Smooth sailing: what CIOs need to know when going offshore

“Yes, I know that the big boys like Microsoft, Oracle, SAP and IBM develop software offshore,” said the CIO, “but I can’t imagine us doing it. I don’t think I could tolerate any loss of control over something so critical.”

Many CIOs have no doubt had similar thoughts, but with offshore outsourcing gaining momentum, chances are that sooner or later most CIOs will at least have to test the waters.

There is nothing new about going offshore anymore; it is a well understood and a frequently used management tool for many services, from call centre operations through to complete accounting processes. When it comes to application development and sustainment activities, however, the offshore option has been slow to gain traction, even though large and small firms in the software development business (both custom and package) have been doing it for some time. In fact, many North American software development companies would probably be non-competitive if they did not!

The concept is straightforward – a small contingent of the offshore vendor’s professionals are stationed at the client’s site working with the business on requirements and with IT management on architectural compliance. Specifications are sent to the offshore team and back comes “factory tested” code ready for acceptance and integration testing.

The potential benefits have been broadcast far and wide: cost, quality and timeliness.

Anywhere from 25 percent to 50 percent of North American “direct” development costs can be saved due to significant wage differences (a senior programmer in India makes roughly US$15K per annum versus US$65K per annum in the United States). These cost advantages, however, may shrink somewhat when factoring in some overheads for relationship management, communication facilities, etc.

As for quality, these guys can cut code! Of the 125 or so software development companies worldwide that are CMM level 5 certified (absolute devotion to well defined processes and unbelievably low error rates), about 75 percent are in the third world.

From a timeliness perspective, often the time-zone differences, if properly exploited, can lead to a 24-hour development environment, with specifications electronically transmitted from a client site in the afternoon triggering design and development efforts overnight.

key considerations

What are the key considerations that need to be analyzed before venturing off to this promised land of greatly decreased IT costs? If you have a few firms under consideration – whether they be based in Estonia, Malaysia or India – there are a number of points to consider.

Does the firm have SEI (CMM) and/or ISO certification? Not that this is utopia, but anything over CMM level 3 is assurance of rigorous adherence to well formulated processes resulting in consistent quality.

Perhaps walking before running is a way to mitigate risks; so, will the firm allow you to use different services – for example, its testing processes and facilities for your in-house development, followed by a small project, then a larger project, perhaps leading to ongoing sustainment? Ultimately, several companies would be pleased to outsource your entire systems delivery/sustainment department.

How does the firm recommend services be delivered? For example, are their business analysts on-site, developing business specifications and sending them to developers offshore? If so, are the on-site staff locally resident (and charging North American rates) or on a foreign assignment, and, if so, how is continuity ensured? How seamless are the hand-offs for various deliverables produced during development efforts between on-site and offshore professionals?

Does the firm have a substantial North American presence that can handle the commercial arrangements and manage the relationship? Is this through opening a subsidiary directly or through a partnership with an existing onshore firm? If the latter is true, it may be advisable to perform some due diligence on the deal between the entities involved.

Then there are internal disciplines to be considered. Will your internal processes, including quality assurance, be robust enough to seamlessly mesh with the level of sophistication of the offshore firm? Are you prepared for the rigour of “doing things right”? For example, your business professionals must be prepared to document use cases and business requirements in rigorous detail – you cannot assume any innate knowledge of North American business norms or sensitivities among offshore developers.

Does the outsourcing firm under consideration have an industry-vertical specialty (e.g., transportation) or a business-process focus (e.g., logistics) that are consistent with your business?

What about cultural accommodation? Yes, there could be some surprises with the assigned onshore resources no matter how smart and professional they are. Perhaps the women assigned have to reside on a separate floor from their male colleagues. The word “yes” for an offshore professional may mean, “I’ll think about it and get back to you”. Some foreign professionals avoid conflict and confrontation, preferring orderly, polite business environments. Things will proceed much more smoothly if your people appreciate and accommodate these differences.

Then there is relationship management. Depending on the volume, complexity and criticalness of the business you may be doing offshore, the governance structure and relationship processes can be very important. Will there be sufficient executive attention, as well as on-site coordination, with satisfactory reporting?

Considering the importance of communications in such an arrangement, the collaboration facilities of the outsourcer should be taken into account. Does the outsourcer’s environment have adequate communication bandwidth and compatible tools for video conferencing, instant messaging and large-volume file transfers? This is most important to developing long-distance relationships, as well as getting the work done.

What about legal jurisdiction? Your legal department may have a hemorrhage if asked to negotiate a deal within an Estonian or Indian jurisdiction. On the other hand, the outsourcing firm (without a North American presence) will have a steep learning curve for our laws – particularly concerning liabilities and other obligations. Also, do not forget that if worse comes to worse, distant pockets are very hard to access in liability situations.

Even though the professional rate structures may look very attractive, you probably do not want to be tied to foreign inflation rates (India has been consistently higher than Canada); nor may you want to deal with currencies other than Canadian or US dollars. Actually, you may be able to demonstrate to your prospective outsourcer that according to the economic theory of “purchase price parity”, an agreement payable in Canadian dollars and subject to the Canadian CPI will keep everyone “whole”.

