Secrets of Offshoring Success

Even as offshore outsourcing has matured, best practices have been few. Now two top academics reveal the principles that should guide CIOs.

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LACITY: Anyone who sets up a captive center wants control. In many ways, it’s easier. In other ways, it’s more difficult. The problem they’re having is, you might be able to understand a government, the Indian federal government, for example. But when you’re trying to actually buy a building, wire a building, get fire permits, hire people, it’s a considerable challenge.

And they’re trying from the get-go to set up a captive center? They didn’t opt for the build-operate-transfer model with a third party?

LACITY: Yes. And what’s interesting is that they think they’re able to get better talent in India because it’s prestigious for [the Indian applicants] to come work for this large, well-known U.K.-based company. Still, the HR issues in India are quite challenging.

Having traveled to India, did you see any evidence of the increased turnover problems we’ve been hearing about?

ROTTMAN: Absolutely. I spent a couple hours with the gentleman who runs the technology park in Hyderabad. He predicted that the demand for freshman college graduates out of the Indian schools would exceed the supply by 2008. And with the demand increasing, you’re going to see a lot of turnover, just as it happened during our own dotcom boom with people jumping jobs.

Turnover affects the knowledge transfer. It affects the protection of the capital expenditure for training. Turnover continues to be mentioned over and over again by the clients we talk to.

Were you able to tease out any best practices for dealing with the turnover issue specifically?

ROTTMAN: The industrial manufacturing firm, in order to mitigate some of that risk, required the supplier to shadow employees, so that knowledge transfer actually was overlapping between two people. The clients would have a key training session over a few months to transfer knowledge from its architects and the lead project managers to the supplier’s project manager. Once that project manager was up to speed, he was shadowed by another colleague on the supplier side. So there were two people essentially doing the same job for an overlap period of three to six months. After that happened, then the initially trained employee went offshore and transferred the knowledge to the offshore development team, while the shadowing employee stayed. They would do this over and over again with a three- to six-month overlap to ensure that if one of those people did leave then the knowledge was contained in another person.

LACITY: And the other thing is, these Indian employees wanted to go home. They don’t want to stay in America for five years. Indian software development companies value the software quality processes and procedures as laid out by the Software Engineering Institute’s Capability Maturity Model (CMM). The leading Indian vendors are usually assessed at CMM Level-5 status, yet their customers may not understand it all. Can that create problems?

LACITY: Yes. We found a lot of that. CMM is what this offshore supplier delivery team is trained in. They are expecting requirements to come over in that form. That’s the start of their work processes. We talked to one Indian CEO who found an interesting solution. You bring over to the U.S. a CMM expert from the vendor who doesn’t know anything about the specifics of your business. Then that person can flesh out all the ambiguities and ask all those questions here when they’re sitting right next to the client, rather than throwing it offshore and waiting for a whole team to ask the same set of questions. [See "Bridging the CMM Gap"]

All those CMM processes can frustrate clients who are used to walking down the hall to ask a developer to make a change. You say there might be some middle ground between the rigid processes of the offshore developer and the way a client is used to working, called "flexible CMM."

ROTTMAN: There was a retailer who had an engagement with a supplier that was robust enough that they could say, "You do whatever you have to do to maintain your CMM processes, but I’m not going to pay for all of that. If I just need a button moved, I want the button moved. I’m not going to pay for a 20-page impact analysis of the movement of the button." That customer had enough clout and a strong enough relationship with the vendor to impose a flexibility on them.

Are most offshore providers willing to be that flexible with their CMM processes?

ROTTMAN: It depends on the relationship and the vendor’s size. If those processes are not billable, then the engagement has to be large enough that the vendor can absorb those costs.

LACITY: If you look at some of the key process indicators and CMM, they’re really geared towards the benefit of the supplier organization. For example, there’s all kinds of processes that deal with tracking defects. Well, those reports aren’t going over to the customer. The supplier is using them internally to fix the software as best they can before it goes over to the client. So, CMM is really about the internal processes primarily used within the organization that’s adopted it. That’s why I think some of the customers say, "I’m paying for all your processes, and I really only want the ones that are customer-facing and adding value to me." Is it still important for the client to improve its own CMM capabilities if it wants to source work offshore?

ROTTMAN: CMM capability is necessary but not sufficient for knowledge transfer. You have to have that framework in which to work. But that structure by itself is no substitute for experience. It does help in requirements definition and process mapping. But it’s no substitute for knowing the people offshore and how they work. It’s no substitute for real experience or social capital.

What do you mean by social capital?

LACITY: Work gets done by people. It doesn’t get done by processes. It doesn’t get done by documentation. If you want to put an umbrella over all the things that we’ve talked about—an onsite engagement manager, job shadowing, bringing over a CMM expert from overseas—it’s really about building the social capital between the customer and the supplier.

It’s not only about knowing the business. It’s knowing who in the business does things. How do they do it? And once that social capital is developed, then knowledge transfer occurs. You develop better relationships with your supplier. Your quality goes up. And you have more satisfied supplier employees who want to stay on the account, so turnover goes down.

It’s so simple. Of course, everybody needs to meet face to face. Of course, everybody needs to develop a personal relationship. But it’s expensive to bring people over from India here. It’s expensive to send people here over to India. And so customers don’t start doing it until they let up on costs and say, "I’ve got to make an investment in this social capital that’s going to let me finally achieve what I’m expecting to get from offshoring."

Has anyone figured out the best metrics for measuring the success of an offshore relationship?

LACITY: I think the best you’re going to get is if you try to do some kind of Balanced Scorecard—a bunch of measures that will help you capture the big picture.

The biggest problem practitioners have is trying to figure out at a fundamental level how much money they’re saving. And it’s very difficult to know, because you’re not doing this in a lab. You don’t say, "OK, you go develop this software onsite, you go develop it offshore, and we’ll compare the cost."

So, they try to guess: how many hours would this have taken me onshore versus doing it offshore? Or they go ask their internal staff, "If you were to do it, how many hours would it take?" Well, is that number valid? It’s very difficult to know how much you’re really saving.

Despite all the work, you talked to some offshore outsourcing customers that were at a point where they were happy with the arrangement.

LACITY: Those are some of our companies that have been doing it the longest, have conquered the learning curve, and have a significant global presence and substantial supplier relationships. But that’s like the prize after the end of a very, very long marathon.

ROTTMAN: A good example is the industrial manufacturer who failed at first. When you talk to them now, they can’t find enough projects to send offshore. Their internal staff is happy. They’re back to working 50-hour weeks instead of 70-hour weeks. Their project backlog is down. Their costs are down. Their quality is up.

LACITY: We work in a global economy, and IT work needs to be done globally. Even if you’re talking about domestic outsourcing, most of that IT work is sourced globally. So I think eventually we’re going to stop talking about domestic outsourcing versus offshore outsourcing and just talk about global sourcing.

Senior Editor Stephanie Overby can be reached at soverby@cio.com.

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Copyright © 2007 IDG Communications, Inc.

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