I noticed this post on a ZDNet site.  The discussion summarizes a recent Gartner report on outsourcing.  As I certainly don’t have the resources to secure direct access to a Gartner report, I’ll have to rely on Andy McCue’s assessment of the document.  According to Mr. McCue, the primary message seems to be:

“Cutting costs remains the primary reason for most organisations going down the outsourcing route, despite unsustainable or unrealistic targets for savings.

But companies lured into outsourcing by promises of cost savings are letting themselves in for long-term problems that outweigh any short-term gains, according to Gartner analysts.

Linda Cohen, vice president and distinguished analyst at Gartner, said placing too much emphasis on cost reduction can lead to dissatisfaction because the savings are either unsustainable or never achieved.”

Ms. Cohen is also credited with saying,

“There is no doubt that cost is a significant factor in any outsourcing arrangement. However, organisations need to take a longer-term view of what an outsourcing relationship can accomplish for their operations overall.”

Gartner’s assessment mirrors my own concerns.  By continuing to operate with a fundamentally broken model for outsourcing, we are reinforcing a situation where the client’s expectations are not consistent with what they are actually buying.  If the clients are using cost reduction as the primary evaluation criteria, they are looking at the wrong metric.  They need to be evaluating their outsourcing relationships solely on the basis of the level of efficiency in terms of benefiting the organization.  I hate to bring up ROI, but a rigorous exploration and evaluation of the impact of outsourcing both in terms of real cost and real benefit to the organization is required.  It’s no surprise that we’re still wondering whether offshore outsourcing is failing.  One small step would be for us to start agreeing on work product, or results, based engagement models.

Technorati Tags:  China, China Outsourcing

There was an interesting post on Information Week’s “CIOs Uncensored” blog.  John Soat had received an email from a PR agency trying to get coverage for some consulting firm.  Part of their pitch was the following:

The end of offshoring: As costs rise in offshore locations and firms are seeing projects fail, much of the gusto for offshore is fading.

* New thing is rightsourcing, using high-quality onsite resources where possible.

Mr. Soat observed that this seemed a bit extreme, then he shared the following:

However, the results of the most recent survey by the Society for Information Management of 130 CIOs and top IT execs would seem to contradict the thesis that offshore outsourcing is on the rise, and suggest that maybe “The end of offshore outsourcing” is a hot topic after all.  Almost 60% of the SIM survey respondents said that less than 10% of their 2007 IT budgets had been allocated for outsourcing of any kind, and 73% said that no amount of their 2007 budgets — 0% — had been allocated for offshore outsourcing.

Mr. Soat goes on to ponder whether offshore outsourcing has run it’s course, or whether it’s still going strong.  Unfortunately, I think that this is entirely the wrong question.  The problem is that it’s based on people writing reports and position papers who are completely missing the fundamental issue.

Offshore software outsourcing is clearly a mainstream practice and that it is going to continue to grow.  Even if there are some temporary setbacks, issues like the coming shortage of skilled software engineers in the west and the necessary drive to improve efficiency will inevitably drive more offshore outsourcing.  The real question that everyone should be asking is definitely not, “Is this the end of offshore outsourcing?”

The right question, is, “How do I create the most efficient process possible for creating and maintaining my software?”  The real objective is increasing your organization’s competitiveness by achieving the optimum tradeoffs between costs (both for engineers and management overhead), time to market and available skills.  Offshore resources will probably be a component of the answer, but they may not be.  If your process depends on high bandwidth frequent communication during work hours, offshore resources may not be appropriate.  Also various regions may be better suited for some problems and types of work than others.  For example, China’s outsourcing teams are often great at testing.  Some teams in eastern Europe are wonderful at development.  India, as the established leader has great processes, but it also faces the challenges that come from its success (attrition, skilled resource shortages & increasing costs).

My point is, we’re damaging offshore outsourcing by focusing purely on the cost per hour.  We should be looking at the impact on overall team productivity and efficiency.  As more organizations understand how to evaluate the role that offshore outsourcing can play for them, the trend will definitely be up and to the right.  In the meantime, we will experience some setbacks, and people will be asking questions like, “Is offshore outsourcing dead?”

Technorati Tags:  China, China Outsourcing

I’m currently advising a new software outsourcing company regarding how they can differentiate themselves from the “pack.” One of the challenges they face is that their service is starting to look like a commodity.  All of the outsourcing companies say exactly the same things regarding low cost, high quality, excellent communication, wonderful project management, outstanding global communication, full client engagement, world-class technical skills, leading edge processes, western trained management… blah … blah … blah.  As any buyer will attest, we’re all making essentially the same claims.  I think that, secretly, there is one original slide deck for outsourcing companies, and we all just change the logos & graphics and re-use the same script.

As I was thinking about this company’s challenge, I had lunch with a colleague and we started discussing demands from his clients that outsourcing teams work overtime without charging for the extra effort.  As we talked about how to balance the client’s requirements against the HR challenges for the vendor, it really struck me that we are asking the wrong question.  Instead of asking, “How can we get clients to pay for overtime?”, we need to be asking, “How can we quantify the value that we’re providing to the client?“  We need to stop focusing on dollars per hour multiplied by hours billed.  We should be focusing on, and charging for, something that is actually both measurable and meaningful to the client.

