Offshore Vendor Selection « Pragmatic Outsourcing

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.

October 14, 2008 Posted by Nick Krym | Offshore Vendor Selection | Offshore Cons, Offshore Pros, Offshore Tips, Outsourcing, Russia Outsourcing | Leave a Comment

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	Country Rating
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.

October 11, 2008 Posted by Nick Krym | Offshore Vendor Selection | Offshore Tips, Outsourcing | Leave a Comment

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 | Offshore Tips, Outsourcing | Leave a Comment

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.

October 8, 2008 Posted by Nick Krym | Making Offshore Decision, Offshore Vendor Selection | Offshore Myths, Offshore Traps, Outsourcing | 1 Comment

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.

October 4, 2008 Posted by Nick Krym | Managing Offshore Engagements, Offshore Vendor Selection | Offshore Tips, Offshore Traps, Outsourcing | 4 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 | Offshore Tips, Offshore Traps, Outsourcing | 1 Comment

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. For example you can reduce the rate by committing to large number of the resources or longer term of the engagement, by agreeing with termination fees, etc.

Here are a couple links for more detailed view on this subject:

Offshore outsourcing statistics for services in 2007
Global Services Location Index (GSLI) for 2007
Choosing the Right Country for IT Offshoring

And finally, the rate table, take it with a huge grain of salt though

Group of Countries	Outsourcing sweet spot	Rate Guideline, USD an hour
Canada, Israel, Ireland some Eastern European countries such as Hungary, Romania	R&D activities, Java/.NET, mainframe, product development	35 +
Most of Eastern European countries such as Russia, Ukraine, Czech Republic, Poland, some South American countries such as Brazil, Argentina	Mobile development, some R&D, C/C++, Java/.NET, product development	25 – 45
India	ERP, maintenance, mainstream development, Java / .NET, QA	20 – 35
China, Philippines	Java / .NET, QA	15 – 25
Pakistan, Malaysia, Vietnam, Chile, Bolivia and many new outsourcing players	TBD	10 – 20

September 26, 2008 Posted by Nick Krym | Making Offshore Decision, Offshore Vendor Selection | Offshore Tips, Outsourcing | 3 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, Lighter Side of Outsourcing, Offshore Vendor Selection | Offshore Bloopers, Offshore Risks, Offshore Tips, Offshore Traps, Outsourcing | 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 | Offshore Tips, Offshore Traps, Outsourcing | Leave a Comment

Offshore Risks: Team and Personal Impacts

Transferring even a small portion of your development offshore has inevitable impacts on your team and yourself. The impact could be dramatic to a degree that it defeats the purpose of outsourcing. Each of the dimensions of the impact should be considered a risk that needs mitigation plan and is dealt with efficiently through out the lifecycle of outsourcing. I’ll touch upon most significant areas:

Loss of team support / respect / relationships with the team. Even the most open minded employees on your team will be concerned with offshore introduction. And they should, the practice of outsourcers replacing the sheer fabric of the company, it’s all too familiar. As an instigator of the process you are likely to become a target of negativity. It comes in all shapes and forms with essence being “you are a traitor of ”. I remember well one of my key architects giving me an ultimatum “it’s me or them”. I do not know of any bullet proof shield here, the chances are some percentage of loss will happen no matter what you do. For me the best risk mitigation strategy in this case has always been transparency and honesty – when you can afford it. I do my best to personally deliver the message to every member of the team or alternatively setup a process which ensures consistent and accurate delivery of the message.

Loss of team spirit / internal unease. Mutual trust even in small teams has some level below 100%. Even a perfectly delivered message will be taken with a grain of salt and generate negativity. So only medicine here is reinforcement of the message – positive reassurance is like food – you can not get enough for life time in one seating.

Decrease in team’s productivity / commitment. Loss of key personnel / technology and business knowledge loss. Loss of team spirit / internal unease even if managed well is likely to result in tangible losses. You need to plan for them in advance of introducing the idea into your organization. Do you have sufficient redundancy in your organization to deal with inevitable loss of key personnel? Are your schedules have sufficient padding to cover for loss of productivity? Are your knowledge transfer / retention devices in place? If answer to any of these and similar questions is ‘No” you need to deal with closing the gap first and searching for vendor after that.

On a personal front the risks are substantial as well. What would championing an offshore initiative would do to your career? What’s your organization’s risk tolerance? What is its failure tolerance? How would the failures of the vendor affect your position in the organization? And so on – there are countless questions to ask here.

But even more important set of questions is around lifestyle impact. Are you prepared to shift work hours? Are you ready to deal with the never ending stress? What is your own failure tolerance?

I remember welcoming Paul Lake (an outstanding account manager for a prominent IT outsourcing company) to a role of AM on an offshore engagement. While no stranger to IT outsourcing he had never dealt with offshore side of the house. “That’s the end of the life as you know it…” – I told Paul – “You will now need to learn how to start every call with “I am sorry, I have to apologize…” I wish I was at least somewhat wrong…

September 23, 2008 Posted by Nick Krym | Making Offshore Decision, Offshore Vendor Selection | Offshore Tips, Offshore Traps, Outsourcing | 2 Comments

Offshore Vendor Selection: Site Visits

The idea of this post partially came from Offshore Visits. Tom’s post is about visits to an existing vendor, the visits during vendor selection process are quite different though.

