Pragmatic Outsourcing

Tips, tricks and traps of IT offshore outsourcing

Offshore Payment Models

Needless to say that payments and payment models are some of the most important aspects of an outsourcing contract. While these items typically well understood and relate well to similar terms in any other consulting contracts they still require extreme attention and caution especially considering caveats off the offshore outsourcing.

The payment models in offshore contracts derived from the underlying contact execution models with most popular being Time & Material and Fixed Bid, see Offshore Model Selection: T&M vs. Fixed Bid.

Time & Material model typically translates to a payment per hour model. The rates / payment approach could be defined at a coarser granularity (e.g. week or month) but the nature of the payment methodology remains the same. If the hourly rate is used the vendor submits invoices with agreed upon frequency (most typical is monthly, small vendors often ask for bi-weekly or even weekly payment schedule). The invoice or its supporting material include hours of allocation for each resource for the corresponding period, rate and totals.

There are a few elements related to that pricing model, most important being a concept of minimum allocation. Minimum allocation defines the minimum number of hours in a month that a resource supposed to be engaged independently of buyer’s induced failures in work allocation.
You need to be careful in analysis of the associated contract language as a minimum allocation could become extremely costly.

Another set of contract elements highly relevant to hourly payment schedules is similar to minimum allocation and is related to work allocation / assignments. If a developer is waiting for business requirements clarifications from the buyer and is not engaged in any meaningful activities, who is paying for his/her time? The fair approach is for the buyer to pay for this time and for the vendor to make reasonable business efforts to keep developer productively engaged on project related activities. Make sure to have corresponding language in your contract.

One of the most popular forms of coarse granularity time based models is one often referred as an FTE model; here FTE stands for a “full time equivalent”. Under that model the rate is most typically negotiated on a per month basis. There are a few issues associated with that model that basically bringing it back to the hourly model. The first question is the workload allocation for the month with most typical number being 168 hours. The next set of issues comes from dealing with overtime, handling time off, vacations, holiday, etc. All these elements need to be understood and agreed upon by both parties.

My approach to negotiating FTE contracts is typically based around following mind set – “It is my responsibility to provide you with workload of 168 hours a month, if the employee can not be allocated for that number of hours the rate must be proportionally reduced. I also expect you to do your best to keep the employee meaningfully engaged in case I hit any obstacle or experience delays.”

Fixed Bid engagement models require a different approach for invoicing / payments. For FB engagement of a project nature the most common methodology is Milestone Payments. The idea is fairly simple – the cost of the project is divided in portions that to some degree correspond to the effort for delivery of a specific milestone. If the milestones are separated by substantial time some additional, often artificial, milestone are inserted in the project schedule to accommodate for smoother cash flow. The most important item to consider when following Milestone model is the process of had-over and acceptance of the milestones. The most frequent payment issues associated failures on FB projects related to small problems that pass through accumulate and accumulate towards the final milestone.

There are multiple variations in payment models that based on one or a combination of the models above. A few are worth mentioning:

  • “Prepayment” a form of milestone payment associated with initiation of project. It is most frequently used by small vendors who can not afford the risk and expense of ramping the project up. I personally prefer to avoid prepayments. It doesn’t mean that you should exclude vendors asking for prepayment, it only means the some additional work in contract negotiation is required, for example if the resource / environment ramp up is the reason for prepayment, it could be shape as a milestone. In other cases an escrow could be considered to avoid some of the obvious risks of prepayment.
  • Time-based (e.g. monthly) installments on FB contracts. I strongly recommend against that approach. In my view it really increases inherit risks of FB model. There are some meaningful situations where monthly payment associated with FB contract; that in particular common for non-project FB engagement, e.g. provision of services under SLA.
  • “Bonuses and Penalties.” This is an interesting concept which could be productively applied in FB contracts for example for delivering before / after specific deadline. The concept must be dealt with a great caution though, it could become a wrong motivator and promote bad practices. Thus one of the mandatory conditions is for the vendor to receive a bonus all aspects of the delivery must be considered / met. Another important aspect to consider is the size of the bonus (as a percentage of the overall payment amount). If the size of the bonus is too small it stops making any difference if it’s too big it could ruin the project – just consider the situation when the vendor realizes in mid of the project that there is no way the deadline could be met and a huge penalty is inevitable.

