Environmental Fears
As I mentioned in At Doorsteps of a New Engagement I have a new vendor to deal with. It is a company that has been working with my team for over two years and thus it’s only new for me. It took about a few days for me to encounter the first set of issues. And that set came from the area so common that it’s worth a post by itself – software environments. Below is an email which I was cc’ed on –
Subject: RE: WCM Publish failed
Ravi,
Please explain to me how the production environment does not match what is in UAT. This is unacceptable and must stop. This is not the first time a production turnover did not match UAT.
We need to review our build, turnover, and documentation procedures. This pattern cannot continue.
Looks familiar? I am sure it is…
If you are in business of delivering software as a service or similar to it the chances you will have the following environments: development, QA, staging, production, disaster recovery. You may also have dedicated environments including Build, UAT, Sand Box(es), Performance Lab, etc. If you work with offshore team the chances are some of those environments are duplicated in the offshore offices.
A number of issues arise as environments proliferate:
Offshore Negotiations: a Macro View
Negotiations are an integral part of business life, that’s pretty much a truism. More so negotiations for business are very much like breathing for human beings. Sometimes it seems that you can not make a single step without getting involved in some kind of negotiations – project scope / resources / time / quality; multiple aspects of employment relationships; vendor relationships; customer relationships; and so on. So it’s no surprise that an ability to negotiate is one of those mandatory job requirements that somehow never make it to job description.
While negotiation skills are important for any professional they are particular important and are put to real test when working with third parties and in particular with offshore. That’s why I decided to put a few posts to cover some of the most important elements of the subject.
Offshore negotiations like many other ones often come down to drawing a line in sand demarcating what’s mine and what’s yours – reaching an agreement on resource allocation, responsibilities, financial aspects and so on. Negotiating in its isolated “pure” form is an ongoing and often major portion of communications through the lifecycle of the offshore partnership. It typically comes up first during the initial contract negotiations, possibly as early as signing an NDA and later comes up at every change in direction ort pace.
What institutes a good negotiation? In a classic form a negotiated agreement is considered good if it is fair, wise, was reached efficiently, and is stable. I would a few more bytes to it – A negotiation went well if your interests are addressed, relationships are intact, you did not lose more than you gained in the process, you did not get more than you bargained for, and you feel good about it.
So, how do we get there?
First and the most important – before entering any negotiation you should understand the situation, the subject of negotiations, and what is at stake. It is amazing how often people jump into negotiation when there is nothing to negotiate (both parties are in violent agreement), too early or too late, or when negotiation is not the way to move forward. Identify the situation by ask yourself:
- What are the problems / issues?
- What are the affected parties?
- What are the timeframes?
Just a few days ago one of my providers called me with rather unexpected message “Nick, we need to increase the rate for some of our developers!” My initial reaction could have been “Rodrigo, are you completely out of your mind?” Tell you the truth that it actually was, internally. I did manage not to say it and instead asked the questions similar to those above. A few minutes late I realized that the problem was far less urgent and severe and that I had a plenty of negotiation space with potentially very promising outcomes…
Second step is gathering the information. In some negotiations that could be a rather involved process and it deserves a stand alone post, maybe a few; for now I will just mention the high points:
- Identify high-level information pertaining to the negotiation for the all parties involved.
- Identify position of your opponents – their stated goals and objectives in terms of what they “want”.
- Discover true interests behind the positions of your opponents – their true goals and objectives or what they actually “need”.
- Identify the situation as it pertains to your negotiation power, timing and skills.
- Discover the same about the situation of your opponents, pressures they are under.
Third step (time wise it could be preceding second step or done in parallel with it) involves defining your own position, your own “wants” and “needs”. As Seneca put it: “If a man knows not what harbor he seeks, any wind is the right wind.” Interestingly enough negotiating for the sake of negotiating is not such an uncommon event. Maybe an emotional rollercoaster of high pressure negotiations, blood taste in the mouth, or twisted pleasure of seeing your negotiation partner crumble to pieces is enough of a motivation, but what will it do for you in a long term?
Start with setting the desired outcomes – Best and Realistic:
- What exactly are we trying to achieve by the negotiations?
- What / Where / When / How do we want it?
- What / Where / When / How do we NOT want it?
- What is gained / lost by resolution?
- What are the achievement criteria?
Next go through some brainstorming and identify your alternatives:
- What are the alternatives that are available away from the table?
- What is your Best Alternative To Negotiated Agreement (BATNA)?
- What is gained / lost in case of no resolution?
- Exactly What / Where / When / How is BATNA manifested?
- Exit criteria. At what point do you stop negotiating and revert to BATNA?
The fourth step, involves tactical and organizational actions for preparing to the “official negotiations” or the process of reaching the agreement. It involves obtaining negotiating authority, setting up negotiation team and addressing all logistic components. There is much to be said about setting up environment for negotiation, in particular in cross-cultural negotiations.
And finally the last step – reaching the agreement. This step is by far the most complex and comprehensive. It requires plenty of skills, knowledge and patience. This step might vary in its complexity, length and structure depending on the complexity of the topic, positions of the parties involved, negotiation space, techniques, and many other dimensions. It definitely deserves a stand-alone post. For now let me just mention a few elements common for many comprehensive business negotiations:
- Initial Discussion(s) – at this stage the parties typically outline negotiations landscape and share their “wants”.
- Regrouping / Final Preparation – at this stage the negotiating teams define / adjust their strategy and tactical approach.
- Reaching an agreement – the “face to face combat”, the heart of the negotiations.
- Paperwork – preparing and finalizing documentation pertaining to the subject negations.
- Closure – signatures, handshakes, and communications.
