Weighing the benefits of outsourcing

IT leaders now think before rushing into deals with offshore developers

Richard Latty's first attempts to work with offshore developers gave him second thoughts about doing it again.

"I saw problems in the '90s with some Indian developers, mainly involving communications," says Latty, CTO of Solutions Engineering, an information systems designer and developer for commercial and government clients in Bethesda, Md.

But having developed techniques for working with offshore developers -- partly through trial and error -- Latty now has a profitable relationship with several other outsource providers.

"With the Romanian programmers, we were saving about 25 percent of what it would cost you otherwise, but that's probably the least significant part of it," Latty says.

Latty, like other IT executives, says offshore services are also attractive for reasons that include getting products to market quickly, the ability to ramp up IT services on an as-needed basis, and the acquisition of project management discipline -- all of which are benefits that engagement with an outsourcer can provide.

Stories illustrating how offshore developers from India to Romania are providing a range of application services for U.S. companies of all sizes and stripes have become commonplace, and no one doubts that the wave of offshore outsourcing is gathering size and speed. The value of IT services provided by offshore labor to the United States, for example, will double to $16 billion this year and triple again to $46 billion by 2007, according to IDC.

Our country's use of offshore services is entering a new phase in which companies have enough experience to use sophisticated management techniques and entrust foreign providers with more complex projects, according to corporate IT executives and industry analysts. Companies are recognizing that rushing into relationships with offshore providers or ramping up use of foreign services too quickly often leads to costly mistakes.

"Using remote resources successfully is not intuitive," says Stephanie Moore, an analyst at Giga Information Group who has authored a number of reports on the offshore outsourcing phenomenon. "Seventy-five percent of the outsourcing deals that fail are due to lack of program management skills on the part of the user."

Companies considering using or expanding offshore services should examine their reasons for doing so and learn from the mistakes and successes of companies who have already tried, say users and analysts.

"There is no reason to enter an offshore relationship today without understanding the factors that are critical for a viable relationship," Moore says.

Spelling It Out

Although there's no single recipe for success that works for every type of company and offshore project, experienced users agree on the importance of guidelines and principles.

"The real secret to successful use of offshore services is that projects must be well-structured," Latty emphasizes.

Solutions Engineering's approach involves processes for project resource selection, a master work agreement, and engineering guidelines. "We don't always give a project to the lowest bidder," Latty says.

To select offshore outsourcers, Latty explains that a hands-on approach works best. It's not enough to look at qualifications such as the CMM (Capability Maturity Model)-level certifications developed by Carnegie Mellon University's Software Engineering Institute (SEI), he says.

"Every time a project is bid, I have the company submit resumes of personnel that are going to work on the project," he says. Latty does this even though he has ongoing relationships with several Romanian outsource providers, including Symbolic Systems and TotalSoft.

A master work agreement should not only detail specifications for the work to be delivered, a timetable, and costs, it should also cover issues such as intellectual property. Rules covering code reuse should be spelled out as well, Latty says.

The engineering guidelines Latty uses are more specific than the SEI's programming assessment model, he says. "It's a document with basic guidelines for writing quality code, involving procedural guidelines and steps for, for example, user interface standards, how to do file locking correctly."

Follow the Money

Users agree that cost remains a driving factor in looking offshore for application development help.

"If anyone tells you he is making a decision to outsource offshore and that cost is not the first criteria, then he's kidding you and himself," says Craig Maccubbin, vice president of technology at LasVegas.com.

LasVegas.com, a travel-services portal, uses several offshore outsourcers including Epam Systems, which not only developed the site's content management system but takes on one-time custom code projects and new system development as well.

Epam is based in Princeton, N.J., but has most of its programmers in Belarus and Russia. Maccubbin estimates he pays offshore programmers about a third of what he would have to pay for internal programmers.

Giga's Moore says that a 25 percent to 45 percent savings is typical, but it also depends on how efficiently the user's IT processes are in the first place.

A Resources Pool

Cost savings, however, should not be the only result of using offshore resources, according to Anant Ahluwalia, IT director at Maine-based food retailer Hannaford Brothers.

