Windward Insights: Choosing An Outsourcing Partner

Transcription

1 Windward Insights: Choosing An Outsourcing Partner 2549B Eastbluff Drive, STE 275 Newport Beach, CA Phone - (888)

2 Windward Insights: Choosing An Outsourcing Partner TABLE OF CONTENTS 1. Executive Summary Introduction A Global and Strategic Perspective of IT Outsourcing Challenges in the Outsourcing Industry How to Evaluate An Offshore Supplier Checklist: Critical Considerations Prior to Engaging a Partner Conclusion

3 EXECUTIVE SUMMARY Enterprises large and small across North America and Europe face significant business challenges in the technology arena - increasing labor costs, intense competition for top talent, and a depleted IT workforce. When managed thoughtfully and executed carefully, IT outsourcing (ITO) can be a very effective way to overcome these challenges. ITO can decrease the costs and risks associated with IT infrastructure, software development, Big Data, cloud and integration projects, and can also provide enterprises with efficiency, flexibility and a global presence. However, realizing these benefits depends on a firm s ability to select the right technologies, the right staff, and in many cases, the right outsourcing partner. This whitepaper outlines the challenges and a number of guidelines, to help business leaders understand the global IT talent marketplace, and to aid them in making informed decisions about selecting technologies, partners and talent. 3

4 INTRODUCTION Information Technology Outsourcing (ITO) is not a new idea; North American firms began experimenting with offshoring of IT labor in the early 1990s. Now, in 2014, as the demand for global technology is increasing, outsourcing is becoming a critical part of an enterprise s staffing strategy. In North America, the software development and IT labor force is depleted and over- priced when compared to many countries around the globe. According to an article from US News, the median annual wage (see Figure 1) for computer programmers was $74,280 in The best- paid 10% in the field made approximately $117,890, while the bottom 10 % made approximately $42, Given the high cost of labor and the intense competition around securing that labor savvy business leaders can see the cost benefits of building offshoring into their talent strategy and harnessing the cost efficiency to minimize costs and drive profit margins. Mean Salary of Computer Programmer $80, $78, $76, $74, $72, $70, $68, $66, $64, Figure 1 Mean Salary of Computer Programmer While the salaries for computer programmers in North America and Europe keep increasing, the demand of this type of labor also remains high. A report from the firm Identified shows just how in demand engineers are. Figure 2 shows the 1 Hellman, N. (2013). Computer Programmer: Salary. jobs/computer- programmer/salary 4

5 demand score of engineers vs. non- engineers. People with engineering degrees on Identified have demand scores that are 1.2 times those of liberal arts majors with equivalent work experience, meaning they are more sought after for jobs. Even in non- technical fields, people with engineering degrees are more sought after than liberal arts majors with the same years of work experience Demand Score of Engineers vs. Non- engineers Identi=ied Score Liberal Art Major Engineer in non- technical Nields Engineers in technical Nield Years of Work Experience Figure 2 Demand for engineers and developers also remains high across a wide cross- section of industries. The challenge faced by many businesses is where to find candidates in a cost- effective manner. The challenge is compounded by the fact that the global IT talent pool which is deep and rich with educated and skilled candidates can be extremely difficult to navigate without assistance. Having the guidance of an expert offshoring partner can mean the difference between success and failure. There are many considerations to be mindful of when choosing an ITO partner. Having the right partner can be a valuable asset to the company, and companies 2 Geron, T. (2011, May 21). Just How Much Are Engineers In Demand? Very Much So. 5