OK, that’s enough for now; it also looks like I will need at least half a dozen of follow on posts; that will keep me busy. Hopefully there will be seats on BART at least on one leg of my commute, otherwise that might take awhile…
Offshore Negotiations Basics: Rules of Haggling
First, let me repeat something I wrote in an earlier post: 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 you owe it to yourself to go through some serious reading on the topic prior to diving into the deal making. Let me recommend a few classic books on the subject: Secrets of Power Negotiatingby Roger Dawson, You Can Negotiate Anything
Through the years in IT leadership position I negotiated many contracts with service providers, various vendors, consultants, employees and offshore companies. That doesn’t make me professional, so do take my advice with a grain of salt. More so, every negotiation is different in so many aspects that what worked in one could absolutely fail you in another.
Anyway, as introduction to offshore contract negotiations I am going to cover ten golden rules of haggling. You might ask: what does it have to do with professional contract negotiations? Well, barraging is the mother of all negotiations and more so there is a high chance that you will be negotiating with a vendor who’s coming from a culture with deep roots in a market style haggling.
Here they are the Ten Golden Rules:
- You must be ready to walk away. If you are attached to the goals of negotiation, if you can not walk away, you ability to get what you want is significantly impaired. Using Herb Cohen’s advice from You Can Negotiate Anything – you should care, but not that much. I strongly recommend reading Herb’s book or even better get it in audio version – he’s a great story teller and covers many of these rules at great depth.
- Look / act interested but never desperate. As a matter of fact if you feel / are desperate you should get someone else to negotiate for you. Acting is an extension of the rule number one. Basically you need to show that “you care, but not that much” and are ready to walk away.
- Keep your eyes on the ball. Negotiation is emotional process and in order to be successful you should never forget what the process is all about, what the goals and the rules are.
- Don’t try impress on the other side. That’s to some degree an extension of the rule 3. Your image is not the subject of the negotiations so just keep your eyes on the ball.
- Always ask for more than you expect. First, you might just get it. Even more important is that higher demands create negotiation space for both partners, and allow your opponent to save face even if they make bigger concessions.
- Gasp and act shocked (flinch) at the other side first proposal. This simple technique does a few things: it sets the pace of negotiation, puts you in the right set of mind, and helps to push your opponent to make the first concession.
- Never say yes to the first offer. By saying yes to the first offer you are not only setting yourself up for missing on a possibly huge opportunity, you are leaving your opponent with buyer / seller remorse.
- Never go down on price or make a concession first. Get the other side to step forward. Like many of the golden rules that one is easier said that done so if you are stuck just remember the rule one and make it clear that you are ready to walk away.
- Never make a concession without asking for something in return. Breaking this rule will put you up on a slippery slope of chain concessions.
- Always congratulate the other side. That is more than just being polite, it leaves the best path for the future negotiations.
Now let me give you the unofficial 11th rule: Sometimes the rules meant to be broken or Know where to stop. In many situations following golden rules might be detrimental to building a win-win relationship. For example if the other party is inexperienced in negotiations or in providing the services as the result your opponent gives up to much ground, paints itself in the corner, or brings negotiation to an impasse.
Your negotiating opponent is meant to be you partner and probably for a long time. So consider a metaphor of sparing with your friend in a kick-boxing gym: while you do want to win you do not want to inflict lasting injuries; now add to it little twist – what if you are far superior to your friend in the skill and power.
A few months ago acting as an intermediary between a US-based customer and a small, bright and very ambitious outsourcing company I was helping to negotiate a fixed bid engagement for developing a windows app. The initial bid came with the “asking” price of ~$100K. At that point I could have pulled out my 10 golden rules check list, I could have flinched, whined, screamed, pushed and threatened to walk away… and would’ve probably gotten the contract down to $70K or $80K. Instead I got on a phone with the vendor, than with the customer, than with vendor’s technical team, back with the client, etc. I finally got them to agree on $350K after two weeks of strenuous back and force. Yes, not a typo, 3.5 times the original bid. And that number I am certain would still keep the vendor on their toes and gives the client superb deal for the product.
You could easily reverse engineer the situation – the client being not very clear with the requirements vs. provider with typical overly aggressive “developer” mind set. All too common I am afraid. I love those small, bright and ambitious companies; unfortunately after being beaten into pulp by “professional” negotiators on the client side they either never deliver or end up one-hit wonders.
Outsourcing Piecemeal – Out-tasking
In BPO world Out-tasking has been known for quite some time. See for example
CompuPacific outsourcing whitepaper – “Outsourcing vs. Out-Tasking: Practical Advice” or an oldie but goodie – a white paper on out-tasking from CISCO. The basic idea is simple – out-tasking is typically described as farming out business processes or IT functions piecemeal rather than all at once. Examples of tasks that may be farmed out are data entry, document-based processing, such as claim handling, graphic arts development, and or document translation / localization.
Most typical definition goes as “Instead of divesting their back-office functions as a whole, companies contract out in an incremental and manageable way”. The top line benefit of out-tasking is typically stated as “out-tasking helps cut cost quickly without loss of control or high set-up costs.” The geography for out-tasking is similar to regular outsourcing with India and Philippines being far ahead of the pack.
Out-tasking could be indeed an efficient and effective way of supporting a technology organization, that if you can find a good partner, and that could be a little tricky. The issue is in volume of tasks that fall into the sweet spot of out-tasking. There are many ways of dealing with it, but first, what are good tasks to consider for out-tasking. Here are just a few to consider:
- All kind of graphical arts – need a power point presentation for a board meeting? face lift for a corp. website? helping your clients with corporate identity? Often these tasks do not justify in-house graphical arts staff.
- Creative and technical writing – press releases, web content, articles, newsletters, white papers, copywriting, editing, etc.
- Email and ad campaigns, in particular if they need to be run on ad hoc basis and do not require a lot of back and force with marketing.
- Occasional or even ongoing Search Engine Optimization activities (SEO); large spectrum of tasks here from SE submission to link building, etc.
- Usability testing. Rather controversial item, many usability exports tell you that outsourcing usability testing is doomed to fail. I do not belong to that camp though.
