Top India Cities for IT Outsourcing
I just stumbled upon an interesting post - The Top Ten Cities for Outsourcing in India. Bala, a Software Programmer working in Chennai, India refers to several major studies by big name industry analysts that produced the top 10 list. India has 35 major cities, not all of them are good offshore outsourcing hubs, for example India’s financial capital Mumbai is not one of those.
The list includes top 10 outsourcing destination in the following order: Chennai, Hyderabad, Bangalore, National Capital Region (NCR) includes Delhi and its surrounding suburbs, Pune, twin cities Chandigarh and Mohali, Kolkata, Mysore, Thiruvananthapuram and Coimbatore.
Pros and Cons of Outsourcing to Brazil
A couple months ago I was talking with Alexandre, a project / account manager from a mid-sized service provider based out of Campinas, an industrial city North of Sao Paulo, Brazil. Alexandre’s team did a great job on one of my past projects and we continue to stay in touch after the engagement ended. The question of Pros and Cons of Brazil outsourcing inevitably came up and I committed to writing this post after some follow with my network and learning a bit more about the destination.
Brazil, the first country in the famous BRIC acronym is not one of the first names that come to mind when you consider IT offshoring destinations. I am sure that overtime that will change and Brazil will gain a permanent spot on the list of top players in technology outsourcing. You would probably agree with me if you look just at the list of Pros of that destination; the Cons may affect your opinion but won’t dramatically change it.
Let’s start with Gartner rating for Brazil which I agree to some degree:
English Skills. English is a very popular skill and not hard to find with technical professionals in Brazil. However, it’s no match to what you find in India. As a matter of fact when you focus on technical skills sooner or later you will find yourself compromising on English fluency.
Government Support. Very interesting topic. According to my connections in Brazil government is unusually supportive in developing IT outsourcing however results of it remain to be seen.
Infrastructure. Unless you partner with a very small provider located in a remote province city you will find infrastructure that meets reasonable expectations. In my / my network experience telecom and other aspects of the infrastructure are excellent.
Labor Pool / Access to Resources. Brazil employs one of the largest IT communities in the world. The IT work force is large and experienced. This is also a highly educated professional work force as Brazilian universities are fairly competitive to get into and rather inexpensive to stay in. Of course in sheer numbers Brazil falls far behind India and China. Finding top-notch technical resources in Brazil is not easy like everywhere else in the world, yet is possible, even when it comes to cutting edge technologies and methodologies.
Educational System. I can not completely agree with Gartner here, while education system in Brazil is not as stellar as in Argentina or Canada when considered from IT stand point it’s at least at par with Chile and Mexico. In my experience the quality of recent grads with CS degrees is very good and that’s rates high on my book.
Cost. Pure comparison of the rates with India or China puts Brazil in serious disadvantage. Based on a limited sampling of rates I had access to it is 30-80% higher than rates for comparable resources in India. The difference could be even higher if you try to take into consideration the tier of the city and vendor. On the other hand, as I mentioned numerous times, rate is only a guideline to cost, the total cost of outsourcing has a considerably lower difference.
Operating Environment. Air travel to Brazil is convenient and affordable. Sao Paulo is a 10 hour direct flight from Atlanta, GA. Small time difference and thus no jetlag make a huge difference in overall comfort of travel. Finding excellent and fairly affordable hotels, restaurants and other creature comforts is easy. With a little support from your vendor chances are you will stay in safe areas and won’t need to deal with crime which is unfortunately a serious issue in the country. Getting things done requires understanding of the system and is manageable. One of the big Pros of the country that came up many times in my discussions was absence of natural disasters
Nearshore advantage. When it come to US based customers Brazil offers nearshore model which is an advantage of high caliber especially for agile projects. Time difference, travel ease, low cultural barriers, etc. institute a huge Pro for Brazil which offsets its high rates to a large degree.
Cultural Compatibility. In my experience as well as according to everyone I checked with cultural differences are very easy to deal with. As a matter of fact when I asked around within my network I heard more about cultural similarities rather than differences. Of course the differences are there and they can not be ignored, here are just a few to consider:
- First and foremost language issues makes a huge imprint on communications, watch out for idiomatic expressions and professional lingo.
- Work / life balance. While many of guys in my Brazilian teams worked crazy hours the attitude towards work / career / life balance was quite different, and that is particular notable if there is a beach nearby.
- In my experience working with Brazilian teams as I noticed that it developers very long time before they could to offer their opinion or disagree with USA team members. That was quite different from Indian “never say no”, it appeared more like fascination with US tech workforce and overly humble judgment of own abilities. Very similar sentiment came from my network as well.
- Facts and technical quality of the solutions carried less weight with Brazilian team than perceived “authority” of individual. There was also much higher level of sensitivity towards “people feelings” than the one you would typically observe in the states; sometimes to determent of the project.
- And, in my opinion, common for the entire region tendency to put very high emphasis on theory and academic values versus pragmatic business decisions.
Resource Quality / Technical Capability. IT outsourcing in Brazil doesn’t seem to be in the same cut-throat competition with other IT employers as in India. It seems that Brazil is still in a stage when working for outsourcing company considered prestigious and highly desired job. In that light getting your hands on top notch resources is still possible.
Turnover Ratio. Turnover ratio claimed by the vendors is low and that has been my experience as well. My limited scope survey gave very positive results with average about 13%. The attrition was also of general nature mainly family issues or education. Not too much of job hopping or inter-company transfers.
There is one more issue worth mentioning – finding vendors in Brazil is not as easy as it should be. Hopefully the latest efforts of several outsourcing vendors combined with the government support give us a solid provider directory which will help us in finding those perfect matches made in IT heaven. But for now consider these links as the humble beginnings – www.softex.br, www.brazil-it.com, www.actminds.com, and www.brasscom.org.br.
oDesk: Freelancing Destinations
Very interesting statistics made available by oDesk, a freelancing marketplace that now tops 150,000 individuals worldwide in over 100 countries. Freelancing geography as seen from oDesk perspective appears quite different from what we see in trends on geography of regular IT outsourcing, for example US freelancers offer strong competition and reasonable costs. The list of top freelancer countries also includes Canada, Russia and Ukraine rather than China and Brazil.