6 gain freedom to focus on their core tasks while benefiting from the outsourcing provider's expertise and infrastructure. Not having a partner or worse, choosing the wrong one can bring the opposite outcome, often introducing liability and risk. This paper discusses some of the key factors in the process of choosing the right partner. A GLOBAL STRATEGIC PERSPECTIVE OF IT OUTSOURCING North American and European businesses have learned much over the past twenty years of offshoring, from both good experiences and negative. These experiences contain valuable lessons. Today, both outsourcing clients and offshore suppliers are more confident about IT outsourcing than 10 years ago, due to both the dissemination of best practices learned from business leaders having shared their stories, as well as dramatic improvements in affordable video conference capability, the proliferation of collaboration and project management platforms, and the flattening of the world, to coin Thomas Friedman. THE BENEFITS OF IT OUTSOURCING ARE CLEAR: Lower labor costs in emerging countries Access to wider IT talent pool increases ability to find and secure the right talent Access to deeper IT talent pool allows teams to scale rapidly Further, the available workforce is growing. Developing countries such as India and China have a very large IT talent pool. In China, for instance, over six million graduates hit the job market in 2010, an estimated 700,000 of which held engineering degrees 3. Prestige of a global presence Allows enterprise to quickly overcome lack of in- house resources Given these advances in tools and knowledge, the IT outsourcing model has matured over the last half- decade, and it has become much easier for enterprises of all sizes to build ITO into their business strategy. One of the most common obstacles to acceptance of ITO, however, has been fear of the communication barrier. To an extent, even at this stage and despite the 3 Bleum. (2011). Understanding China. 6

7 great advances in telecommunications technology, it remains one the biggest challenges in the IT offshoring business some ideas, even if they are technically obsolete, can linger, powered by long institutional memories. A decade ago, communication was the most popular method for team communication on offshore projects. Project management tools were not nearly as mature, widespread or affordable as they are today. Clients needed to visit their offshore team constantly, or even stay there, to ensure the project was moving on the right path. This created a burden and, at times, was a contributor to less than ideal outcomes, and those with long memories may still harbor ill feelings. Today, however, with significantly increased Internet speeds, videoconference technology and other project management tools, communication is no longer a technical issue and this has driven tremendous growth in the ITO industry in recent years. In a recently released article, McKinsey & Company found the global market for offshore business and technology services will grow to about $500 billion by 2020, from the current $80 billion a year 4. The offshore engagement has become more complex than 10 years ago. Before, it was a simple buyer and supplier relationship; today, offshored projects call for more intense collaboration rather than the traditional buyer- seller relationship. A study from Ovum states that more IT leaders lean away from multiple outsourcing suppliers and short- term contracts, in order to gain more stability and control instead, clients are looking for a single, trusted outsourcing partner for long- term development. Instead of only cost reduction, clients want more value out of their ITO. In their report, Ovum observes that despite growing requirements for agility and for companies to deliver quick wins from current IT projects, there is recognition that unless they do the groundwork, organizations will not be able to achieve the strategic transformations they are seeking. 5 While companies need to be more responsive and deliver rapid results, Ovum found, they are taking a thoughtful approach to doing so - many organizations are now taking three to six months of up- front due diligence to understand their exact requirements before committing to investments. IT buyers will be looking for stability, capability and accessibility in their outsourced service partners. The desire for stability and control is an increasingly 4 Kaka, N. (2009, August). Strengthening India s offshoring industry. 5 Butler, J. (2012) Trends to Watch: Bundled Outsourcing 7

8 high priority. 5 These observations suggest that there is significant value in finding a competent and reliable outsourcing partner, who can not only deliver a quality product for lower prices, but also can deliver on qualities such as good governance, transparency, and commitment to customer satisfaction. Finding such a partner, however, is not always as easy as it sounds the field is rich with suppliers, and care must be taken to select those whose service offerings, internal culture, and regional culture are good fits for the client. CHALLENGES INHERENT IN IT OUTSOURCING: Outsourcing entails a myriad of challenges, any one of which, if overlooked, can introduce risk into a project or initiative. However, taking an informed, programmatic approach to understanding and planning for those challenges can allow an organization to reap great rewards. The key to overcoming the inherent challenges in outsourcing center around gaining knowledge about the cultural mores at play, and knowing what to expect from partners and suppliers (as well as what to expect internally, inside the client organization) and, most importantly, having a defined process for managing an outsourcing engagement. Windward Systems has gained unique insight into those challenges through years of experience in navigating ITO engagements on behalf of our clients. Some of the key issues we and our clients and partners have found include: Communication Issues: When dealing with offshore partners, the first issue to consider THE KEY CHALLENGES IN IT OUTSOURCING ARE WELL KNOWN: Communication issues & language barriers Cultural divides require understanding and a smart approach Internal hurdles; fear of unknown inside client organization Cultural bias, trust issues among leadership and those with long memories 8