- Marketing materials from creative writing to brochures and campaign designs, sales and sales support materials. Outsourcing of these tasks is especially meaningful for small companies.
- Translation, internationalization, localization, etc. especially if these are once off or occasional tasks rather than ongoing activities
- Data entry of all kinds, for example transferring paper-based documents into electronic formats. BTW, these activities almost always benefit from outsourcing.
- Many types of legal tasks and services, for example developing agreements such as MSA, software licenses, terms of services, privacy policies, NDA, etc.
As you can see from the list above almost any company has a good deal of tasks that could be out-tasked. The next step is finding a vendor, or more likely vendors that can provide the services on out-tasking basis.
Finding an out-tasking partner require a different mind-set / different approach from those used when selecting an outsourcing vendor. The first rule and the main difference are to measure invest of the efforts in the search process versus the scope of task. Chances are you do not need to invest much and in case you made a mistake in selecting a partner it’s usually fairly easy to fix and find another partner.
Not that long ago we needed to build basic corporate identity for our new venture. The requirements for logo and look & feel of the site were rather ambiguous. Instead of going through the process of refining requirements we used what we had, got multiple graphical artist to bid on the project, picked half a dozen that replied first. In just a few days we had just under a hundred of logo prototypes. After a few internal meetings we picked the winner who completed the entire corp. identity package in a couple weeks. Yes, we paid a bit more that we could have but time savings alone justified it.
Similar approach could be used for many out-tasking activities. Finding providers that are eager to bid for your business is also fairly easy task, especially for things like creative writing, graphical arts, and most of the items in the list above. For example you are looking for Search Engine Optimization services. You may just google SEO services and logically those who understand anything in SEO would appear on the top of the list. Another approach could be as easy as posting a few sentences about your project under computer gigs on www.craigslist.org; make sure to stay anonymous otherwise vendor spam will be chasing you for months. Another, very efficient way is to use freelancing sites. There are a few dozens of them with very large community of individual freelancers and small to midsized companies offering the services. Most popular sites are www.odesk.com, www.elance.com, and www.guru.com. In addition to offering access to thousands of providers these site offer some value add by helping in managing vendor-provider relationship, for example offering escrow services.
Dealing with individuals and very small vendors has its pitfalls though. The rating systems provided by freelancing services are far from perfect. Continuity of services, quality of deliverables, and turn around time could be far below your expectations. I will cover some tips on dealing with it in a separate post.
If dealing with freelancers is not your cup of tee you may consider larger vendors who would be prepared to establish out-tasking relationship. There are many of those, in particular in India and Philippines. You may want to team up with a few of those on one side and with a couple of companies (buyers like yourself) on the other to provide sufficient volume of revenue stream to the vendors and meaningful pricing for yourselves.
Path toward Disposable Outsourcing: S/W Development
There are many very important aspects of SDLC related to s/w development activities which should be implemented whether you outsource or not. Some of them are essential to DOM. Your intermediary whether internal or external must verify that these steps are taken and not just as a checkmark on a SDLC compliance list, they have to be made consistently and to a degree that satisfies the intent.
The first is the code standards. Of course following language naming conventions goes without saying; there are a few more standards that have to be diligently followed:
- All names are in English (classes, variables, methods, etc.) ALL
- Sufficient level of comments, of course in proper grammatically correct English. Developers must understand that they are not required to write essays; they just have to get comments to unambiguous level.
- Same applies to headers, check in notes, etc.
Next is the documentation. Creating the documentation that could be used to learn about the code and its intent, that doesn’t lose concurrency and go stale, and that doesn’t cost you an arm and a leg is not a trivial exercise. As a matter of fact a detailed design / technical design documentation is one of the most controversial topics in s/w development methodology. In a large degree the documentation’s level of detail depends on the SDLC model employed. In particular the level of documentation details digresses considerably with level of agility of the process. That is often exacerbated by a low level of maturity of organizations electing agile methodology. I do not want to get too deep into this topic at this point, just want to point out several mandatory elements:
- High level functional and technical design documentation.
- Functional and technical design documentation at detail level, specific artifacts depend on SDLC methodology, type of the project, rate of change and many other organization specifics.
- Comments in the code written in a standard way that allow JavaDoc or similar tools to generate meaningful documentation is one of the most important steps. Same goes for DB schema.
A couple relevant notes here:
- Waterfall style processes with their high degree of details in documentation, staged delivery and isolated hand-offs work naturally with DOM, in particular when the vendor offers a higher level of CMMI maturity.
- Agile methodologies work exceptionally well DOM unless they are taken superficially. That becomes particular clear in attitude towards documentation. It’s amazing how many times I heard things like “we run agile development process, so we do not do the documentation”, never from anyone who understands agile though.
- In order to define an appropriate level of documentation for your process you need continuously evaluate value of documentation for the process and for execution on DOM vs. the cost of producing and supporting it.
Next, in no particular order some of great development practices that have been proven to work under broad range of models from clean room waterfall to XP:
- Unit Test written before the code, at best taken all the way to Test Driven Development. Take a look at www.testdriven.com a site with a lot of good references by Eric Vautier and David Vydra.
- Continues Integration. There is a plenty of info on CI and supporting tools. In CI builds I strongly recommend include smoke tests, subset of unit test suite, and a number of management reports. CI scope is typically different for check-in runs and nightly builds.
- Code Review. Somewhat controversial technique which might backfire if not performed properly; I would strongly recommend using tools to facilitate code reviews, in particular I suggest crucible.
- Frequent progress reviews with live demos; I recommend at least bi-weekly.
- Collective Code Ownership (CCO). There is however a plenty of controversy associated with this practice, in particular accountability. I see huge value in eliminating blind spots which CCO offers and recommend introducing “feature” or “area” lead. Under that model CCO still is taken to full extent when it comes to work unit allocation and yet there is a single point of contact for each “area”.
