Offshore, Nearshore, Right Shore, Best Shore… oh My

As we can see generating x-shore names is a popular among all kind of companies even established players such as capgemini and eds jumped on band-naming wagon.

It won’t take long till someone trademarks smartshore or ezshore or put a copyright on the word shore – too bad all nautical charts would have to be reprnted… Other companies find using shore words too mundane and invent their own words and phrases such as Chindus Strategy (China-India-US) or BRIC-sourcing. And Me2 – with my term of Disposable Outsourcing.

Hey, why not? That’s somewhat akin to starting companies in the dot-com era – the more confusing it was the high the chances VCs would be all over it … Well, let me tell you, there is no best shore when it comes to IT, there is no best of all shores, and there is no silver bullet. By all means why would anyone outsource if they could deliver on their obligations without headache of dealing with geographically distributed culturally remote third parties?

During those good old days when a Ph.D. from a 3rd world country was only $8K a year cost advantage was so profound that that it was practically impossible to resist the temptation of outsourcing. Today if Ph.D. is asking for $40K the chances are s/he bought the diploma on some black market. With average saving of mare 20-30% it’s not about cost advantage anymore, we go offshore for variety of reasons, goals and objectives. Defining those should be your first step before you even consider vendor search and daunting task of picking perfect destination. “If a man knows not what harbor he seeks, any wind is the right wind.” [Seneca] It should be set of your own objectives, reasons and goals specific to you organization, not taken verbatim form some book or my blog (even though I think you can find a lot of helpful ideas in Top Reasons for Outsourcing or My Reasons to Outsource).

When the reason are clear in your mind it’s time to start picking the “shore” and like with grocery shopping you may want to start with the nearest supermarket and only if what you need is not there you would consider taking a longer drive. Thinking of that metaphor it could be actually not that far off. I live in one of those cul-de-sac communities, the nearest supermarket to my place is expensive and offers limited selection, I do not often shop there, but it’s great when you just want to hop in a car and bring a gallon of milk and a loaf of bread. My main shopping place is about 15 min further driving, but it still doesn’t cover all what I need, for example Whole Foods is about 30- min drive from my place and I still go there once in a while, and add to it occasional trips to farmers market, wineries of Napa, or my friend’s organic farm…

I can’t tell what shore is going to be the best for you, chances are it is different from what is best for some of the vendors knocking on your door, but one thing I am sure of – chose it wisely. We are free to a point of choice, after that the choice controls the chooser.

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Main Forces of Negotiation

A little while ago I started a thread covering general negotiation tips, tricks, and techniques. Just for the sake of consistency let me repeat the caveat I mentioned before: 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. Many of these books cover the main forces of negotiation (Time, Information and Power) in great details so I will take a very superficial approach in covering them. In addition I touch upon two more forces which are at least as important yet are not typically covered – Skills & Experience.

The topic of negotiations is complex and comprehensive; each of the bullets below probably deserves at least a few page long post by itself. So by any means do not expect that reading this post will make you a professional negotiator. I do hope that it would be a good check list to keep handy for your next opportunity to negotiate.

Let start with Time:

The main rule of Time is very simple: The party under the greatest time pressure is the one at disadvantage / the one to lose the ground. Here are a few main tips on dealing with Time in consideration of the rule:

  • Do your best not to put yourself under the time pressure; for example committing to your management that you will have offshore contract done by end of month would not be a good idea.
  • Learn to recognize time pressures your opponent is under.
  • Never reveal that you are under time pressure; that shows your weakness and gives your opponents more armor.
  • Try to put your opponent under time pressure.
  • Recognized when your opponent uses time pressure against you (it’s often artificial / manipulation that could be easily deflected).
  • As the time flies away and the finish line approaches the time pressure grows and the party under the highest pressure start losing the ground. Typically 80% of concessions are made during last 20% of the negotiation time span, so do not leave too much to the end.
  • Be aware of special timing, e.g. end of year / quarter bargaining, but do not be swayed by it, it could be nothing but artificial – just another “time pressure building” technique.