I am fairly convinced that the unwritten rule – “must visit perspective vendor site to make a selection” was originated by offshore sales force. This is a well known closing technique similar to test driving the car (“must drive before you buy”) a.k.a. “puppy close”. The goal of the salesperson is to build your commitment to purchase and getting you involved, getting you to invest the time paves the road to closure.
From vendor’s standpoint on-site visits help tremendously in many other dimensions, for example having you on their territory (care salesperson would take you to his office “just to discuss some details”), playing one of the strongest powers of persuasion – reciprocity, etc.
Does it mean that to avoid high pressure of sale you should avoid on-site visits? Not at all. You just need to keep your eyes on the ball and counter the pressure. Shear understanding of the role the site visits play in the selection process will help a great deal. Also here a few simple techniques that should help you counter the pressure:

Visit several vendors on the same trip.

Separation of duties may help a great deal – if it’s at all possible use people not involved in the final decision making to go on the trip.

Be the driver of the agenda for all meetings on the trip.

Concentrate on your needs and things you should accomplish on the trip.

Take a few days off after the trip to do some personal travel and enjoy the scenery which you may never have a chance to see again.

The main goal is to make progress in your vendor selection in a way beneficial to you and not helping vendor to close the deal. In that light I find site visits extremely helpful and educational. My typical agenda would include:

Interview with perspective team (I usually go for marathon interviews – 20-30 people per company, 20-30 min per person)

Informal interview of managers, executives, etc. – I do not interview them per se, instead get a chance to see them in action

Review infrastructure, take a pick in server rooms, see desktop environment

Check out employee lifestyle – workstations, libraries, transportation, food, break rooms, wallpapers, etc.

Assess physical and other aspects of security

I do my best to avoid:

Meetings with large participation and no purpose

Sales presentations in any shape or form

Any optional activities that do not pass sniff test

September 19, 2008 Posted by Nick Krym | Making Offshore Decision, Offshore Vendor Selection | Offshore Tips | 1 Comment

Offshore Vendor Selection: Criteria

There is no one-fit-all list of vendor selection criteria, as the list depends on the organization, its needs, scope of outsourcing initiative, etc. I would like to suggest some items that you may want to consider for including in your list. To offer some structure to the list I put items in five major groups:

Macro Factors. This group includes criteria important for selection of outsourcing region and type of outsourcing organizations to pursue in your search.

Critical Factors. The group of selection criteria covers items that are critical for the success of the outsourcing initiative.

Relevant Factors. While these search criteria are important I always take them with a grain of salt as assessment of these factors is complex / subjective.

Things to Consider. Tie breakers, items of relatively low importance which could still affect your decision with consideration of special circumstances, etc.

And Personal Factors. That is a very important group of criteria if you are the person who has to carry on the engagement. If you only charged with selection these items should reflect needs of future stakeholders, assuming they could be reasonably assessed.

My recommendation is that you take a critical look at the list below and pick only items of the high importance; selecting vendors based on an excessive list of criteria would be a daunting task.

Macro Factors

Geography – Region / Country / City. Impact of locale on outsourcing initiative is multifold; in large degree the geography determines time differences, language, culture, history, average rates, typical turn over ratio, etc. There are however some notable fluctuations based on specific city and company. For example some companies in Eastern Europe change their work hours to minimize time difference.

Political Stability. Political stability will affect multiple aspects of an outsourcing relationship, an impact range from minor fluctuations in productivity to mandate to cease the operations.

Legal System Maturity. Generally you are not planning on going to curt with the vendor yet you should never dismiss a possibility of that happening. What’s good about your NDA or MSA if its clauses are not enforceable?

Company Size and Organizational Structure. The attention you receive from the vendor is directly proportional to percentage of revenue your business represents; see offshore outsourcing Rule # 1.

Business Model Match. Search for vendors that support and have track record of executing under the outsourcing model that is right for your organization. See Vendor Selection Rule # 3.

Financial Stability. Multiple aspects of financial stability are important factors in the selection process, with most important being profitability and cash reserves.

Time in Business. The time in business should be defined as the time in doing business in specific model / under specific circumstances matching your needs. See Vendor Selection Rule # 3.

Business Focus. Many outsourcing vendors chase any and every business opportunity inevitably creating organizations with unstable structure, staff and culture.

Critical Factors

Capability Maturity. Certification level. See Vendor Selection Rule # 2. Make sure that certification is applicable to the specific ODC / location you are considering.

Access to the Top. Level of access to executive management / decision makers. See Vendor Selection Rule # 4.

Methodology Match. Is methodology you are planning to use is in DNA of the vendor? Does vendor has a track record / history of using specific methodology in the target ODC? See Vendor Selection Rule # 3. Keep in mind that methodology is bigger than just SDLC, it should cover project / program management and other essential process.

Delivery Track Record. I would give that criterion a very high weight and would do my best to assess the track record of success on engagements similar to your initiative. Keep in mind specific aspects of your engagement such as change rate ratio, urgency of deadlines, etc.