November 8, 2008 Posted by Nick Krym | Contract Negotiations, Managing Offshore Engagements | | No Comments

Offshore Model Selection: T&M vs. Fixed Bid

It’s quite amusing to see many offshore vendors to use LinkedIn Answers for self-promotion but instead of leads generating volumes of offshore-bashing. However amid of self-advertising and political positions you can find browsing this section helpful in many aspects, no cloud without a silver lining I guess… This time LinkedIn Answers offered an interesting discussion topic with a help from Irina Semenova: When outsourcing projects offshore which model is preferable – Time and Materials or Fixed Bid? And my answer is… “It depends.”

What model is going to work for your specific engagement depends on the project goals & objectives, both parties’ org structure and experience, SDLC maturity and style, etc. The selection should be made by careful analysis of all ingredients and with consideration of classic engagement objectives: scope, time, budget, and quality. Below are some tips that you may want consider when making the decision.

If the scope of the engagement is extremely well defined and firmly set Fixed Bid model is very natural way to go. Some of my friends from Agile Camp would probably say that the scope being “extremely well defined and firmly set” is an oxymoron – requirements always change, etc. Well, I do not want to start a philosophical discussion; instead, I’d rather mention a few items that often overlooked in scoping exercises:

  • Non-functional Requirements. This is not a very good term but widely used for some reason. By non-functional requirements I mean horizontal requirements that apply to the product not to its functionality. These requirements typically include dimensions such as performance, scalability, maintainability, interoperability, etc. They are extremely important for any project but often overlooked and dealt with in catch up mode exploding the cost of the engagement. For FB projects you not only must specify upfront the requirements but also defined how the compliance would be verified.
  • Delivery Requirements. Sometimes considered a subset of non-functional requirements the specifics of engagement delivery affect the cost dramatically. The vendor typically has its own benchmarks in that respect which could be drastically different from your expectations. Do you expect to have 80% unit test code coverage? Do you expect well-document DB design delivered in Erwin format? All these requirements must be spelled out before FB contract is put in place.
  • Communications. The volume of communication is a notable aspect in vendor’s overhead and thus affect the cost of the project. You might be expecting daily project updates and rigorous reporting at multiple levels while the vendor thinks just milestone updates and PMO quarterly meetings. It’s much better to bridge the gap up front.
  • Quality. It is extremely important to specify Acceptance Criteria in all aspects of Quality of the product as well as process of Acceptance. Metrics and methodology definition should be one of the inputs to the vendor for defining FB price tag.
  • Change Management. Any vendor that has meaningful experience in delivering FB engagements has Change Management well under control. What vendor could be not familiar with is your specific change rate and budget change tolerance. It takes tremendous expertise on both side of the relationship to manage Change Management and avoid scope creep wars.

If addressing items above in addition to developing meticulous definition of product requirements falls outside of your capabilities you can hire your vendor to do it for you on a Time and Material basis. That appears like a nice T&M segue into a FB model. There are a few traps associated with that model though. The main being a potential conflict of interest: Will the vendor has your best interest in heart and won’t use this exercise to dramatically increase the scope of the project? That’s not unheard of. You can mitigate that risk by hiring different vendors for FB and T&M portions of your engagement; that approach of course has its own drawbacks.

