Some companies have successfully leveraged offshoring to grow their businesses. Others have failed in this arena by incurring “hidden” costs, due to a lack of planning and the inability to implement an appropriate offshoring strategy.
To be successful in offshoring, you should plan to build your internal capabilities step by step. In this article, I share a strategy we advise clients to use, which we call Crawl, Walk, Run. I also share a few tactics; detailed elaboration of the tactics is beyond the scope of this article. I illustrate my points with a case study I’ve composed based on the true experiences of several of our clients in the small-medium enterprise (SME) space, to which I’ve given the single pseudonym of ABC-Software.
Step 1. Discovery
The first step in the offshoring process is to assess your suitability for offshoring. Do you need to transition to new products and services? Have you reached capacity and cost constraints? What are the sensitivities of your customers, people, products and workflows towards offshoring? What is the difficulty of decoupling workflows and product architectures? What type of preparations and governance structure will you follow? Will these internal costs, which are no longer hidden, outweigh the benefits? An estimate of these factors will help you decide whether an offshoring route is feasible. If you’re in the SME space, plan on spending at least one to two weeks to complete the assessment process.
ABC-Software realized that its focus had shifted completely to support of existing products and services, with virtually no bandwidth available for delivering new applications. It needed to double its technical staff over the next 18 months, to do justice to both types of requirements. Offshoring held the promise of reducing the maintenance back-log and enabling existing in-house staff to shift to new work. After accounting for the launch, preparation and governance costs associated with offshoring to India, it estimated a long term incremental cost reduction of around 40%, compared to a complete in-house software operation. So it made a decision to pursue the offshoring route.
Step 2. Definition
In this step, you need to define a low risk strategy to build your global operations progressively. Looking inwards, preparations (“offshore awareness”) and governance (“offshore execution”) are two major internal capabilities or “muscles” you need to support the strategy. Taking a phased approach — Crawl, Walk, Run — will enable you to build these capabilities and address offshoring risks incrementally.
ABC-Software realized that outsourcing to India would be easier than building its own subsidiary. It defined the Crawl phase or pilot as a set of stand-alone offshore projects, involving development of tools for automating support procedures. Further, these tools would be used by its in-house staff and not be exposed to its clients. The two teams would kick off the collaboration effort with personal trips and the use of on-line collaboration tools. The pilot would consist of six to eight offshore personnel and two part-time in-house managers, for a period of three to five months. Support procedures that had become fairly routine would be documented such that a fixed price offshore contract could be put in place. The overall goal of the Crawl phase would be to get to know the offshore provider, and learn practical ways of managing virtual projects, which also involved differences in cultures, time zones and business skills.
Success in the Crawl phase would, with time, lead to the Walk phase. At this point ABC-Software would have gained a reasonable understanding of offshoring and the effort it needed to invest in preparations and governance to ensure success. This growth in its offshoring muscles would now enable it to send a few critical projects offshore, such as maintenance and enhancement of a few applications. Expansion of offshore work would also free up the in-house team to design new products and services for the market. This phase would also be characterized by stronger performance measures, transparency in communications and incorporation of a non-stop workflow by leveraging the nearly 12-hour difference in time zones between the locations.
ABC-Software expected its in-house team to experience more interest in offshoring at this stage, due to carrying off a successful pilot. This would lead to a team of four to six in-house managers working part-time with an offshore team growing to 20 to 25 personnel over a period of 12 to 15 months, with regular trips originating from both sides.
An Offshore Dedicated Center or an ODC contract would be executed for this phase. The ODC would consist of a fixed number of offshore personnel (including project management staff) and would be managed through monthly review cycles between the two sides. Any adjustments to offshore staffing would be planned two months in advance. This arrangement would be more flexible than a fixed price contract, by enabling the operations to work with unfolding business realities. The overall goal of the Walk phase would be to establish control over an integrated in-house, offshore operation by delivering consistent results.