Staff Competency & Domain Expertise. It’s clear that staff competency is critical to the success of the initiative. To rate that criterion you would need to decipher what the competency of staff assigned to your project would be. That would require understanding vendor current state of competency, sourcing and competency building methodologies.

Training. Tightly related to previous item this one is all about assessing what vendor does to sustain and increase competency of its employees.

Knowledge Transfer and Retention. With turn around being unavoidable knowledge transfer and retention are critical to “average competency” of the organization. To rate that criterion you will need to understand what tools, processes, and methodologies are used by the vendor to assure continuity of knowledge.

HR Practices, Staff Sourcing & Development. Vendor activities in order to find (“source”) and retain its employees are critical to countering turnover and increasing “average” resource competency and quality.

Data Security & Privacy. This criterion is particular important if your organization is dealing with sensitive data such as financial or HIPAA covered data. You need to look into multiple aspects of security (policy, physical, network, data, etc.). Assessing state Data Security & Privacy could be very time and resource consuming. Asking for results of a third party audit is probably the easiest short cut.

Relevant Factors

IP Protection. IP Protection is a critical factor yet assessing it is extremely challenging, see some of my thoughts in Protecting Data and IP when Outsourcing Offshore.

Organizational Mission. Alignment of organizational missions may have a good positive impact on success of your project. The chances of finding the alignment are not high though.

Client Management. Client management or account management is especially important when access to the top is limited.

Quality Management. Some organizations, in particular those high on CMMI scale, offer somewhat independent quality management which could be a value ad to the engagement in a long run.

Things to Consider

Organizational Statistics. Organizational statistics, such as %% of sales vs. development, %% of people with advance degree, etc. could offer interesting insights on the organization and suggest trends.

Outsourcing Tools. Engagement tools such as communication dashboards, time tracking tools and others could offer substantial value in tracking the progress.

Specific Expertise. Narrow niche domain expertise or specific technical competence offered by vendor could be important if not critical factor. I find counting on that fairly risky.

Network Infrastructure. Many outsourcing companies today offer network infrastructure at par or even better than you may have in house. Its sufficiency needs to be verified though.

Telecom Infrastructure. Similar to the item above, strongly related to geopolitical criteria.

Personal Factors

There is a great variety of personal factors that should be considered. They range from personal preferences to geography to your own risk tolerance, from your career aspirations to knowledge of foreign languages. And depending on your relative weight within organization they might be even more important than critical factors.

September 19, 2008 Posted by Nick Krym | Offshore Vendor Selection | Offshore Tips | Leave a Comment

Offshore Vendor Selection: Basics

Nothing is as critical for the success of your outsourcing initiative as finding a right vendor. Right vendor doesn’t have to the biggest, most prominent, etc. It just needs to be the right vendor for you, somewhat similar to a partner in a personal life – it’s all about a match. But that’s where the similarity ends, chances are you won’t run into a perfect vendor at a friend’s wedding and unlike in personal life by no means when you meet the right vendor “you just know”.

In order to zero in onto a right partner in reasonable time you need to go through many steps; here is the backer’s dozen of the most important:

Identify and engage selection process stakeholders.
Verify executive sponsorship / commitment / support.
Define and agree upon the communication plan.
Define and confirm / get approved the scope and budget of the initiative.
Identify and confirm the budget for the selection process.
Define selection criteria.
Decide on items you won’t compromise on.
Define selection process details / procedures.
Define success and exit criteria for the selection process.
Identify the team charged with the process of selection.
Identify the team charged with decision making.
Go through the selection process and results analysis.
Finalize vendor selection and move into next stage of the engagement.

That might look like a long list, well, let me tell you – it’s a short version. All the items on the list are mandatory and price for missing any one of them is quite hefty, mainly paid in frustration, lost cycles, ruined relationships and lost credibility.

Approach to process design (item 8 on the list above) depends in a large degree on your budget and timeline, scope of the outsourcing, and the organization’s culture. It could vary from a swift selection from a handful of companies to a multi-step RFP process performed by a third party. For example here is a high level breakdown of the process I recommend for midsized software organizations:

Identify / finalize your target outsourcing model.
Formalize list of selection criteria.
Define weight for each of criteria. Multidimensional weigh tables could be helpful.
Narrow the scope of outsourcing on several dimensions – geography, vendor size, years in business, etc.
Develop an RFP around your selection criteria.
Develop initial list of vendor – recipients of RFP.
Issue RFP and manage Q&A and proposal process.
Select an initial short list of vendors based on results of proposal analysis.
Create a final short list by going through vendor interviews / proposal presentations.
Go through on-site visits and zero in on 2-3 semi-finalists.

One of the ingredients critical for success in vendor selection is the search criteria list. There is no one-fit-all template I could share. Creating such a list is not overly complicated and I will cover it in separate post.

September 15, 2008 Posted by Nick Krym | Offshore Vendor Selection | Offshore Tips | Leave a Comment

Top 10 Technology Tasks to Outsource

If you listen to an offshore vendor you will quickly learn the top 10 or 1000 tasks you should outsource. The chances are anything and everything that you do will be on that list. And that would be the list of things the vendor wants you to outsource. Take a look for example at Top 100 Projects You Can Outsource. The real question is about what is good for you, and of course it depends on your specific needs and challenges. My first outsourcing item does not currently land itself well in offshore model so I did not include it in top 10 - Data Center / Hosting. That covers hardware / networking equipment / etc. for range of systems – production, staging, development, etc. environments. The “degree” of outsourcing may vary greatly and depends on the maturity of your staff, you demand dynamics, etc. You may only take the space, bandwidth and power; expand it to fully managed infrastructure or even consider grids such as Amazon elastic cloud.

