Follow-up: 8 Outsourcing Myths

Technology analyst, Gartner, who had originally coined the term multi-sourcing lists eight outsourcing myths that are undermining outsourcing success. According to Gartner, building a successful sourcing operation requires a new approach that goes beyond the traditional view of outsourcing – hence multi-sourcing.


Gartner describes multi-sourcing as an innovative discipline that takes organizations beyond "quick-fix" cost cutting to enable capability building, global expansion, increased agility and profitability, and competitive advantage

The myth of sourcing independence: This is the idea that sourcing decisions can be made entirely independent of business strategy. As a result, organizations create outsourcing relationships that are incompatible with the business results expected.

The myth of service autonomy: A similar myth is that services are autonomous-and one sourcing relationship has nothing to do with another. According to Gartner, in today's world, "all of a company's business processes and services are interrelated. We've created an operating environment where autonomous services simply don't exist."

The myth of economies of scale: This myth takes the form of service recipients demanding cut-rate prices for highly customised services. "Service providers can only pass along cost savings from economies of scale if they can achieve scale through standardised offerings," says Gartner.

The myth of self-management: Buyers believe that once they sign a contract the outsourcer and the contract itself will manage the service. Most organisations do not budget and plan adequately for the ongoing management of the relationship and the services that are provided.

The myth of the enemy: This is the idea that service providers are out to fleece service recipients. Many organisations view contract negotiations as a war in which there will only be one winner rather than an attempt to create a mutually profitable relationship.

The myth of procurement: A related myth is that the sourcing of services is primarily a procurement exercise where best price wins. In reality, many services outsourced today are vital to corporate strategy, and therefore issues of capability, culture, relationship, and other factors are often more important to long-term success than price.

The myth of the steady state: This myth supposes that, once signed, the outsourcing contract remains set for its term length. In reality, outsourcing contracts and relationship management must be developed to anticipate and accommodate change.

The myth of sourcing competency: Finally, and perhaps most painfully, many organisations believe that they have the requisite expertise to manage complex sourcing environments even when they have never done it before.

Technorati Tags: Gartner, outsourcing myths, software outsourcing maturity, multi-sourcing

INSIDER | Understanding Multi-sourcing

During the past month i realized it's hard for me to post large materials on weekly basis. So i've decided to drop "weekly" from WEEKLY INSIDER and post articles as they go, hopefully twice a month. I will use the official logo of Outsourcing-Insights blog as the new image for my articles. This article is called "Understanding Multi-sourcing" and i hope it will help people realize the challenges and benefits of this approach.

Sourcingmag dictionary defines multi-sourcing as a strategy that treats a given function -- such as IT -- as a portfolio of activities, some of which should be outsourced and others of which should be performed by internal staff. This approach moves away from the idea that all of a function should be viewed as a commodity, easily handed over to a service provider. Multi-sourcing (or multi-sourcing) is also known as "selective sourcing."

Outsourcing of software development and services has become a mainstream for many Fortune 500 companies across diverse verticals. But betting on a single vendor often is not a viable option as functions that an organization wants to outsource may differ greatly. Software, hardware, operations, processing - it looks natural to engage multiple providers that specialize in each of the above.

Even if a company managed to outsource diverse functions to a single provider, there will be always the fear of dependancy on that supplier and the power which transfers to the outsource supplier in respect of their own business activities. Multi-sourcing is the way to mitigate these risks. In fact, industry research indicates that multi-sourcing will be the prevailing outsourcing model.

By 2010, market leaders will instill disciplined multisourcing as a core competency for successful business operations. Lack of multisourcing management discipline will result in large-scale business disruption among buyers, suppliers and their value chains. Gartner

Managing outsourcing relationships is a challenge that requires a whole new set of skills, requiring staff training and setting up a new management structure. Although, when done right, multi-sourcing benefits greatly to achieving high performance.