9 is language. A key question to ask of both partner and of one s own organization is how any language barriers will be managed does the partner organization have high standards for English language capability on their technical staff, or do they offer translators as part of their services? Inside the client organization, is there a language capability that matches the needs of both parties? How prepared is the client organization to create and deliver clear requirements, and explain expectations for deliverables, timelines, and successful outcomes? How able is the partner to provide clear, concise status updates or queries? Does the client organization have the technological expertise in- house required to manage the undertaking? The technical side of the communications issue video conferencing, project management tools, and the like are no longer a serious challenge, provided that both parties have strong, reliable Internet connections. However, there can be no understating the importance of ensuring that the human side of the communication issue is addressed. Cultural Divide: Cultural differences can be another major challenge, especially when companies do not take the time to learn or get coaching on how to best interface with partners from other cultures. When undertaking an outsourcing engagement, the client organization must ensure that they have a robust understanding of what they can and cannot expect from their overseas partners. Will the suppliers technical staff be comfortable working at night to match American or European time zones? Will the client organization be capable of clearly delineating their expectations regarding business ethics and practices? Beyond these somewhat obvious questions, there is another layer of cultural issues that must be considered. For instance, some Asian cultures have a much greater power distance 6 than most Western countries, and this can manifest itself in junior developers being reticent to volunteer ideas or solutions in meetings for fear of being seen as challenging the boss. Other countries may have a strong cultural aversion to saying no to a client, even when doing so is extremely important. Some countries will perform very well on complex, long- term projects; others might be best suited for rapid deployment of more simple 6 For more on Power Distance and other cultural factors, see the research conducted by The Hofstede Centre on Cultural Insights - hofstede.com/ 9

10 work. Some cultures value staying at one employer for a very long time, while others encourage short- term projects and staffers job hop frequently. Taking the time to ask the right questions, to understand the answers, and get ensure that the client team is ready to work in partnership with their offshore suppliers can mean the difference between an unhappy outcome and a roaring success. Fear, Uncertainty & Doubt: Despite the many benefits that an outsourcing program can bring to a firm, reluctance inside the client organization to outsource can be very strong. Change isn t always the most welcome of visitors in an organization; leaders must be mindful that employees may fear the perceived effects of outsourcing, especially in the wake of the poorly- handled outsourcing of the 1990s. Some may see outsourcing as weakening the client organization s control over critical processes or product; others may see the required level of planning and diligence to be overly burdensome. Still others may wonder if their own jobs are at risk, if their contributions are still valued. How a client organization s leaders approach these issues can have as much an effect on the success of an engagement as any external factor. As part of their outsourcing process, the leaders of the organization must ask and answer the difficult questions asked by their colleagues: How can we ensure that we have adequate controls and process in place to protect quality? What is the most effective way to ramp up internal capability to manage ITO engagements? What are the business goals of this outsourcing engagement? Lack of Trust: CIOs and IT directors often do not want to share inside knowledge with offshore partners, primarily because of the concern of losing confidential information and intellectual property, as well as risking time and money without recourse if a project goes awry. There are a number of factors that go in to creating a solid, trust- based partnership. For instance, is a supplier ISO compliant for data security? Are they bonded or insured for errors and omissions? Do they understand American copyright and trademark law? Do the principals have experience working with, or in, American or European businesses? Is there a track record of transparency and integrity? 10