The next major force of negotiations is Information:

You can consider Information as the currency in the world of negotiations. The side that has more information pertaining to the topic of negotiations has the upper hand. Offshore negotiations offer a great illustration of that rule. Consider an example of negotiations around a blended rate. The vendor knows the rates to be paid to the team members, anticipated turnover rate, cost of overhead and all the other components that define exact/true cost of the team. The vendor also has other factors that affect the minimum number the vendor is prepared to agree upon. If the customer has access to the same information they can as easily define minimum rate and take hard stance on negotiation driving to get the bottom line price.

Another illustration is access to specific information such as pressures that would make your opponent to be more flexible. For example if you learn that the sales person who is working with you had not met his quote and could lose his job if this deal is not closed. Knowing that allows you to time negotiations close to say quarter end and let the time pressure itself drive the rates down.

Same goes in the opposite direction – for example a vendor just learned that a couple of competitors bailed out from the negotiations with you. The vendor could easily use this knowledge to get more concessions out of you.

Manipulation of information is a strategy game that requires in-depth understanding of goals and objectives of the process. Here are some of the guidelines for getting better at this game:

  • Gather as much as you can information prior to entering the negotiation and continue collecting it through out the negotiation process.
  • Be very careful in disclosing and distributing information, some supposedly innocuous facts can turned out to be critical ingredients in the information repository. Consider following a good old “Need to Know” principle.
  • Consider disclosing information as trading of goods. For example if I disclose some information to you I would expect a similar act or a concession of different nature in return.
  • At the same time you should understand that information sharing is a mandatory component of negotiations in particular when searching for a win-win solution.
  • Never assume that you know all the facts or that your information is correct.

The 3rd major force of negotiations is typically called Power. At a very high level, Power is ability to influence people, make them do things that otherwise they would not do. Power by itself is just ability, application of power that what makes the difference in the behavior of people.

There are several main ingredients of Power as it pertains to the negotiations:

  • Situation power, e.g. buyer vs. seller in offshore contract negotiations.
  • Reward power, ability to provide rewards.
  • Coercive power, ability to punish, intimidate.
  • Title / position power; note high importance of it in offshore negotiations.
  • Expertise power.
  • Power of flexibility, often undermined yet exceptionally potent ingredient.
  • Character power, charisma, consistency, integrity, command of respect.

Interestingly enough the most important is not the Power itself but its perception. You can say that Power in some sense is similar to beauty: power lies in the eye of the beholder. Another way to put it is if you are perceived in the position of Power you are.

Consider “title” power – if your opponent perceives you as a high ranking official they would interpret your statements in that way even if in reality you are not. For another example of perception of power consider asking your boss for a raise (I assume that you are top notch contributor). Things that could be going through your mind would assign your boss the coercive power – “what if as a result I get fired!?” while the boss might not have this power (firing you could be disastrous for the organization) and the only thoughts in your boss mind would be “how cheap can I get out of it” assigning you the coercive power (ability to punish by quitting).

Negotiations is a game of skill, and as a matter of fact many skills, so I prefer to include the Skill in the list of the main forces of negotiations. The list that covers skills required for running successful negotiations would be very long and complex, so I take a high road suggesting only the main areas. And even though it is greatly simplified the list might seem intimidating, yet you should consider it in its comparison to the task. Offshore negotiations are not necessary as complex or stressful as Union or hostage negotiations, so you do not have to have all the skills at top level. More so the skills may be distributed among the team members and that would make achieving the success much more realistic task.

Foundational skills or ability to –

  • Learn and improve.
  • Control your own emotional state.
  • Maintain your own integrity.

Specific skills pertaining to negotiation process –

  • Setting goals, objectives, outcomes.
  • Defining and staying within boundaries, limits, constraints, conditions.
  • Using negotiating techniques – recognizing, using and countering negotiating gambits.
  • Finding and driving for a Win-Win outcome whenever is possible.
  • Obtaining and maintaining required authority

Analytical abilities are particular important for defining game plan and assessment of opponent’s position / game plan –

  • Negotiation limits / negotiation space.
  • Best Alternative to Negotiated Agreement (BATNA).
  • Final Exit Point (FEP) and a Reservation Point (RP).
  • Offers, propositions, tactics, techniques.