The Benefits & Challenges of Multi-sourcing.
One major benefit of multiple outsourcing is the best of breed effect: you choose suppliers based on their specific expertise, instead of outsourcing every possible function to a single provider. Further, you create competitive environment, lowering the risk of delivery failures, escalating fees and inflexible services. The multi-sourcing approach also gives organisations more flexibility to follow the crazy pace of tech industry developments like softtware as a services (SaaS) and service oriented architecture (SOA).

Multi-sourcing strategy brings complexity: even if you are engaged with three or four strategic suppliers, breakthrough organizational efforts and sufficient funding are required. While some expenses are one-time, others are ongoing. For instance, tracking all outsourcing agreements requires qualified staff with financial and technical skills.

The other side effect is that you probably will loose some of your outsourcing contracts with majors because large outsourcers are not interested in smaller transactions.

Below are best practices of multi-sourcing and also the list of things to avoid

Multi-sourcing Best Practices

Managing multiple offshore providers can become mission impossible if you fail to follow the best practices:

Look for strategic partnerships
Technology analyst, Forrester Research indicates that best-practice organizations try to establish strong relationships with a few providers, instead of dealing with multiple outsourcers with the goal of reducing outsourcing services to the level of commodities. Taking the time to develop each relationship in a multi-sourcing arrangement is important and can pay off in smoother communication, better execution and avoidance of unnecessary expenses.

Create transparency
Typically multi-sourcing relationships span across diverse IT functions: one provider is responsible for hardware or software, the other is running operations. When the software vendor deploys a new application, the hardware vendor must know ahead how, say, processing requirements will be effected by this new software.

Develop a single SLA
While managing outsourcing vendors across the globe, legal issues can become a bottleneck. Developing a single standard contract worldwide might speed up project lifecycle.

Measure Everything
multi-sourcing projects should be measured vigorously from day one. There are different methods to evaluate outsourcers' performance, such as Balanced Scorecards. Corporate executives love ROI metrics, however it is important to measure not only Return in Investment, but also return on every resource you use.

Multi-sourcing Bad Practices

Focus on price
The number one bad practice deals with the common myth that outsourcing and offshoring are two strategies for getting cheap software and services of good quality. This is last century even if we talk about outsourcing to a single vendor. Today outsourcing as well as multi-sourcing become major tools for building competitive advantage through long-term strategic engagement with best of breed providers. Speaking at Gartner's outsourcing and IT services summit 2007 held in Sydney, Gartner's analyst Linda Cohen said than hit-and-run deals will inevitably fail because most of them were created only to cut costs and provide quick access to skilled workers and managed poorly on both sides.

Ad-hoc management
While running ad-hoc processes is a bad practice per se in any king of offshore engagement, it becomes a real nightmare when you have multiple outsourcers and no outsourcing management strategy. Typically such projects fail to deliver ROI, if any meaningful outcome at all. Setting up proper practices, beware re-instating employees from outsourced units as sourcing managers because their vested interests may hamper the vendor's productivity

"Me too" approach
When done right, multi-sourcing requires significant time and finance commitments, at least initially. Thus multi-sourcing for its own sake does'nt work. With smaller-scale outsourcing contracts it is just not cost-effective to break up the sourcing approach across multiple suppliers. If you need to outsource diverse functions and internal resources are scarce, consider granting the project to a single vendor that manages multiple sub contractors.

Technorati Tags: Forrester, Gartner, insider, Linda Cohen, multi-sourcing, outsourcing bad practices, outsourcing best practices, outsourcing management, outsourcing myths

Nasscom: Indian Outsourcers Should Go Beyong Arbitrage

The National Association of Software and Service Companies (Nasscom), in Delhi, said Wednesday that Indian outsourcers have to go beyond taking advantage of India's lower costs for staff and other expenses. In the face of the recent wage inflation and competition pressures from multinational services companies that are also building services delivery capabilities in India, Nasscom came up with the new strategy for Indian ITO providers.

Indian companies have built domain experience and offer superior delivery capabilities, but they now have to differentiate by focusing on innovation in their businesses processes, business models, and in creating intellectual property (IP), said Rajdeep Sahrawat, vice president at Nasscom, in a telephone interview with InfoWorld on Thursday.