CANADA
Total Number of Providers: 3,581
Average Hourly Rate Charge: $19.60
Average Feedback Score: 4.32 (out of 5.00)
INDIA
Total Number of Providers: 27,454
Average Hourly Rate Charge: $12.52
Average Feedback Score: 4.01 (out of 5.00)
PAKISTAN
Total Number of Providers: 5,960
Average Hourly Rate Charge: $11.13
Average Feedback Score: 4.36 (out of 5.00)
PHILIPPINES
Total Number of Providers: 17,213
Average Hourly Rate Charge: $6.33
Average Feedback Score: 4.30 (out of 5.00)
RUSSIA
Total Number of Providers: 2,721
Average Hourly Rate Charge: $16.86
Average Feedback Score: 4.31 (out of 5.00)
UKRAINE
Total Number of Providers: 2,929
Average Hourly Rate Charge: $15.96
Average Feedback Score: 4.36 (out of 5.00)
USA
Total Number of Providers: 52,637
Average Hourly Rate Charge: $18.32
Average Feedback Score: 4.40 (out of 5.00)
Gartner’s Top 30
Selecting offshore destination just got easier - Gartner has its new list now. While I am often skeptical about info you can get from Gartner reports, in particular in its application to small to medium sized businesses, I believe in its value as long as it’s taken with a grain of salt. “Determining the country or countries that are best placed to host offshore IT operations is a daunting task for many organizations, according to Gartner, Inc. This year, Gartner has assessed the suitability of 72 countries as offshore locations, and has announced its ‘Top 30’*. The analysis showed that the dynamic nature of the market has seen a number of countries position themselves as credible alternatives to the BRIC countries (Brazil, Russia, India and China)…“
“In 2008, Gartner’s top 30 locations for offshore services, by region, were:
- Americas: Argentina, Brazil, Canada, Chile, Costa Rica, Mexico and Panama
- Asia/Pacific: Australia, China, India, Malaysia, New Zealand, Pakistan, the Philippines, Singapore, Thailand and Vietnam
- Europe, the Middle East and Africa (EMEA): the Czech Republic, Egypt, Hungary, Ireland, Israel, Morocco, Poland, Romania, Russia, Slovakia, South Africa, Spain and Ukraine
Although only seven countries from the Americas appeared in the final list of 30, these countries are becoming an attractive proposition for the largest buying market for offshore services – the US. “
See more on Gartner Identifies Top 30 Countries for Offshore Services in 2008.
Also see good insight in NetworkWorld reaction By John Ribeiro India’s competitors catching up as outsourcing hotspots.
Offshore Interviews: Personality Aspect
There are several common misconceptions about interviewing for “personality” with the offshore resources:
- It’s irrelevant. These are not employees I am hiring, why would I care about their personality?
- It’s the same as with local resources: what’s good for the home team is good for the offshore.
- I let my gut decide or I am good at reading people and I do not need any help here.
Let me start with debunking those myths:
The first one is the easiest. Of course it’s relevant; just think about how much damage a QA engineer without attention to details can do, or how much “value” a Project Manager with no appreciation for authority and processes would bring to a project.
Why isn’t it the same in that case? In some aspects it is, for example for your staff QA engineer you would be interested in someone who has great attention to details, eye for imperfections, appreciates structure and processes, doesn’t mind repetitive work, etc. All these personality traits would be great assets for your offshore QA engineer as well. The difference comes with dynamics of the employment arrangement.
Generally you can not count on keeping offshore resources on your project over two years, after that they are likely to move on; as a matter of fact for the purposes of personality casting you would be looking for just one year in offshore case; hopefully you have a better longevity with local resources, let’s say 3 years. Over that period of time some personality traits will play a role that are not as important when it comes to one year. For example you are looking at résumé of someone who changed his job once a year; that might be a showstopper for staff position but could OK for offshore resources. What about their ambitions, desire to learn new technologies, track record of continuing education, etc. Many aspects of personality become irrelevant when you are looking for offshore resources or turn to opposite.
Another important aspect of personality interviews is the team diversity. I am not talking about race, religion, etc. instead it’s a diversity of the team. I believe in diversity of personality and when building local teams I prefer to have a well balanced but diverse team. For example you need people with “big picture” view as well as “detail” view; you need process fanatics and “break all the rules” mentality. When properly cast and well balanced diverse teams perform much better than homogeneous organizations. Of course casting is a key here, e.g. you do not need a social butterfly to work nightshift processing firewall logs. When it comes to offshore team diversity could mean unnecessary complexity and unpredictability.
One more important consideration in that regard is the fact that careers of offshore resources are not in your hands. In that light again many aspects of personality become irrelevant when you are looking for offshore resources or turn to opposite.
Now, on “I let my gut decide” topic. That’s a common approach to personality interviewing not only in offshore but for staff position all across the industry. I know that some managers are just darn good at reading people and even they make mistakes. I consider myself above average in that skill, mainly because I invested great deal of effort and education in it, and yet I make mistakes, sometimes serious ones. If your gut (intuition) can pinpoint attention to details, ability to strive under pressure, appreciation for processes, impeccable integrity… or an another side dishonesty, habitual irresponsibility, lack of work ethics… well, you probably are working as FBI profiler or psychic reader 
Intuition is important and you should listen to it, no doubts about it. You just should not rely on it or just only on it when selecting members of the team, especially when working remotely, over a phone, and across the cultural differences.
Now, a really hard question: how to define personality match while interviewing offshore developers? Personality interviews are tough to begin with, offshore exacerbate the complexity of the task. The approach I typically use includes several steps:
- Simplify an ideal personality profile. For example for Black Box Tester I’d be looking only for several personality traits absence of which would be a show stopper: attention to detail, ability to handle stress, and respect for the structure / process.
- Communicate the desired profile to my vendor with a hope that the screening catches at least obvious mismatch cases.
- Prepare a few open-ended questions that cater to discovery of those specific traits. For example, “Based on your prior experience please describe a situation when you ability to handle stress helped deliver on engagement objectives”.
- Take the answers for the face value. If the candidate can fake the answer hopefully they can fake the personality trait till the time the move on to a different project.
- I usually have a few questions ready but do not necessary ask them all. Sometimes the candidate would fail a few ones just because those are unusual questions, not something they have been condition to hear. But if they can’t learn the drill after I’ve asked them a few questions, it’s not the person I’m interest in hiring anyway.
Offshore Interviews: Basics
There are plenty of books, articles and various materials on the Net pertaining to technical interviewing. There are several substantial differences that need to be accounted for when dealing with offshore resources. The first one is a mindset.
Many people who outsource large scope IT initiatives outsource interviewing as well. They see sourcing (finding, interviewing, negotiating, etc.) activities as responsibility of vendor. In addition many vendors not only prefer but insist on keeping that activity internal to the vendor.
Depending on the scope of outsourcing initiative and your own bandwidth you my elect outsource the sourcing completely or to some degree. In my opinion that is the area where you need to stay involved. Quality of the resources is one of the highest risks for offshore outsourcing, and one of the factors that affects total cost of outsourcing at a very high degree. You should only outsource it if you believe that the vendor can do a very good job in sourcing, and how can you get there? – only by interviewing their resources. So interviewing is unavoidable, at least during the vendor selection process.