"We've used offshore staff numbering … four times the number of our internal staff, and that's where the competitive advantage is. To have the ability to tap into such a vast resource pool in a flexible way levels the playing field against the giant retailers," Ahluwalia says. "When necessary, we can use this resource pool to ramp up new systems quickly."

Indian developers from Infosys Technologies upgraded CICS (Customer Information Control System) Cobol systems to IBM's DB/2 when Hannaford needed to double the transaction capabilities of supply-chain systems after the company's acquisition of the Kash n' Karry supermarket chain.

The decision to use offshore outsource partners was a strategic one made by company leadership, Ahluwalia says. Hannaford first started using Infosys to update legacy systems for the Web, when many U.S.-based Cobol programmers were scurrying to finish Y2K projects, and the relationship grew from there. Now Infosys typically does work involving legacy system upgrades, ports of applications, and expansion of current capabilities. Hannaford itself, however, works with its customers to determine, for example, how supply-chain systems can be tweaked to best meet future demands.

"We need to stay a step ahead of our customers, and that is something that our own people, who have the experience and knowledge of our customer's business, can do best," Ahluwalia says.

Staff Buy-In

IT executives agree that strategic decisions about what can be outsourced need to be made at the senior management level, but they also agree that the IS rank-and-file need to be on board.

Jim Honerkamp, an outsourcing consultant in Cincinnati, says senior executives are quicker to use offshore resources than IS staff. "The IT people really need convincing. They look at it as a control issue and see a possible threat to their positions," he says

Starting small is one way to build trust within the IS department and create a model for the right mix of onshore and offshore development resources. In his former role as vice president and chief information officer at an Ohio door manufacturer, Honerkamp started using Sierra Atlantic on discrete "Oracle housekeeping-type projects," the first being an upgrade from Oracle 10.7 single organization to multiorganization implementation. Sierra Atlantic is based in Fremont, Calif., but most of its development staff is in India. "In general, it's best to start with self-contained projects like upgrades of technology, things that don't require a lot of end-user interface issues," he says.

As organizations increase their use of offshore resources, they can use their experiences to help put in place project management processes that can be reused and serve as guidelines for new projects. In addition, the most experienced offshore services vendors have developed mature program management methodologies. Sierra Atlantic, for example, recently announced its nShore methodology, which incorporates best-practices guidelines, project management software, and reusable code. For its part, Epam plans to commercialize its own methodology, which LasVegas.com's Maccubbin uses on a daily basis to track how projects are going .

"You can't just surrender your project and say, 'Tell us how it's going every four weeks,' " Maccubbin says.

Many users of offshore services also endorse service-level agreements, which can involve penalties for defects or missed deadlines. "In the end, who cares what kind of methodology a provider has if he can't get the work done?" Honerkamp notes.

In addition, no matter how qualified the offshore provider is, an onsite project manager with good communications skills is necessary for larger projects.

"You might have a project manager from the offshore provider who is an excellent business analyst, but he can't be shy about going into people's offices and talking to them about how they do their business," Honerkamp said.

The Big Picture

The largest users of offshore resources need centralized program-management capabilities as well as a multilevel approach to control of the development facilities. Cisco Systems started outsourcing software development to Indian companies in the 1990s. As it moved to high-end, core product development work in India, Cisco needed a new outsourcing model, and it set up a wholly owned development subsidiary.

"Over time, we realized that there was much more value to doing work in India than mere cost savings," says Samu Devarajan, managing director of Cisco's Indian subsidiary. In addition to a staff of about 600 employees at its facility, Cisco has approximately 2,400 people working on its projects at dedicated offshore development centers set up for the company by Indian software providers.

Ultimately, the benefit derived from offshore outsourcing by companies big and small, from mighty Cisco to midsize Hannaford, is much the same.

As Cisco's Devarajan says, "We couldn't have done a quick ramp-up if we had to do everything in-house."

Copyright © 2004 IDG Communications, Inc.

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