Taking a viewpoint of a midsized software developments company here are 10 items I found to be on the top of list of tasks to outsource in technology.

1. Security / Availability Monitoring. In my experience I found that achieving aggressive service level benchmarks while maintaining high level security and privacy is practically impossible for a small or midsized company without use of Managed Security Monitoring. The scope of outsourcing may vary greatly depending on your needs. In my current place I outsource security monitoring and use third parties for security testing including ethical hacking.

2. Database Administration. I found outsourcing of DBA tasks, in particular related to supporting uptime of critical systems, extremely cost effective. Currently I use third party to monitor my production databases on 24×7 basis and use consulting from the same vendor on tough DBA design tasks.

3. Black Box Testing. I found that outsourcing some of QA tasks, in particular Black Box testing gives me great flexibility and has good price performance. In my view the key is to outsource appropriate portion of testing leaving sufficient portion in-house for acceptance, cross checking, knowledge retention and many other key elements of the development process.

4. Usability Testing. In my view Usability Testing is a perfect task to outsource due to many reasons with most important being an independent / objective feedback which is difficult to achieve with captive resources, other reasons include lack of in-house expertise and high cost of tools and infrastructure.

5. Graphical Arts, Writing and other Creative tasks. Assuming that Creative tasks are not the core of your business you may find outsourcing of it to offer dramatic price performance. With huge supply of freelance and offshore talent you can find high quality resources at a fraction of the price of high end firms and even in-house resources.

6. Tech Support. If you have to support your products the front line of Tech Support is one of the areas that can greatly benefit from outsourcing. Of course you have to be very careful in outsourcing any customer facing activities, and tech support is one of those arrears that got particular strong negative rap.

7. SEO. Search Engine Optimization could be quit laborious and requires in-depth knowledge of the techniques, latest trends, and subtle differences. Some offshore shops specializing on SEO offer performance based approach to compensation.

8. Software Maintenance and Sustenance. I found outsourcing of those “less glorious” tasks relatively meaningful, especially when I had a large legacy product to support. One of the value add items in outsourcing of maintenance task is potential morale boost for the local team. A word of caution here – as outsourcing of these tasks only pays off in a long run.

9. Reporting. Developing of a large variety of reports for internal and external clients often could become a considerable burden on technology team. Using offshore resources to produce and support custom reports in experience paid off quite well in many cases.

10. Technology Migration. Migration tasks could be perfect candidates for outsourcing, for example moving your database from MS SQL to Oracle, an app server from WebSphere to JBOSS, or migrating code from VB to VB .NET. The word of caution – some migration tasks could be IQ-demanding heavy lifting and require a lot of in-house efforts before they could be moved offshore.

I said earlier that these 10 items are on the top of my list. Well, in many cases they formed the list in its entirety. You may consider outsourcing all these items before you move on onto more challenging and riskier outsourcing tasks.

September 12, 2008 Posted by Nick Krym | Making Offshore Decision, Offshore Vendor Selection | Offshore Pros, Offshore Tips | Leave a Comment

Selling offshore concept to your organization

Let’s assume that you are sufficiently sold on the idea of using offshore. If you are not, stop right there. You will not be able to sell your organization on any idea unless you believe it 100% yourself. There will be a plenty of people wildly against offshore and unless you are true champion of the idea it will be an uphill battle. More so there is a good chance that there will be a plenty of people supporting and even promoting the idea for all wrong reasons. Unless you know and believe in what you’ll be doing you will be stuck with delivering on wrongly set expectations against unachievable goals, and the time to update resume will come sooner than you think.

The next step is introducing offshore into your organization. Unless your organization has history of success in using offshore that will be a complex long-cycle process of selling the team on the concept itself, its benefits, and your abilities to mitigate the risks.

Your initial introduction may follow the traditional pattern, for example:

General state of the organization

Strong foundations

Budget cuts

Competitive pressure

Challenges / pain points

High attrition

Recruiting failures

Time to market pressure

Solutions considered

Local subcontractors

Internal structure changes

Offshore

Why offshore

Local subcontractors

Pros

Cons

Decision

Internal structure changes

Pros

Cons

Decision

Offshore

Pros

Cons

Decision

Expected returns

Goal 1 – SMART Success Criteria

Goal 2 – SMART Success Criteria

Goal 3 – SMART Success Criteria

Risks & Risk Mitigation

Risk 1 – Mitigation Plan

Risk 1 – Mitigation Plan

Risk 1 – Mitigation Plan

Control mechanism

Governance / Oversight

Metrics / Feedback

Exit strategy

You may have to sell to different groups and audiences such as execs, your team, and investors. – tune your presentations for each audience.