11 These are real concerns among many businesses, and they only highlight the need for businesses to do due- diligence and ensure that they are choosing the right offshore supplier partners for their business. HOW TO EVALUATE OFFSHORE SUPPLIERS Strong outsourcing relationships require partners who can deliver their clients a tailor- fit service. The partner needs to be able to provide a turn- key project solution, at a minimum; but, more valuable is the ability to present a hybrid delivery model. A hybrid model combines the client organization s internal onshore project management team with offshore development resources developers, programmers, engineers, and quality assurance testers. A client organization must properly vet potential suppliers, to ensure that they have the appropriate technological capability, have an adequate staff to deliver to the client s expectations and timelines, and that there is an appropriate match in corporate values and commitment to the client s project. Depending on the client organization s risk appetite or aversion, ISO certifications should be checked, as well as whether or not any insurance or bond is offered. Typically, a client organization s technology team should visit their potential suppliers meet the leadership and staff; observe the working environment; test the supplier s infrastructure, and see examples of past work and gather references, just as they would for any other major vendor or partner. Alternatively, the client organization can partner with a firm that specializes in ITO that handles the vetting, insurance, security and other due diligence and acts as the client organization s agent. Ultimately, the client organization needs to evaluate how a partner intends to collaborate with the client during the engagement. Processes need to be delineated and understood by both sides; at a minimum, there should be in place: Executive involvement on both sides of partnership Regular face- to- face meetings between primary points- of- contact A formal communications and meetings plan Proper documentation such as Mutual Non Disclosure Agreements, Master Services Agreements, and clear, well- defined Statements Of Work Online Communication tools such as GoToMeeting and Skype, and project management tools such as JIRA, Basecamp, Asana, or the like 11

12 Regular, frequent status meetings Backup and contingency plans CHECKLIST FOR CHOOSING A PARTNER Before one decides to enter a relationship with outsourcing partners, take a look at this checklist. Outsourcing can be hugely successful for organizations, but it takes prior planning, and a commitment to: ü Executive Commitment ensure key decision makers are comfortable with and supportive of the effort ü Be involved in the interviewing and selection of key team members ü Ensure partners have experience in similar technology and domain ü Ensure partners have an infrastructure capable of supporting the engagement technology, culture, human resources and leadership commitment ü Look for partners with certifications in management and quality control such as CMMI, ISO 27001, etc. ü Partnering with proven successful partners; look for experiences in related project and industrial domains ü Have English support for communication on both sides ü Having enough bandwidth for project development and international communication CONCLUSION It is no surprise that IT offshoring is not as simple as it was 20 years ago. With new technologies always rising and evolving, IT offshoring is growing fast and will continue to do so in the future. Experiences gathered over the past two decades have revealed that outsourcing entails a myriad of complexities, which can be best managed when evaluated using a balanced, holistic approach from distinct 12

13 perspectives. Businesses that can find the right partners and put in place smart systems to harness the power of the global IT labor pool will find significant efficiencies and rewards, but only if they engage with due diligence, a thoughtful approach, and the right partners. Offshore 1.0, what the business world experienced in the 1990s and early 2000s, was a period of great learning, if only for the number of failures and difficult situations businesses found themselves in as a result of poor communications planning and a lack of effective communications technology. Offshore 2.0 is a new way of building competitive advantage for businesses both large and small, that harnesses not just technological advances in communications, but also leverages the lessons learned over the past twenty years. Offshore 2.0 focuses on forming smart partnerships, based on mutual understanding of cultures and goals, of project needs and clearly delineated processes, and of working across cultural divides to produce high quality results at affordable costs. Western businesses now have improved communications tools, access to a host of best practice guidance and sophisticated offshore partners, and a much better understanding of how to work across different cultures. When these businesses, better prepared and better educated, engage in Offshore 2.0 with the right partners, they will be able to take advantage of the best the new global business environment has to offer, and find considerable competitive advantage. 13