Outsourcing Trends for ‘09
As I mentioned earlier in ‘08 – the Year of Predictions it’s difficult to not to yield the temptation of making predictions. First, in the uncertainty of today’s economy almost every one is looking for those; second, all of us with strong opinions on the outsourcing have some predictions at least in our minds; and third, personally I am very curious whether I can get any close to what ’09 will eventually show…
Being new to the fortune telling market I have been considering cold reading techniques, the art of creative vagueness, and audacity of stating the obvious. Those all seem like winning strategies and after some considerations I decided to use them all and present my predictions in a form of Outsourcing Trends for ’09, so here we go:
1. India will remain the leading outsourcing destination. How about that? Well, let me add at least something meaningful to this “discovery”. When it comes to India I expect:
- a notable decrease in the rate of growth, I’d say mid teens to low twenties;
- minor decrease in a market share;
- consolidation with many casualties in the low end of the market;
- improvements in quality of resources and general metrics of the services such as turnover ratio for top providers;
- we will see a few megadeals mostly from the top tier vendors.
2. China will continue to straggle to grow its IT outsourcing offering:
- there won’t be substantial growth in IT outsourcing, the figures at best reaching high single digits;
- there will be some reshuffle of the top tier with some of the current leaders substantially giving up their position; my bet on the biggest loser is Freeborders;
- the outsourcing for Japan will grow stronger, US business will grow at a lower rate.
3. Russia, Ukraine and Byelorussia will continue loosing their edge:
- there won’t be any considerable growth in IT outsourcing, the figures will be in low single digits;
- there will be no reshuffle of the top / second tier; a few of the current leaders will be responsible for the most of the growth figures; companies below second tier won’t show growth and many cease to exist; the big guys will get bigger and stronger, my bets are on Luxoft and ePAM.
- the outsourcing for Europe will be responsible for majority of the growth, US business will grow at a very low rate.
4. Brazil, Argentina, Mexico will show some positive signs:
- the growth figures in IT outsourcing will be in a mid to high teens;
- formation of tier one will create a few prominent names with some companies really pushing for leadership position, in Argentina my bets are on Globant;
- emerging leaders in LA market will build ODC in smaller or less developed in terms of outsourcing countries;
5. Supply of IT resources will increase across the world:
- there won’t be any considerable growth in IT outsourcing in gross volume sense, the figures will be in low to mid single digits;
- the new outsourcing players such as Egypt, Morocco, Nigeria won’t make any ripples or bring anything substantial to the market just a few 100K of additional resources that will play in the low end of the market;
- while overall number of IT resources will go up, the rate of growth will go down, with less interest in the IT arena across the world;
6. IT outsourcing volume from US, UK, Germany, Japan, and other large IT consumers will grow at very low pace:
- there won’t be any considerable growth in IT outsourcing in gross volume sense, the figures will be in low to mid single digits;
- there will be however increase in percentage of work outsourced across the industry;
- geographical pie chart won’t change dramatically yet it will show more aggressive outsourcing to new destinations and nearshore.
7. ’09 will be a buyer’s market:
- Closing new deals, renewing existing and retain current customers will become increasingly more challenging; companies that do not invest in “farmers” and solid account management will pay for that dearly.
- The price wars and cost pressure will affect everyone; boutique shops with typical sales pitch “we do not compete on price” or “we are not the most inexpensive but we have excellent people” will need to adjust their message or get ready to face dwindling revenue stream.
- Vendors catering to small companies need to be ready for a wild ride, especially in the first couple quarters of ’09 – many contracts will broken, payments delayed, AR will grow and cash flow degenerate; even “good clients” will develop hearing problems and it will take much longer for US mail to deliver checks.
8. Rates on average will fall slightly or stay the same:
- the disparity in rates among offshore destinations will narrow: rates from Asia will grow while Latin America and Eastern Europe rates will fall;
- the average ratio of US “full time” rate to Offshore rate will slide notably;
- the gap between freelance rates across the world will continue to narrow.
9. One of the most interesting trends with some tangible events will come from top tier vendors going outside of their native land:
- The trend will be led by Indian outsourcers building ODCs in Asia (other than India) and Latin America. I would expect top destinations being China, Philippines, Brazil, Chile, and Mexico in no particular order.
- There will be some moves in opposite direction, e.g. China companies opening centers in India. The volume of those would be rather small.
- We’ll see some promising cross country hiring, in particular in sales and executive roles; this activities are likely for many vendors even outside of top echelon.
10. Engagement structure, contracting approaches and model usage will generally remain the same with a few emerging trends:
- We will see more large corporations with substantial offshore engagements buying those engagements from the vendors. Some companies will execute of their BOT strategy, some will approach vendors with “offers they can’t refuse”, some, especially smaller companies won’t be too generous and would cut the relationships without giving much warning.
- The new contracts will become more complex and will aim for accounting for currency exchange volatility, political instability, changes in standards of living, etc.
- We will see more usage of Disposable Outsourcing Model mainly driven by readers of this blog.
Well, that is a lot of trends, and some are neither sufficiently vague nor 100% obvious. We’ll see how well the world of outsourcing performs on a challenging task of meeting my expectations. The trick is of course will be in measuring the performance versus my objectives… Some of the stats should be available in late ’09 / early ’10, some would be very difficult to find, I guess I will run some polls or try other bullet proof methods of gathering BI…
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
Selecting Outsourcing Engagement Model
Model selection in terms of Outsourcing Engagement Models is not a trivial process and your choice depends on large number of factors such as nature of the outsourced activities, organizational maturity, budget, risk tolerance, and so on. Below are some simple guidelines that you may consider when making the selection. See also earlier post Offshore Model Selection: T&M vs. Fixed Bid for relevant info.
Resource Augmentation / Classic Augmentation / Extended Team.
- One of the easiest ways to start with offshore outsourcing.
- Scales well both up and down (adding or taking resources off the project).
- Works well for poorly defined projects and activities.