Outsourcing companies could focus on building reusable IP assets that could help them cut down time to deliver services to their customer, or develop new technologies that are useful to customers' IT infrastructure, Sahrawat said

As a first step in this direction Nasscom has proposed setting up a professionally managed fund that will provide angel stage funding to startups. The fund, which will raise money from industry, will start with about $25 million. This strategy of innovation has the potential to add $50 billion to the revenue of India's outsourcing industry by 2012, according to a joint study by Nasscom and management consultancy firm The Boston Consulting Group.

via InfoWorld

Technorati Tags: India, Nasscom, outsourcing industry, software outsourcing maturity, Wages

Computerworld: Pakistan's offshore IT potential held back

Terrorism and political instability, including two unsuccessful efforts to assassinate President Pervez Musharraf held back ITO industry development in Pakistan. Nonetheless, in many areas of the country, it's business as usual.


In March, 2007, Chicago-based consulting firm A.T. Kearney Inc. for the first time added Pakistan to a list of 50 countries that it evaluates for their offshore services market potential. A.T. Kearney's Global Services Location Index weighs more than 40 metrics, such as a country's labor pool, infrastructure and legal system.

Pakistan was added to the list of evaluated countries in order to stay ahead of interest from the consulting firm's clients. Although it's doubtful that large companies will build offshore development centers in Pakistan, smaller companies seeking outsourced IT services. might ve interested. "In many respects, it's similar to India in terms of education and people skills," A.T. Kearney report says.

via Computerworld

2007 Trends in Russian ITO Industry

A new issue of Russian IT Quarterly newsletter focuses on the latest development of the software outsourcing market in Russia and summarizes the major market trends:

Rapid Growth

The aggressive growth rate of the Russian IT outsourcing market remained the main remarkable tendency throughout the year. The software exports from Russia grew by almost 54% in 2006 and reached $1.6 billion in volume by 2007. Still small by global standards, Russia claimed the #3 place by market volume among offshoring locations, next to India and China.

M&A Spree

The most palpable developments had to do with mergers and acquisitions in the Russian ICT market. While a number of domestic systems integrators kept on acquiring smaller companies, and at the same time merging with the quasi-equals, software outsourcers looked to turn away from purely Russian investments. It resulted in the acquisition of two Russia-based exporters by American and Baltic companies. Smaller players are engaged in active search of larger partners, to cooperate either on subcontracting basis, or by merging into one business.

More Attention to Russia

A definite shift in the behavior of some Russian outsourcing providers is the soaring of activity on the Russian market with some negligence in marketing in overseas locations. This fact is easily explained by the boom in IT spending among Russian companies and the ample opportunities in systems integration in Russia.

This is why the past year has also seen more of foreign systems integrators offices on Russian ground, as well as a rapid appearance of new captive centers: EMC, Google, Hewlett-Packard, SAP... Moreover, the recent Russoft study on offshore software development in Russia, pointed to the fact that almost 20% of the entire market is attributed to the MNC-owned business units.

Government Promises

The government support of the country's IT companies seemed to have slowed down, but really, the initiative has shifted to the local governments of Russian regions, who are ready to take steps to promote their resident IT companies in both domestic and global marketplaces.

Although the local authorities can not influence the state legislation on a large scale, they at least make all the necessary changes to the local laws and provide an adequate funding to pay for the participation of IT firms in international events.

Specialization Speeds Up

The maturity of the market manifests itself in the clear tendency for specialization of mid-sized independent providers. While generic software development has certainly become the destiny of larger companies and most of them are now joining efforts with international business entities as software centers, smaller ESPs now tend to use the "value shop" model, focusing on particular verticals and business solutions.

via Russian ICT Industry Blog

direct link to "Russian IT Quarterly" report in pdf

Technorati Tags: ITO analysis, pdf report, russian ITO, software outsourcing industry, software outsourcing maturity

Small and Midsize Tech Companies don't Outsource

Recent researches held by Carnegie Mellon University and Columbia University reveal that companies in Hi-Tech industry outsource software development to much less extent than the ones in financial services, entertainment, technology consulting and telco sectors.