With all these complexities of FB model why even consider it? Why don’t just go with T&M for all types of engagement? Well, some projects land themselves extremely well in T&M space, for example a classic team augmentation – situations when you just need a team of QA engineers added to your organization during major release, or you need a graphical artist to assist with development website, etc. There are as well a plenty of other situations that make a short or long term T&M arrangement the most meaningful. You should not rule out a FB model for engagements of recurring nature and augmentation tasks though. For example an ongoing legacy s/w maintenance and support task appears as a great candidate for T&M, but it could be extremely well handled as FB SLA arrangement.

A popular concept states that vendors prefer T&M model because it allows them to achieve maximum utilization of resources while being shielded from customer failures to deliver on their obligations. That is a major misconception. Under true T&M model the vendor gets paid only for work being done and is not for waiting for customer to make up their mind. In majority of the situations that would mean that developers would be sitting on their hands for major portion of the project. So typically T&M engagements are sold as “minimum utilization” models, in those the customer pays the maximum of minimum agreed upon amount and T&M amount. That model shields the vendor quite well.

In that light T&M model doesn’t only shield the provider it also reduces dramatically inevitable scope creep wars on fixed bid projects. In many aspects it is good for both sides. The main challenges it presents for the buyer are somewhat hidden and thus create serious traps. Here are just a few to consider:

  • Carefully constructed T&M project opens a huge opportunity for add-on sales and could generate enormous amount of unnecessary work. As proverbial car salesmen IT consultants are exceptionally skilled in upselling the customer, keeping themselves occupied, and discovering new opportunities. On the other hand buyers become their own worst enemies as T&M promotes sloppiness in handling scope. As a result T&M projects, unless handled properly, have a high probability of costing more, often much more than expected. The example which comes to mind is ERP implementation which I observed at a large automotive manufacturer; being budgeted initially at $30MM it ended up costing in excess of $300MM.
  • T&M projects require meticulous time tracking which could become a considerable overhead. I remember myself spending easily 1 hour a day on keeping track of my time in three systems, of course that hour was billed to the customer as well. For developers that are not used to consulting lifestyle timetracking is true bane of existence, often resulting in malicious compliance producing little to no meaningful results.
  • T&M projects are more difficult to budget for and are real pain in GL allocation when services cover multiple cost centers / etc. Appropriate allocation in particular requires detailed time tracking with its respective impact and reliability issues.

November 3, 2008 Posted by Nick Krym | Contract Negotiations, Managing Offshore Engagements | , , | 2 Comments

Using Contracts to Mitigate Offshore Risks

MSA – a “horizontal” component of an offshore contract can become a powerful tool in managing an offshore engagement and mitigating its risks. My approach to turning MSA in such tool includes several main steps:

1. Identify specific risks associated with the engagement. See my earlier post Top outsourcing risks as an example.

2. Rank the risks and select top ones; limit the selection to 5-10 items. The reason I recommend limiting the list is the cost / length of negotiation process.

3. Find out the reasons the risk mitigation is not in place / insufficient. You need to understand why this presents the problem for the vendor; without that knowledge negotiations are likely to hit an impasse.

4. Identify your preferred risk mitigation plan(s). The plan should include what both parties should do to reduce / eliminate / mitigate the risk

5. Insert and negotiate corresponding language in the MSA. Keep in mind that negotiating each of the topics may require multiple revisions and some give and take on both sides. Taking a win-win approach to the negotiation from early on is essential.

Let’s consider a greatly simplified example: Let’s assume that you are negotiating an MSA with Indian outsourcing company and after second step arrived with top two risk items: “Excessive resource turnover” and “Technical capability of the resources”.

Why is excessive turnover so common? Could it be avoided? Why don’t they (the vendor) just fix it? Well, they can not. The employment situation in India when it comes to IT resource is similar to what we’ve seen in Silicon Valley during the peak of DOT COM.  Can you spell Java? Hired! Inevitably job hopping becomes common… So, facing the facts, you know that there will be turnover on the project, and it will be higher than the 20% average you vendor told you about (see my post Outsourcing Myths: Turnover Ratio).