After a successful Walk phase, ABC-Software would execute the Run phase. This final phase would be characterized by the offshore execution of a multitude of tactical and strategic software projects to establish market leadership. A major highlight of this phase would be an increase in productivity on both sides, due to the bridging of perspectives between client and provider. End-to-end product maintenance, complete system testing and some new product development would be handled offshore. Product architecture, prototyping and the most critical system design, development and maintenance work would continue to remain in-house. Each team would back-up the other as necessary. Operations across the shores would be seamless; the bar on work quality would be raised. The offshore team would ramp up to be of the same size as the current in-house team. The ODC would continue, and ABC-Software would have an option to transfer it as its own subsidiary. The overall goal of the Run phase would be to effectively leverage a global work force for continuing success in the marketplace.
ABC-Software spent two to four weeks to define the Crawl, Walk, Run strategy.
Step 3. Design
After planning the strategy, you need to design the offshore projects for the Crawl phase, specify an outline of the Walk and Run phases and select the right offshore partner.
ABC-Software prepared itself by cleaning up some of its existing workflows and architecture. The support procedures were also documented. The company provided training to a few key individuals in governance of offshore projects. The training involved management of virtual projects and also practical techniques for bridging differences in cultures, time-zones and business skills. To cement the concepts, we also carried out client and provider role playing of execution scenarios related to project launch, problem resolution and project monitoring across the shores.
ABC-Software also identified a set of offshore providers through references and sent out a request for proposal (RFP) to seven firms, spelling out the deliverables for the Crawl phase, and suggesting the Walk and Run phases. It short-listed three providers based on proposals, references, scalability and potential for a long term relationship. The differences in the fixed price bid for the Crawl phase between the highest and lowest cost providers was more than double, which later was determined to be due to an overestimation of the work. Bid differences for the ODC fell slightly since a fixed number of offshore personnel were involved; however, the person month rates still differed by more than 50%.
ABC-Software undertook a trip to India and selected a partner, which was not the lowest cost provider. The partner differentiated itself by its commitment to invest in a long-term relationship and by sharing the same business values and principles.
ABC-Software spent a total of six to eight weeks in the Design phase.
Below you’ll find a diagram of the Crawl, Walk, Run strategy for offshoring with key performance indicators for ABC-Software.
The y axis represents a normalization of the entities with respect to a full (100%) in-house operation.
For example the estimated offshoring cost in the Crawl phase could be as high as 80% of the cost of an equivalent in-house operation (this cost includes partner selection). Typically, the offshoring cost consists of offshore labor, in-house preparations and governance and other setup costs. It was estimated that this cost — expressed as a fraction of an equivalent 100% in-house operational cost — would fall progressively in the Walk and Run phases, primarily due to higher productivity of the offshore team (by acquiring more business knowledge) and higher productivity (“muscles”) of the in-house team for managing the offshore operation (by acquiring more operational knowledge of offshoring). There were no major setup costs related to infrastructure in this scenario.
Performance metrics refer to quality, quantity, productivity, schedule adherence and responsiveness of the offshore operations, in comparison to a full in-house operation. The Crawl phase being a learning phase, it was not expected that the performance would be similar to that of an in-house team doing the work. The metrics would get stronger with each passing phase, due to better teamwork across the shores and more business knowledge transfer to the offshore team. However, you may find that, based on the nature of projects, and client and provider capabilities, you can realistically start off with high performance measures for the Crawl phase.
Project criticality refers to the urgency and importance of projects executed offshore, in comparison to the work done in-house. This progressively grows with each phase, representing better integration of offshoring with the business.
We also present the offshoring game plan for ABC-Software in the table below.
|Attributes||Phase 1: Crawl||Phase 2: Walk|| Phase 3: Run|
|Contract||Fixed Price||ODC||ODC, self-owned|
|Scope||1-2 projects||Major projects||Company proliferation|
It was expected that interactions between the in-house and offshore teams would get enriched with each phase. Direct, precise communication in the Crawl phase would give way to a “suggestive” and partnering approach in which business challenges faced by ABC-Software could be addressed.
Step 4. Development
This is the step where the rubber meets the road. You enter Crawl and prepare for Walk. During each, as the client, your effort should be dedicated to governance.
