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

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

Offshore Risk: Cost-reduction expectations

Establishing high cost-reduction expectations is one of the most serious traps a technology leader can get him/herself into. If the only reason you are going offshore is cost savings – my best advice would be – stop right there! If you are very good at utilizing offshore you may realize 30% savings on somewhat sizable initiatives, and you still will need a lot of luck. That’s aside even if you do understand the paradigm of cost savings you still have to establish appropriate expectations with your execs / peers / team. Failure to establish correct expectations results in insufficient budgets, often in a collapse of the entire outsourcing initiative with a serious ripple effect.

I receive emails from one of Beyondsoft (China) sales execs on a pretty much monthly basis. While his tenacity is commendable his message is totally ludicrous, here is one of his emails:

Dear Nick,

I know your schedule is very tight, but I really hope we have an opportunity to share our ideas on how to help you decrease cost by 300% in next 12 months.

I thought that’s a good opportunity coz you are in Beijing now, and our meeting would make you more impressive.

Looking forward to your early reply.

Best regards,

George Tong

300% wow! where do I sign!? Think about your execs who are continuously spammed with such messages. Direct mail, articles, whitepapers, case studies and so on conveniently delivered to your boss’s ear scream about potential saving from offshore. Setting appropriate expectation on your part will be a balancing act of delivering a bad news without sounding like a sandbagger. Here is a presentation approach I found somewhat successful in setting my audience’s expectations at a reasonable level.

Start with debunking the Myth of Cost Savings

  • What vendors are telling us
  • Couple genuine offshore horror stories
  • Rates vs. True Cost of Outsourcing

Change audience focus to specific challenges / reasons for outsourcing, e.g.

  • Time to market
  • Access to specific resource type
  • Refocusing internal resources

Setup SMART (specific measurable actionable result-oriented and time-bound) goals for outsourcing, e.g.

  • Move 100% maintenance of product X to Worksoft team by 5/15/210
  • Deliver 50 functional points by ZenSar’s team by 9/20/2009

Another pointer – my recommendation is to setup an expectation that there are NO cost savings and work in terms of alternative delivery benefits rather than cost. For example:

  • The project Odessa requires 5 FTE for 10 months.
  • While we do have a budget for it we do not have the resources.
  • Finding skilled developers and QA engineers is likely to take us over 3 months and we will need to train them for about 2 months.
  • To save the ramp up time we are going to us MindTree team.
  • The budget allows us enough resources to deliver the project under 12 months.

There is another trap here – what if the team you recommended can not deliver on time? Well, that’s not at all inconceivable, yet easier to control and deal with.

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Top outsourcing risks

Putting development of your product or any other aspect of technology in the hands of a third party is certainly a risky proposition. To properly mitigate the risks of outsourcing one needs to understand the outsourcing landscape quite well. The top offshore outsourcing risks fall in several main categories. There is much to be said about each of the categories; I am planning to add more substance / clarifications /examples to each of the bullets below, as well as some ideas on risk mitigation. For now, here is the high level list:

Geopolitical

  • Government regulations, on the both sides of the equation
  • Political stability
  • Legal maturity

Security

Internal – Organization

Internal – Team and Personal

  • Loss of team support / respect / relationships with the team
  • Loss of team spirit / internal unease
  • Loss of key personnel / technology and business knowledge loss
  • Decrease in team’s productivity / commitment
  • Career impact
  • Lifestyle impact

Vendor capabilities

  • Financial Stability
  • Organizational maturity
  • Organizational commitment
  • Infrastructure (macro / micro view)
  • Technical capabilities
  • Ability to deliver
  • Personnel turnover

Joint responsibilities

  • Process confluence
  • Scope management
  • Geographical dispersion
  • Cultural differences
  • Knowledge transfer
  • Communications

My reasons to outsource

I mentioned already the top reasons for offshore outsourcing typical for many organizations; let me list some of my own:

  • Diversity. Diversity in terms of bringing individual contributor with different background into the team often means a tremendous increase in productivity. A healthy portion of resources with different education, practical background, and way of operating could bring a fresh breath of air in stagnating organization. Also “diversifying” your portfolio of resources might help a great deal to deal with micro factors affecting employment / recruitment landscape of a specific geography.
  • Education. In countries such as India, Russia, China you find many people who value education to much higher degree than we do in the states. On one of my teams from St. Petersburg a majority of developers had at least MS and over 40% had Ph.D. That including QA engineers! Needless to say the brain power of the team was absolutely amazing.
  • Work Ethics. That doesn’t go across all geographies and companies, but fortunately you still can find outsourcing organizations with resources who’s work ethics are far superior to what you find for example in corporate America.
  • Talent Pool. Some outsourcing organizations instead of typical “selling mediocrity in bulk” build their team with top notch experts and people with exceptionally high IQ. Building such a team, no matter in which area of the world takes very long time.
  • Processes. Getting process right is time consuming and costly. When ISO or CMM processes are a requirement it’s often much easier to build relationship with a subcontractor who already has those in place.
  • Project Management. Project and program management is often something that a small software organization can not afford (or more often VPE can’t sell his execs / team on the need for it). Many, especially Indian vendors have that in perfect shape.
  • Cost. While I do not believe that offshore guarantees cost savings I do believe that there is a huge potential there especially with careful execution of multi-sourcing or/and micro-sourcing strategies.

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Not yet ready for China

I love travel and visit new places, even if that’s on a business trip. Needless to say that living “5 to 7” lifestyle (by 5 am Monday you are on a plane to the client and ~7 pm on Friday are back on your way home) grows old quickly, but my engineering leadership role delivers travel in just the right amount. So I was quite excited when I got a chance to go to China to meet with a few promising offshore outsourcing companies. Impressed by meetings with vendors’ execs I was looking forward to starting with one of their teams in China.

Jumping ahead, I have to tell you that out of my top three impressions of China one was far above the expectations, one was at par, and one was way below. The first one was food – sorry Chef Chu, Dragon Well, and Yank Sing – there is no better place for Chinese food than China. The impression that was exactly at par with my expectations was my prospect resources’ command of English – it was dreadful. That was not a big deal for me though – English is a second language and work in progress for me as well, plus quoting Clarence Darrow, “Even if you do learn to speak correct English, whom are you going to speak it to?”. The thing that fall way below my expectations and to large degree ruined the trip was technical skills of engineers I saw.

Having spent the last 10 years of my life in Silicon Valley I’ve been conditioned to be surrounded by people much smarter than I. A great majority of them came from Asia. So I was expecting to see people like Bhaskar H, John B, Mark Dao, Shao Fang, Harshal Deo, Michelle Sue, Ashish Mangla… I was expecting maybe not the same level of intelligence, grasp on technology, and knowledge of foundations but at least somewhat close. Instead, my vendors paraded in front of me dozens of engineers who could not explain what a polymorphism is, project managers who did not know how to use MS Project, business analysts with nothing but a desire to be one. A few days into my interview process going through at rate of ~20 30-min interviews per day I met only one decent PM who did not speak English at all, one good yet quite junior business analyst (she was an IIT grad and just moved to China with her husband), and a handful of barely acceptable engineers. My interviewing stats were:

Project Managers – 1 out of 9
Business Analysts – 1 out of 11
Senior Developers – 0 out of 6
Mid Level Developers 2 out 14
Junior Developers – 4 out of 9
QA Leads – 1 out of 4
Blackbox Testers – 4 out of 6
Automation Testers – 0 out of 7

After visiting four companies my mind was set and I switched to enjoying tours to Forbidden City, Bird’s Nest and Summer Palace; I climbed the Great Wall, took many pictures, and bought a bunch of souvenirs. I knew that would be a while before I see China again.