Behavioral skills and abilities –

  • Focus
  • Observation skills
  • Planning and organizational skills
  • Rapport building skills
  • Flexibility
  • Creativity
  • Tenacity

Command of communication techniques –

  • Presentation skills
  • Active listening
  • Art of silence
  • Read opponent’s non-verbal language
  • Communicate non-verbally
  • Information recovery

And the last in the list of the main forces of negotiation is Experience. The only way most of us can become good negotiators is by consistent learning and using multiple aspects of the art in real life. As in many areas of our activities it comes down to mileage, the more you sail the better you get at controlling your boat…

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Offshore Millionaire

I am very much surprised with Slumdog Millionaire taking Oscar’s Gold. As far as I am concerned it’s very much a mediocre tearjerker with a few very good scenes, plenty of mediocre ones and few ones on a border line of plagiarism. If you are at all interested in what slums are rent the City of God… well I am not the Academy member and that was not the point I wanted to make. What I wanted to say is that the movie in many ways insinuates that slums are India’s past, and those who survived can work in call centers, speak perfect English and offer crest smile of Hollywood proportion. You would be hard pressed to find something further from the truth. On one of my recent trips to India I got a dubious pleasure of observing slums through the cab window for about two hours while getting to downtown from the airport. I was out there right after the monsoon season so it was not just stinking piles of garbage they were steaming stinking piles and per my driver and guide those were far from the worst parts. Doing business in 3rd world countries is not for the faint of heart. For some Americans the sheer sight of slums and widespread destitution could be too much to handle, so be careful who you send for onsite visits…

10 Myths of Offshore IT Outsourcing Revised

Google search on 10 myths in offshore outsourcing brings a few good articles written 3 – 7 years ago, some of them are still worth looking at even though some of the top myths lost their mystical nature, some debunked myths turned out to be facts, so it is worth taking a new look at what the myths are and whether they are worth debunking…

Let me start with a few Facts that are often called Myths:

Fact # 1. Offshore outsourcing is costing U.S. jobs. This myth has been debunked so often that by now we should strongly believe in its opposite. Supposedly someone very trustworthy institution calculated that for every dollar spent on a business process that is outsourced to India, the U.S. economy gains at least $1.12. An easy way to fix the economy, isn’t it? Should we pass the idea to the new administration? Well, I am not planning on questioning this global statement. What I can say with certainty is that every outsourced IT job is a local IT opportunity lost.

Fact # 2. The cost benefits of outsourcing are overstated. I touched on this subject in several earlier posts (e.g. Outsourcing Myths: cost advantage). The reason I wrote on the topic is exactly that “the cost benefits of outsourcing are overstated”. I would not call IT outsourcing “the best story ever sold” yet there is a large portion of exaggeration to almost every offshore vendor presentation I’ve ever seen. Fortunately many of buyers came to grips with the fact that on any meaningful scale IT outsourcing can at best save 20-30%, if handled well.

Fact # 3. There are “huge” cultural barriers. For anyone who’s been through any substantial outsourcing initiative there is nothing mythical about cultural barriers. The fact that they are not necessarily huge and sometimes only subtle doesn’t make them easier to deal with. Especially now when “IT outsourcing” doesn’t equal “Outsourcing to India” underestimating complexity and challenges associated with cultural differences can trip over otherwise bulletproof engagements.

Now let me switch to some of the most popular misconceptions that fit the definition of “Myth”:

Myth 1: India is the best destination for IT outsourcing. India is a leader in IT outsourcing no matter what angle you look at – sheer volumes, number of providers, process maturity, breadth and depth of service offering and so on. It doesn’t make India the best destination in every case though. In particular India is farshore destination for European and US-based companies vs. nearshore option provided by Eastern Europe or Latin America correspondingly. There are other Cons to India as the destination (take a look at Pros and Cons of Outsourcing to India). Growing competition from almost every country in the world cuts into India market share and offers multiple alternatives to buyers across the world.

Myth 2: Offshoring is the best strategy for cutting costs. Offshore outsourcing is just one of the strategies that companies can use deploy in tough economic climate. There are many areas that should be considered by the companies looking for bottom line improvements. In many cases the steps should include rationalization of IT portfolio, SDLC and other process improvements, usage of tools, etc. Offshoring is a very powerful weapon and as other ones is a double-edged sward.