More so when you move into the first stage of engagement and your vendor puts together a team, how can you control the process and ensure that the team has quality resources? Amid of engagement when inevitable turnover kicks in how can you control that the quality of the resources is not going down? The uninspected deteriorates. [Dwight David Eisenhower] Only by getting involved in the interviewing.
I believe in the following interviewing schema:
- Vendor selection stage. Interview a fair sampling of resources that are “softly” committed to the engagement. The size of the sampling depends on the size of the engagement and your bandwidth. The goal of this interview process is not to pick members for the team, it is to form your opinion of the vendor capability to build a team.
- Kick off / Team Building stage. Interview all/subset of the team for the engagement. The scope of the interview depends on the size of the team and your bandwidth. For small teams, say under 20 people, “all” is the goal. For mid sized and large teams the leaders of the team and other key members must be interviewed. A fair sampling of the rest of the team must be interviewed as well.
- On-going engagement. Interview replacements for all key team members. Do a spot-check interview for new members.
And for now just a few tips on interviewing process:
- During Vendor Selection stage I typically use speed-dating style interviewing with individual interviews limited to 30 minutes covering ~20 people a day. It is important to have at least two people involved in the interview process working together, one of the main reason for that is a continues feedback and support they can provide to each other to stay on the top of the process and increase quality of discovery.
- Interviews during the Kick off / Team Building stage and ongoing engagement should be substantially more involved, especially for the key members. That typically means multiple people involved in the interview on your side, several dimension of interviewing, e.g. technical, personality fit, etc. The investment in the interview process has a very high return, however it still need to be weighed against the contract terms and the scope of engagement.
- The investment in interviewing process should be proportional to the expected value of the resources, e.g. technical lead for the project vs. black box tester. The process of selecting key members of the team deserves as much vigor and attention as if you are selecting full time employees. On a typical s/w development engagement the key members of the team include project manager, tech lead, QA lead, business analysts, and some senior engineering contributors.
The process of a full scale interview is similar to one for fulltime employees. It is easier to some degree as many non-technical issues, e.g. salary, do not need to be covered. It has its own challenges though, for example obvious issues of remote interviewing. I will cover interviewing in a separate post.
Pros & Cons of Outsourcing to Latin America
Latin America offers one of the best options for nearshore outsourcing for the USA and Canada. It also offers great resources for Spanish localization projects getting increasing important in the states. Latin America offers a large spectrum of options roughly corresponding to the countries in the region covering almost entire alphabet from Argentina to Venezuela. Each country has its own specifics and its own set of Pros and Cons; the differences between countries could be dramatic, compare for example political climate in Mexico and Venezuela. There are still enough commonalities to considering covering of Pros and Cons for the entire region.
Infrastructure. The quality of infrastructure varies greatly from country to country but it’s quickly catching up to the required standards across the region. In countries leading of LA outsourcing – Argentina, Brazil and Mexico the infrastructure is likely to meet or even exceed your expectations, but even in countries far behind the quality is still acceptable. I was surprised how solid the infrastructure was in Chile or some cities in Bolivia. One thing is extremely important – the high quality infrastructure could be found mainly and sometime only in industrial areas of these countries. It is not at all as pervasive as it is in the USA. You must validate infrastructure sufficiency before moving forward with the vendor. The simplest way to do it at superficial level is to request a video interview over Skype.
Operating Environment. Flying to Sao Pao and getting to your vendors’ HQ is Campinas takes a while but small time difference makes it much easier to deal with than while travel to China or India. Working in many of the LA countries would not be extremely complex, challenging or dangerous. You have to know where to go and where not to but chances are you will be safe and can get your job done. Chances are your vendor operates from some of the country’s most industrially advanced area with decent standards of living and acceptable infrastructure. Of course language and cultural differences can create some challenges typically easily dealt with considering general hospitality of the region and with a little help from the vendor. All that ease falls of the cliff as you step out beyond the borders of the industrial areas. Destitution of the rural areas for most of LA countries is truly disturbing; my honest advice – leave these areas to National Geographic and Peace Core…
Skills Availability. Skill availability for high tech occupations depends on specific country / city. In general it could be characterized as medium to low. Generally you can build a small team of Java or .NET developers in somewhat reasonable timeframe, but size of the talent pool is microscopic when compared with India and China. The quality of the pool helps to some degree make up for its size, but only to some degree. In my experience putting together an 8 member team of high quality Java developers / QA engineers took over 4 months. I have to say that my quality requirements were very high and I was looking for somewhat unusual set of specifics. When you are after more run of the mill skill set you probably would have easier time. Legacy technology skills and enterprise applications skills are even less common.
English Skills. Not as good as you’d expect… and why would you even expect? I worked with many countries in the region and in each of them I met engineers who spoke English better than I, but in general you have to be prepared for language barriers or for substantially impaired hiring if you make fluent language skills a mandatory requirement. Written communications appear to be in better shape across the board; however, they still cause a drop in productivity for many of the team members.
Cultural Compatibility. I find cultural differences with LA workforce some of the easiest to bridge. That could be me personally as there are a plenty of differences to be notes. A few most important areas that I have observed while working on technology projects:
- Developers on LA teams took very long time before they could to offer their opinion or disagree with USA team members.
- Facts and technical quality of solutions carried less weight with LA team when it came to conflict with personnel influence. For example a less efficient solution was accepted just because it had a lot of hours invested by the team members. To appease someone / protect their feelings was enough of a motivation in making core technical decisions.
- A very high emphasis on theory and academic values versus pragmatic business decisions.
Take a look at Cross-Cultural Communication Between Latin American and U.S. Managers for a good list of the most significant differences.
Rates. LA offers great variety of rates that depends on the country from relatively high in Argentina and Brazil to moderate in Chile, Bolivia, and Uruguay. While the rates by themselves tend to be on a high side they are fairly attractive when taken into consideration with “the entire package” that includes short / no time difference.
Resource Turnover. LA countries offer better turnover rates than many of other regions. At the same time turnover on some of my / my friends’ projects outsourced to LA showed fairly high ratio. That seemed to be related more to a specific company rather than the region.
Resource Quality / Technical Capability. Quality of resources varies greatly from a country to country, from a city to city, and specifically from a provider to provider. However, in general technical capabilities of the resources are quite impressive / above average. I was able to find people with in-depth understanding of cutting edge technologies and with proven experience of working with fairly recent methodologies in many countries across the region. There is also no shortage of resources when it comes to mainstream skills such as Java / .NET / C/C++. Legacy technology skills and enterprise applications skills are less common though.
