several Indian providers. Now Epam maintains First Index's Web-based application for matching buyers and suppliers of manufacturing components.

"Epam really did their homework, sent people to visit us, while the other firms came across as somewhat arrogant even though I know they wanted our business," White says.

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Although preliminary analysis and choosing the right provider are crucial, industry observers agree that many offshore projects fail without hands-on management.

"This may sound obvious, but probably the biggest stumbling block to offshore outsourcing is that after all the contracts have been signed, companies abdicate responsibility for projects to the outsourcer," Deepak Khandelwal,  analyst of business process outsourcing at McKinsey, said during a forum at the CeBIT America show in May.

"Companies that outsource forget that they still have to manage the projects they outsource. Communication is key: You need to have your weekly meetings with the project managers and the quarterly meetings at the CEO or [executive vice president] level," Khandelwal said.

"It's not just a matter of calling somebody and giving them work and forgetting about it," says Manoj Kunkalienkar, executive director and president of ICICI Infotech, an IT services provider based in Edison, N.J., with facilities in India. "You have to set up processes and take into account time differences and distances."

According to Group 1's King, his company has executive-level meetings to give the green light to projects they expect will cost more than $100,000. King's division, which includes a little more than 50 staff members, has a five-member project management team that reviews code developed by service providers on a regular basis. Group 1 typically pays for work on delivery.