Myth 3: Offshoring drives IT salaries down. Offshore outsourcing is of course a contributor and plays its role in salary dynamics, it is however less important factor than other elements of the economy and geography. The areas that are affected the most are actually wages of “local outsourcers” – freelancers, contractors, etc. Take a look at oConomy you will see some staggering trends catering to the concept of “flat world”. Hit with homesourcing many US freelancers had to drop their rates to what market is ready to pay nowadays. On the other hand some comp. packages increased in size: consider for example rates you need to pay people running distributed engagements.

Myth 4: Offshoring will result in significant unemployment in the technology sector. Similar to salary dynamics offshoring affects employment trends, and so far did not deliver the impact feared. High-end IT professional continue to be one of the scarcest commodities in the world, even low-end IT workforce still remains gainfully employed in a large degree despite huge economy downturn. It remains to be seen how far IT unemployment figures would go and would be the geographical distribution.

Myth 5: Quality of offshore IT operations is lower than in the US. That is almost as bad of a generalization as they get. As a matter of fact having seen IT operations in many companies in this country and some of the best operations offshore I can say that there is much to be learn from IT companies in China, India and other countries. As a matter of fact how many CMMI5 companies are there in US and how many in India? It would be interesting to see average maturity across IT outfits in different countries.

Myth 6: Quality of code produced by offshore organizations is very poor. Quality of code produced by outsourcing companies is another topic being frequently discussed. And again I would not venture to generalize; the code is produced by people, not organizations. Bad programmers write bad code and bad programmers are one of the most numerous creatures in the IT habitat. High wages of IT and huge demand on it attracted large volume of mediocrity into the field across the world and even in exclusive locations such as Silicon Valley you will come across of horrible code on a regular basis. Add to that the possibilities of writing bad code that have been opened by new “forgiving” technologies such as Java or PHP and you get where we are today…

Myth 7: Offshoring is a never ending nightmare. Funny enough I hear this one more and more often nowadays. Yet when you deep dive into the reasons behind nightmare they often point much more towards the organization outsourcing the IT tasks rather than to the vendor. As I said many times it takes knowledge and skill to apply outsourcing tools to the benefit of your organization. You can not get rid of a problem by throwing offshoring at it. Organizational inefficiencies such as broken communications are only amplified by outsourcing and can result in the nightmares.

There are more common misconceptions about outsourcing, it’s not surprising as it is still a somewhat new and rapidly changing phenomenon, but I think I should stop at this point as I met my quota of top 10…

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10 Things you Don’t Want Offshore Vendor to Know

I am an avid proponent of open communications and believe the more partners know about each other the better are the chances for the partnership to be successful. There are still a lot of things that you should keep to yourself for the same general reason – to increase the chances of the partnership being successful.

1. Game plan. Negotiations are an ongoing part of business relationship – not just the talks around the contract. Keep you card close to the chest and never disclose the game plan, even far after the game is over.

2. Decision making process. Whether you signing the initial contract, extending the scope of the engagement or making changes in the way the relationship is run you should not disclose the details of decision making process. In particular if you are the one making the decision you should not proudly announce it. There are many reasons for keeping it low, let me mention just a couple:

  • Disclosing decision making process will limit you ability to use “high authority” negotiation gambit that is a powerful technique for getting more in negotiations.
  • The last thing true decision makers need is all might of vendor sales force targeting them through every sales channel.

3. Budget. I always give my vendors an indication of the budget but never exact figures. One of the main reasons to keep it private is the nature of budgets – they change, funds get reallocated, etc. And of course something to be said about negotiation upper hand with less information at your partner disposal.

4. Roadmap. Product and relationship roadmaps should be shared with your vendor only at a very high level. Details should not be communicated for many reasons – business counterintelligence and agile nature of the roadmaps (similar to budget note above) being the most important.

5. Details of competition. The competition can offer a lot during contract negotiations: from cannon fodder to reasonable alternative. Your offshore partner should know that competition exists (at least that would keep them on their toes) but not the details, even the names of competing entities is not something to disclose. Among many reasons let me point out just a couple:

  • You probably have an NDA in place, that’s already a strong reason to keep your lips sealed.
  • The runner-up competitor today can be a vendor of choice tomorrow.
  • You do not know what kind of back-end links your vendors have in place.