- Requires high management overhead.
- Tends to be costly especially for not well defined activities.
- Doesn’t leverage vendor’s processes / structure / quality.
Project-based Augmentation / Task-based Augmentation.
- Good transitional model, in particular applies well for large number smaller projects.
- Scales up and down reasonably well.
- Offers good control of the scope and budget
- Offers less control over the resource productivity.
- Requires fairly high management overhead.
- Requires high maturity of the vendor processes and structure.
Project Outsourcing / Full (Activity) Outsourcing.
- Good model for well defined projects with clear scope and deliverables.
- Requires minimum management overhead.
- Well control budget (assuming well defined project and low scope creep).
- Very dangerous model for large (scope / duration) projects.
- Very high risk due to low control of productivity and performance of the resources.
- Requires exceptional maturity of both customer and the vendor.
Offshore Development Center (ODC) / Captive ODC / Captive Teams.
- Could very cost effective in terms of total cost of outsourcing.
- Offers ultimate control of the resources.
- Allows using cohesive processes across organization.
- Very high management overhead.
- Very high internal resource / cost impact.
- Requires customer to perform many operations in offshore location.
Hybrid Model.
- Inherits pluses and minuses of the underlying models.
- Some minuses could be addressed by combining model.
- The pluses of the underlying models become weaker.
Build – Operate – Transfer (BOT).
- Inherits pluses and minuses of the underlying models.
- Introduces wide spectrum of new challenges, as both vendor and the customer need to operate well in three distinct different phases with completely different models.
- Requires exceptional maturity of both vendor and the customer.
Disposable Outsourcing.
- As I mentioned in my earlier post the model falls out from the list above since it’s more like an overall approach toward outsourcing rather than just a way to structure the engagement.
- The model could be applied on a top of different models.
- Minimizes risk associated with outsourcing.
- Is more expensive than underlying models.
- Offers add-on value in many aspects of the project, e.g. reducing impact of turnover
Outsourcing Engagement Models
There are more various engagement models than it is worth listing here; some models are just naming differences invented for “market differentiation” or slight insignificant variations. In general modeling the engagement depends primarily on project delivery model, ownership of the resources, and services provided by the vendor organization on the top of the services provided by individual associates / individual contributors. This post covers the most common models using most common terminology:
Resource Augmentation / Classic Augmentation / Extended Team. Under this model the vendor supplies individual contributors who work as a part of the team on T&M basis. These resources can work onsite or offshore and typically have double reporting structure – they would report into customer organization as well into their own org structure. The vendor organization typically provides services that include HR, MIS and miscellaneous admin support. Resources maybe organized in structure groups / teams. At some point the scale of outsourcing demands more comprehensive resource management, in these cases the vendor provides project / program management and other work structure related services.
Project-based Augmentation / Task-based Augmentation. Under this model vendor supplies individual contributors who work a specific project or a task order. The work is still performed on T&M basis with addition of some elements of Fixed Bid model. In particular the vendor typically forms the team with a structure most appropriate for the project, provides program management and quality support, engages process improvement and other services that harness company resources outside of the immediate team. That additional support is typically “free” meaning that its cost is included in the team rate. The vendor is also produces upfront estimates of the work and adjusts the estimates through limited scope control process. Typically the actual cost of the project should fall in 20% range of the initial estimates with exception of the scope creep.
Project Outsourcing / Full (Activity) Outsourcing. Under this model vendor delivers a specific project or takes on a specific activity. For example it could be a turn-key delivery of the system, full scope of activities for technical support, etc. The project outsourcing typically is done on a Fixed Bid basis, activities outsourcing could be done on FB or T&M basis. Under that model the vendor takes on full responsibility for the delivery and correspondingly has the freedom to form and operate the team based on their own processes and approaches. This model can extend to full technology outsourcing and beyond.
Offshore Development Center (ODC) / Captive ODC / Captive Teams. There are multiple permutations of this model with main commonality being the ownership of the resources. In ultimate scenario the vendor provides very narrow HR, MIS and Admin services to support offshore team which for all intents and purposes works for the customer. In that case the vendor charges “management fee” based on the cost of the services, rent, utilities, etc. This model while possibly the least expensive one puts much higher burden of resource management and utilization on the customer.
Hybrid Model. As the name implies the hybrid model is a combination of models above. One of the most common implementations of the model is used for large scale initiative that start with research / analysis / estimating phase performed under one model and then continue in single or multiple streams of projects using potentially different model. For example a project can start with estimating engagement on T&B basis that produces an estimate and a project plan for the next phase which is delivered on Fixed Bid basis with scope creep handled on T&M basis.
Build – Operate – Transfer (BOT). BOT is a transitional model. It can start as any of the previous models and after a specific period of time the entire team and supporting assets are transferred to the customer. The transfer could be full scope transfer under which vendor ceases to play any role in the engagement or partial, for example transfer to Captive ODC model. The logic behind the BOT model is clear: the offshore partner can initiate operations and reach operating stability much faster than in case it is done by the customer.
Disposable Outsourcing. That is not a common term; as a matter of fact I might be the only one using it. And the model itself falls out from the list above since it’s more like an overall approach toward outsourcing rather than just a way to structure the engagement. It is however very relevant and important. The objective is clear and simple – I want to be able easily and quickly terminate a contract with my vendor and find another in case I am not happy with the vendor performance. Disposable Outsourcing is a way to structure the engagement that it could be possible, and of course it’s not at all as easy as changing cell phone carrier, there is a lot to be done to get there. I will put a separate post(s) on that topic.