Having spent some time thinking through the reasons behind my failure to find the vendor I could probably attest to those commonly known:

  • China is relatively new to the IT outsourcing, in particular for US projects. There is a great deal of skills, experience and understanding that has not yet been built up.
  • Language is a natural and serious obstacle which China outsourcing companies need to invest a great deal.
  • Chinese outsourcers need to learn how to deal with a large variety of cultural differences to successfully compete (and not only on cost). I believe that they need to find their own style. While a lot could be taken from success of Indian vendors, just “cut and paste” would not work.

On my trip to China I also discovered a few things that I had not heard of before:

  • In Chinese education system getting an English major ranks bottom low vs. engineering or CS degrees. Inevitably it attracts the least talented students. However, in a race to address language handicap outsourcing companies recruit English major students for key development positions – project managers, business analysts, etc. No wonder none ob the BA I interviewed heard of UML…
  • While checking out offices of many outsourcing companies I noticed one thing in common: developers’ desks were perfectly clean – not a single book anywhere. I guess one of the reasons is in lack of relevant literature in native tongue. Reading O’Reilly in English is an uphill battle for many of engineers.
  • Most of the engineers I talked with gained all their knowledge on the projects they worked on, which is a great way to learn when it is one of the methods, not the only. Result is extremely narrow scope of knowledge / expertise.

So I guess I am not ready to send my work to China yet, while I really do want to. Why? That would be a great topic for another post.

Can’t teach an old dog new tricks

“Yes to death” is a well known phenomena. In many places people are conditioned never to say “No” and that’s particular true for India and even more so for Indian outsourcing companies. Saying No as well as other forms of delivering “bad news” or “negative message” are considered rude and offensive. The fact that it causes enormous issues on business delivery side is dwarfed by the cultural conditioning. Not long ago I was on an interviewing marathon in Noida, India. Just before the start I spent some time talking with a VP of services for the company. I asked him what his company did to deal with cultural differences. He went on explaining how they invested in cross cultural training and that all employees were specifically trained on “cut to the chase” American culture, and so on. My first interviewee was a project manager with about 10 years of experience. I asked him “Rajiv, imagine the situation that when your team is falling behind because of some serious screw up on my part. What would you tell me to deal with the situation?”. The next five minutes went into back and force of defining the fine details of the situation and I started running out of patience, so I asked again “Will you tell me that you are falling behind and that is my fault?” Rajiv went silent for a few seconds, looked at VP and than said – “Of course I would never tell you that!”

Trading Places

Once in a while it’s fun to put on shoes of a vendor and see the selection process from the other side of the table. A few days ago I was asked by my long time vendor to help them on a sales call. I have to mention that one of the reasons I like working with these guys is they made themselves a true part of my team, so I felt obligated to help them out as I would do to someone from my own company. Nothing to make a sales call fun like last minute changes. This time it was pretty dramatic – the sales person could not make it. So I found myself along with another guy in a similar situation in front of a CTO of successful startup in the city. Ted, the CTO, did not seem to enjoy the situation. He turned to the “hiring manager” and asked him: “Vladimir, are you saying to me that the company which we are considering is not even here!?” I felt bad for the guy and decided to say few good words about my vendor, reasons I hired and kept them for quite some time now. Ted did not find my attempts to any degree entertaining “Why are you talking!? It should be the sales rep who answers my questions! I have real questions – what is your turn over ratio? I need to know exact percentage!” In the next few minutes the situation progressed from goofy to outright embarrassing. Fortunately it did not last long and in 15 minutes we were escorted out of the building. Oh boy, am I glad that my paycheck doesn’t depend on outcomes of such meetings. BTW, to the best of my knowledge we paved the trail for an Indian company that made a presentation right after us, they had a solid slide deck, all ratios ready and I am sure were not wearing jeans and pullovers. What is still bewildering to me is why someone would prefer a ppp to a genuine customer reference. But as they say “different strokes for different folks”

