Outsourcing IT projects have now become a very mature paradigm for many organizations (that is not to say that it does not come with its slew of potholes and disasters). Gartner surveys indicate that the Application Outsourcing (AO) segment has witnessed more growth in the recent years. Most of this increase can be attributed to organizations’ needs to manage their complex legacy application environments and their commercial off-the-shelf (COTS) packages that support their businesses. Data Center outsourcing, which had seen substantial growth in the past, is predicted to reach a plateau. However, the real winner could be Cloud computing service projects, which will see tremendous immediate growth. All these facts mean that outsourcing IT projects will still be a major factor in cost savings for many organizations.
The terms “011” are often used interchangeably because many outsourced projects nowadays implemented in offshore locations outside of the United States. Some studies have indicated that the issues can diminish the real benefits of offshore outsourcing in communication, skill sets, accountability and data security that have plagued many projects.
However, currently managed, offshore IT projects can reap substantial rewards. In one of its reports, the FDIC expected that financial institutions could save up to 39% in operational costs, especially in areas like IT implementing offshore outsourced projects.
Attractions for offshore outsourcing could be the presence of less stringent oversight on financial reporting, health, safety and environmental regulations in locations outside the States.
If an organization has decided to outsource its projects inshore or offshore, the ultimate responsibility of making the project(s) successful lies squarely with the initiating group. The fact that the performing organization or the service provider may have signed a Statement of Work (SOW) or any other binding contract does not relieve the “client” or the initiating organization from the responsibility of defining, controlling and delivering the quality of deliverables of the outsourced projects.
As an example, the management team at a major software consulting firm thought they had a good thing going--they seldom heard anything from their client about a project that was estimated to last one year. Then lo and behold on the ninth month, the initiating organization that was in the Fintech business raised red flags of all hues. Apparently, the Fintech banking organization was under the impression that the consulting firm had everything under control and stepped into conduct user acceptance testing as per published milestones. To their surprise, they found that the developed solution addressed not even 20% of their requirements.
This incident could very well be an exceptional case in the realm of outsourcing. However, the fact that such instances can happen between mature organizations when it comes to software outsourcing should be an eye opener. So what is the right approach to manage responsibility in outsourced projects?
A collaborative environment must be set up by the initiating organization where the “client” and “consulting” team members should constantly be communicating project ideas. Milestones defined in the contracts should be evaluated well before completion to make room for any adjustments. The initiating organization’s project manager should be given ultimate responsibility to determine the quality of the project deliverables. Moreover, the client and consulting organizations should be flexible and accommodate to make the project successful.
Nowadays, the mere promise of a lower cost is not the only criteria for selecting a suitable service provider. More than 10 years ago, major companies in the United States jumped on the offshore outsourcing bandwagon primarily to save costs. At that point, the emphasis was to shift “lights on” operations to other countries and focus on strategy operations inshore. However, after many years of successful (as well as failed) offshore outsourcing experiences, organizations have learned a major lesson: the importance of selecting your service provider based on their long-term growth goals, sustainable skill sets for the staff, comprehensive training programs, and financial status.
Many models can adopt outsourcing projects or services to offshore. However, the current preferred model has managed services, where the delivery management accountability is taken up by the servicing organization. From a cost perspective, this model provides better predictability for the initiating organizations. The service provider also gains flexibility in their staffing models as the project success will depend on more on success factors of the deliverables.
Other models like captive project teams and single-source providers need to be evaluated carefully based on an organization’s project needs. It is entirely possible that an offshore service provider who may not be a No. 1 firm has proven capabilities in delivering application development projects as compared to a No. 1 service provider who might specialize in data center operations. An evaluation based on the delivery strengths of these vendors will provide much better value in the long run. However, there is a risk of managing multiple providers for realizing the organization’s core outsource goals. It will very helpful if the client organization and the provider collaborate on the long-term strategy to develop solutions that align with the growing needs of both the organizations.
Contracts that written over thousands of pages are not unusual for any outsourced contract agreements. While the inclusion of every imaginable clause provides an almost foolproof contract, it can also work as a major hindrance to project execution on an ever-changing technology and business landscape.
A good example is the case of a contract management team at a major telecommunications company struggling to meet the outsourcing contract that was established a few years back by a team of lawyers and consultants. When the telecom industry trends started changing overnight, they found that they could not hang on to the established service contracts with the service provider. As an added complexity, the service provider partner had already aligned their budget, technology goals and staffing for an extended period based on the five-year contract agreement. This particular situation put both the client and the provider at crossroads--the client not being able to accommodate its business needs, and the servicer not being able to change due to resource commitment.
The recent trend in outsourced projects is to start the contract with the bare minimum legal terms and expand on the quality, quantity and manageability of the deliverables on a periodic basis. As experience has shown over the last many years, businesses have a dire need to adjust their asset investments based on the market reality. There definitely will be resistance from legal and governance teams in the initiating organization to embark upon an outsourcing journey with a slimmer contract. A conscious effort must be taken to align the business and technology roadmap to the final negotiated outsource contract. However, in certain industries, innovation and change may not be the driver for some operations. In such scenarios, the classic approach to defining service-level contracts over an extended period will still work well.
If the initiating organizations can find their service partners who are willing to start small and grow in an organic manner, then heartaches over contract violation and dissatisfaction can be avoided to some extent. For an outsourced engagement to work, the relationship between the client and the servicer has to be symbiotic in many ways.