IT outsourcing is exaggerated
Just red IT offshoring is exaggerated and the IT labor shortage is real by Jason Hiner, a very interesting perspective that should both appease local IT professionals and offshore providers: “…new evidence shows that the IT offshoring trend is greatly exaggerated. The Society of Information Management’s 2008 IT Trends Survey shows that IT leaders are planning to increase offshore outsourcing in 2009, after two straight years of declines. Nevertheless, even with the increase, offshore outsourcing only represents five percent of projected 2009 budgets, and CIOs say they are still having trouble finding enough domestic IT workers with the right mix of skills to fill the open positions that they are keeping at home.” The article of course spawned a bunch of negative comments as any realistic, positive or pragmatic view on offshore would. I find it very insightful and very much in line with my observations of the market.
This discussion is bound to continue for a while, here is another interesting article / reaction to Hiner’s article: Offshore Threat to IT Jobs: Overblown or on the Money?
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.
CIO.com Perspective on Offshore Risk Management
A very good article on CIO.com – Offshore Outsourcing: A Risk Management Perspective. It offers a high level perspective on risks of offshore outsourcing with specific look into several dimensions -
- Geopolitical
- Cultural
- Contractual
- Operations
- Compliance
- Business Continuity
The article also gives some high level approach to risk mitigation. These risks as well as methods of dealing with those are most relevant to large outsourcing contracts and companies but should be considered even by small companies which in some cases could slide in between the items of that caliber.
Perpetual Search vs. Status Quo
Any even a semi-decent offshore provider will tell you that they are in it for a long run. That they are not interested in “drive by” project and want to build lasting mutually beneficial relationship. That they know that you have options in the market place and they will do the best never to give you a reason to look for these options… but is it ever a “happy ever after”?
Mr. Buyer, should you ever look back and consider other options in the market place after you found a provider, went through the ordeal of ramping up the engagement and finally started getting the value from the vendor? Chances are you should.
Ms. Provider, be aware – no matter how good your services are there are stronger / better / cheaper vendors out there and their sales force is talking with your customers. Better is the enemy of good. Voltaire. There are plenty of examples when large outsourcing contracts migrate from one provider to another. That’s true for every industry, not only outsourcing.
From the buyer’s perspective there are several main reasons to search for outsourcing options outside of the current provider:
- If the provider is failing in some major way – one does not need any other reasons. As a matter of fact there are practically no reasons to stay with that provider.
- If the provider is doing well in all aspects of the engagement and there is absolutely nothing wrong with them… Brush up on Murphy’s laws: the chances are you are missing something. I am being serious, in my 15+ years of experience in offshore I have never seen a situation where there were “absolutely” no problems with my suppliers. And if you know a vendor that can do it please send them my way!
- If the provider is doing generally well in most aspects of the engagement and just causing you a few minor pains – you still should. However, before I cover some of the reasons I have to mention a few very important caveats:
- Nobody is perfect. Switching vendors may resolve the issues you are having with your current provider, it will open a whole set of new ones.
- Search for the suppliers is a cost of its own.
- Thee cost associated with switching providers is potentially fairly high. It must be considered in what if analysis for the switch.
Now just a few reasons for considering options even though your current situation is almost perfect:
- Keeping the vendor on their toes. Not just for the shier pleasure of it. It’s all about raising the bar and driving towards higher productivity, stronger value add, better customer service, etc.
- Planning for the worst case scenario or just being ready for typical issues such as key employee loss.
- Being aware of market value of the services and thus keeping the price you pay for the service in line with the market.
There is also more to be said about multisourcing (using multiple suppliers), applying “the best tools for the job” model and cross validation techniques, as well as many other related techniques that could help buyers to dramatically increase value they receive from outsourcing partner.
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.
Offshore Model Selection: T&M vs. Fixed Bid
It’s quite amusing to see many offshore vendors to use LinkedIn Answers for self-promotion but instead of leads generating volumes of offshore-bashing. However amid of self-advertising and political positions you can find browsing this section helpful in many aspects, no cloud without a silver lining I guess… This time LinkedIn Answers offered an interesting discussion topic with a help from Irina Semenova: When outsourcing projects offshore which model is preferable – Time and Materials or Fixed Bid? And my answer is… “It depends.”
What model is going to work for your specific engagement depends on the project goals & objectives, both parties’ org structure and experience, SDLC maturity and style, etc. The selection should be made by careful analysis of all ingredients and with consideration of classic engagement objectives: scope, time, budget, and quality. Below are some tips that you may want consider when making the decision.
If the scope of the engagement is extremely well defined and firmly set Fixed Bid model is very natural way to go. Some of my friends from Agile Camp would probably say that the scope being “extremely well defined and firmly set” is an oxymoron – requirements always change, etc. Well, I do not want to start a philosophical discussion; instead, I’d rather mention a few items that often overlooked in scoping exercises:
- Non-functional Requirements. This is not a very good term but widely used for some reason. By non-functional requirements I mean horizontal requirements that apply to the product not to its functionality. These requirements typically include dimensions such as performance, scalability, maintainability, interoperability, etc. They are extremely important for any project but often overlooked and dealt with in catch up mode exploding the cost of the engagement. For FB projects you not only must specify upfront the requirements but also defined how the compliance would be verified.
- Delivery Requirements. Sometimes considered a subset of non-functional requirements the specifics of engagement delivery affect the cost dramatically. The vendor typically has its own benchmarks in that respect which could be drastically different from your expectations. Do you expect to have 80% unit test code coverage? Do you expect well-document DB design delivered in Erwin format? All these requirements must be spelled out before FB contract is put in place.
- Communications. The volume of communication is a notable aspect in vendor’s overhead and thus affect the cost of the project. You might be expecting daily project updates and rigorous reporting at multiple levels while the vendor thinks just milestone updates and PMO quarterly meetings. It’s much better to bridge the gap up front.
- Quality. It is extremely important to specify Acceptance Criteria in all aspects of Quality of the product as well as process of Acceptance. Metrics and methodology definition should be one of the inputs to the vendor for defining FB price tag.
- Change Management. Any vendor that has meaningful experience in delivering FB engagements has Change Management well under control. What vendor could be not familiar with is your specific change rate and budget change tolerance. It takes tremendous expertise on both side of the relationship to manage Change Management and avoid scope creep wars.