Of course one of the most significant Pros of the region it’s nearshore advantage, mostly linked to little / no time difference. The impact of it is difficult to overestimate – small time difference, similar holiday structure and bridgeable language differences makes working with teams in LA a great experience.
Generating a List of Prospect Vendors
Fining an offshore provider is much more difficult than it should be considering the supply abundance. Yet the complexity starts right with the first step – generating a “long” list of prospect vendors.
The easiest and probably the least meaningful way to find providers is just publicly announce you needs, for example post a question on LinkedIn. The problem with this approach is that if you are CIO or VPE chances are you are already getting plenty of annoying cold calls from offshore suppliers. Public indication that you are searching for an offshore provider is only going to increase the spam and cold call inflow. Of course you can elect respond to the unsolicited emails and cold calls, in the end of the day most of them are produced by real companies, and quickly build a very long list of the prospect vendors. The problem with this list is that all prospects are unqualified and you have to go through very laborious process of separating good leads from gazillion of bad ones.
The next set of options comes from using public sources. Public sources in this space are far from perfect and won’t necessary fit your needs they are however worse considering:
- Directories from outsourcing associations are not bad. They typically offer basic information on about companies in a specific geography. For example if you are looking for offshore companies with ODCs in Russia go to Russoft.com. The directory it offers is fairly up to date. The main problem with it as with other directories is that the key information relevant to vendor selection is missing or difficult to find.
- To 100 lists such as The 2008 Global Outsourcing 100 and other similar sources are only good for finding companies such as Tata, Satyam, Accenture, etc. I personally also do not have much trust to those lists having been exposed to what it takes to become one of the companies mentioned there. However if you motto is “you can not be fired for hiring IBM” those could be the best source of prospect vendors.
- There are a large number of companies that offer anonymous access to vendors, for example www.elance.com, www.guru.com, www.odesk.com. These companies typically position themselves as a middle man between supplier and provider. That might be fine for small projects but not for any sizable offshore initiative. There are a few more serious problems with these companies, one of the most serious issues being that the sites are full of low quality freelancers and fly-by-night firms digging through which is a painful experience. The vendor rating that the sites offer helps in the selection process only to some degree.
Another set of options comes from using outsourcing consultants of all types and calibers, this approach have plenty of challenges as well:
- Gartner and other similar sources are expensive and slanted towards the needs of large / multinational corporations. They offer a great a great “corporate” insight into outsourcing world. These sources are probably most meaningful for large companies and significant scope engagements.
- Mid-level / low level consulting firms offer fairly good advice at a decent price. However that approach’s first challenge is right on the surface – finding decent consultant organization to begin with.
- Low-level small consulting firms or individual consultants specializing in offshore selection offer even better price performance which is more than offset with narrow view, legitimacy of sampling, and scope of penetration in the offshore market. Also with both mid-level and particular low-level consultants what is your assurance that they are not tethered / attached to a few offshore vendors that they represent on an “unbiased” basis?
An option which by my limited scope survey is used the most is professional networking. Reaching out to your professional network via email or other means is likely to generate enough prospects and offer some pre-qualification of the leads. You need to be careful not to blast your network and just reach out to colleagues with knowledge of the subject and somewhat similar interests in terms of engagement.
And the final option is working with me… A big caveat here - for me offshore consulting is more of a hobby rather than a business, so I do not do it often. I did started working on developing an offshore vendor directory which would help people with this and other vendor selection tasks, but, again, that is a project financed out of my pocket that doesn’t get much attention. I still hope to get the initial directory out by the end of the year though.
Pros & Cons of Outsourcing to Canada
Once again an interesting question asked on LinkedIn IT, this time by Vladimir Kondratenko - Pros and Cons of Outsourcing to Canada. My recent experience with that region is rather limited so I decided to make a few calls / send a few emails and connect with my colleagues who have first hand experience in doing that. It was a bit of challenge but I managed to find a senior technology exec who outsourced a small portion of his portfolio to an outsourcing company based in Ottawa, the information he shared with me very much confirmed my somewhat knowledge and expectations. Outsourcing to Canada is an interesting phenomena indeed and it offers its own Pros and Cons, very few Cons I have to say:
- Political atmosphere and legal system makes working with Canada outsourcing extremely easy and far less risky than probably any other country in the world. Recently with Canadian dollar shooting 25% above average made it the least likely place for outsourcing as well. Now when the exchange rate is back inline with what it used to be Canada can offer great options to some offshore buyers in IT space.
- Language, cultural closeness and no time zone difference with the USA are huge pros of Canada making it a superb location for outsourcing. Generally as long as you are fine with telecommuting you can’t tell the difference between working with developers in Detroit or Toronto. There are of course some cultural differences steamed mainly from significantly different social support structure. Also appreciation of life values versus business success appears stronger in Canada than in the USA. I would say that these differences are not likely to affect outsourcing engagement a great deal.
- Taxes and other elements that constitute government support for outsourcing are mediocre at best, on the other hand employee lifestyle issues are well taken care of; think free education / healthcare / etc.
- Education system in IT space is decent with very few top-notch schools but no match to the USA or India. Also many It professionals receive a great deal of professional education from the same sources than people in the USA.
- IT and telecom infrastructure across the country is excellent, with prices close to those in the states.
- Data and IP security is non issue. Well, as non issue as it is in the USA. A few Data Centers that I saw in Canada were in shipshape, SAS70 compliant, etc. Power and other infrastructure dimensions related to climate, etc. are more reliable than in many places in the USA.
- Personnel turnover is medium to low, and if you exclude a couple cities like Toronto is actually very low. Key personnel turnover is very low.
- Labor pool / access to engineering talent is decent, but no match to China or India by any stretch of imagination. Interesting dynamic worth mentioning for this case. General size of the pool is somewhat small however it’s much less polluted and quality / quantity balance makes it possible to staff projects in relatively short time frame.
- Quality of the talent pool is well above average; as I mentioned above the talent pool is less polluted, more so, advanced educations system and easy access to multiple means of professional education caters to generally higher quality.
- Of course there is price to be paid for all those great things and that is a high rate. It’s still much lower than the rate you’d pay for local resources in San Francisco or Manhattan, but is very close to what you can find some rural areas of this country. The cost are so high that exchange rate can practically kill any cost advantage and with overhead of offshore engagement make the total cost of outsourcing above cost of sourcing it locally.
Pragmatic Outsourcing vs. Gartner
You may have seen latest Gartner view on offshore destinations via Gartner rates offshore outsourcing hot spots or variety of other sources. I find Gartner view quite interesting, informative yet sometimes not very relevant to needs of software product companies. In this particular analysis the information is very good and applicable to a large degree with exception of a few important areas where data is misleading when applied to IT and Software Outsourcing specifically for small to mid-sized companies.