What can you do to deal with inexorable? Here are just a few options – maintain ongoing recruiting efforts, keeping staff on stand by, continues investment in crosspollination, knowledge management, documenting everything, etc. The list of mitigating techniques goes on and on. Your vendor is probably has a bunch of them in place. Well, it’s a perfect opportunity to ask the vendor to put the money where their mouth is.

For example you can ask for guaranteed replacement of the resource in two weeks. You can consider overlap of the resources in order to perform knowledge transfer for minimum of two weeks. You can ask for periodic audits of knowledge related documentation.

An important consideration to keep in mind: some of the turnover mitigation techniques employed by the vendor do not work in your favor. The most obvious one is moving resources from project to project or client to client in order to keep the resource engaged. I would recommend consider counter measures for example if the resources are moved off your project but retained within vendor’s organization some harsher penalties / longer overlaps applied. But you do not want to push your vendor against the wall making it financially unreasonable or preventing them from doing basically a right thing.

Here is a small example of MSA language:

Vendor shall not reassign any key resource providing Services for a period of 12 months after their respective start date of providing Services without prior approval from Client, provided that Client commits to the resource ramp up outlined in Section 5 of this Agreement. Key resources shall consist of resources critical to the Statement of Work and unless otherwise agreed, will be the Project Manager, Technical Lead, Business Analyst, Architect, and Quality Assurance Lead.

Let’s now cover the technical capability of the resources. Why that could be a problem? Well, try to find good developers in Silicon Valley even today – not easy by any stretch of imagination. Your vendor faces exactly the same issues exacerbated by several factors with huge competition from multiple dimensions – multinational corps, product companies, large offshore companies, etc.

This particular issue fall’s in a category “that is a fact, it is not my problem” but if I ignore the fact it will become a problem. In any case, the quality of resources is not something I am prepared to compromise on. So what could be my mitigation techniques here?

I typically ask for direct access to resources, right to interview and approve / disapprove, etc. That is a huge issue for many vendors though, most of the vendors do not want you to handpick the resources, for obvious reasons. So, it’s likely that you would have to offset it in some way, for example ask for interviews / etc. process for named key resources and allow vendor to deal with the rest of the team. You may consider some compensation (rate, T&C). Another approach could be setting performance benchmarks and holding vendor to those.

Here is a small example of MSA language:

For Statements of Work undertaken by Vendor on a time and material basis, Vendor shall obtain Client’s approval prior to adding any resources to such Statement of Work. Client will have the option of interviewing Vendor’s resources prior to their providing Services under a Statement of Work.

October 30, 2008 Posted by Nick Krym | Contract Negotiations | , , | No Comments

Offshore Contracts Basics

In general the language you put in contracts will not change the nature of the business, will not counter the Fundamental Laws of Outsourcing, and won’t prevent things going south. Yet it is impossible to overstate the importance of a well-written contract. The goal is to develop the contract in a way that it encourages / enforces desired behaviors and provides a framework for dealing with issues, complications, and disputes. That applies to both parties – the contract has to work for you and your vendor, in that light, considering the nature of the engagement, nothing is as important when developing a contract as keeping a win-win mind.

A typical offshore contract includes two major components: a Master Service Agreement (MSA) that acts as an umbrella document covering specific terms and conditions of the engagement, and series of documents covering the specifics. Individual tasks and assignments are usually covered by documents such as Task Order, Statement of Work, Work Order, etc.

An MSA typically is negotiated once and stays in power through the life of the relationship. There are many important elements of an MSA that define the fabric of the relationship. To some degree they are vendor and even offshore agnostic. These elements fall in a “vanilla” category and typically require just basic template and a lawyer. However even these items can create a serious obstacles and require tooth and nail negotiations. Here are the main items that fall in that category:

  • Term, renewal and extension
  • Legal framework / Changes in laws and regulations
  • Security and privacy
  • Confidentiality / Audits
  • Proprietary rights / IP ownership
  • Legal responsibilities of parties
  • Indemnitification

The second group of MSA articles defines specific aspects of the relationship and should be in general agreed to prior to getting legal departments involved. One of the reasons that should be done is that there is still a long way from general to specific T&C. For example people rarely discuss the penalty for late payments before MSA is on the table. When the initial draft is presented by the vendor the number is typically 2.5% monthly which is completely ridiculous – that is ~35% on annual basis and beats some of the worst credit cards.

