Even IT executives who have successfully outsourced parts of their companies' services abroad can tell you the road to profitable relations with offshore partners can be painfully bumpy.
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Just ask Group 1 Software's vice president of postal affairs Tim King, who was forced to pull the plug on two of the four offshore application development pilot projects he initiated in the past 12 months.
"Either, in the design phase, they just didn't get it, or the code they delivered was just not up to our standards," King says.
Fortunately for Group 1, a data quality and direct marketing software maker, King quickly reassessed the offshore outsourcing strategy and limited the financial exposure of the aborted relations to under approximately $100,000 each.
Despite these setbacks, King has succeeded with offshore ventures; but he is by no means alone in experiencing outsourcing failures.
"Over half the people we talked to for our own research said that offshore projects failed to achieve full potential for cost savings," says David Foote, president of IT advisory and research company Foote Partners, an IT advisory and research firm.
Foote and other IT executives believe offshore project success requires the client company to clarify goals and expectations, rigorous project-management discipline and an understanding of how best to manage communications.
The first step in making an outsourcing relationship work is to analyse your company's expectations, says Tony Greenberg, chief executive officer of Ramp Rate, an IT outsourcing advisor.
"We have a whole series of questions," Greenberg says. "What do you hope to gain from outsourcing - cost reduction, business transformation? What criteria do you use to identify vendors? Do you truly understand your internal costs?"
Oftentimes, the best course of action is to stay at home.
"Companies must also realise that ultimately the vast majority of outsourcing is done cost efficiently in the US and that offshore outsourcing is not for everyone," Greenberg says.
Establishing a decision process to define what should and should not be outsourced goes a long way toward avoiding pitfalls down the road, Group 1's King says.
"We wouldn't outsource those things we sell that are regulatory in nature - for example, a postal coding product. The code has to be in the hands of customers at a certain date in order for them to comply with US postal service regulations," King says.
According to many who have contracted offshore services, understanding the real benefits of offshoring and setting reasonable expectations are also important to ensuring success.
Eric Michlowitz, former vice president of strategic services at WorldChain, a provider of hosted supply-chain applications, says that a truly successful outsourcing initiative will produce advantages beyond mere cost savings.
Companies do not want to spend money to hire extra people to ramp up quickly on projects only to have excess staff when things get slow, he notes.
After a company has set the goals and expectations for an offshore venture, the selection process becomes the next crucial step to success. "It's no use using good people for the wrong purposes," Michlowitz says.
Many client companies look for service providers with credentials such as the CMM (Capability Maturity Model)-level certifications developed by Carnegie Mellon University's Software Engineering Institute. But that's not a guarantee that a provider did not experience staff turnover after the certification was granted.
"You also have to check customer references and see how responsive the companies are in their sales process," says Russ White, chief executive officer of First Index, which uses a web-based application to match buyers and sellers of manufacturing components.
First Index selected Epam Systems - a services provider based in the US but with programmers in Russia, Hungary and Belarus - to maintain its web-based application for matching buyers and sellers of manufacturing components.
"Epam really did their homework and sent people to visit us, while the other firms came across as somewhat arrogant even though I knew they wanted our business," White says.
Although preliminary analysis and choosing the right provider are crucial, many offshore projects fail without hands-on management.
"This may sound obvious, but probably the biggest stumbling block to offshore outsourcing is that after all the contracts have been signed, companies abdicate responsibility for projects to the outsourcer," Deepak Khandelwal, analyst of business process outsourcing at business consulting and research firm McKinsey said during a forum in New York at the CeBIT America show in May.
"Companies that outsource forget that they still have to manage the projects they outsource. Communication is key: You need to have your weekly meetings with the project managers and the quarterly meetings at the CEO or [executive vice president] level," Khandelwal said.
According to Group 1's King, his company has executive-level meetings to give the green light to projects they expect will cost more than $100,000. King's division, which includes a little more than 50 staff members, has a five-member project management team that reviews code developed by service providers on a regular basis. Group 1 typically pays for work on delivery.
Those management policies have aided in the development of several successful offshore outsourcing projects, mainly with Headstrong, an IT consulting and services company based in the US, with programmers in other locations, such as the Philippines.
King and other outsourcers agree that there is no one type of contract that fits all projects. Payment for the building of a specific application or piece of an application is usually not based on time but on the completion of the project and is sometimes portioned out through milestones, King says.
For maintenance projects, King and representatives of Headstrong usually confer on how much work will be needed and agree on an annual fee.
Most users of offshore services warn about open-ended contracts based on payment terms for hourly wages. "You have to be careful of scope creep," former WorldChain executive Michlowitz says. Servicelevel agreements (SLAs), which typically outline a time frame for specific deliverables, can help put a check on scope creep, he adds.
Although contracts and SLAs are important for ensuring that specific code is delivered on time and on budget, many industry insiders believe communication is often what determines the long-term success or failure of an outsourcing project.
Communicating with offshore providers can be hampered by cultural differences. A common observation is that Americans and Indians tend to communicate differently. Offshore experts believe that, on the whole, Americans tend to be informal and expansive, whereas Indians tend to focus on topics and discuss them point by point.
"[Indians] will give you exactly what you ask for, so it's a literal kind of thing," ICICI Infotech's Kunkalienkar says. Although that can often be advantageous for the outsourcing client, it can sometimes lead to misunderstandings.
"Often problems are more a matter of cultural differences. Simply things like the wording of an e-mail can be misinterpreted," Kunkalienkar says.
"An American might send a long e-mail and get a two-liner in reply and think, 'Is the person hiding something?' That's why conference calls are a good thing to do."
Establishing clear lines of internal communications on the client side is also vital to offshore success.
"Companies need to communicate both externally and internally," Foote notes. "But they do a lot of things that almost guarantee that there's going to be a lot of fear, uncertainty, and doubt in their organisations.
"They tell Wall Street that they're going to be reducing costs and then fail to communicate to their own employees how that is going to affect them. Some of people they end up wanting to keep get so pissed off by process that they split."
Group 1's King agrees, saying that offshore outsourcing has become a fear factor for many employees.
"When you talk about outsourcing, a lot of people freak out. Our strategy is not to replace jobs but to supplement what we have, to be more cost-effective," King says.
"Our mantra for some time has been to do more with less, and we've tried to be up front about that. You have to be candid and gain credibility, and that goes a long way."
Marc Ferranti writes for IDG News Service