An obvious disclaimer here – my opinion is based on a fairly limited sampling – my own observations, recent experience and analysis plus some supporting data from several people in my network with relevant experience and knowledge.
If review had been based on viewpoint of IT/SW professional the rating for Labor Pool, Infrastructure, Cost & Data and IP Security and Privacy would have been different, for example Labor Pool in Uruguay when it comes to software developers is not nearly as bad as the survey presents, and as a matter of fact it is better than in Costa Rica and Mexico. Some other ratings seem seriously off even to an uneducated eye, take for example cost of resources in Russia marked by Gartner as Very Good; I’d say they have not been in Moscow recently.
But a single rating that prompted me to make calls, talk with many people and write this article was rating for Data and IP security and Privacy in China as Poor. Anyone who went through on-site visits with major IT Outsourcing vendors in China would tell you - there have been huge advancements in that arena, the quality of Data and IP security that the vendors could provide is very impressive. As my friend, a VP Engineering for very successful SF startup, told me - “I’ve seen the Great Wall of China, but what really impressed me was the Great Firewall of China I saw during my trip to Beijing…”
Americas:
| Americas | Source | Argentina | Brazil | Canada | Chile | Costa Rica | Mexico | Uruguay |
| Labor Pool | Gartner | F | G | V | G | F | V | P |
| Pragmatic Outsourcing | F | F | G | G | F | F | G | |
| Cost | Gartner | V | G | F | V | G | V | V |
| Pragmatic Outsourcing | G | G | P | V | G | G | V | |
| Data and IP Security and Privacy | Gartner | F | F | E | F | F | V | F |
| Pragmatic Outsourcing | F | G | E | G | F | G | G |
Europe+
| Europe, Israel, S. Africa | Source | Czech Rep | Hungary | Ireland | Israel | N. Ireland | Poland | Romania | Russia | Slovakia | S. Africa | Spain | Turkey | Ukraine |
| Labor Pool | Gartner | G | G | G | G | P | G | G | V | F | F | G | F | F |
| Pragmatic Outsourcing | F | G | F | G | P | G | G | G | P | F | G | F | G | |
| Cost | Gartner | G | G | F | F | F | G | V | V | V | F | G | G | V |
| Pragmatic Outsourcing | G | G | P | F | P | G | F | F | G | F | F | G | G | |
| Data and IP Security and Privacy | Gartner | V | G | E | E | E | G | G | F | V | V | V | G | F |
| Pragmatic Outsourcing | V | V | E | E | V | G | G | G | F | G | V | G | G |
And Asia
| Americas | Source | Australia | China | India | Malaysia | New Zealand | Pakistan | Philippines | Singapore | Sri Lanka | Vietnam |
| Labor Pool | Gartner | G | V | E | G | F | F | G | G | F | F |
| Pragmatic Outsourcing | G | V | E | G | F | G | G | G | P | G | |
| Cost | Gartner | F | V | V | G | F | V | V | F | V | E |
| Pragmatic Outsourcing | P | E | V | G | P | V | V | F | E | V | |
| Data and IP Security and Privacy | Gartner | E | P | G | F | E | P | F | V | P | P |
| Pragmatic Outsourcing | E | G | V | F | E | P | F | V | P | F |
Pros and Cons of Outsourcing to India
India offers the most developed, experienced and sophisticated outsourcing community. No surprise – embedded advantage of ESL, huge supply of IT talent, and low standards of living made it a top destination for IT outsourcing long time ago. Y2K and management talent solidified the success creating multi-billion dollar giants and changing ethnic landscape of many cities in the USA. As I mentioned in Offshore Vendor Selection: Choosing the Destination “if your risk tolerance is low and/or your organization is new to outsourcing go to India, you can not get fired for hiring IBM. Go to India if you have to choose on a spot, or have little knowledge of outsourcing, or have to deal with large scope ERP implementation, or … as a matter of fact if you have to ask this question chances are you should consider India as your top destination.” Now let me put a few bullets here supporting my statement:
Infrastructure. Unless your partner is tiny and located in a 3rd tier city you won’t have any problems with infrastructure. Well, you may have to deal with some irregularities in connectivity due to some natural disasters, it gets quite rainy during monsoon season out there, but I tell you that: we use AT&T as our internet provider in our San Francisco office and once in a while they drop connectivity despite blue sky and sun outside. With a huge supply of IT services in India you can find infrastructure that would cater to most ridiculous demands.
Operating Environment. Flying to India is far from fun especially from the west coast, in particular if your company doesn’t cover first class travel. 30 hours in transit plus you arrive there in the middle of the night. Unless you time your trip well the nature would great you with heat and humidity. Flying back could be so much better if you did not need to deal with airport lines and crowds. The good part, that’s pretty much the extent of the adversities. Chances are you will be staying in a good hotel, will have a personal driver, eat in good restaurants, and even corruption is wide spread in India at all levels you most like won’t need to deal with it.
Skills Availability. That’s is one of the strongest Pros of the country. No matter what skill you are looking for there will be at least 10,000 people who have it. Well, more seriously, the supply of IT talent in India is outstanding, some areas more than others of course. Mainstream technologies of today and yesterday – Java, .NET, C/C++, ERP, Cobol, etc. – have substantial oversupply. You also can find a lot of talent even on a cutting edge of the technology. The quality of the talent follows the bell curve and nowadays the median has gone up comparing to late 90th.
English Skills. Well, that’s a hidden gem isn’t it? Of course with English being widely popular in India the main issue you would need to deal with would be an accent. Maybe some idiomatic expressions, some speech forms, etc. but generally it is not an ever a showstopper and forms a huge Pro of the country.
Cultural Compatibility. While there are a plenty of cultural differences between India and USA I would put the Cultural Compatibility in a category of Pros, here are a few reasons:
- The cultural differences on business side were not so dramatic to begin with considering history of British influence on legal and business system of India.
- Resources from India have been in this country in large numbers and for a long time. People in the USA learned the differences, behavioral patterns, and idiosyncrasies to a pretty good degree.
- Many Indian vendors invest a great deal into cross-cultural training as well as in accent training. As a result the gap between cultures is narrowing considerably.
There are of course cultural differences that are deeply embedded in people’s psyche, here are a few most notable:
- “Never say No” or “Yes to Death” – while working with Indian resources you always need to keep in mind that they might have a very difficult time say “No” in any shape or form. “Can you do that? – Yes, we will do Nick.”, “Do you have access? – Yes we do Nick”. That doesn’t mean that they can cater to any need or demand, they just can’t say NO.
