BUILDING THE OPTIMUM OUTSOURCE MODEL: THE CEO S BEST PRACTICE CONSIDERATIONS IN BUILDING A HIGH-FUNCTIONING TEAM

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1 BUILDING THE OPTIMUM OUTSOURCE MODEL: THE CEO S BEST PRACTICE CONSIDERATIONS IN BUILDING A HIGH-FUNCTIONING TEAM SYNOPSIS The success or failure of outsourcing doesn t rest with R&D alone; software CEOs need to create the right expectations to facilitate maximum resource productivity. This report provides key guidelines for setting up an outsourced business model using lessons learned from outsourcing expert, Rony Lerner of Tripwire. LEARNING FROM EXPERIENCE Rony Lerner works as Vice President of R&D for Tripwire, a Portland, Oregon software security company. Tripwire currently has an Asian office performing software development, in addition to utilizing nearshore outsourcing. Lerner has extensive experience working with outsourced software talent, and his nearshore partnership with Tempe, AZ, company Tiempo Development, has helped create a successful formula for easing the typical unknowns of working with outsourced teams.

2 During his eleven years in R&D, Lerner has utilized outsourcing from Asia, the Middle East and Eastern Europe, as well as Mexico and Latin America. His experience has made him an advocate of nearshore. Offshore requires a lot more effort and investment. I believe the difference on rates between Asia and Mexico/Latin America are not enough to cover the additional investment that needs to be done to make Asia (and other offshore sites) really work. While there are cases where cheap labor for mechanic and repetitive tasks are good, if you try to have an integrated team with your local R&D, it becomes very difficult. In building the optimal outsourcing model for Tripwire, Lerner has developed a methodology that balances the demands of managing budgets while maximizing productivity. OUTSOURCING CONSIDERATIONS FOR THE CEO Once a company reaches critical mass with its software product development success, outsourcing becomes a de facto part of the equation. The pressure to reduce costs and shorten release cycles creates an overriding pressure point. The trouble starts when it comes time to scale. According to Lerner, the typical CEO rarely takes a hard look at outsourcing beyond how cost savings measure out on paper. Even when venture capitalists start entering the picture, the focus typically remains on financial considerations. Whether or not the software CEO possesses a deep understanding of the product development lifespan, few understand the challenges and problems that come with outsourced teams. Issues with outsourcing revolve around three basic considerations: time, scope and quality, says Lerner. Is the outsourced partner right? Is the location right? Are you making good use of the money? The problem of understanding efficiencies, incorporating best practices and reducing potential waste makes it necessary for the savvy CEO to ask relevant questions. According to Lerner, there is always opportunity to do more. Even CEOs who don t come from a technical background can gain a better understanding of what the outsourced team is delivering, and whether the outsourcing strategy is on track. Lerner suggests there are a multitude of considerations a CEO should take into account to make sure the company is getting the most out of its outsourcing model. 2

3 BEST PRACTICES CONSIDERATIONS FOR THE IDEAL OUTSOURCE MODEL There is no question that outsourcing allows software companies to expand capacity at a more affordable price, accelerating the development power of R&D while dividing and balancing the risk of attrition. But according to Lerner, there is no singular optimal scenario for the outsourcing equation, just strong guidelines. Achieving the right balance doesn t happen by itself; setting up the right expectation is the key. Whether your outsourcing is rural, offshore or nearshore, it s all relative to investment. More people do not equal more productivity. It s important for R&D managers to demonstrate improved productivity, not just cost savings. Lerner provides the following guidelines and considerations for CEOs looking to measure outsourcing benefits: 1. The equation is not as simple as one outsourced body = one local body. Lerner cautions against the naive impulse to regard outsourcing from a rudimentary, financial perspective. The productivity of an outsourced worker will not measure equally to the productivity of an in-house worker. For example, a CEO has to realize that the time zone challenge of offshore resources based in Russia or India is not a simple 9-12 hours of separation; it s an exponential hours. By the time the local software team realizes a problem in the software code, twelve hours have elapsed. It then takes an additional 9-12 hours for the offshore resource to (optimally) achieve resolution. Another twelve hours go by before the team learns the results. And the cycle begins again. In building his nearshore team, Lerner relies on his nearshore outsourcing to reduce the number of time and productivity issues he experiences with offshore. Most issues of time zone and language are non-existent with nearshoring, he says, making it ideal for Tripwire s situation. For that reason, Lerner advocates nearshore outsourcing as the more ideal model when it comes to resolving the exponential impact of time zone issues. The proximity of nearshore resources can reduce or eliminate delays, resulting in cost and scheduling savings. 2. Invest in results with the appropriate amount of time and training. Lerner s success comes from developing his outsourced teams to the point where their product expertise is on par with his local team. The success of your outsourced location should be measured by product knowledge of the application, not short-term gains and savings. They should be able to explain the product and demonstrate the new release with as much technical fluency as the local team, says Lerner. 3