  • Definition of services
  • Responsibilities of parties / roles of the parties as it applies to executing the engagement
  • Payments and other financial aspects, terms and conditions
  • Initiation / Setting up ODC and other (“hidden”) fees
  • Termination

This group of the MSA articles requires very detailed analysis as it will impact Total Cost of Outsourcing in the most dramatic manner. The last article in that list, Termination, requires especial attention and a legal eye. As a buyer of offshore services you want to make sure that you can get out of the contract easily in case anything goes not the way it was planned. This is not a symmetrical clause – the vendor’s right to terminate contract should be limited to legal or financial bridge of the contract on your part.

The last group of MSA articles is not typically found in the initial draft. These are clauses that are specific to your company and nature of the engagement. Developing that list and negotiating each point is not a trivial exercise, and deserves a separate post, which I shall have shortly.

October 27, 2008 Posted by Nick Krym | Contract Negotiations | , | No Comments

Dealing with Turnover

Turnover impact on the cost for an offshore engagement could be dramatic.  It’s fairly obvious: any change in resources on a team triggers changes in the team dynamics, new resources need to be ramped up on technology, project specific and domain knowledge, etc.

Depending on a type of the assignment new resources will display lower productivity for weeks or even months. For a regular full time employee on development task the cost of replacement is typically estimated at 3 months of fully burden salary plus recruitment fees. The cost of the replacement in offshore scenario depends dramatically on contract arrangement and vendor capabilities. Interestingly enough it could be substantially lower than in captive resources scenario. In my view outsourcing companies could turn the issue of turnover into a competitive advantage. I have not seen too many that managed to so yet.

To deal with the turnover you need to start early during vendor selection stage and do not stop working on it till the engagement is closed.

Vendor Selection. Pick the vendors that have turnover under control; do not just take their word on it, research all aspects of employment lifecycle and derive your own conclusions. Here are some of the questions you need to get the answers to:

  • What is the vendor’s employee sourcing strategy and tactics?
  • Does vendor have any advantages in local market in terms of acquiring and retaining employees vs. competition? Or same question from a different angle - what are the employee choices in local job market?
  • What employee retention mechanisms the vendor has in place?
  • What the vendor does to counter results of the turnover? In particular what are the knowledge retention mechanisms? Cross training? Etc.
  • What were actual turnover ratios for reference (especially unsolicited) accounts? How did vendor acted upon reducing the negative impact of the turnover?

Contract Negotiation. Now it’s time to ask the vendor to put their money where their mouth is. Here are a few elements you may consider for including into MSA:

  • Clear definition of the turnover ratio with a penalty for exceeding specific benchmark.
  • Key employee clauses. You need to cover definition of the key employee, specify minimum retention period for them, and identify process of replacement in case of their departure. I would consider covering two scenarios – force major (vendor can’t do much about loosing the employee) and transfers (the vendor elects to move the employee to a different engagement) with much more considerable penalties for transfers.
  • Regular team member clauses. Those would be similar to key employees with focus on the process of replacement and much softer penalties.
  • Transparency clauses. You want to know about employee departure as much ahead of time as possible, you wan to be able to get to the bottom. Maybe you want to be able to do the exit interviews. You might be interested in right to connect with team members directly, but be prepared for serious fight here unless you are working with small vendors.