6. IP / Know-how. If you must share anything of that nature make sure that the information distribution is governed / controlled tightly. The vendors with the best intention have little power over disgruntle employees – the prime venue of information leak. Employ distribution of the information on a Need-to-Know basis.

7. Confidential information. Same as above applies to many aspects of your business, internal and external (e.g. customer data). Consider rules associated with on handling ePHI (electronic protected healthcare information) or financial information and penalties associated with its mishandling. This is a very comprehensive topic; I will cover it in a stand-alone post.

8. Dirty Laundry. Sharing it with your vendor can hurt you in many ways; in particular consider the scenario of the relationship gone sour for any reasons; won’t you prefer your ex-partner to know as little about you as possible?

9. Personal details. Do not get close and personal with the vendor / vendor employees. There are many ways it can end up costing you more than you bargained for. There is no harm in sharing you “public” personal details (married, three kids lived in Bay Area all your life, etc.) but sharing little known data may put you in a difficult situation.

10. Ulterior motives. Ulterior means hidden – so keep it that way, if you pick your vendor based on something rather than items stated in your RFP, keep it to yourself. It’s amazing what kind of confessions I heard in that department (e.g. “I picked the company in China because my wife is Chinese and it makes it easier for us to stay in touch with her family”). This won’t help you professional image / reputation and can actually hurt your career…

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Offshore Impact: Personnel Issues

So you are moving forward with offshore initiative, maybe a new or expanding an existing one. What is going through the minds of your team members? What kind of questions are coming up? What is not letting them sleep at night? That’s not difficult to imagine:

  • Is my job at risk?
  • Is my salary at risk?
  • Is my career at risk?
  • Is my quality of life at risk?
  • Is my project / department / team at risk?

Let’s start with a reality check: chances are there will be three groups of people easily categorized by the answers to these questions – Yes, No and Mixed / In between. There will be people who can lose their jobs or forced to take lower paying jobs. Transferring jobs offshore may reduce scope of career opportunities or completely eliminate some. Some people might be asked to work odd hours, and so on. Maybe some of the team members won’t be affected at all. And for some there will be a mixed impact. That impact on employees inevitably affects the employer, and as I pointed in my earlier post The Darkest Side of Outsourcing that impact could be very serious. That’s why minimizing negative impact of personnel issues is likely to become your primary objective as an outsourcing champion or the manager in charge.

One of the ways to do it is to tune into your team’s WII.FM station. What’s In It For Me? What is the silver lining of the offshore initiative for your team members? That of course depends on specifics of your organization and the scope of offshoring; here are just a few general ideas for your consideration:

  • Offshoring might offer an opportunity to offload grunt work freeing up employees to work on more interesting / engaging projects.
  • In similar manner offloading grunt work may allow organization and its employees to focus on core strengths and areas of competence.
  • Sometimes offshoring opens an opportunity for the employees to learn new technologies / products.
  • Management / leadership opportunities can open up.
  • Specifically offshore management opportunities could be attractive option for career development. With offshore here to stay experience with offshoring can benefit many employees even those not involved in management / leading roles.

Let me repeat something I mentioned in The Darkest Side of Outsourcing: Associating introduction of offshore with layoffs – replacing local workforce with offshore resources is a double hit on remaining workforce with inevitable impact on employee morale and overall workforce quality:

  • Employee motivation will disrupted with result in increase in political behaviors, anger, fear – which is likely to negatively impact quality of customer service, performance decline, and decline in quality of work atmosphere.
  • “Survivors” experience more stress due to longer work hours with re-designed jobs, and increased uncertainty regarding future downsizings.
  • Senior and the most marketable employees may leave with result in decline of overall quality and qualification of workforce and loss of institutional memory.

A silver lining here is an opportunity those events could represent for some of the employees: an opportunity to show one’s ability to excel under pressure, a chance to step up to challenge and learn new product, skill, fulfill the void left by departing employee.

In my experience I’ve seen that on numerous occasions – a problem creating a launching pad for capable but for some reason unnoticed or underappreciated employees.