Couple words of caution:

Do not overuse “negative sales approach” (something you might have learned from Sandler Training). You need to get your audience to support the idea for a long time, you need them jazzed up enough to get over the hump of initial rejection and even more important through the turbulence of establishing the relationship.
At the same do not oversell – that’s a self death sentence. Remember that offshore is likely to fail your lowest expectations.
Do not delegate selling to offshore account managers and/or sales execs. They will offer you that and will gladly act on your behalf. They will probably do a decent or maybe a marvelous job and you will lose control over the situation. Most likely they will over commit and you will be the one to under deliver.

Unlike in a traditional “hunter” selling model with a sole target of closing the deal you have to prepare yourself for never ending “farmer” selling process. As inevitable issues creep up and buyers remorse overwhelms some of the stakeholders you will need to manage the expectations and continue showing benefits of the offshore … of course if you see any.

September 11, 2008 Posted by Nick Krym | Making Offshore Decision, Offshore Vendor Selection | Offshore Tips | Leave a Comment

Vendor Selection in China

This post is a summary of vendor selection trip to China made for a purpose of s/w outsourcing initiative for a midsized product company. The main focus of the trip was “profiling” of the vendors that made on a short list after a rather involved RFP process.

Profiling involved in-depth interviews of employees ranging from Sr. PM to Jr. QA analysts. I had a chance to interview over 60 people, and I believe that I had a chance to work with a somewhat fair sampling. I would expect that if employees were selected for interview completely randomly I would have the same professional skills ratings but English skills ratings would be substantially lower.

The table below presents a summary of my view on the software teams I’ve seen during the trip. Professional skills are rated from 0 to 10; 0 means no knowledge of the key subjects, 10 means exact or above expectations for the position. English skills are rated from 0 to 10, 0 means no knowledge, 10 means fluent (strong accent, minor grammar mistakes, etc. acceptable).

Position	Professional Skills	English Skills	Comments
Account Management	5-8	6-9	I did not interview AMs per se, I had a plenty of time to observe their work though. Skills / understanding of AM practices were not at all impressive. While the hospitality was truly commendable understanding of AM activities was far from what I would expect from professional AM / sales / presales team. In particular the ability to listen and concentrate on my needs versus out of the box presentations and sales pitches was not demonstrated.
Project Management.	4-6	5-8	I interviewed 2 PMs, 2 were dreadful, one good, the rest were semi-decent but junior. Most of the PMs had almost no theoretical knowledge and border-line acceptable hands-on skills; only one was PMP certified, unfortunately he needed an interpreter to communicate. Real hands-on PM experience was ranging from 2 to 6 years. Most of the PM in US terms could probably be ranked somewhere between a Project Coordinator and Junior PM.
Business Analysis.	3-5	3-7	Unacceptable. I interviewed at least 8 of them and the only one I would possibly consider was a junior Indian girl. Most of them had moderate English skills, but still far less than you would expect from a BA. Their skills in written English were notably better but they really straggled in spoken language; understanding them was a challenge as well. Their domain expertise was not impressive even for the projects they worked on. Functional skills such as ability to gather requirements were very poor. Technical skills such as data modeling skills were practically non-existent.
Junior Developers (“coders”).	3-8	4-8	Developers range from very bad to pretty good. Most of them offered very poor theoretical skills and narrow and shallow practical. Need to be hand-picked, but there is a large pool to draw from. I would expect a hit ratio of 1 out of 4. I saw great deal of desire to succeed and multitude of signs of superb work ethics.
Senior Developers (“architects”)	3-6	3-5	Very poor, most of them at best would qualify for mid-level developers. English skills are notably worse than juniors. The more senior the person is the more difficult s/he is to understand. The only good guy I met (would rate highly in Silicon Valley) required an interpreter.
Technical Leads	5-6	4-7	Mediocre. Probably not self sufficient on tasks requiring dealing with complex technical issues. They seem to be generally a combination of a mid-level developer with a junior PM. I would say on both PM and technical accounts they are a notch lower than I would expect in the USA. On the other hand I saw a very strong drive / desire to succeed which could possibly compensate to some degree for the lack of knowledge.
Junior QA, Black Box	6-9	5-10	Testing skills ranging from good to very good. English at pretty decent level (most of them came from English studies or had lived in English speaking countries). Most of the QA analysts I interviewed seemed to have a great personality to position match.
Junior QA, Automation	4-5	5-7	Very small pool, most of them were mediocre at best with very limited exposure to tools. Typical “record and play back” skill set. Most of them had a career path of black box tester to an automation engineer (no development background).
Senior QA, Automation	4-5	3-5	Bad. I saw only four of them though; both skills and language were below mediocre.
QA Lead	7-8	5-8	I saw 9 QA leads and all were OK, nothing spectacular but very focused, detailed oriented, well organized, etc. Good grasp on QA process (very specific to the company’s process though). Understanding / grasp of QA automation at very basic level.
General Management	5-10	6-10	Very strong business leaders with outstanding work ethics and commendable drive. Mostly ex-pats / returnees from Western countries / Hong Kong / Singapore. However some of them were not professionally strong as they seem to be able to get the jobs on the raising wave of outsourcing mainly due to their western credentials. For example one of the execs I met was a Ph.D. in theoretical physics with no prior consulting / sales / software experience, very smart guy with very little experience / exposure / understanding…

September 9, 2008 Posted by Nick Krym | Making Offshore Decision, Offshore Vendor Selection | China Outsourcing, Offshore Cons, Offshore Pros, Offshore Tips | 1 Comment

S/W Development Outsourcing: China vs. India

A few months ago I went through a vendor selection process for a technology company in SF Bay Area. The goal was to find a vendor that would become a long-term partner / a part of a local development team. My clients were set on considering only two countries – India and China.