Managing the Engagement. The main point is not to rely on your vendor’s adherence to the contract but take an active role in increasing retention of the team members at multiple levels. Of course that must be done in a concert or at least not in a conflict with the activities of the vendor. Most reasonable organizations do not intend on breaking the contract and in a large degree are interested in minimizing the turnover the same way you do, maybe with just a few exceptions. These exceptions come from market pressures and internal constraint, the better you understand them the more you can do to counter the issue. Here are a few reasons for these exceptions and some tips on dealing with them:

  • The concept of seniority in an offshore organization is likely to be different from what you have in-house. For example a java developer with 6 years experience would be considered very senior in China and expected to act as a tech lead on the project with 20 developers. So forcing that developer to be a junior member on a team of 5 would be an insult which is likely to lead for him to quit one way or another. You need to be cognizant of that and other similar trends and form the team which would create a favorable environment for the team members not on your terms but on their terms.
  • Same problem has a different angle: let consider a vendor’s viewpoint. As a practice manager I need to leverage my resources well. If I have a senior tech lead he is expected to run a team of 20 people. In that case I can afford to charge my clients some reasonable rate for his time as my losses would be more than offset with profits I make on junior members. As you can imagine a client’s request to form a small team with several senior members is not going to make me happy… One of the ways to deal with it is to be much more flexible on rates and find alternative / additional methods of compensation. More important if small team with very experienced team members is your preferred scenario – you need to pick vendors who are ready and interested to work in that model (and not just because they told you so!). Consider boutique consulting organization, Eastern Europe and Latin America.
  • Another factor to consider is employee engagement. Long term development projects, especially large scale maintenance ones offer different challenges over time. Initially they could be interesting for people motivated by technical complexity and vast scope, but after a while these challenges disappear replaced by mundane repetitive tasks. So it’s no surprise that some of the team members are ready to fly when you just starting to rip the benefit of their experience and knowledge. In my experience the best way to deal with it is by selecting resources with personality / mind set match for the project. There are plenty of people who a great and maintenance projects and enjoy that work as well, they might be a bit slower in uptake, but that is the bullet you need to bite.

In a large degree to reduce turnover of your offshore team you can do many of the same things you would do for your own staff, often by the vendor’s hands. Here are just a few things you can consider:

  • Compensation & Gifts. Remember a $1K bonus goes much further in India than in Indiana. A few technical books sent directly to a developer would earn disproportional value in loyalty.
  • Classic motivation factors: advancement, recognition, and achievement. Recognition is particular simple and pays off incredibly well.
  • Team building. A few things with huge impact: joined development activities like SCRUM style meetings, offshore visits, especially for local team members with specific tangible objectives such as training or k-transfer, bringing best off-shore team members on-site, etc.

October 9, 2008 Posted by Nick Krym | Contract Negotiations, Managing Offshore Engagements, Offshore Vendor Selection | , | No Comments

Negotiating a Fair Rate

Let’s assume that you have selected a few companies for your shortlist and are getting close to the final stage of negotiations. At that point you already have the “asking” rate, which should be within reasons. Negotiating space in offshore deals is rarely above 30% and if asking rate is 100% above your expectation the vendor should not probably be on your list.

Now, how to make sure that you get the best rate and at the same time not push your vendor beyond the line where your negotiating “success” will backfire? The key is to drive for “win-win” arrangement with every prospect vendor and pick the best one. Here are a few tips on doing that:

  • First, most important, you need to set the focus of your negotiations. Your goal is not to minimize the rate but minimize the Total Cost of Outsourcing (TOC) over the terms of the engagement. TCO is an abstract concept unless looked at in retrospect, yet it could be reasonably assessed with some basic assumptions. After the assumptions are locked you can easily negotiate towards minimizing TOC.
  • Next step is arranging your arsenal of negotiation options. You do not want it “all come down to rate”, that’s just one aspect of TOC plus it’s likely to stall the negotiations. List all aspects of the contract you could to negotiate and form your position on each of them. Offshore contracts typically offer large number of areas to negotiate, e.g. financial and payment terms, work hours, overtime rates, length of engagement, access to resources, multiple operation benchmarks and guarantees, etc. Each of these items could have a massive impact on the TCO.
  • Research what is reasonable in terms of rates for your vendors. There are plenty of tools to do that. For example follow up with references the vendor should have given you (it’s amazing how much info you get if you just ask), check regional job boards to determine salary ranges, etc. Take you research data with grain of salt though, e.g. be aware of the timing of your data. For example I was involved in contract negotiation with the same vendor in 99, ’02 and just recently; the terms of the contract were somewhat similar, the rates for mid level java developer were respectfully $42, $21 and $27 an hour.
  • Negotiation is a complex skill if not art. If negotiations are not particular your cup of tea you may consider involving professionals, in particular those who have experience negotiating offshore contracts. At least go through some serious reading on the topic prior to diving into the deal making. Here are a few great books to consider: Secrets of Power Negotiating by Roger Dawson, You Can Negotiate Anything by Herb Cohen, and Getting Past No by William Ury.
  • One aspect of the rate is often gets overlooked – the rate changes overtime. The easiest approach here could be locking rate for the term of the engagement, yet it might be not feasible due to many reasons. You want to make sure that you do not get hit with huge changes and at the same time you do not want to find your vendor loosing money on your project due to for example natural changes in the cost of living. Linking rate changes to some objective index might be a path to consider, see an example below.

X.  Cost of Living Adjustment. With respect to the rates stated in each Work Order with a term longer than one year, commencing on the first anniversary of the effective date and on each anniversary thereafter during the term of each such Work Order (each, an “Anniversary”), if the Employment Cost Index, Total Compensation, Not Seasonally Adjusted, Private Industry for Professional Specialty and Technical Occupations published by the Bureau of Labor Statistics of the United States Department of Labor (the “ECI”), as published on the most recent date the ECI was published prior to the Anniversary of the current year (the “Current ECI”). is higher than the ECI published on the most recent date the ECI was published prior to (i) the effective date of the Task Order with respect to the first Anniversary; or (ii) the Anniversary of the previous year with respect to all subsequent Anniversaries (the “Prior ECI”), then, effective as of such Anniversary, the then-current rates for such charges shall be increased by an amount calculated by multiplying then-current rates by a fraction, the numerator of which is the Current ECI and the denominator of which is the Prior ECI, minus 1. For example, on the first Anniversary of a Task Order, if the Current ECI is higher than the Prior ECI, the increase to the then-current rates under this Section 5 would be calculated as follows:

Increase to then-current rates = the then-current rate on the first Anniversary X ((Current ECI / Prior ECI) – 1).

If the ECI ceases to be published, then Consultant and Client will agree on and substitute another comparable measure published by the same or another reputable source.

September 29, 2008 Posted by Nick Krym | Contract Negotiations, Offshore Vendor Selection | , , | No Comments

It’s Not Over, Till It’s Over

I was fairly certain that an offshore development company with majority of their staff in St. Petersburg, Russia was the best choice for a large scale initiative for my company. The decision came after complex vendor selection process which included on-site visits, marathon interviews, long and pricy MSA negotiations, etc.

I hang up the phone after final discussion with the CEO and smiled. I liked the team in Russia, some of the guys I met there were at par with my best developers in-house, I was happy with the location as it was offering a cure for my nostalgia, and I was proud to be able to deal with the biggest obstacle I faced on the day one of the negotiations – substantially higher rates of developers in Russia comparing to those in India.

“Why work with India if you can find more expensive developers somewhere else?” is not exactly the question you want to be discussing with BoD or your executives. My convoluted negotiation scheme has paid off. I was quite happy with what I was able to squeeze out of the vendor. There were only a few formalities to take care off and I would move forward with the project.