I suspect that the problem stems from the historical notion that outsourced resources are just like the client’s own employees, who can be paid based on time worked.  They’re not, but we persist in trying to charge like they were.  Unfortunately, this way of thinking is a little bit lazy on both sides of the table.  Vendors don’t want to think about innovative models for providing services, and clients are comfortable thinking in terms of cost per unit of time.  Whenever we discuss project prices, you can see them doing the algebra in their heads - “My staff costs $XX/hour, and it will take us YY hours.  This idiot vendor will do the work for substantially less than $XX/hour, great!“  Unfortunately, this thought process doesn’t include considerations for productivity per unit of time, nor does it account for time billed versus time actually worked (Who is paying for time spent training?  Who pays the salary when a member of your outsourced team is sick?  Are members of your offshore outsourced team actually toiling away all day on your project, or are they taking breaks to browse the Internet?  How do you know?).  Fundamentally, the billable hour model is fatally flawed from both the vendor, and the client, perspective.  We’re just too lazy to come up with something better.

Within this context, we started thinking about ways to change the model.  I attempted to identify measurable units of work that could be the basis for payment (test cases executed, functionality implemented, defects discovered, bugs fixed…).  My colleague, who is a very experienced delivery manager (he’s even PMP certified!), raised all of the expected objections to each of these as either being difficult to quantify (breadth & complexity of each test case is wildly variable,…), or impossible to unambiguously assign accountability (Is the low defect discovery rate due to poor testing, or great code?…).  When we couldn’t agree on objective metrics, my colleague suggested a model that couples time based payments with a success bonus.  While that approach does bring some measure of the delivered value (the “success”) into the discussion, I still find it unsatisfying.

I’m kind of obsessed with this topic, now, and I’ll post more when I form better opinions on how to address it.  Suggestions are most welcome.

Technorati Tags:  China, China Outsourcing

A former colleague called my attention to a sea change in the Chinese software outsourcing industry that’s going on as I write this.  I’ve seen a couple of key shifts over the past several years.  Now we’re seeing the third big transition.

The Early Days

Prior to about 2004, most of the Chinese software outsourcing companies either did business domestically, or in Japan.  The few companies that succeeded in winning western business tended to have strong founders with deep western experience and contacts.  Not to diminish their accomplishments, but their success came largely from the direct and indirect contacts of the founders.  Most of these companies invested little, or nothing, in marketing and were very conservative in their direct sales force.  During this stage, some companies became leaders, including Achievo, Augmentum (Cadence & IBM heritage), Huatek (HP heritage) and Symbio (IBM heritage), but no companies really emerged as a dominant player.

The biggest challenge for prospective buyers was simple awareness.  Most western prospects couldn’t even get a useful list of the Chinese vendors.  Direct competition between the vendors was limited because most prospects weren’t aware of the competitive vendors.  You could win just by making the contact and speaking English.

Chinese Software Outsourcing Starts to turn Heads

The next stage was short, and disruptive.  From about 2004 to mid-2007, some of the companies began to understand the value of marketing and PR.  This awareness coincided with an influx of private equity.  Some of the leading companies assembled pretty tidy war chests (see also: “What Will They Do with the Money?” and “hiSoft Announces Completion of Largest Investment in IT Outsourcing Space” [$30M Series B on top of a $20M Series A]).

Among other things, they listened to their investors and made investments in marketing.  They also started to build U.S. based direct sales teams.  In a case of perfect timing, this is the period when China really exploded onto the world stage.  As a result of both the newfound attention, and the early investments in marketing, western prospects were starting to hear about a few of the leading companies.  Some analysts began to cover China and there was enough media coverage that pretty much anyone with an interest could come up with a list of vendors.

As this stage wrapped up, competition was becoming more real.  Clients understood that they had alternatives, and they had access to a body of third party analysis to help them identify the stronger players.  Competition was somewhat increased, but you could still win by telling a good story, because it has been difficult to objectively compare vendors.  Some companies that emerged as leaders from this stage include Worksoft, hiSoft and BeyondSoft.

We Join the Big Leagues

The stage that we’re entering now is interesting for a number of reasons.  Foremost among them is that the industry is maturing and becoming a “real” business.  Investors are backing Chinese outsourcing companies with significant financial resources and are expecting them to win.  We’re also seeing a wave of very skilled managers moving into senior level positions in the industry.  They are generally, either Chinese returnees with very strong western experience, or aggressive managers that learned their lessons at some of the leading companies in the earlier stages.

Any client with the slightest level of interest can find a list of vendors and details about their offerings.  A large, and growing, group of sharp analysts is covering the Chinese software outsourcing space and they are actually traveling to China to gain an understanding of the vendors.  The mainstream media runs several stories on Chinese outsourcing and the companies involved every day.

Competition is fierce and winners need to be hitting on all cylinders.  Execution really matters.  Delivery has to be world class, as does both sales and marketing.  The competitors have the resources, and are increasingly willing to spend money on infrastructure, training, recruiting and external messaging in order to gain market share.  Vendors have to offer services that clients want, with good quality at competitive prices.  Beyond that, they have to achieve a scale, in terms of both revenue and delivery team size that allows them to be taken seriously in the global outsourcing industry.

Will A Dominant Player Emerge?

This new phase is really gaining momentum in the second half of 2007.  I expect that we’ll see at least a couple more Chinese software outsourcing companies gaining access to the public markets before the end of Q1 2008.  I also expect that the stronger companies will continue to pursue acquisitions to accelerate their growth.  I’ll go out on a limb, and predict that at least one, and maybe two, organizations will emerge as the clearly dominant companies by the middle of 2008.

Technorati Tags:  China, China Outsourcing