- No bad news is a no-news. While the times of chopping off bad news barer heads are over, the habit is still there. So if you do not hear about bad news, it doesn’t at all mean that everything is going well, it just simply means that you do not hear / do not know what is going on.
- Motivational hierarchy. Of course Maslow’s Pyramid rules. But there is a plenty of subtle differences in how its upper levels translate for a specific culture. Not bad / not good – just different. For example, personal success in India outsourcing is often measure in number of people the person supervises. “I have 100 people under me…” That pushes good developers away from the technical track towards managerial with inevitable profound negative impact on technical abilities of the organization.
Rates. India rates fall neither into Pro nor into Con category. They are benchmark against which other rates are compared. And I guess that makes for a nice segue into Cons discussion:
Resource Turnover. Turnover is very high, it is high to a degree that it almost outweighs all pros of the region. See my earlier post Myth for more thoughts on the subject.
Resource Quality / Technical Capability. IT Outsourcing proved to be a rather lucrative business for many social groups in India – entrepreneurs, engineers, education providers, etc. Millions of people moved into the field in the Golden Rush of the century. As a result average quality of resources started going down to a degree that even time-proven trademarks of quality do not work anymore. Not long time ago I was stunned when I had to fire a consultant for incompetence; the stunning part came from the fact that he had a master degree from IIT.
One more Con related to the Golden Rush is worth mentioning: huge number of companies with a large number of low quality fly-by-night vendors makes it extremely difficult to find a right provider. It’s very much like looking for gold – you have to go through the tons of dirt to find the right substance. However, you are looking for gold, and one thing I am certain of is that you can find that gold in India.
Offshore Destinations: Russia
I was born in Moscow, USSR and the word “Russia” in my mind associates with a large empire of 15 republics. Things since than have changed dramatically and referring to some of the parts of ex-USSR as Russia is not just politically incorrect. Yet you are likely to hear about Russian outsourcing even if the ODC is located in Minsk, or Kiev. As a matter of fact in many respects outsourcing landscape of Byelorussia, Ukraine, and Russia has a lot in common. More so, large outsourcing organization such as ePAM, Luxsoft, and others have offices in these countries. Most of other countries of ex Soviet Union do not play significant role in offshore market, some due to low density of IT talent, some due to high cost. While offering in these countries exist, and you may find great providers in Estonia, Moldova, and others, in terms of outsourcing statistics these countries would be a rounding error. With that in mind let me cover some Pros and Cons of doing business in Russia.
- Infrastructure. IT infrastructure in large cities of Russia is very good; smaller, second tier cities lag behind, the difference if pretty dramatic. Generally today you will find sufficient network bandwidth, stable connectivity, and solid pool of Sys Admin talent that would allow you stay in touch with your ODC. The cost of it will be not inconsequential though and needs to be taken into consideration. A very important aspect of infrastructure which you need to asses is vendor facilities – it is difficult to find well equipped offices with quality server rooms, etc. that is especially serious for companies with offices in second tier cities. In my view Pros here outweigh the Cons.
- Operating Environment. Running offshore engagement with Russian ODC will offer many operating challenges even if you stick to tier one cities (for the purpose of this discussion that’s Moscow, St. Petersburg, Kiev, Minsk). Getting to these cities is fairly easy, they offer great selection of hotels, solid municipal infrastructure, and … mind boggling prices. As I heard Moscow has been recently awarded with a title of the most expensive city in the world with St. Petersburg following it closely. Second tier cities are substantially cheaper but you get what you paid for in terms of quality of hotels, food, transportation, etc. Another issue to be aware of is high crime rate (accidental traveler be aware!) and very high rate of corruption. Corruption could become a very serious obstacle for models involving ownership of the resources such as BOT. With caveats considered I would still put Operating Environment as a Pro of doing business with Russia.
- Skills Availability. That is in my view is one of the weakest traits of the region. First at a very high level, Russia produces IT resources at a fraction of speed of the countries such as China and India. This problem is exacerbated by fairly consistent internal demand for IT resources and high geographical dispersal of the talent pool. In large degree Russia talent pull is already exhausted. Pretty much everyone who is interested in working in offshore organization is already working for some client, often for several, as many of talented engineers work several jobs, moonlight or find other ways of get themselves reasonably compensated. Finding software aces is challenging even in second-tier cities, in the first tier cities it’s practically impossible.
- Cultural Compatibility. My experience in that arena has been surprising to say the least. I left Russia in ‘91 as an accomplished technology professional with almost 10 years of experience under my belt. I had not expected to have any problems in dealing with companies in Russia and yet I found it easier to work with companies in India instead. Some of my greatest pains came from several areas of communication / work related behaviors.
- Customer is always right… Maybe, but not in Russia. As a matter of fact the vendor seems to always know what I want better than I do.
- Being “Politically Correct” is not a Russian way. However, while I prefer straight forward communications I do not enjoy when my vendor is rude to me or more so to some of my employees.
- Work ethics. Very sensitive topic, I have seen many great, hardworking developers in Russia, but unfortunately they seem to be outnumbered by short-timers with “get money and run” attitude.
- There is one interesting aspect of Russia’s culture which while “positive” contributes to the difference – attitude towards education. It is amazing how many highly educated people you find among Russian developers and even QA engineers. I am not talking BS, I mean Ph.D. and above. While by all means commendable quality the negative impact of it is actually multifold: theoretical approach to problem solving, abandoning career for the sake of education, investment in education at cost of work skills, etc.
- English Skills. In my opinion English skills of Russian outsourcing community are at the level you would expect them to be with a typical bell curve distribution and the median being at acceptable level. Chances are you won’t have problems understanding developers and would be able to carry on a rich conversation with account managers and other client facing resources.
- Rates. Rates of Russian development workforce vary greatly depending on location. Rates in T1 cities are very high, often making Russian outsourcing to be cost prohibitive. To deal with this issue many T1-city based vendors diversify by opening locations in small cities. Rates for smaller city are as the standards of living in those cities – they fall off the cliff as soon as you move 100 miles outside of the tier one city boundaries. However resulting rates continue to stay on a high side comparing to India’s.
- Resource Turnover. Turnover tends to be on a low side comparing to India especially in a T2-T3 cities. The trend is however discouraging – according to what I hear from my network the turnover rate has bean steadily growing correlating to growing demand and increase in expected standard of living.
Let me close this post on a positive note covering one of the most important Pros of Russian outsourcing community – its Technical Capability. For many reasons Russia IT community in many cities in Russia offers above average technical capacity, innovation and creativity. That is particular notable for boutique vendors from St Petersburg, Moscow, Kiev, Minsk and Novosibirsk as well in the top echelone resources from lagre Russian outsourcers.