Finally, you must consider exit strategies. In spite of the due diligence on these considerations, any relationship may sour over time. If so, are there “off ramps”, with appropriate intellectual property protection provisions, that will allow a graceful transfer of work and responsibilities. One potential problem during an exit lies with the outsourcer’s use of proprietary tools and software for development platforms, administration and project management. For some third-world companies, it is more economical to develop these from scratch rather than buy the household names off the shelf. Ensure your agreement provides access rights to these.

recipe for success

To determine if offshore application development and sustainment offers potential to your organization, while minimizing risks, consider the following approach:

Objectives. As in most other new undertakings, be very clear on your business objectives for going offshore, trying to make them as measurable as possible. They should clearly articulate the reasons for this evaluation in a documented business case, from potential cost and quality gains through to eliminating staffing difficulties in your current environment.

Research. Determine viable vendor candidates with some high-level filters, such as critical mass, vertical industry specialization, business-process specialties, North American presence, CMM and/or ISO certification level, etc.

Vendor Selection. Using more detailed criteria, including exhaustive reference checks, screen the viable candidates. If one or two appear promising, then strongly consider site visits to evaluate facilities, processes and standards, management and professional competence, customer profiles, etc. Most certainly do not overlook financial and ownership due diligence, as well as reviewing any agreements between the firm and important affiliates (e.g., a North American partner).

Business Case Validation. Before venturing further, ensure the business case is still sound and that your objectives can be met. As previously indicated, try to factor in some of the indirect costs that will be incurred in managing a distant relationship (if you plan to deal directly with the offshore resources).

Proof of Concept. Even if the chosen vendor has passed all hurdles with flying colours, this is a new experience with many unknowns outlined above. Therefore, consider a small undertaking to test the dynamics. For these efforts, the vendor can be “kept whole” on a time and materials basis with accumulated credit reconciled when a contract is consummated. Further, even if the proof of concept works well, you may still exercise a cautious approach going forward by gradually increasing the size and complexity of projects commissioned to the vendor until complete working relationships are established and trust is earned. Also, during this period, the governance structure that will be used to manage the relationship should be launched to ensure compatibility of business styles.

Agreement Negotiations. Perhaps these can be conducted in parallel with the proof of concept work. As illustrated above, there are several pitfalls to avoid with international agreements, but there are two overriding safeguards: first, a sound transition strategy in the event of contract termination; and second, ownership of software products developed during the relationship, rights of access to any proprietary tools needed to maintain this software, and intellectual property rights for both parties.

Relationship Management. Ensure the structure is established and positions, roles and responsibilities identified for all aspects of managing the relationship, including senior level contact, financial management, planning, service level reporting, and project management. At the outset this requires focus and drive until a self-perpetuating rhythm is established.

Hopefully, this discussion has emphasized some key messages. Yes, there are benefits to offshore development in terms of cost, quality and timeliness. And no, these benefits do not come without some detailed planning and hard work. By following the right recipe and conducting the required due diligence, CIOs will find that offshore software development and sustainment is within their grasp – and not something only for the big boys.

Graham McFarlane is a Director with Western Management Consultants based in Calgary. During his 25 year practice, he has participated in several outsourcing, system delivery and system sustainment engagements, and recently had the experience of dealing with offshore services for system development and delivery.

an approach for the gun-shy

Some CIOs want to capitalize on the benefits of offshore outsourcing but are hesitant to deal directly with an offshore firm. Their preference is to form the relationship with a North American based company that has access to offshore resources. There are a few ways to accomplish this, each requiring its own due diligence.

First there is the model in which the outsourcer establishes a North American presence. In these cases, the offshore firm establishes a North American subsidiary with a sizeable critical mass. These onshore resources would perform the onsite work (e.g., business analysis and user requirements definition) and deal through electronic communications with the offshore resources performing detailed design, programming and testing work. This model is becoming increasingly popular, as offshore firms understand more about this reluctance among several prospective clients.

The benefit of this approach is the comfort in dealing with an onshore company with a contract under North American jurisdiction. The due diligence required, however, is to ensure the vendor is in North America to stay and that the rate structure they charge for various individuals working on the account reflect their place of residence.

Then there is the model in which a North American based firm has a relationship with an offshore provider. Here there is a degree of comfort of dealing with a North American firm acting under North American legal jurisdictions and used to North American ways of doing business.

Three key questions regarding this model are as follows: (1.) What is the legal relationship between the onshore and offshore entities? It is important to ensure that there is an appropriate, long lasting relationship between the two entities. This may require an investigation of the legal agreements between them, particularly those that deal with the termination of the relationship. (2.) How seamless are the hand-offs between the onshore and offshore resources? If the processes appear disjointed and seem to operate with different underlying standards, then trouble is on the horizon. (3.) Will the vendor give preference to North American based resources (thereby potentially driving up costs) or work at an appropriate balance, allowing the offshore resources to do what they do best?

Finally, there is the offshore firm with long-term onshore assignments. In this model all personnel operate under the same methodologies and standards with some surcharge for the personnel located onshore (usually on the client’s premises). Again, there are some measures of due diligence. Will there be an appropriate rotation schedule for the onsite resources ensuring continuity, accumulation of business knowledge and overall investment back to the client? What legal jurisdiction can be negotiated to save the client’s legal department from losing sleep? Is the balance of onshore/offshore resources and skills appropriate to the tasks at hand?

The different models described above may suit different organizations. The important thing is to do your homework.

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