The reason small to mid size Hi-Tech businesses don't outsource is that they often can't fraction their core product development process to simple pieces that they can outsource effectively. As for data entry, customer support and testing/SQA, communications and management bandwidth require significant resources SMB firms don't have.

According to Carnegie Mellon University professor Ashish Arora, the tech industry has never made up more than 15% of the outsourcing market. Banking, finance, and insurance account for about 40%, followed by telecom (17%), and manufacturing (12%). Arora includes the product development that companies such as Microsoft (MSFT), Adobe (ADBE.O), and Cisco (CSCO.O) perform in their offshore locations in his estimates.

New research by Columbia University professor Amar Bhide shows that off the 106 companies he interviewed, 19 performed some product-development-related functions in their offshore offices. Of these, 11 were developing a core product abroad, and the rest were developing ancillary subcomponents or doing other work. An additional 29 companies had some relationship with outsourcing companies, but only five of these were for core products.

China ITO Industry Will Grow at an Annual Rate of 50% to 2009

New report from Research and Markets estimates in the next few years, the annual growth of China software outsourcing industry will maintain at about 50%, being far higher than that of the international market. As is forecasted, the portfolio of China software outsourcing will be up to US$4.696 billion (even if the total amount of China software outsourcing reaches US$4.696 billion in year 2009, the figure will be only half of that of Japan’s software outsourcing; and one twentieth that of global software outsourcing market.).

China's software industry has gradually stepped out of the downturn since 2005, which is mainly attributable to the decreasing number of new entrants into the industry on one hand; and to software companies extending to software outsourcing market on the other hand. The software industry will go through a long-term rapid growth. Since 2002, China's software and system integration business has been developing rapidly. In addition, the overall growth of the Chinese software and system integration market stood at more than 30% in 2006.

However, most domestic listed software enterprises are short of independent core technologies as well as distinctive products. Meanwhile they have a small number of high-end system software products, general software and software development platforms. The fierce competition among those enterprises makes their survival even less likely.

During the course of developing self-owned brands, Chinese software enterprises have long looked down upon software outsourcing business, which they think would damage the images of enterprises. But actually, being weak in strength and technologies at present, most of domestic software enterprises have difficulties in developing independently.

Currently, China's software outsourcing industry shares a small proportion globally, which indicates enormous potentials in this industry It estimates that the industry will maintain growing at an annual rate of 50% before the year 2009.

It is forecasted in fiscal year 2007 that the market size of American software and IT outsourcing industry alone will be up to US$300 billion. The offshore share will rise from 10% in 2004 to 24% in 2007, and the offshore outsourcing expenses will be approximate to US$70 billion then.

Out of the considerations for economic security and risk decentralization, multinationals don't expect the software outsourcing market to be clustered in one region. As for American software outsourcing, India believes it can take a market share of 50% or US$35 billion, while China is the most competitive rival against India.

Direct link to "China Software Outsourcing Industry Report, 2006-2007" report

PwC: Outsourcing Comes of Age

A new survey from PricewaterhouseCoopers confirms the growing complexity of outsourcing from changes in the customer / supplier relationship to the emergence of new stakeholders and new governance models. PwC survey provides evidence that leading outsourcing customers and service providers are shifting from traditional to collaborative business models.

Outsourcing is alive and well; in fact it's emerging issue for many businesses. It has the potential to deliver value well beyond cost savings by opening access to talent and capabilities while maximising business model flexibility.

But success and growth are not without their challenges. Customers continue to be held back by cost benefit justification (i.e., the challenge of creating a business case where benefits are measured and delivered) and their own lack of experience. Nearly all feel challenged by one or more aspects of the outsourcing lifecycle; and their first inclination is to blame service providers when projects fail. Service providers think the main cause of failure is poor collaboration with customers.

