by Stephanie Moore

How To Mitigate Risk in an Overheated Outsourcing Market

Sep 09, 20115 mins

As global sourcing vendors are being given more responsibility from a technical and business perspective it is more important than ever to continuously evaluate and monitor vendor performance. Forrester has some recommendations on how to mitigate risk and maintain value from your vendor relationships.

When it comes to global outsourcing, particularly from India, the risks — and the stakes — are higher than ever. Global sourcing vendors are being given more responsibility from a technical and business perspective, and they are being given greater access to internal systems and customers. At the same time, the increasingly volatile, inconsistent, and expensive labor pool in India makes this increased trust much riskier.

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Given these realities, it is even more important today to continuously evaluate and monitor vendor performance. Even as many mature sourcing and vendor management (SVM) groups focus on advanced topics like establishing new governance models and driving innovation, conversations with Forrester’s clients reveal that it’s all too easy to neglect the seemingly mundane risks related to employee attrition, questionable vendor viability, and the risks associated with the increasingly popular managed services engagement model. SVM executives and their internal clients need to remember the basics when evaluating and managing global IT services and outsourcing vendors. To mitigate risk and maintain value from vendor relationships, Forrester recommends that SVM executives look to:

Ensure Quality Processes and Standards are Behind Vendor Promises

Some companies assume that all vendors in India (whether it is IBM, Infosys, Accenture, or other small vendors) are adhering to the same high- quality standards. This is not true. The top tier Indian vendors (e.g., Cognizant, Infosys, TCS, Wipro) ignited this industry by delivering excellence, in large part, by adhering to the highest possible quality coding and delivery standards. Today the most important certification, CMMI Level 5, is the standard that all vendors use, but many vendors, particularly newer or smaller vendors, have either not bothered to get this certification or have not gotten this certification for all parts of their business. SVM executives must audit or demand proof of relevant certification (third-party certification from an auditor such as KPMG) for the teams and facilities that are supporting their business. The difference in consistency and quality is substantial.

Audit Staff Resource Qualifications and Certifications

Are fresh 21- or 22-year-old graduates given a two-week training course in advanced business application programming (ABAP) before they are set loose on your SAP system? Have they been certified in SAP, either by SAP or through a rigorous internal, but externally certified, training program? The importance of staff certifications applies to software work, but also to more critical roles. For example, clients often pay a premium for project managers, but many of these project managers are not project management professional (PMP)-certified or lack equivalent internal certifications. Today customers see phony CVs with inflated experience levels on a regular basis, and the clients that insist on interviewing project team members are often shocked by the discrepancy between resumes and actual qualifications. The easiest way to solve this problem is to require proof of certification from relevant vendors or standard bodies.

Evaluate a Vendor’s HR and Recruiting Capabilities

The HR and recruiting functions at your vendor partners have never been more important. Attrition in India is skyrocketing. Your vendors need to have state-of-the-art HR and recruiting capabilities to retain staff, keep them happy, and to employ new staff. SVM executives need to audit these capabilities to ensure that the vendors they are selecting have made the right investments in human resources (especially if they are not in the top tier, or if there is unusually high turnover on their accounts).

Look for Innovation from Vendors with Deep Vertical/Industry Expertise

The only way to understand the innovations possible for a client today is to combine top-notch technology expertise with deep vertical business knowledge. Vendors that have clients concentrated in specific verticals often claim to have expertise in those same verticals, however, customers can’t take that as an indicator of vertical capability. SVM executives must evaluate the vendors’ vertical experts and the vertical intellectual property in order to confirm vertical capability.

Evaluate Pricing and Productivity Issues in the Context of Quality

While customers are generally less price sensitive today than during the period of deep economic recession, they are still concerned about rates and rate stability. However, buyers need to be aware of the productivity-price trade-off. An overemphasis on rates and rate cards and a neglect of seniority metrics can result in very low rates, as well as less productive and experienced people on your projects. To gain transparency into developer productivity and code quality, some companies are using tools, such as those from vendors like Cast, to evaluate the quality of externally developed code and ensure that it meets certain coding and productivity standards.

Beware of Managed Services Engagements Obfuscating Reality

While managed services engagements can be extremely beneficial for clients, in this tight labor market customers must ensure that the managed service model is not just a vehicle for hiding junior resources and/or short-cutting parts of the software development life cycle (SDLC) in order to save money. Service-level agreements (SLAs) have to be sophisticated enough to prevent this, and SVM executives who are concerned about their vendors’ managed service maturity may still need to evaluate key project team members.

Stephanie Moore is a Vice President and Principal Analyst at Forrester Research, serving Sourcing and Vendor Management Professionals. She will be keynoting Forrester’s upcoming Sourcing and Vendor Management Forum, November 7-8, in Miami.