Like it or not, offshore outsourcing is becoming increasingly central to IT. As the drumbeat grows ever louder, chances are you’ll eventually be asked to get in step.
But how do you design and implement an effective offshore initiative? What are the key issues to keep in mind? The offshoring landscape is littered with the spectacular failures of companies that missed or lost sight of the big picture. “People who jump on the bandwagon to make some quick savings get quickly frustrated,” says Ramakrishnan Ramamurthy, general manager and practice head at Bangalore, India-based Wipro Technologies.
To avoid becoming an offshoring cautionary tale, heed the following tips from expert offshore outsourcing consultants, vendors, and analysts.
1. Never outsource your core value.
Firmly establish which IT functions are key to your company’s competitive advantage, advises Frances Karamouzis, research director at Gartner. Those functions are the ones you’ll want to keep in-house or at least onshore. She advises managers to consider how they expect their companies to remain competitive and what intellectual capital they must retain in order to thrive.
After deciding what you should not move offshore, put everything else on the table. “The scope is really the big kicker,” says Ben Trowbridge, managing partner at Alsbridge, an outsourcing consultancy. “People go into an offshore deal thinking it’s only the nonthinking work [they] can move offshore -- the raw coding. In reality, they can probably move a much wider scope.” Karamouzis recommends a complete portfolio analysis for every application development project or IT process. For example, examine how offshoring will affect customer retention, the supply chain, and so on.
Make offshoring part of a broad business strategy. Unfortunately, many companies dive in tactically in search of cheaper labor rates on specific projects, Wipro’s Ramamurthy says. “The ones who succeed are the ones who’ve thought it through, ... have very clear areas they want to outsource, and [have] a long-term strategy.”
2. Get boardroom ownership.
Get senior management committed to your offshoring initiative in its initial phases. “The CEO, the CFO, someone pretty senior has to own a direction and a broad business case for offshoring early -- and keep steering the team back to that business case,” Trowbridge says.
With buy-in from the big shots, you’re better positioned to get everyone else on board as well. To do so, develop a communication and change management strategy for handling the various internal issues that will arise. “Passive resistance in the organization can doom the outsourcing relationship,” explains Cliff Justice, multishore practice leader at consultancy EquaTerra.
“The internal organization needs to be equipped to handle the discontinuity,” agrees Balaji Yellavalli, head of global sourcing solutions at Bangalore-based Infosys Technologies. “That means discussing outcomes honestly with employees and planning for change.”
3. Forge internal competencies.
Build a strong internal project management team. “The greatest challenge is getting yourself prepared and putting the governance structures and people in place,” explains Peter Bendor-Samuel, CEO of The Everest Group, an outsourcing consultancy. “Managing this when it’s remote takes some organizational redesign. There have been plenty of cases where people have badly stubbed their toe.” Bendor-Samuel advises creating an internal “center of outsourcing excellence” that can provide the “superstructure” of tools and best practices for effective outsourcing project management, including governance vehicles, incentives and penalties, oversight mechanisms, risk mitigation strategies, service descriptions, and metrics.
Internal competencies include the ability to manage internal demand so that the offshoring vendor isn’t overwhelmed with excessive or conflicting requests. “The client organization has to become very good at developing requirements,” EquaTerra’s Justice says. “You can’t do that at the watercooler anymore.”
All of this costs money, notes Alsbridge’s Trowbridge, who estimates that a large airline, for example, might spend 2 percent of its budget managing the outsourcing relationship. “Don’t underpower this. If you don’t spend it now, you’ll spend it later,” he warns. “I don’t care how smart the client thinks they are. … Ultimately, you’re trying to mitigate risk by identifying the risk, and having a good strategy and internal governance process to deal with it.”
4. Fix your process before offshoring it.
A key maxim of outsourcing is, “Don’t outsource a broken process.” This goes double for offshore outsourcing. Companies must clean up their internal IT processes before sending them abroad, says Ashish Paul, president of the Indian subsidiary of outsourcer Cincom Systems. “If you can create productivity gains before offshoring, you can do a more efficient job. Don’t try to migrate a process offshore that’s broken. Fix the process first.”
Executives at Infosys and Wipro advise synchronizing client and vendor processes and methodologies up front -- for example, making sure both have the same level of CMMI (Capability Maturity Model Integration) or ITIL (Information Technology Infrastructure Library) capabilities. “It’s always better if there is a synergy between the two companies’ ways of working,” Wipro’s Ramamurthy says.
5. Demand domain expertise.
Because there are dozens of reputable Indian and U.S. companies offering “global sourcing” services, you must weed through them carefully. “Pricing is fairly comparable,” Bendor-Samuel says. “It’s the approach and cultures you’d be picking.”
Bendor-Samuel considers a range of factors when evaluating vendors, starting with an understanding of various approaches. “You want to be able to pick specializations,” he says, noting that many companies are moving toward a “multisourcing” model, using multiple vendors with specific domain expertise.