The size of a potential outsourcing deal was fairly small: ~15 people. That would roughly correspond to $1M on annual basis. The size of engagement was still big enough to give us a chance to pick a company from a large pull of vendors who seemed to be interested. Here are some observations based on our analysis:

Rates

In both countries we saw a plenty of companies prepared to compete on price and go very low just to get the deal. Larger / more mature companies had notably higher rates, many of them with very similar message “We are by far not the cheapest but we are the best”. Considering companies we liked the rates for India depending on position and company were roughly between $20 and $35 an hour with blended rate for our team ~$30; the rates for China were roughly between $15 and $30 an hour with blended rate for our team ~$20;

Access to Resources

Access to resources in high-tech centers of India is getting increasingly complex, finding It talent ion cities such as Bangalore is almost as complex as in San Francisco. Outsourcing companies also have to compete with subsidiaries and offshore divisions of multinational corporations such as IBM, Microsoft, Accenture, etc.

We still were surprised with how difficult and slow the sourcing process was. It seemed that finding even mainstream roles such as .NET developers or Winrunner QA guys was practically impossible.

We found that access to resources in China was not as complex. It appeared that companies in China were able to staff up for a project 3-5 times faster than India companies. In example confirmed by the references it took 2 months to build a 30 FTE team versus 9 months for the same by Indian Tier 1 InfoSys.

Resource Quality

The companies with $5M-$20M revenue range (our target based on scope of outsourcing) fall in a group of 3rd to 5th tier companies with inevitable impact on their access to resources which is exacerbated by general scarcity of IT talent. So it was not a surprise for us to see very poor quality of resources. Our average “hit rate” (number of people we would consider for “hire” vs. people presented to us by the vendors) was 1 out of 4.

Companies with the same $5M-$20M revenue range are the first/second tier companies in China with top pick in off campus hiring as well as other methods of employee sourcing. We saw that as a solid, and possibly the most important, advantage for Chinese firms. However our hit ratio was even lower than in India – 1 out of 5.5 due to serious communication / language handicap.

Concentrating only on those resources who we considered potential “hires” we saw a decent blend of theoretical and practical knowledge with some diversity in skills / background / experience in India. Our potential “hires” in China showed rather weak theoretical knowledge across the board. Their practical skills were solid yet extremely narrow; most of the “good” people we talked with were “pigeonholed”, and did not seem to mind.

Employee Turnover

Getting honest information about turnover, retention and attrition seemed practically impossible so we got the numbers from unsolicited references rather than from the vendors.

Most of the large s/w outsourcing companies in India have turnover rates exceeding 30%. Attrition is particular high in large centers such as Bangalore, Hyderabad, Mumbai, New Delhi. For small companies it is not unusual to see offshore staff turnover rates exceeding 50%.

Turnover rates in China outsourcing industry are under 25%. The companies that were selected claimed to have attrition rate about 15%. We saw low attrition rates as probably one of the greatest advantages of China over India.

Communications

There is no comparison in communication skills of consulting work force in India and China. Command of English language for majority of people we interviewed in India was far stronger than mine. In China the situation was opposite, more so the more skilled and senior the resource the lower his/her language skills.

Language in just one of many dimensions of communication. There are many skills important for bridging cultural differences and communication gaps. When it comes to dealing with USA companies Indian consultants have a huge lead on Chinese in many aspects, just to name a few:

Body language / facial expressions – much easier to understand and follow
Overall presentation skills
Understanding of professional lingo
Grasp on general rules of professional communications and office etiquette

With communications being one of the most important aspects of majority outsourcing initiatives India have a huge lead on China.

Mindset & Work Ethics

Talking with a large group of reference accounts (including unsolicited) gave us an interesting insight into mindset and work ethics of development teams in India and China. Here are a couple things that people had general agreement upon when it comes to resources from Indian vendors:

A mindset of typical outsourcing company is oriented towards revenue / profit and is focusing employees towards “billing hours” rather than customer satisfaction or success of the project.
High turnover rates and general acceptance of job hopping have devastating impact on resource’s attitude and work ethics.
Majority of consultants have over-inflated expectations in terms of their seniority, type of work they should be doing, and a speed of promotion.

We heard much more favorable assessment of mind set and work ethics for Chinese workforce:

With aggressive market share oriented drive of China s/w outsourcers employees of these companies are focused on high productivity and customer satisfaction.
Workdays of 10-12 hours are not at all unusual (note that billing is typically negotiated on monthly basis with 8 hour workdays).
There is a strong prevalence of team values over individual.

The workforce work ethics present one of great advantages of the outsourcing companies in China. Combined with lower levels of flexibility in job market (partially due to the country’s political and economical structure) the work ethic to some degree offsets luck of knowledge and experience.

