Outsourcing Projects Often Fail
Many Are Doomed Before They Even Take Off
According to the recent study from PriceWaterhouseCoopers, 48% of ITO/BPO buyers feel they lack experience to go offshore and another 37% confess they lack skills to manage outsourcing. Too often offshore vendors are the ones who are blamed for the failure; now, off cause, they share responsibility.
But here is the bitter truth: enterprise buyers make mistakes that cost them millions of dollars and yet they do not feel the need to change their methods. What is a provider to do? We feel it is our duty to share what our most successful Fortune 500 clients did to get the most from offshore software development outsourcing. The following are 3 components critical to success:
Sound Outsourcing Strategy
Answer this question: “What is the ultimate goal of your outsourcing practice?”
“Cost Reduction” is the wrong answer. Because You can’t really expect you will shut down your IT department and get the same work done 70% cheaper offshore. The total cost of outsourcing includes expenses such as market research, dedicated project management, documenting requirements, sending out requests for proposals (RFP) and evaluating the responses, negotiating a contract and more.
It took years of effort and strategy development for Hi-Tech industry leaders such as IBM and SAP to achieve 30% savings by outsourcing offshore.
The right answer to the question above is “flexibility, focus, and innovation.” When you hand off your non-core competencies to an offshore outsourcing vendor for whom those activities are core and who has already implemented the best practices in those areas, you can focus on your core activities and achieve more. In short, you work more efficiently this way.
The value of offshore outsourcing is comprised of tangible as well as intangible elements. And tangible cost savings are just the tip of the iceberg. The real value is in your ability to focus, to bring your products to the market faster, and to discover and implement innovations.
The key to achieving long-term value is having a sound outsourcing strategy in place. As reported by our clients, the following sequence leads to success:
- Start with setting the right goals
- Develop Service Delivery Model and business case
- Implement a solid framework to consistently assess the total value and total cost of outsourcing as you move through the project.
Robust Management and Governance
It is impossible to get where you want to be , if you don’t know where you are. While a sourcing organization can still achieve significant results with ad hoc management and governance in the initial phase, in the long-run the company will loose up to 50% of its potential value (Figure 1). Robust governance and management frameworks help organizations make sound decisions based on facts and trigger appropriate activities immediately. The hardest part? In order to achieve long-term value, you must share decision-making power with your offshore vendor while balancing between customized and standard solutions across your business units. This flexibility comes at a price if you run your processes ad hoc.
Here is an example of how healthy management and governance worked for our client: Initially one of the Fortune 500 multinational’s business units decided to outsource data reconciliation solution re-engineering . Throughout the development cycle our client’s head office assessed our performance and measured the total value and cost of outsourcing to ETNA Software. Upon the completion of this assessment, we were offered to participate in the development of an organization-wide document-management system. We were also given more power to make decisions and were advised as to where we would have to improve our performance. The project was a huge success.
Wider Perspective
It’s unclear as to why software development outsourcing is still often viewed as a single transaction. Often buyers are conscious of how fast a provider brings programmers up to speed, but what they forget is that offshore vendors also need lead time and an understanding of the context in order to keep pace with significant changes in the customer’s business and its goals.
We believe that each offshore delivery is a complex initiative that changes the fundamental operating model of the company that uses it. What’s more, most successful sourcers understand the complex nature of ITO. In order to achieve maximum outcome they imply a high level of partnership and the development of trust from day one. Smart sourcers view the vendor as their business partner rather than another one time sub contractor.
We declare: organizations that use offshore software development outsourcing will be successful if they strive to develop a long-term partnership with carefully selected offshore vendors.