Food for thought

No matter how well traveled you are be beware of dining experiences. The dangers come in all shapes and forms, literally. Many of my friends were knocked down by local foods while vendor shopping especially in China or India. My friend Boris, VPE of a successful Silicon Valley startup, was out for two days after savoring jellyfish dinner in China, another friend was hard down for almost a week after lunch at McDonald’s in Moscow. I heard that asking for simple local food (something they know how to cook) works well. I also heard that asking for “food that an American can eat without getting sick” gets the message across. I tried those as well as many others and can assure you that none are fail-proof. My latest memory is a low key dinner in Bangalore, where my hosts were quite accustomed to guests from the states. Everything was beautifully served and spiced to a perfect degree; no surprises and no concerns. After the dinner the waiter brought a plate with leaves wrapped into small pouches. My hosts all gabbed one of those and suggested that I do the same – “it’s like a mint candy”. I guess “like” was the key word there, a second later I learned that biting the green pouch feels like drinking Listerine out of fire hose. Luckily I knew the way to restrooms which I covered in just a few jumps.

It’s good to be king

Shopping for an offshore vendor is unforgettable experience even if you are looking for relatively small contract. Where else an IT manager would be a subject to such royal treatment? Every time when I face a dubious pleasure of vendor shopping I keep reminding myself that it is probably one of the best parts of outsourcing. And there is always something fun to remember about those trips. Not long ago I was in Pune, India meetings with Satyam – one of the top tier outsourcing firms. The lobby of Stayam’s office was decorated with welcome slogans, flowers and colored sand “paintings” on the floor. There were four of five executives greeting me, all holding high positions in the company. They shook my hand with impressive enthusiasm. A few women dressed in saris welcomed me with large bouquets of roses. While a photographer jumped around taking pictures of this one-of-a-kind event one of the execs whispered in my ear that this was unusually flamboyant greeting that they only offered to utmost important guests. After a few more awkward moments we moved to the conference room with maybe 20 execs and managers. The power point parade began after 30 minute round of “quick” introductions. 15 min into presentation I noticed that older execs started to fall asleep, most with their eyes opened; the skill I always wanted to master. A couple hours later I was exposed to more glorious aspects of the company history and abilities than one can possibly tolerate. By that time I knew for sure that no company in the world comes close to Satyam in terms of quality of the resources, ingenuity of leadership and reliability of its management. Speaker after speaker we were moving down the agenda of what was called out as a brief discussion of the company’s capabilities. Lunch, a buffet of monumental proportions, was a welcome break then an hour later and a few pounds heavier I was back to the power point water-boarding. But I was adapting, it seemed that finally I was getting the grip on the art of sleeping while actively participating. Unfortunately the photographer woke me up. He brought me a CD with my pictures. I put it in my laptop to bring back fading memories of the morning. Here they were: the lobby, execs, saris, roses… Alas, the victims of the greeting ceremony were two strange guys wearing suites and all American smiles. For some reason I did not feel that special anymore. Yet so happy as that little excitement saved me from immanent death by power point.

Offshore productivity: developers

Why is offshore developer’s productivity so much lower than one from your local employees? You would expect that for positions that require high communication overhead or for those tightly linked to difficult to acquire domain expertise, but why developer? Java, C#, C/C++ know no borders and far more international than Esperanto ever aspired to be. So why do we habitually see offshore developers offering productivity at fraction of what we expect in-house. I think there are many reasons for that, some transient some foundational. Here are just some of them, specifically applicable to India outsourcing:

  • Bangalore is a beautiful vibrant city; in some strange way it reminds me of San Francisco. No wonder it has become the heart and a synonym for IT outsourcing, one would be hard pressed to find a better place for India’s Silicon Valley. One of the parallels between Bangalore and SF Bay Area is abundance of technical jobs. Everyone and their brother are there from giants like Microsoft, IBM, and Siemens to small progressive engineering companies. Just look at a very small subset at http://en.wikipedia.org/wiki/List_of_IT_companies_in_Bangalore. So if you are a decent developer your job choices are practically unlimited. And let me ask you that – if due to your exceptional talents you had a choice of working for any software company in the world would you pick someone like Google or Infosys Technologies? It’s tough to get into someone’s mind yet I am sure that a choice between Google and Quadwave Consulting Pvt. Ltd. is statistically obvious. The corollary here is obvious as well: when it comes to pick of the litter even very successful outsourcers are in a long line behind a very large group of “the best companies to work for”.
  • One of the interesting phenomena is how cultural environment affects building the skills. What I have observed in several geo areas is that the culture is “against” the learning progress; that is especially true for consulting companies. For example, many consulting companies have a business development track vs. expert track, the first one being compensated substantially better. In that case a bright person is pushed either to take a biz dev track or bail out of the company when his / her earnings come hits the ceiling. Broader cultural issues have even more profound effect, for example I noticed that in India one’s personal success is measured in number of people working “under you”, most of the time that means that one’s skills would be used mostly on management tasks and not tuned to acquiring new skills / knowledge / etc. Very much a cliché – promoting a good engineer to a manger means losing a good engineer and gaining a bad manager. The impact of that trend is quite devastating for buyer especially with smaller sized teams – how can you get a solid tech lead for your team if it is only 3-4 people while someone with 5 years experience could be managing a team of 30? That trend is exacerbated by scarcity of high-level resources every consulting company faces: if a practice gets their hands on great resource, he or she must be leveraged across large group of mediocre resources.
  • I realized another angle to the topic when building my own consulting / outsourcing teams. Managing engineers is not an easy task, managing bright engineers is extremely complex. So if your main goal is generating a revenue stream (a.k.a. “putting buns in seats”) you may take an “expert” route and deal with celebrity personalities and never-ending need for motivation or build your team with “a middle of the road” resource in mind and live happily ever after. The later seems like a much easier route and that’s why many offshore resource augmentation companies are in the business of “selling mediocrity in bulk”. What is the difference in productivity between star and mediocre software developer? Some say that it’s order of several magnitudes, and I can attest to it.

Outsourcing Myths: cost advantage

On a surface that seems obvious: even with dollar fall, rising cost of living in India, China and especially eastern Europe the hourly rates continue to be much lower than those you have to pay in the states. For example, a mid level java developer would roughly cost you:

SF Bay Area, full time $60/hr
SF Bay Area, contractor $80/hr
Bangalore, India $25/hr
St. Petersburg, Russia $30/hr
Shenzhen, China $20/hr

So for every contractor in your San Mateo office you can put 4 in Shenzhen or 2 in St. Petersburg. Or, looking from savings angle, instead of paying a team of 8 engineers roughly $80K a month you can pay less than $30K in China and get yourself a hefty raise.

However, let’s take a look at real cost of outsourcing. The first rate killer is productivity: in my experience on average productivity of resources in India would be 50% of what you would get with local mid level resources, for senior developers it would be at best 75%, and for juniors you could potentially see it as good as 80%. To achieve that level of productivity you would need to put above average efforts in shaping your team and have considerable amount of luck. Typically getting a good senior developer is only possible if s/he is managing is at least 20-25 resources. Also be prepared that understanding of seniority may greatly vary from what is considered a norm locally, and in that light delivering another productivity hit. Let’s imagine that you are planning to outsource a 5 member team that includes one tech lead, two mid-level java developer and relatively junior ones. Your cost for the team would be roughly:

Role Level Experience QTY Salary Aprox Rate Monthly Cost
Tech Lead Senior 10+ 1 $140,000.00 $ 82.60 $ 14,537.60
Developer Mid 7+ 2 $100,000.00 $ 59.00 $ 20,768.00
Developer Junior 3+ 2 $ 75,000.00 $ 44.25 $ 15,576.00

Total:

$ 50,881.60

What would it cost you in Noida? Let’s assume that you got lucky in finding a tech lead for the team and the rest of the members were typical developers you could find out there.