If addressing items above in addition to developing meticulous definition of product requirements falls outside of your capabilities you can hire your vendor to do it for you on a Time and Material basis. That appears like a nice T&M segue into a FB model. There are a few traps associated with that model though. The main being a potential conflict of interest: Will the vendor has your best interest in heart and won’t use this exercise to dramatically increase the scope of the project? That’s not unheard of. You can mitigate that risk by hiring different vendors for FB and T&M portions of your engagement; that approach of course has its own drawbacks.
With all these complexities of FB model why even consider it? Why don’t just go with T&M for all types of engagement? Well, some projects land themselves extremely well in T&M space, for example a classic team augmentation – situations when you just need a team of QA engineers added to your organization during major release, or you need a graphical artist to assist with development website, etc. There are as well a plenty of other situations that make a short or long term T&M arrangement the most meaningful. You should not rule out a FB model for engagements of recurring nature and augmentation tasks though. For example an ongoing legacy s/w maintenance and support task appears as a great candidate for T&M, but it could be extremely well handled as FB SLA arrangement.
A popular concept states that vendors prefer T&M model because it allows them to achieve maximum utilization of resources while being shielded from customer failures to deliver on their obligations. That is a major misconception. Under true T&M model the vendor gets paid only for work being done and is not for waiting for customer to make up their mind. In majority of the situations that would mean that developers would be sitting on their hands for major portion of the project. So typically T&M engagements are sold as “minimum utilization” models, in those the customer pays the maximum of minimum agreed upon amount and T&M amount. That model shields the vendor quite well.
In that light T&M model doesn’t only shield the provider it also reduces dramatically inevitable scope creep wars on fixed bid projects. In many aspects it is good for both sides. The main challenges it presents for the buyer are somewhat hidden and thus create serious traps. Here are just a few to consider:
- Carefully constructed T&M project opens a huge opportunity for add-on sales and could generate enormous amount of unnecessary work. As proverbial car salesmen IT consultants are exceptionally skilled in upselling the customer, keeping themselves occupied, and discovering new opportunities. On the other hand buyers become their own worst enemies as T&M promotes sloppiness in handling scope. As a result T&M projects, unless handled properly, have a high probability of costing more, often much more than expected. The example which comes to mind is ERP implementation which I observed at a large automotive manufacturer; being budgeted initially at $30MM it ended up costing in excess of $300MM.
- T&M projects require meticulous time tracking which could become a considerable overhead. I remember myself spending easily 1 hour a day on keeping track of my time in three systems, of course that hour was billed to the customer as well. For developers that are not used to consulting lifestyle timetracking is true bane of existence, often resulting in malicious compliance producing little to no meaningful results.
- T&M projects are more difficult to budget for and are real pain in GL allocation when services cover multiple cost centers / etc. Appropriate allocation in particular requires detailed time tracking with its respective impact and reliability issues.
Using Contracts to Mitigate Offshore Risks
MSA – a “horizontal” component of an offshore contract can become a powerful tool in managing an offshore engagement and mitigating its risks. My approach to turning MSA in such tool includes several main steps:
1. Identify specific risks associated with the engagement. See my earlier post Top outsourcing risks as an example.
2. Rank the risks and select top ones; limit the selection to 5-10 items. The reason I recommend limiting the list is the cost / length of negotiation process.
3. Find out the reasons the risk mitigation is not in place / insufficient. You need to understand why this presents the problem for the vendor; without that knowledge negotiations are likely to hit an impasse.
4. Identify your preferred risk mitigation plan(s). The plan should include what both parties should do to reduce / eliminate / mitigate the risk
5. Insert and negotiate corresponding language in the MSA. Keep in mind that negotiating each of the topics may require multiple revisions and some give and take on both sides. Taking a win-win approach to the negotiation from early on is essential.
Let’s consider a greatly simplified example: Let’s assume that you are negotiating an MSA with Indian outsourcing company and after second step arrived with top two risk items: “Excessive resource turnover” and “Technical capability of the resources”.
Why is excessive turnover so common? Could it be avoided? Why don’t they (the vendor) just fix it? Well, they can not. The employment situation in India when it comes to IT resource is similar to what we’ve seen in Silicon Valley during the peak of DOT COM. Can you spell Java? Hired! Inevitably job hopping becomes common… So, facing the facts, you know that there will be turnover on the project, and it will be higher than the 20% average you vendor told you about (see my post Outsourcing Myths: Turnover Ratio).
What can you do to deal with inexorable? Here are just a few options – maintain ongoing recruiting efforts, keeping staff on stand by, continues investment in crosspollination, knowledge management, documenting everything, etc. The list of mitigating techniques goes on and on. Your vendor is probably has a bunch of them in place. Well, it’s a perfect opportunity to ask the vendor to put the money where their mouth is.
For example you can ask for guaranteed replacement of the resource in two weeks. You can consider overlap of the resources in order to perform knowledge transfer for minimum of two weeks. You can ask for periodic audits of knowledge related documentation.
An important consideration to keep in mind: some of the turnover mitigation techniques employed by the vendor do not work in your favor. The most obvious one is moving resources from project to project or client to client in order to keep the resource engaged. I would recommend consider counter measures for example if the resources are moved off your project but retained within vendor’s organization some harsher penalties / longer overlaps applied. But you do not want to push your vendor against the wall making it financially unreasonable or preventing them from doing basically a right thing.
Here is a small example of MSA language:
Vendor shall not reassign any key resource providing Services for a period of 12 months after their respective start date of providing Services without prior approval from Client, provided that Client commits to the resource ramp up outlined in Section 5 of this Agreement. Key resources shall consist of resources critical to the Statement of Work and unless otherwise agreed, will be the Project Manager, Technical Lead, Business Analyst, Architect, and Quality Assurance Lead.