Total Cost of Outsourcing

And finally – Total Cost of Outsourcing (TCO). TCO is the cost that accommodates for the communication overhead, lower productivity, and all other costs that are not reflected in the rate. In a large degree assessing the TCO requires substantial experimental data with a specific vendor. Based on a survey of the references during this engagement, my own experience and experience of similar companies in terms of the structure and the scope of outsourcing we came up with interesting numbers presented below. The numbers are presented as a percentage of savings / losses over typical full time employee rates:

Project Type	India	China
Small R&D projects	Loss 25 – 45%	Loss 30 – 70%
Large R&D projects	Loss 10 – 15%	Loss 10 – 15%
Small mainstream projects	Loss 10% – Saving 10%	Loss 15% – Saving 15%
Large mainstream projects	Savings 10 – 30%	Savings 15 – 45%
Large QA (black box) projects	Savings 15 – 30%	Savings 25 – 50%

September 5, 2008 Posted by Nick Krym | Offshore Vendor Selection | China Outsourcing, India Outsourcing, Offshore Cons, Offshore Pros | 5 Comments

Top 5 Rules of Offshore Vendor Selection

The key to building a list of vendors to consider in your outsourcing initiative is narrowing your search. There are only ~20,000 outsourcers in India alone – picking a good one should be just a walk in park… Jurassic Park so to say… Start with identifying geography, business model, maturity and size of target offshore vendors. Here are a couple tips (Nick’s Rules) to consider for narrowing down your search:

Rule # 1: Size matters. The attention you receive from the vendor is directly proportional to percentage of revenue your business represents. If a revenue stream your company generates for the vendor is a rounding error in the vendor’s AR this vendor is probably far from a perfect match. On the other hand you will have a major misfit if a minor fluctuation in your business needs send your vendor in a frenzy of on-a-spot hiring or forces them to lay off a half of the company. There is not magic %% and boundaries depends on your personal risk tolerance and many other factors. My recommendation is to set the boundaries early in the selection process and do not even consider companies that fall outside. I have to mention an important consideration though – many large outsourcing companies organize their workforce in business divisions dedicated to certain verticals or in some other manner. That creates smaller companies within larger organization, for example you could be dealing with $40M Healthcare division of Stayam rather than $1B organization. It’s not the same as dealing with $40M company and would have its own pluses and minuses. From standpoint of “attention share” it gets to be very close.

Rule # 2: Always ask for a Second Opinion. In today’s outsourcing world 3rd party confirmation of development process quality is called CMMI certification. Development processes maturity confirmed by high level CMMI certification is not necessarily going to make your life easy. As a matter of fact I have seen how it creates additional humps and complexities. What CCMI certification offers is reasonable guarantee of the process maturity and more important process and thus relationship predictability. You will face many issues during you outsourcing journey, handling them while working with CMMI5 certified organization will be smoother. On the other hand process heavy organizations won’t be able to turn on a dime and change the processes to fit your needs or circumstances. Therefore there is a strong correlation between importance of CMM and the size of your engagement. As a rule of thumb I would say anything beyond 60 man*month worth CMMI3, beyond to 20 man*years you may seriously consider CMMI5.

Rule # 3: Match is the key. Focus on the companies that have proven track record of working with clients akin to your company and on projects similar to those you plan to outsource. A supersized bodyshop with one gazillion of man*years experience in ERP implementations is not a good match for web 2.0 start up. Search for the match on every aspect of your engagement – technology, SDLC, vertical, etc. The supply of outsourcing talents is huge and chances are you will find what you need. Finding a good match has an incredibly high pay off and is worth the effort.

Rule # 4: Aim for the Top. Seek companies where you can get access to the top. Your chief architect’s brother is a CEO of a decent company in China? Your COO plays golf with an owner of offshore outfit in Brazil? Head of operations for an outsourcing company in Vietnam is your MBA alumnae? All those could become a good place to start. If you do not have any friends or connections – use professional networking and other means to gain access to the companies at the top level. Be aware though not to fall in the “relationship trap” and feeling obligated to do business with someone just because they are a friend or so. The friendship built on business is by far better than a business build on friendship.

Rule # 5: Remember the Babylon. One of the main obstacles and the reasons of failures in IT outsourcing is infamous communication barriers. If the organization has more than one employee it will have communication issues, needless to say the communication challenge could only be exacerbated by geographical, cultural and language diversity. So do not build new communication barriers if it is at all possible. Three quarters of your engineering team are Russians? Go to Russoft first. Do not have a single Mandarin speaking employee? Take China off your outsourcing radar.

September 3, 2008 Posted by Nick Krym | Offshore Vendor Selection | Offshore Tips | 2 Comments

Protecting Data and IP when Outsourcing Offshore, cont.

What can you do to minimize / mitigate risks of IP loss with your outsourcing partner? Here are some tips to consider:

General

Learn, understand and keep yourself up to day on Information security topics
Do not outsource your crown jewels. If it’s at all possible do not send any high value IP work offshore.
Hold the offshore vendor, its employees and subcontractors to the same or higher standards of Data and IP security as your own team.

Vendor search / RFP process

Include IP handling inquiries in your RFP process and in on-site visits
Consider legal maturity and IP laws from geopolitical view
Check for signs of casual treatment. For example while at the site visit ask developers what they are working on / etc. Your IP would be at best treated in the way it’s treated for current clients.

