What are the factors to take into account in the offshoring and outsourcing model?
By Axel Winter
03 Apr 2009
In the course of my work, I had to quickly come to terms with different IT delivery models, which meant to leverage a set of well-known offshoring providers in India and China, which are embedded into a set of master service agreements, with commercially focused evaluation systems. The content has been around application development and maintenance, system maintenance, and data centre services.
In this kind of framework, the technology skills are seen as a commodity and the commercial approach to negotiate with Indian or Chinese providers, or in future Vietnamese or South African, are key considerations.
The first trip led me to a set of different typical offshoring cities including Hyderabad (India). I visited several different business parks and found that most companies are co-located in the same campuses. During lunch time, I realised some formal meetings taking place in an otherwise casual environment. I asked my companions about it and found that these are recruiters and head-hunters.
It seems many people worked for different service providers (Indian, US or European) in the same campus. During internal meetings later on, many of the staff members gave a review of their prior employers and again, a large selection of local and foreign IT services companies was mentioned by almost every single person.
Intellectual property
That was an interesting finding and my first thought was about intellectual property. Some people admitted taking all useful documents along to their new employers. Some seemed to have developed a method of circulating in different companies in a short time, in order to push their careers. This is not unique to a country or a company, but appears to be a trade of this industry.
Furthermore, I found that in many projects, the resources offered are entirely junior and more experienced resources are just participating in key meetings or conference calls, leaving the actual work to teams with only basic knowledge. To validate some of these findings on the skills and to better understand the quality delivered, I did a set of quick source code reviews and the result was not at all encouraging.
Technical excellence, as defined in a higher degree of reusability, stability, scalability, inter-dependence of specific vendor solutions, maintainability, ability to be extended by different developers and importantly enough security concerns (for example, internal fraud), needs to be a generic and important requirement, to enable companies building longer-term IT solutions.
Based on that experience, the following question comes up: How can we evolve the offshoring and outsourcing model in general to ensure improved quality and to build the appropriate technology and services platforms?
The first step was to ensure all stakeholders are more closely involved and are accountable for their deliverables. The introduction of a system delivery life cycle (SDLCs) is a key tool, to teach business, IT, and service providers which artifacts and design work need to be generated, before anyone starts coding or setting up systems.
Unfortunately, I had to find that the model used in many companies still has issues with this. There are different SDLCs to pick from. For an organisation unfamiliar with such methods, a waterfall approach (approve every stage before moving on) is certainly a good starting point. Generating a more professional delivery organisation will certainly require the definition of a more complex approach, in which multiple work streams can be processed in parallel. This concludes in an increased management complexity.
Technical standards
The second step was to formulate and publish key technical standards (eventually in the form of a wiki) explaining or referencing configuration/source code, giving the execution teams a map of how to apply standards. This can be developed together. However, it takes an experienced and hands-on technical architect to ensure an appropriate quality at this stage.
The third step is to implement a quality assurance approach. This is not only a source code or configuration review approach, but also a question of which automated tools and processes should be used. In terms of source code reviews and governance tools, there are some open-source choices (CheckStyle, PMD) or excellent commercial choices (WebLayers).
More importantly, processes and a review mechanism of the architecture and deliverables in general also need to be considered. Spot reviews of architecture and source code reviews are complementing the automatic approach (full manual source code reviews are too labour-intensive in larger applications). The quality assurance aspects should also be implemented in the master services agreements, to ensure service providers are incented.
These steps apply through the life cycle and are involving business departments, IT, and the vendor, as part of the process. It is not a question of investment or assigning larger teams, but a question of having properly skilled people.
In my view, a company which wants to outsource or offshore requires a set of delivery-experienced managers. The kind of people, who don’t take no for an answer, but have a realistic view of what it takes to deliver systems and understand how to ‘deep dive’. Functional experts, with a sound understanding of processes and functionality, and of course, trusted technical advisers applying some of the principles from above. The key is to be able to question and conduct dialogues with service providers on all layers and this happens all too seldom.
However, on many occasions, organisations are just focusing on the business decision to outsource and offshore without taking the above-mentioned points into consideration. At a later stage, those companies find faults in their operation—be it the quality of IT operations, cost or time to market for new products, or all three.
Staffing issues
A Deloitte study from 2008 confirms that more then 50 per cent of respondents, who engage in large outsourcing initiatives, highlight the quality of delivery and staffing issues with their outsourcing provider as a key concern. (‘Why Settle For Less? Deloitte Consulting 2008 Outsourcing Report’).
For me, this goes back to my on-site experiences and working for both sides of the fence. Strategic decision-making is important, but we need to consider the ‘tools’ to achieve success.
It is important to add that in some of the Asian economies, for example in Thailand or Indonesia, offshoring into other locations or even outsourcing does not always generate the same financial benefits as for an organisation in Europe or North America.
Typically offshoring works, based on labour cost differences, which are not applicable in all countries. Other elements of the value proposition are ‘efficiencies through scale’ of operating for multiple clients and key expertise in specific processes or technologies.
It is rather important to clearly understand the value to be achieved and to develop methods that are aligned with the suggestions above, which means to clearly evaluate the benefits of such a relationship. A pure commercial evaluation will always lead back to the three fundamental IT issues (operational qualities, cost, time to market), but in a rigid contractual framework often preventing the organisation from implementing ‘quick-win strategies’, to address these issues.
Some of the organisations I am working with understand the significance of checks and balances, but have no interest in developing such technical and delivery management skills internally and count on external help to fill this gap.
The latter is the reason for me to return into the consulting environment, to focus on supporting organisations taking on some of these challenges. At any rate, I would recommend conducting some on-site visits and take along some internal experts as well. This drives interesting discussions and is a worthwhile experience.
Axel Winter is director financial services and responsible for Deloitte IT Consulting Southeast Asia.