I have t ell you - having had set my eyes on the Russian vendor I had to stick my neck out a great deal. There were plenty of concerns with outsourcing in my organization to begin with, moving it to Russia was a challenge of a much high caliber. “If the creator had a purpose in equipping us with a neck, he surely meant us to stick it out.” [Arthur Koestler] Those are the words to live by. I was selling idea of using the Russian team as there was no tomorrow. My efforts were paying off on that side as well – I had full support of my executive team and was ready to move forward with the contract and a very hefty budget.

Next day I was on my way to LA, long weekend offered a perfect break from the grueling selection process and contract negotiations. I was in a wonderful mood and almost all the way through the 10 hour trip when I got a call from my vendor’s CEO. For some reason he decided to speak in English: “Nick, my board of directors has reviewed all the details of the contract and after much discussions had made the decision to withdraw our proposal and exit the negotiations.” I said something borderline polite, hang up the phone, and issued a very loud, long and very politically incorrect tirade…

Funny enough things worked out to the best, the vendor that was awarded the contract instead of the Russian team in many respects offered a better match, stronger skills and less time difference… Plus, I added a few more notes to my bag of tricks, tips and traps:

  • Never come to the finish line of selection process with a single vendor in mind. Make sure that your short list has at least two, better three capable companies.
  • Do not rely on your intuition (bias, preferences, etc.) when selecting the vendor; let the facts, spreadsheets and team consensus drive the decision.
  • Do not oversell your team, company, and execs on the benefits of outsourcing and especially on any specific vendor. Remember no matter how low you set the expectations your offshore vendor will easily fail them.
  • Do not get lost in complex gambits and convoluted negotiation schemas.
  • And the most important, do not try to pay the vendor less than they can generally get in the open market.

The last bullet deserves special attention as a fair rate is a moving target and depends on many aspects and circumstances. I guess that will be my next post.

September 25, 2008 Posted by Nick Krym | Contract Negotiations, Offshore Vendor Selection | , , , , | 1 Comment

ODC Hidden Fees

The conference call I had with my ex-partner in Noida, India was quite unusual and it’s worth mentioning. Two PMs, AM and I were going in circles for 30 mins in attempt to solve a $10,000 conundrum. About a year ago we purchased 3 servers for our team in India, at roughly $3K a piece. The relationship came to an abrupt end due to major reshuffle of the road map on our side a few months ago.  Naturally we wanted to get our servers back in a form of iron or cash.  That turned out to be unreasonably costly.

As it turned the servers were in some special industrial zone and to get them out of the zone we would have to pay a de-bonding fee to India customs.  The fee at this point would be about 75% of the price of the new server, supposedly if I would wait for about 5-6 years the fee would be reduced to almost zero.   But today to get the servers to San Francisco between shipping and customs I would have to pay the price of new server for one year old box I already “own”.  I could not even donate the boxes to any of my friends in Noida – they would have to pay de-bonding fee to take the servers off the vendor’s premises.  Talk about hidden fees and small print!

That would be my latest lesson learned on ODC hidden fees.  There are a plenty of others you need to be on look out for when negotiating a contract with an offshore vendor.   Here are just a few I came across over the years:

  • Telecommunication, a variety of expenses associated with connectivity and other telecom needs
  • Setup costs, including workstations and other expenses
  • Administration fees, a bizarre combination of fees including janitorial, rent, etc.
  • Recruiting fees in a wide variety of contracting clauses
  • SW Licenses, sometimes for just “non-standard” components often for all
  • Termination fees, a variety of clauses preventing from or penalizing you for canceling agreement
  • Variety of financial fees, such as late payment fees with percentage higher that you would see from credit card vendors

What is important here is of course not the fairness of the fees.   You need to inspect every inch of the contract, every caveat and clause to avoid surprises and control your total cost of outsourcing.  Hopefully that will save you from serious blunders and oversights like mine.

And just FYI, thanks to Chris Balmain, here is a link for de-bonding procedures http://india.ewasteguide.info/files/Debonding_Summary-Report_2007.pdf

September 24, 2008 Posted by Nick Krym | Contract Negotiations, Offshore Vendor Selection | , , | No Comments