Role Level Experience QTY Salary Aprox Rate Monthly Cost
Tech Lead Senior 10+ 1 N/A $ 32.00 $ 5,632.00
Developer Mid 7+ 2 N/A $ 28.00 $ 19,712.00
Developer Junior 3+ 2 N/A $ 25.00 $ 17,600.00
PM Mid 5+ 1 N/A $ 30.00 $ 5,280.00

Total:

$ 48,224.00

Note that team in India also includes full time PM which is not surprising for a team of 9. The result is a staggering 5% of cost savings. Your actual numbers could be different based on your negotiating skills, but the dynamics won’t change.

I am sure that many outsourcing companies would dispute my assessment of productivity. Well, let me give you a couple examples:

  • We stopped a development project (CICS adapter) being developed by team of five “very senior engineers” from Mastech after ~3 months due to unacceptable quality of deliverables. 2 months later the adapter was developed by a single developer we had on staff.
  • We had to stop and take in-house a handheld development project (.NET) being delivered by a senior developer and several mid-level ones from MindTree due to low quality of code and extremely low productivity. This project was later delivered by a single mid-level developer with oversight from a senior developer in time shorter than it had taken us to ramp up the team in Bangalore.

The list of examples can go on and on, they are just examples, however, considering that I could not offer any examples of an opposite nature, there is possibly a trend here. The question is why offshore developer’s productivity is so low? I’ll put my thoughts on in a separate post.

Top reasons for outsourcing

Whenever I have to introduce using offshore to executives I start with a slide with has title “Good reasons for going offshore”. The slide is otherwise empty. With all the headache it will cause why would I go offshore if I do not absolutely have to? I have been using offshore vendors since ‘92 and there is no place on my body which doesn’t have scars left by that experience – from grotesque stabs on the back to burned fingers. And yet again and again I find myself using offshore vendors and recommending them to my clients and partners. So what are the main “bad” reasons for using offshore? What typically drives companies to consider offshore outsourcing? For many companies those reasons could be roughly grouped into 3 categories:

Reducing operations cost, some most obvious examples would be:

  • Lower resource cost; this topic deserves a separate discussion but for now let me just say that if you are good at utilizing offshore you may realize 25-30% savings;
  • G&A savings (benefits, office space, utilities, etc.);
  • Other resources related savings (reasonable severance, resource add-on acquisition cost, training cost, etc.).

Reducing time to operations / time to market, some examples include:

  • Access to existing pool of resources vs. hiring; I will need to touch upon that subject in more details, for now let me just say that that in some cases that is true;
  • Establishing development / operations infrastructure vs. using existing or building upon existing;
  • Access to specific skills / domain expertise / methodology, etc.

Solving specific organizational issues, a lot of diverse and unique items here, here are just a few common examples:

  • Outsourcing legacy maintenance to motivate developers by moving them onto more glorious tasks. That is a well known double-edged sward though.
  • Dealing with sawmill of resource demand. Need for resources goes up and down if you staff at the top level your resource utilization suffers, if you target the bottom you can not react to market needs. Proper offshore supplement can help alleviate the issue.
  • Risk mitigation, for example: should you hire for dealing with substantial spike in demand? Is the change permanent or when the novelties ware off you will be facing RIWFs? Outsourcing could be a better way to handle the spike.
  • In some way the same idea as above but put into terms very clear and dear to hearts of CFOs – eliminating fixed cost
  • Using third party operational expertise, existing processes, certifications, etc.

While in a way each of the reasons above could be enough to consider offshore in my view you need more than one reason to actually go offshore. The risks and penalties are just too high. And that deserves a separate discussion.

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