The question is whether as the leader of organization you can carry on positive message and motivate the troops to take advantage of the opportunity rather than dwell on native events and unforgivable loses. Another question is whether you can deal with inevitable negativity and ripple effect of the changes. Here are a few things to consider for dealing with the personnel impact:

  • Consistent non-stop communication. Check out 7 Cs of communications and follow those as much as you can afford considering the situation.
  • Consistent aggressive motivation. “Motivation is like food for the brain. You cannot get enough in one sitting. It needs continual and regular top up’s.” [Peter Davies]
  • Be prepared to pay above market. Hopefully offshore cost savings can offset some of the cost impact.
  • Invest heavily in the staff redundancy. That is a complex issue that requires longer discussion, let me just mention just one aspect of it: staff redundancy will give you the confidence to operate in the challenging environment that offshoring is likely to create in your organization.
  • Process and methodology changes / adjustments / improvements to create environment tuned to the new organizational layout.

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The Darkest Side of Outsourcing

While writing a post on a topic of personnel impact of the offshore outsourcing I had to go through a rather unpleasant exercise – I had to terminate one of my employees. Termination is never fun, it is particular painful on a backdrop of economy downturn. Through my career I had to let go a great number of people, mainly due to the industry’s downturns / massive layoffs. Layoffs are painful yet the sheer size of the event makes it easier on everyone. Things tend to go much more close and personal when you have to let go someone on a performance basis.

Reaction of the person being let go on a performance basis is very difficult to predict and control. I have seen budges fly in my face, verbal explosions and threats, I have been in situations when I had to call security and once got very close to calling an ambulance. This time it did not go particular well either. The employee got agitated, angry and quite upset with the unfairness of the event. After the termination the direct manager of the employee and I started receiving harassing calls from a blocked number on our personal phones…

Sending jobs offshore is likely to create a few enemies. For example when I introduced offshore concept in Spear Technologies one of my key employees came back with a common in this case blackmail techniques: “I’ll quit”; he did not, just remained never ending pain in the neck. Two other people quit citing offshore decision as one of main reasons. If sending jobs offshore means layoffs things can get quite ugly. Especially if the laid off employees are picked on a performance basis, what is quite typical and the right way to go, especially in smaller companies.

Performance based termination rarely goes well, and sometimes goes exceptionally bad. It was not long ago when a laid off employee took lives of executives of his company in a Santa Clara startup. As my CEO put it “There is too often a thin veil that covers members of society and when the wind blows, the veil can come off. After 10 years in the emergency department I can tell you that apparently senseless violence is hardly rare. The details of this occasion are making headlines but frankly not the violence. Very sad to me is not just the violence but the lack of priority or even care for this guy’s own family. He destroyed more lives than he ended.”

I’ve written about potential pitfalls of outsourcing and will write more. You should move carefully and make educated steps when outsourcing, if your offshoring decision is causing / associated with local job losses be exceptionally careful. You could be making the decision based on spreadsheets and what if analysis, for better good, the company survival and bottom line needs; for you that might mean “nothing personal” yet for those who are about to face job search in today’s market it will be very personal. To minimize potential backlash consider a few general tips:

  • Deliver clear and consistent communications with messages covering reasons, expected goals and objectives, as well as processes behind. The communications should in general precede the events and continue on long past them.
  • Do not cut the jobs across the board. Rather, make the tough decisions to selectively cut jobs. Do not disguise performance based termination as layoffs.
  • Focus on those who stay, yet remember that “survivors” will judge you / organization by the way layoff was conducted and downsized employees were treated

Associating introduction of offshore with layoffs – replacing local workforce with offshore resources is double hit on remaining workforce with inevitable impact on employee morale and overall workforce quality:

  • Employee motivation will disrupted with result in increase in political behaviors, anger, fear – which is likely to negatively impact quality of customer service, performance decline, and decline in quality of work atmosphere.
  • “Survivors” experience more stress due to longer work hours with re-designed jobs, and increased uncertainty regarding future downsizings.
  • Senior and the most marketable employees may leave with result in decline of overall quality and qualification of workforce and loss of institutional memory.

This post was not intended to be “all gloom and doom”. Not many people make offshore decision just for the fun of it. Outsourcing is only one of the tools IT leadership has at its disposal today and as any tool it has its dark side. Knowing that side should help you apply the tool properly and minimize collateral damage.

And the last tip for now – if you are planning to replace some of your local underperforming workers with offshore resources get unlisted – make sure that your personal contact info is not in company directory, white pages, linkedin, resume, etc. – not a trivial task nowadays…

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