Offshore Outsourcing: The Big Five

Offshore Outsourcing: The Big Five Sunil Sharma June 9, 2003

E-Commerce

Outsourcing of software development, support and maintenance is gradually emerging as a source for competitive advantages--and a source for headaches, too--for a number of companies.

A recent study by Gartner attributed the first year-over-year revenue drop suffered by the IT services industry in 2002 to growth in offshore services, which is pushing down the prices. Forrester Research says that the offshore outsourcing is going to rise from 12 percent of corporate IT budgets in 2000 to more than 28 percent in 2003. Meta Group predicts that as much as 50 percent of U.S. IT workers will shift to contract labor by 2007.

A CEO of a young IT products company recently said on the panel of a popular Washington, D.C. event that by outsourcing its R&D center to Bangalore, India, his company was able to develop products very efficiently, effectively and with a minimal amount of cash. With only a $15,000 to $20,000 monthly cash burn rate, his company was able to compete against 4- or 5-year-old VC-backed companies that had raised multi-millions.

But is that all there is to outsourcing--reduced cost? What are the various things that one should consider while employing outsourcing? Industry experts say that there is a lot that stays hidden but has an enormous impact on the decision to outsource. Let's examine the experiences of these people to understand what it takes to successfully outsource a project.

Outsourcing Is More Than Labor Arbitrage
Labor arbitrage--the ability to pay one labor pool less than the other--has definitely modified the fundamentals of outsourcing. Also, the availability of a greater number of equally qualified people--India produces 75,000 IT graduates every year as compared to 26,000 in the United States--has played a big part in the growth and efficacy of offshore outsourcing.

However, there is more to outsourcing then just lower HR expenses. There are many areas including vendor selection, communications, technical oversight, security/privacy and specialization, which all need to be considered while outsourcing work offshore. Studying best practices in these areas is a must if you want to be successful. Five things will help you achieve that.

Select the Right Vendor
As an industry, outsourcing has matured. There are many documented benefits and pitfalls of outsourcing. The general awareness has reached such a level that the case for outsourcing has been pretty much made. Now the prevalent question has changed from "Why outsource?" to "Outsource to whom?"

How you select your vendor will have a significant impact on your success. There are a host of questions that you need to get answers to. You need to establish selection criteria to evaluate vendors. You need to understand your core competencies, your business needs and how they relate to the core competencies of the vendor. You need to evaluate the industry knowledge of each vendor and their processes and methodologies, including CMM, ISO9000 or TQM certifications. You need to understand the cultural diversity and the impact that it may have on communications and development efforts.

One startup company that tied up with an outsourcing company in India had to constantly answer this question while seeking outside investment: "How are you going to assure that you have this effective development organization in India with all of the negative things going on around the world?" It was able to address this concern easily because it wasn't the only company using Indian development centers. Its vendor was also supporting a number of other U.S. companies that were much larger and prominent than the startup. The vendor had enough redundancy and resources for backup and recovery to ensure continuous operations in emergency situations.

Do Your Homework
An entrepreneur that is using outsourcing to build his startup venture said, "Outsourcing is not going to be an easy process, but it can be relatively simplified if you know what you're getting into." Outsourcing is quite different than contracting, more specifically time and material (T&M) contracting.

T&M contracting--the more prevalent form of IT contracting--usually entails getting people to join your team to complete the work. The client keeps the control and tells the contractors what is needed, when it is needed and how it will be done. The project management, resource planning, scheduling etc., are all done by the client.

On the other hand, in the case of outsourcing you ask the vendor to deliver you something and it is responsible for the complete development and the delivery of the final product. In this case the vendor is responsible for project management, resource planning, scheduling etc., hence it calls for a different type of preparation than T&M contracting.

In outsourcing, the completeness and thoroughness of business analysis is very critical. You need to ensure that your analysis specifies each and every aspect of the proposed job.

The lessons learnt mentioned by a panel of CEOs discussing outsourcing in a recently held Washington, D.C. event included requirement specifications and documentation. These companies spent a large amount of time writing the specs and completing the documentation that they then handed over to the vendor. They broke their specs in multiple modules, which could be much easily communicated to the development team as compared to the complete system. They developed elaborate matrices to measure the final product. They communicated this matrix to the vendor well in advance. Their suggestion? Don't even think about outsourcing if you are not willing to develop detailed specs and the measurement matrix.

It's the Process
In outsourcing projects, even though the project management, resource planning and scheduling is done by the vendor, the client still has to monitor the vendor. The lack of proximity to the vendor puts a greater importance on the process that is employed to communicate the work, to get the work done and to report back the progress.

That is why many companies are putting greater emphasis on the certification like CMM, ISO900, TQM, etc., as compared to the technical resources of the vendors. The vendor must deploy a consistent and high quality process for analysis, design, development, QA, reporting, project monitoring and management. The client and vendor must have a clear understanding about the process. Otherwise, the project will fail.

Other than SDLC processes and certification, another critical aspect is the outsourcing contract. The contract should be flexible enough to be able to address various late-stage concerns and modifications.

Protect Your IP
When the software is developed in a far-away place that you do not visit very often and where you do not have control, it can raise doubts about the protection of your intellectual property rights. How you go about protecting your IP will have a great impact upon the success of your company, not just the success of your outsourcing initiative.

One company split its system into multiple pieces and worked with multiple companies, finally integrating all pieces and coming out with the eventual product. This way none of the outsourcing vendors have a clear idea about the eventual product. They only knew about the modules that they worked on, not the whole picture.

Communicate Well
A common problem that the software people face is the miscommunication of requirements. A CEO of a company that outsourced work to India once mentioned that while developing software in  the United States, he had same communication issues while developing software in India. However, when the development is in a different country, the problem can be exacerbated. How you address this will have critical bearing over the success of your project.

You need to develop thorough communications that address all foreseeable issues, including the time difference between different locations, the language and cultural differences, whether video conferencing capabilities exist, etc. Such a plan should specify how often you communicate, who will set up the agenda, who will initiate the discussion, etc.

IT outsourcing has been gaining momentum for some time. The industry has matured to a very good level. A number of big and small companies have consciously made an effort to pursue outsourcing on a strategic level and they have set up many good and bad examples. Getting your IT work done offshore has many advantages, but it also comes with a number of risks. If you do not address those risks and take care of all the areas mentioned above, then your outsourcing project may become a nightmare for you.

Strategic and results-oriented, Sunil is an entrepreneurial consultant who founded a B2B ASP for the Building and Construction Industry. He is the CEO of Cerebral Works Inc., a strategic management and technology solutions firm. He publishes a business and marketing planning  e-newsletter. An avid mountain climber and runner, Sunil has climbed Mt. Kilimanjaro and various peaks in the Himalayas and finished the Detroit Marathon. He holds an MBA degree from the University of Michigan, Ann Arbor, and a BS in Electronics and an MS in Mathematics from the BITS, Pilani, India. He can be reached at (703) 395-9812 and at sunilsharma@cerebralworks.com.

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