Offshore Vendor Selection: Choosing the Destination
Selecting a destination could be quite simple if you have strong drivers pushing you towards certain geography. Maybe your engineering team is predominantly Chinese, or maybe the board of Directors is firmly set on India, or maybe you have vast network of industry connections in Romania… Almost any geography can offer a variety of companies among which you could find that great match for your needs. And what if you do not have strong bias towards a particular location, where should you go? Let me start with a few quick tips here:
- If your risk tolerance is low and/or your organization is new to outsourcing go to India, you can not get fired for hiring IBM.
- Go to India if you have to choose on a spot, or have little knowledge of outsourcing, or have to deal with large scope ERP implementation, or … as a matter of fact if you have to ask this question chances are you should consider India as your top destination.
- If you are not an outsourcing neophyte and ready to invest time in research and vendor selection a whole new world opens up to you, with some decision shortcuts:
-
- If you are looking for partner that operates as extension of your team on an agile project consider near shore, e.g. Latin America
-
- If you are looking to outsource large volume of manual regression testing consider China or Philippines.
-
- If you have IP intensive engagement consider Israel
-
- Are you looking for resources for mobile development? - Consider Eastern Europe.
-
- Are you very cost sensitive and ready to deal with immature vendors, consider nascent territories: the countries such as Pakistan, Vietnam, Macedonia, etc.
Of course those tips are just ideas, the country selection needs to be taken exceptionally serious as it is one of the most decisions you make in the vendor selection process. While selecting the country I recommend using weighed selection criteria approach:
- Identify your selection criteria; keep in mind that the criteria should be country specific rather than company specific.
- Give each of the criteria weight – the rating of its relative importance for your organization.
- Define an initial list of countries you are willing to consider. Keep it relatively short to limit the rating efforts.
- Rate each of the countries using latest information you can find. Industry analysts’ reports would be the most helpful, consider Internet research and outsourcing associations, as well as the common sense.
- The rating for the country is derived as a sum of ratings for each criterion times the weight of the criterion.
Below is an example of such analysis performed for a mid-sized software development company in Washington, DC area. The company was looking for a partner to perform substantial on-going customizations of their SaS product. Scope of each customization project would keep a small team of Java developers and QA engineers busy for ~3 months.
After the list of the countries has been agreed upon we started with a very rough analysis and then detailed ranking for a shorter list.
Initial List
Country |
Infrastructure |
Operating Environment |
Skills Availability |
Cultural Compatibility |
English Skills |
Rates |
Resource Turnover |
Political Climate |
Time Zone |
Brazil |
Med | Med | Med | High | Med | Low | Med | Med | High |
China |
Med | Low | Med | Low | Low | High | Low – Med | Med | Low |
India |
High | High | High | High | High | Med | High | High | Low |
Israel |
High | High | Med | High | High | Low | Low | Med | Low |
| Pakistan | Med | Low | High | Med | High | High | Med – High | Low | Low |
Philippines |
Med | Low | Low | Med | High | Med | Med | Low – Med | Low |
| Romania | Low | Med | Low | Med | Med | Low | Med | Med | Med |
Russia |
Med | Low | Med | Med | Med | Low | Med – High | Low | Med |
Ukraine |
Low | Low | Low | Med | Med | Med | Low – Med | Low | Med |
Refined detailed rating
Country |
Infrastructure |
Operating Environment |
Skills Availability |
Cultural Compatibility |
English Skills |
Rates |
Resource Turnover |
Political Climate |
Time Zone | Country Rating |
Weight: |
4 | 8 | 10 | 5 | 8 | 6 | 9 | 4 | 7 | |
Brazil |
7 | 8 | 6 | 8 | 7 | 6 | 8 | 8 | 10 | 458 |
China |
6 | 6 | 7 | 5 | 3 | 10 | 10 | 7 | 6 | 411 |
India |
10 | 10 | 10 | 10 | 10 | 7 | 4 | 10 | 6 | 510 |
Russia |
7 | 5 | 6 | 8 | 6 | 4 | 6 | 7 | 7 | 371 |
Ukraine |
6 | 4 | 5 | 8 | 5 | 5 | 7 | 6 | 7 | 352 |
Based on this analysis we narrowed our search to 3 countries (Brazil, India, China), which in my view was still excessively broad and could result in a very expensive vendor selection process. By the way the winner of the engagement was a vendor from Brazil, and it remains to be seen how well the project works out.
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.
Outsourcing Myths: Turnover Ratio
The impact of turnover on the total cost of outsourcing is difficult to overstate. Of course you know that and put a turnover question as one of the most important ones in the beginning of your RFP. You look at the proposal that just came back from your vendor and see 18% as the response, “whew, I think we found our guys!”… Welcome to the murky world of turnover ratios. The sad part is that this answer may mean very little; being the most infamous curse of offshore engagements the turnover ratio comes with a few extra traps.
The most frequently overlooked issue strangely enough is the meaning of the “turnover ratio”. When your prospect vendor tells you that their turnover ratio is lower than the country’s average (high changes that’s exactly what you are going to hear) what does the vendor mean?
On one of my recent engagements with a reputable company in Noida, India the staff on the project changed at an amazing rate – while working with 10 member team for about 1 year we saw over 20 people, and only one person stayed on the project from the beginning to the end. No matter what formula I tried apply to that situation it did not seem to align with 18% stated in vendors proposal. And yet every account review my vendor pushed the idea that the turnover ratio was not out of bounds. Ah? ‘Well, Nick:
- We moved Rajiv and Venkat off the project because they were not performing job well enough;
- Ramki’s mother got sick and he had to quit to do the right thing;
- Shushma got married and moved to Hyderabad…
And so on and on and on…
As it turned out my valued partner had a completely different view of the turnover ratio. My guess is that they calculated the ratio based only on the number people who’d left the company for competitors.
Another trap worth mentioning is an internal transfers. What difference the company’s average turnover rate makes if your project turnover exceeds it by two or three times? I’ve seen that numerous times and in a large degree it’s unavoidable. The vendor will move people around to increase their utilization, to appease the loudest customer, and to keep employees motivated.
And one more trap to mention is key resource turnover. If your team has an average turnover of 20% (you lose and have to retrain 2 people a year on a 10 member team) it might not be so bad if these two are junior QA engineers. What if these two spots both belong to the tech lead on the project? You find a great TL, he comes to your site for knowledge transfer and after two months go back to India just to resign the next week, two months and countless meetings later another one comes to your office, goes through K-transfer and goes back, and then gets hit by a typhoid fever?