Other criteria to look at include financial strength, legal and regulatory compliance capability, security practices, and the ability to provide insurance against eventualities. But Gartner’s Karamouzis notes that many of the leading Indian companies are on par with one another in these areas, which can make the job of evaluating more challenging. “They all started from the same heritage, and clients are saying they all look and feel alike. Their value proposition is very similar,” she says. “They’re trying to desperately find differentiators. … It’s a dog-eat-dog race.”
6. Require evidence of best practices.
Find the vendor best equipped to propel your business forward. According to Wipro’s Ramamurthy and Infosys’ Yellavalli, companies should look for evidence that the vendor will bring best practices and productivity gains to the table via reusable software modules, knowledge management systems, and SOA frameworks. “Looking at cycle times [and] how to bring down the cost of an implementation -- these are key things the client should look for in the evaluation phase,” Ramamurthy says.
It’s vital that vendors abide by industry standards, Cincom’s Paul says. High levels of IT process experience and certifications and frameworks such as CMMI, ISO, and Six Sigma are also important. Everest’s Bendor-Samuel, however, says certifications are useful only as evidence that a vendor has process discipline, not as ends in themselves. “It’s a hygiene factor. If you don’t have it, then you stink,” he says. “But it can be overblown.”
7. Write talent into the contract.
One nightmare of offshoring is to be promised the A team up front, only to get the junior varsity after the ink dries. The leading offshore vendors are growing so fast that they can’t recruit, train, and retain nearly enough rock-star developers, analysts say. “Some of these firms have developer turnover as high as 20 percent a year, so you’re in a fight for talent,” Everest’s Bendor-Samuel explains.
Aside from standard provisions such as security, compliance, and data privacy, it’s crucial to structure the contract to address make-or-break issues such as project staffing. The contract must specify that you get the best-quality people working on your account and as much personnel continuity as possible, Bendor-Samuel says. “You’ve got to develop incentives and penalties that ensure not only that they initially put that high-quality team on but [that] they keep it on,” he says.
There are no limits to creativity when it comes to structuring offshoring contracts. One company wanted a clause that gave incentives to their offshore vendor to surprise them by surpassing expectations, recalls Yisrael Dancziger, CEO of Digital Fuel, a software company. So the client company created a survey process through which its employees could rate the offshore vendor’s “wow factor” each month, and it included a contractual requirement that “the wow score [had] to be above 8,” Dancziger says.
8. Investigate pricing models.
Select the pricing structure that offers the biggest bang for the buck. Traditionally, offshoring contracts for staff augmentation were written on a time and materials (per hour) basis, Gartner’s Karamouzis says. As projects have become more complex, though, and long-term, contracts are shifting toward fixed fees, fixed scopes -- deals that focus on deliverables rather than inputs such as cost per developer-hour.
“Indian vendors want to be measured based on output of deliverables rather than allowing the clients to manage the people,” explains Wipro’s Ramamurthy, noting that fixed-fee contracts encourage vendors to become more efficient. “Fixed-price [contracts] could be lower [cost] as time progresses because of increased productivity,” he adds, advising clients to fortify such contracts with service-level specifications such as turnaround and response times.
Gartner’s Karamouzis thinks it’s even possible to hold an offshore vendor accountable for the successful delivery of an entire IT process. “It depends on how well you define the end points,” she says. “Where it begins and ends and where the handoffs are must be contractually clear.”
9. Acclimate to cultural differences.
Bridging cultural and communications differences -- the human side of offshoring -- is perhaps the trickiest issue to navigate but presents the biggest potential payoff.
“Dealing with confrontation and consensus building is very different from culture to culture,” says Alsbridge’s Trowbridge, who notes that U.S. management teams are used to conflict, whereas Indian companies have a tendency to avoid it at all costs. “They’ll try very hard to comply and listen, but you’ve got to say no at various points to be able to get the thing to work,” he warns. “‘No’ means ‘I love you’ in this case -- by saying ‘yes, yes, yes,’ you’re not helping the client.”
Establish a precedent of open, honest communication at the start and spend extra time with potential vendors. “If you just write a set of bid requirements and they come in and give their three-hour pitch, they’re going to say what you want to hear. You’re not going to pick up the cultural differences, and you start off with a fraction of difference that becomes miles a year later,” Trowbridge says.
Building personal relationships can bolster the institutional relationship. Experts urge regular visits to offshore vendors and investing time to get to know individuals in both business and social settings. “Once-a-year visits to the India or China development centers by key members of the client IT office can create a lot of understanding,” Infosys’ Yellavalli says. “It can help them understand how this offshore engine works.”
10. Get your feet wet.
Last but not least, companies should stick their toes in the water before plunging in headfirst. “Small projects you can micromanage,” Everest’s Bendor-Samuel says, but not large-scale projects and long-term relationships (see “Analog Devices takes long view on offshoring”).