ABC-Software ran into problems in the Crawl phase. Initial deliveries from offshore were poor quality; some were late. Instead of blaming the provider, it looked inwards to identify whether its inputs — preparations and governance — were adequate. It also asked the provider to do a similar introspection.
Most of the issues stemmed from a difference in perspectives between the two teams. One of these was a late realization by ABC-Software that it was necessary to generate an additional support report for its clients. While it perceived this to be a minor change in the original specifications, it actually caused a major design change at the provider end.
The problem correction exercises involved identifying the kinds of self improvements each team could undertake, to prevent similar problems from occurring. It transpired that the client needed to transfer more business knowledge to the provider, and the provider needed to increase the client’s awareness on operational processes (specifications, reviews, validations etc.). These exercises avoided the “blame game” and actually strengthened the partnership.
In the Walk phase, there was a major thrust in building the relationship between the two teams. This effort bore fruit in that ABC-Software was able to delegate more maintenance work offshore, than originally planned. The relationship building involved regular trips from both sides, direct communication among engineers and increased usage of online communication. Communications were not confined to the projects alone; several peripheral subjects such as software industry trends, business verticals and the retention environment in India were discussed. ABC-Software had an on-going dialog with the provider about what it could do to make itself the “customer of choice” for provider employees. Its key managers knew every Indian team member by name and participated in setting key results and conducting performance assessments for the team leaders in the ODC. The provider occasionally enlisted ABC-Software’s assistance to talk to departing employees in an effort to retain them.
While open communications addressed some of the operational challenges in the Walk phase, there were other major issues. For example, some critical software problems that ABC-Software’s employees encountered during the US working hours had to be deferred to the next working day in India. There was no choice but to fix some locally in the US; however this caused confusion since maintenance was “owned” by the India team.
In addition, attrition occurred in the India team primarily due to pressure on wages, leading to potential disruptions in quality and schedule of the deliverables. Usually the provider had a buffer to take care of this problem, but in some instances the loss in skills had an impact. ABC-Software had tried unsuccessfully to provide a bonus solely for its Indian team members, but this was against the policies of the service provider. However, the service provider could work out a scheme for regular trips to its US location for Indian engineers and get them engaged in more complex projects to retain their interest. But it had to agree to an adjustment of some of the monthly deliverables as suggested by the provider, primarily to reflect attrition.
The provider made great strides in understanding the business domain in this phase. It participated in a few user conferences in the US and had regular quiz sessions with ABC-Software (on-line and on-site) to gain feedback about its level of knowledge. One of the tests in the Walk phase related to handling ambiguities in specifications; the provider was able to exercise appropriate judgment in some cases, due to an increase in business knowledge. For example the provider was able to add use case scenarios, which improved the robustness of the products under maintenance.
ABC-Software was also able to redeploy its in-house staff to design and prototype a new product line, which enabled it to get ahead of its competition.
Step 5. Deployment
In this final step, you’re in the Run phase and are now ascending the value chain of your customers, while managing your existing products and services. Further, you have mastered the essence of collaboration with a diverse entity in a flat world.
Within 24 months of starting offshoring, ABC-Software had nearly doubled the size of its team, which was almost equally split across the US and India. While most of the headcount increase occurred in India, there also was an increase in the US team to develop and maintain new products. The in-house team experienced job enrichment by developing into global leaders and managers. The offshore team had settled down to a mix of experienced engineers and relatively fresh recruits. Strong software engineering and training processes had ensured that this team could deliver according to the monthly schedules. Work-in-progress continued in three areas: 1) emerging gaps in business knowledge of the offshore team leading to incorrect decisions; 2) complacency in the in-house team leading to inattention to operational details; 3) managing service provider attrition primarily due to wage inflation in India.
Overall, ABC-Software is now a major player in its market vertical and its streamlining of global workflows bodes well for the future.
We led the companies “behind” ABC-Software through steps 1 to 3, as well as a part of step 4. We’ve remained an advisor for the rest of the process, enabling ABC-Software to gain self reliance in offshoring.