Contract / negotiation process

Make sure to include IP elements in the contract, have it reviewed by legal team specializing in IP. My preferred approach is to have vendor “work for hire” and keep the ownership all IP including IP produced during engagement.
Make sure that required clauses are enforceable and can be seen through downstream (employees, subcontractors, etc.). You can ask for specific language in chain of trust agreements and NDA documents.
Put excessive penalty clauses associated with IP loss in the contract. I also recommend including “right to inspect” and other control elements directly into the contract.
Decide on a level of additional security elements you need at a physical / infrastructure level, for example network separation, biometric locks, etc. Keep in mind that it usually comes with a notable price tag.
Align payments with deliverables and milestones. Put some time for verifying deliverable before your pay for them.

Kick Off

Define and communicate to vendor policies and SOPs on data and IP handling, e.g. level of encryption, separation of duties, firewall policies, etc.
Consider investing into education and helping your vendor maintain IP and data secure.
Consider an infrastructure approach under which none of the sensitive elements reside on a vendor side. For example developers could perform all work on your network using terminal services over VPN.

Ongoing

Make sure that all information and artifacts produced by your vendor are physically copied to your location.
Test integrity of the information delivered by the vendor. For source code my preferred method is using continues integration (CI) integrated with unit / smoke testing running of local repositories.
Control / inspect / audit the guards you agreed to put in place.
Consider independent audits by a 3rd party.

Termination

Plan / define termination procedures when establishing the contract
Use appropriate InfoSec processes and procedures to close accounts, revoke privileges, destroy media, etc.
And make sure that you part on good terms

August 29, 2008 Posted by Nick Krym | Managing Offshore Engagements, Offshore Vendor Selection | Offshore IP, Offshore Tips | Leave a Comment

Protecting Data and IP when Outsourcing Offshore

Securing data when working with offshore is a well known yet a very challenging task. It’s especially serious if your company deals with financial or private data, such as ePHI (electronic protected health information). In some way though dealing with data protection in offshore scenario while complex is a straight forward task, especially for companies that are used to that kind of challenges in-house. Protecting Intellectual Property (IP) takes the challenge to a completely new level.

Risk of losing IP through offshore outsourcing is serious and real. I would venture to say that overall price tag related to IP loss in offshore outsourcing is measuring in billions. For example a friend of mine found himself out of the job after an IP ordeal with an outsourcing company in Eastern Europe. He was responsible for a product line in developer’s tools space in late nineties. He found a hired a group of vary talented engineers from Byelorussia. The requirements were coming from USA and development work was done 100% offshore. Source control and document repository were maintained offshore what seemed to be the right approach considering aggressive nature of the project and weak communication infrastructure. Cutting to the chase – when it came to transferring of the finished product into the hands of the owner the team in Byelorussia simply refused to do so. Initially the asked for some ridiculous amount of money but later on dropped out of negotiations, re-branded the product and took it to the market themselves…

To mitigate the risk you first need to understand channels of IP loss, here are the main few to consider:

There is clear possibility of malicious / criminal acts relevant to your IP. Your product idea could be stolen, repackaged and sold by the very partner you have entrusted. Not just idea, the source code, processes, documentation.
Even more probable scenario arises when a disgruntle or “entrepreneurial” employee of your vendor takes advantage of gaining access to your IP, source code, etc. Of course that could happen with your own staff; offshore just exacerbates the issue / increases the probability.
Immaturity of vendor infrastructure (physical security, network security, etc.) could become a reason for massive IP loss / data exposure. Insufficient physical, network security and data security opens up data and IP for hackers of all sorts.
Poor understanding of data and IP security, insufficient or non-existing security policy framework has the similar effect, often with even more severe consequences.
Casual treatment of IP security by your vendor. I remember visiting one offshore outsourcer in Eastern Europe. During a tour of facilities my guide brought me to office which had a number of expensive physical guards in place. We still went inside and my guide started – “here where we have super secret project with the company I can not name, they are a major search engine that rhymes with “frugal”, wink, wink. Those guys use our Ph.D’s to…”

What can you do to minimize / mitigate risks of IP loss with your outsourcing partner? That would be a next post

August 29, 2008 Posted by Nick Krym | Managing Offshore Engagements, Offshore Vendor Selection | Offshore Cons, Offshore IP | 1 Comment

Next Entries »

About

The price one pays for pursuing any profession or calling is an intimate knowledge of its ugly side. [James Baldwin]

In IT outsourcing one does not need to go too far to get ultimately familiar with its ugly side. However, despite all disappointments and failures I honestly believe in offshore capacity and its positive impact on the industry. I’ve seen enough success stories to continue using offshore resources myself and recommend it to others. Offshore outsourcing is one of most powerful weapons in a technical leader’s arsenal. And like any other powerful weapon it requires careful handling and a great deal of knowledge in its use and application. Ugly enough even slight mistakes in its utilization could cost companies enormous pain and expense and technical leaders their reputation and career.

The goal of this blog is to bring to everyone involved in offshore outsourcing my 5 T’s – Thoughts, Tools, Tips, Tricks, and Traps of outsourcing. I hope you find it helpful.

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