4 This capability, he advises, is hard to measure quantitatively but easy to measure in person. Here again, Lerner advocates the efficiency afforded by his nearshore teams, whose close proximity allows closer oversight in training and developing the level of expertise he seeks. 3. Build a partnership with the outsourcing provider. True productivity comes from elevating the skills of the outsourced team to the point of becoming a true extension of your local team, not a separate entity. Lerner advises that setting the same expectations and goals, and providing the same investment in time and training, requires partnership with the outsourcer. You re in it together, says Lerner. No provider can operate without the full support and investment of the client. With Lerner s model, the outsourced team takes three to six months to reach optimum product knowledge and productivity, a process that requires collaborative management between outsourcer and client. 4. Start requiring metrics. It is the CEO s responsibility to monitor outsourcing productivity, and demand metrics from R&D management. Fifty percent of issues are solved simply by asking the questions, he says. Too often success of the model is measured by how much R&D can grow the team for the money. They don t look at the productivity; they only know the price, that they can get 70 people instead of 20. ACHIEVING THE RIGHT BALANCE DOESN T HAPPEN BY ITSELF; SETTING UP THE RIGHT EXPECTATION IS THE KEY. IT S IMPORTANT FOR R&D MANAGERS TO DEMONSTRATE IMPROVED PRODUCTIVITY, NOT JUST COST SAVINGS. - Rony Lerner Vice President of R&D, Tripwire This sounds great, says Lerner, but the value is misplaced. There needs to be metrics on output and delivery. You shouldn t assume the R&D manager is taking good advantage of the 70 people. The metrics of measuring outsourcing success is itself a very fluid concept. Unlike measuring sales success, software is more complicated and uncertain. When R&D fails, it s too late. You don t know until it releases, and it turns out the product was over budget and doesn t work. But the fact that no hard and fast measurement standards exist doesn t mean CEOs shouldn t seek metric benchmarks. It s very difficult to measure how 70 outsourced people are doing, but if you set the expectation, R&D managers will find a way. 4

5 5. Achieve the right ratio for the situation. For the outsourced team to truly provide a contribution, R&D must achieve a balance between the local team and the outsourced team, a measurement that differs in each circumstance. According to Lerner, most people believe in a local-to-outsourced ratio of 1:2 or 1:3. As a rough guideline, he feels a ratio of 1:3 or 1:4 is excellent for the same budget. If a company cannot achieve a good ratio, the whole model falls apart. Costs increase on the management end, including travel. I will shift strategies rather than work within a less-than-ideal situation, says Lerner. However, Lerner s emphasis on extensive training and development has allowed him to stretch this ratio with Tiempo nearshore resources even further. Because I go on the assumption that my outsourced talent is fully independent, and fully versed on the product, they need fewer of my local people to direct and validate their work. That is my goal. Here s where the benefits of nearshore outsourcing become a more obvious choice for Lerner, who further leverages the success of his model with Tiempo s emphasis on Agile methodologies to ensure close communication, synchronization and success. Proximity and communication become a necessity, not a luxury. A larger in-house to outsourced team ratio requires constant and very fluid communication to work, says Lerner. EVEN CEOS WHO DON T COME FROM A TECHNICAL BACKGROUND CAN GAIN A BETTER UNDERSTANDING OF WHAT THE OUTSOURCED TEAM IS DELIVERING, AND WHETHER THE OUTSOURCING STRATEGY IS ON TRACK. WHEN AN OUTSOURCED TEAM BECOMES FULLY OPTIMIZED, SCALING ITSELF BECOMES EXPONENTIAL. 5

6 JUDGING OUTSOURCING SUCCESS What are some of the key signs that your outsourcing strategy is fully optimized? > The outsourced team is as fluent in product knowledge as the in-house team. > The local team only needs to do a smoke test to make sure code does not break completely and more serious problems aren t lurking. When this happens, you ve reached the point where your outsourced team is truly an extension of the business. > The company can begin delivering real value in the form of additional product functionality and features faster and for the same budget. Lerner also mentions that when an outsourced team becomes fully optimized, scaling itself becomes exponential. Lerner s ratio allows him to spin up a whole new team by hiring only one or two additional people. If you have two teams, all it takes to create a whole new team is moving 1/3 of people from one team and 1/3 of a second team, and filling in the difference. Only one third of the people in the new team are actually new, which drastically reduces training and development time. I don t have to wait the typical 3-6 months to create a fully-operational, new team. Lerner points out that, in the end, the true measure of success for any strategy is whether you re providing more value to your software customer. Is the customer better off with the result? Once again, asking the question is the key. TIEMPODEVELOPMENT.COM