Direct link to "Outsourcing Comes of Age" report in pdf

The Iternal Problem of Offshore Outsourcing

Hari Candadai over at Global Services Blog writes about ill communication and cultural gap between Indian ITO firms and their US/Europe clients.

Is it just me sitting here in Silicon Valley or is it really happening? I am sure this is top of mind topic for many of us in the Indian IT services industry but what surprises me is the same reason I keep reading over and over again: rising value of rupee. Is that truly it? What about equiping our people with some basic communication and cultural skills to stay competitive? How long before we wake up to the fact that technical skills aren’t everything?

I met a top Indian IT services executive last week in Sunnyvale, CA. I was shocked how we provide little to no training (even within the big firms) on basic communication, business and cultural skills before we ship our people to US client sites. He is on the verge of losing a huge contract because of the quality of his people on site and their inability to communicate effectively. Is this isolated? My guess is not as I keep hearing more and more such stories..I think our true differentiation will be in combining our technical expertise with other ‘flatworld skills’ like basic communication, effective e-communications, ‘ways of working’ in US, UK, etc. I think we will continue losing our edge if our IT and HR executives dont pay attention to this ASAP.

Clearly "flatworld skills" is such a big issue for India, China, and Asian countries in general because the cultural background, the mindset of Asian people is quite different from US/European. Thus it's not just about training, it's also about the willingness to explore & understand different culture as you try to establish communication.

I get several promo e-mails from Indian IT shops per week and every single one looks pushy to me. In Russia Asian & European cultures are mixed, but i bet initial reaction of some Brit bloke would be to trash such an e-mail immediately.

Indian outsourcing companies hold out well against the pressures

According to Computerworld, India’s outsourcing industry continues to do well despite the appreciation of the Indian rupee against the U.S. dollar and higher staff costs.

The appreciation of the Indian rupee against the U.S. dollar pushes down rupee realizations for revenue earned abroad by Indian companies, even as staff costs in India are going up. The U.S. is the largest market for Indian outsourcers, accounting for about 66 percent of export revenue.

Indian outsourcing companies seem to be holding out well against the pressures.

India's second largest outsourcer, Infosys Technologies Ltd., has maintained its net margins despite the rupee appreciation, higher wages, and costs of visas to the U.S., the company said Wednesday, while announcing its results for the quarter ended June 30.

via Computerworld Singapore

Who Outsourced the Outsourcers?

The 2007 Aberdeen Benchmark Report "Who Outsourced the Outsourcers?" describes how saving money might not be the only driving force when looking for an offshore outsourcing provider or even in maintaining a current offshore relationship. This report will look at how companies get the most value from outsourcing ADM work and examine the roadblocks they face in achieving an even higher return on their investment (ROI) and look at the strategies and best practices the Best in Class are using to attain their companies goals.

Aberdeen's research shows that 92% of enterprises surveyed outsource application development and maintenance (ADM) work to provider; 63% of those companies outsource to a provider offshore (at least 4 time zones away). The results show that while India remains the leading offshore destination for many companies, Eastern European, Russian, and Asian providers are maturing quickly and sustaining double-digit growth, making the practice of offshoring, or more importantly multi-sourcing, more complex and no longer just commodity based.

Link to "Who Outsourced the Outsourcers?" report

Pakistan ITO industry surpass $108 million

New software development outsourcing locations appear on the map as businesses search for alternatives to India, China and CIS countries.

According to the Pakistan Software Export Board (PSEB), this year Pakistan’s IT and IT-enabled Services industry has witnessed tremendous growth as it surpassed its target of $108 million and have approximately touched $110 million at the close of the fiscal year. Right now Pakistan experiences year-on-year growth of 50 percent in ITO industry.

However, such factors as availability of trained human resources in IT sector and office space in the urban centres of Karachi, Lahore, and Islamabad may constrain future growth.