Let’s now cover the technical capability of the resources. Why that could be a problem? Well, try to find good developers in Silicon Valley even today – not easy by any stretch of imagination. Your vendor faces exactly the same issues exacerbated by several factors with huge competition from multiple dimensions – multinational corps, product companies, large offshore companies, etc.
This particular issue fall’s in a category “that is a fact, it is not my problem” but if I ignore the fact it will become a problem. In any case, the quality of resources is not something I am prepared to compromise on. So what could be my mitigation techniques here?
I typically ask for direct access to resources, right to interview and approve / disapprove, etc. That is a huge issue for many vendors though, most of the vendors do not want you to handpick the resources, for obvious reasons. So, it’s likely that you would have to offset it in some way, for example ask for interviews / etc. process for named key resources and allow vendor to deal with the rest of the team. You may consider some compensation (rate, T&C). Another approach could be setting performance benchmarks and holding vendor to those.
Here is a small example of MSA language:
For Statements of Work undertaken by Vendor on a time and material basis, Vendor shall obtain Client’s approval prior to adding any resources to such Statement of Work. Client will have the option of interviewing Vendor’s resources prior to their providing Services under a Statement of Work.
Offshore Contracts Basics
In general the language you put in contracts will not change the nature of the business, will not counter the Fundamental Laws of Outsourcing, and won’t prevent things going south. Yet it is impossible to overstate the importance of a well-written contract. The goal is to develop the contract in a way that it encourages / enforces desired behaviors and provides a framework for dealing with issues, complications, and disputes. That applies to both parties – the contract has to work for you and your vendor, in that light, considering the nature of the engagement, nothing is as important when developing a contract as keeping a win-win mind.
A typical offshore contract includes two major components: a Master Service Agreement (MSA) that acts as an umbrella document covering specific terms and conditions of the engagement, and series of documents covering the specifics. Individual tasks and assignments are usually covered by documents such as Task Order, Statement of Work, Work Order, etc.
An MSA typically is negotiated once and stays in power through the life of the relationship. There are many important elements of an MSA that define the fabric of the relationship. To some degree they are vendor and even offshore agnostic. These elements fall in a “vanilla” category and typically require just basic template and a lawyer. However even these items can create a serious obstacles and require tooth and nail negotiations. Here are the main items that fall in that category:
- Term, renewal and extension
- Legal framework / Changes in laws and regulations
- Security and privacy
- Confidentiality / Audits
- Proprietary rights / IP ownership
- Legal responsibilities of parties
- Indemnitification
The second group of MSA articles defines specific aspects of the relationship and should be in general agreed to prior to getting legal departments involved. One of the reasons that should be done is that there is still a long way from general to specific T&C. For example people rarely discuss the penalty for late payments before MSA is on the table. When the initial draft is presented by the vendor the number is typically 2.5% monthly which is completely ridiculous – that is ~35% on annual basis and beats some of the worst credit cards.
- Definition of services
- Responsibilities of parties / roles of the parties as it applies to executing the engagement
- Payments and other financial aspects, terms and conditions
- Initiation / Setting up ODC and other (“hidden”) fees
- Termination
This group of the MSA articles requires very detailed analysis as it will impact Total Cost of Outsourcing in the most dramatic manner. The last article in that list, Termination, requires especial attention and a legal eye. As a buyer of offshore services you want to make sure that you can get out of the contract easily in case anything goes not the way it was planned. This is not a symmetrical clause – the vendor’s right to terminate contract should be limited to legal or financial bridge of the contract on your part.
The last group of MSA articles is not typically found in the initial draft. These are clauses that are specific to your company and nature of the engagement. Developing that list and negotiating each point is not a trivial exercise, and deserves a separate post, which I shall have shortly.
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 |
eBook
The Pragmatic Outsourcer series consists of 5 volumes, each covering a different phase of the outsourcing process. Volume 1: Making the Decision is available today for your free download. Volumes 2 through 5 will be available during 2010.
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Tools & Links
Trip to blogosphere
Outsourcing is a very broad topic with plenty of controversial topics, inevitably there plenty of people who have something to say about it. Chances are if you are interested in this subject you run across articles and posts by Outsourcing Institute or Horses for Sources. A couple years ago I put a few references in my blogroll and started a blogosphere directory. Thanks to the law of reciprocity that generated a few back-links and traffic to my blog. Over time the blogroll become stale pointing the blogs that become dormant or completely disappeared. I did not notice it till just recently, as I was doing some cleanup of the blog.
Similar to my freelancing directory the blog roll needed to be refreshed. In addition to cleaning it up I decided to create an outsourcing blog “directory” as well. And with no hesitation I went on blog hunting with a help of my fearless VA Yesha, looking for blogs that cover outsourcing. Very soon we had a list with more than 100 entries, unfortunately, many of them covered topics that I am not too familiar with and/or not too interested in such as Law Process Outsourcing or blogs solely focused on BPO. So we went back pruning the list getting it to less than 50 entries. Some of the blogs that got the ax were fairly active in outsourcing blogosphere, and I may include rejected entries in the list later on after I get a chance to check a few posts and see whether they are worth considering. Of course what’s one man trash is another man’s treasure, so “worth considering” is a very subjective term. Plus in any blog the posts are typically hit-or-miss, and even loosely related sources can put some interesting article once in a while. Well, I cannot create full directory, even with help of a couple dozen of Vas, that’s why we have omnipotent Google.
Anyway, please see the list sorted by URL of the blog on this page. To make the list a bit more helpful I added PR and Alexa ratings in the same manner as in my freelancing marketplace directory and created two additional versions of the list, one sorted Alexa Global and another by Alexa US. As usual, feel free to comment and suggest new entries. I am planning to update the list in ~12 months from now.
November 2, 2011 Posted by Nick Krym | Managing Offshore Engagements, News, Articles, Thoughts and Comments | Offshore Tips, Outsourcing | Leave a Comment