Recognizing that there is much more to turnover than just a percentage sign is a huge step forward. Dealing with turnover is a much more complex issue and a rather large topic, so I’ll cover it in the next post.
Fundamental Laws of Outsourcing
A while ago when answering a question on LinkedIn I suggested applying three well-known principals to managing offshore engagements. I call them Fundamental Laws of Outsourcing a.k.a. FLAWs of Outsourcing (FLOs for short). These laws in my view are as strong as the law of gravity, and as you know if you attempt to ignore it you will at best end up with your face in the dirt…
- The first FLO is The First Murphy ’s Law: “Nothing is as easy as it looks.”
- The second FLO is The Second Law of Thermodynamics (Entropy Always Increases)
- And the Third FLO is the First Law of Military Communications: “If an order could be misinterpreted, it will be”.
That really sounds encouraging you may say. How can you ever consider working with offshore under these laws? Well, back to gravity – it doesn’t seem to prevent us from being ultimately successful in our lives and have fun in the process. So here are just a few basic tips…
1) To deal with FLO # 1consider a few things –
a. Starting with a stellar contract (MSA) which addresses typical offshore traps (quality benchmarks, attrition remediation, knowledge transfer / retention guarantee, etc.).
b. Setting expectations right (your management, your team, and your own). “Right” in this context means as low as possible. For example: there will be no cost savings, the work load will increase, everything that could go wrong will go wrong, things that just can’t go wrong still will, and no matter how low your set the expectations your vendor will surprise you.
c. Setting an “exit water mark”. No matter how long you march down a wrong road you will need stop and go back. In case you made a wrong decision there is a point where you are better off by cutting your losses short.
2) The second law of thermodynamics applies to any organization or project. You might remember these quotes:
The uninspected deteriorates.
- Dwight David Eisenhower
The only things that evolve by themselves in an organization are disorder, friction, and malperformance.
- Peter F. Drucker
In offshore outsourcing the second law of thermodynamic exhibits itself as consistent degradation of quality of services in absence of non-stop energy applied from the on-shore. Consider uninterrupted control from a dedicated resource on your side (make sure it’s someone you trust and who has your company – not the vendor’s – interests in heart). Everything from timesheets to hard core deliverables to be scrutinized and verified. The only way to stay ahead / prevent quality decay is to apply pressure on the vendor even when things are still going (seemingly) well.
3) The FLO # 3 applies to all aspects of communications and in particular to the project/product requirements. Any ambiguity in your documentations, specifications, processes, procedures, and especially verbal instructions will be (innocently) exploited to create maximum damage and cost increase. Consider crystal clear communications and small scope of controlled deliverables. For example, very short project phases, interim builds, etc. Work as many control / feedback points in your process (SDLC) as you can possibly afford.
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.
Offshore Developer Rates
What is a fair rate for a mid-level Java developer working offshore? Seems like a simple question, yet the answer you are likely to receive from anyone familiar with the subject is “It depends…” A fair rate you need to negotiate towards to with your supplier depends on many attributes and circumstances. Here are the most important:
- Location. Almost like in the real estate business location plays utmost important role in the cost of the product (rates in this case). Location granularity is roughly at a city level, meaning that in a single city you will have roughly the same rates for specific position. Large cities such as Bangalore, Beijing, and Moscow may have some pockets / districts with higher / lower rates, those differences are not as dramatic. Raising level of granularity to a country level skews the results significantly unless you limit your horizon to only “first tier” cities.
- Other geopolitical factors. In countries experiencing explosive growth or political turmoil standards of leaving fluctuate greatly and that inevitably leads to dramatic changes in rates. Rates of vendors from Eastern Europe and China have been growing at the highest rate recently. It’s no surprise considering major improvements in standards of leaving of these countries and weakening dollar as well.
- Competency. That’s an interesting phenomena I have observed over the years. It appears that engineering community competency has very notable local preferences. For example there is a great deal of skills in mobile development in Russia, Vietnam developers seem to prefer to speak .NET, you find many developers working with OS cores in Israel.
- Company size. Unlike in the food industry where large chains offer lower prices s/w outsourcing has opposite trend – typically you will be able to negotiate better rates with smaller shops.
- Vendor business model. In high-level view there are several business models which offshore organizations operate on:
- “Body shop” – under this model the vendor is focused on billable hours / resource utilization and is typically in the business of selling mediocre resources in bulk. This not the business model you will find presented in RFP or website of the vendor, however you will see it between the lines of the proposal, in general practices, etc. This model scales well and you can see body shops ranging from Krishna’s Shack to multi-nationals of colossal proportions.
- “Consulting Organization” – same as above but with vigorous attention to the quality of resources. These organizations are typically smaller and have much higher quality of the resources.
- “Boutique shop” – I use this term for small sized high-end consulting firms which offer top quality resources often in a very narrow field / niche.
Rates naturally would be the lowest for first model and the highest for third. The questions of course is appropriate analysis as most of body shops present themselves as consulting organizations and some smaller one pretend to run “boutique” operations.
- Engagement model. There are plenty of models you can elect to work with offshore, for example resource augmentation on T&M basis, fixed bid engagements, Built-Operate-Transfer, Managed ODC, etc. Each model will offer slight adjustment to the actual rates.
- Contract details. Rate can vary greatly depending on the details of your contract, with each element being a double edged sward though. Fo
Mumbai Sad Nomination
An interesting and very important aspect of selecting an outsourcing destination is the location safety. And it is quite different from what it used to be just a few years ago. The recent terror in Mumbai brought a lot of attention to the subject and put Mumbai in the top ten riskiest places. Here is a how the list looks today:
The Most Dangerous Ten
1. Jerusalem (Israel)
2. Mumbai (India)
3. Rio de Janeiro/ Sao Paulo (Brazil)
4. Manila/Cebu/Makati (Philippines)
5. Delhi/ Noida/ Gurgaon (India)
6. Kingston (Jamaica)
7. Kuala Lumpur (Malaysia)
8. Johannesburg (South Africa)
9. Bangkok (Thailand)
10. Bogota (Colombia)
The Safest Ten
1. Singapore
2. Dublin (Ireland)
3. Santiago (Chile)
4. Krakow/Warsaw (Poland)
5. Toronto (Canada)
6. Prague/Brno (Czech Republic)
7. Budapest (Hungary)
8. Monterrey (Mexico)
9. Beijing (China)
10. Cairo (Egypt)
See more in Mumbai named second most dangerous outsourcing location by Matthew Scott
December 12, 2008 Posted by Nick Krym | News, Articles, Thoughts and Comments, Offshore Vendor Selection | Offshore Risks, Offshore Tips, Outsourcing | No Comments