Why China will overtake India in ITO by 2011

According to the Gurgaon offices of Everest Research Institute, China’s revenues from exporting software services stood at $2 billion in 2006, and will grow at a rate of 38% to reach $7 billion by 2010. While India is now far ahead in terms of revenue (it closed fiscal 2007 at over $39 billion software revenues and is predicted to top $60 billion in such sales by 2010), the following factors will influence country's leading position:

• Massive investments in English language skills of Chinese IT workers
  
  
• Major Indian ITO players invest in China as their clients demand location redundancy
  
  
• Chinese 2-nd tier cities provide much cheaper workforce than Indian ones
  
  
• Indian 1-tier cities have poor infrastructure compared to Beijing, Shanghai and Dalian
  
  
• Soring wages (the side effect of India popularity as ITO/BPO destination)

WEEKLY INSIDER | A Perfect Match

In this week's INSIDER we will cover what may seem to be the basics - how a company or individual that wishes to outsource a business solution or just a piece of technology can find the right offshore software development services provider. While it might be easy to find a software outsourcing services provider per se, it becomes a real challenge to find a perfect match, a company that will deliver to the max and potentially will drive your long term value through strategic partnership. Further this article will focus on finding offshore software development partner and while some of the tips given here may be applied to business process outsourcing situation, BPO is a very different field in some aspects and deserves a separate article.

This article will answer the following questions:

• What criteria are important when choosing the outsourcing location?
• How to choose the optimal engagement model for your outsourcing project?
• What to look for at ITO services providers' websites?

Consider Your Location

Outsourcing implies you are handing the chunk of your work to the 3-rd party in one of the low wage countries. The difference in wages is the driving force of ITO as well as BPO industry. Each country that supply low wage specialists has its own characteristics, for example, India and especially China lead by the price, but often large, science-intesive projects fail due to high attrition rates and overall mediocre level of IT specialists there. Russia & CIS countries as well as Mexico can be considered as very close geographically as well as culturally for Europe and US firms respectively.

Time zone proximity together with cultural, geographic and regulatory closeness enables faultless integration between on-site and off-site teams, improves overall effectiveness and contributes to seamless knowledge transfer. Russian IT specialists are typically very strong in computer science and are more of creative thinkers. Specifically, IT shops located in Moscow and St. Petersburg accumulate the vast pool of talent from major country's universities and are capable of delivering complex enterprise-scale solutions with speed and quality. Hence, the price tag is different. There are some tips on major outsourcing locations worldwide in one of the previous posts on this blog.

Pick up the right pricing model

There are conceptually 2 engagement models in software development outsourcing. They are "Fixed Price" and "Time & Materials".
When the scope, schedules and requirements of the project are well defined, fixed price model is a cost effective and low-risk option. The primary advantage of the Fixed Price model is that it allows you to determine exactly the project budget in advance. The drawback here is low flexibility of the process. If you decide to change the list of "must have" features or scale up the team in the middle of the project, you will be back to phase one.

Time & Materials model offers the flexibility to balance team size and project workloads and is usually applied to large projects whose specifications may vary during the development process. Time & Materials model is ideal for companies that need quick access to resources. In this model outsourcing firms provide services on the basis of direct labor hours at specified fixed hourly rates and materials at cost.

The popular option is to establish a Dedicated Development Center which is basically a special team dedicated to your project, managed and recruited under your governance. Dedicated Development Center operates as your own branch in offshore location. The advantage of this approach is the ability to establish full-fledged software development center without bothering about issues related to managing full-time employees, such as HR, legal, tax, accounting, equipment, office management. You are free to choose how much to pay programmers – either drive down costs or hire top notch programmers for ultimate efficiency and extensive R&D.

Narrow the List

As you could conclude from the above, software outsourcing services providers can differ greatly depending on their location. What's more, whether explicitly or not each of them specialize in a quite narrow field.

Now, off cause any of them is capable of delivering a mid-scale CRM or CMS system, but after looking at the portfolio, browsing case studies and testimonials it becomes clear that one has say 3+ years experience in financial software development for Fortune 100 companies and the other maintains US automotive after-market software standards. After choosing outsourcing company location further narrow your list to the companies that have relevant experience.