Two Types of Outsourcing Risks

When you sit with an outsourcing provider, the conversation typically turns toward Technical Risks. These include discussions about technologies, delivery processes, compliance issues, staffing, etc. These are the down-and-dirty details that ultimately determine how well a team can manage their deliverables.

For a supplier, these are highly relevant.

For you, however, there are a number of other risks to consider, which your suppliers will rarely bring up. These are Business Risks that include:

1. Business process impacts, ability of your market to absorb the changes you propose
2. Ability of your end users to adapt to proposed changes
3. The overall network of suppliers and internal resources needed to deliver your products and services.

Most outsourcing initiatives typically fail because of Business Risks.

The reason is that decisions and money are controlled by the people who look primarily at these risks.

I remember sitting in a meeting with a large government organization while the strategy for a $400 million project was being developed. This project would involve16 major outsourcing suppliers, dozens of sub-contractors, and would impact over 150,000 people. At the time, I was deeply involved with process improvement concepts and felt that I knew a lot about how to make this kind of project work.

The discussion, however, never even touched on my area of specialization. All technical risks were brushed aside by one comment, made by the senior-most manager in the room: "Our assumption is that you can make the technical details work. If you can't do your job, then you shouldn't be in this meeting."

Guess what? I never said much for the rest of the meeting :)

What I witnessed in that, and later in other, projects was that the big decisions that make or break an outsourcing initiative are those that relate to business risks. If you can manage these, then your project will have a much better chance of success.

Another example to illustrate the power of managing business risks is a different project for another government organization that I worked on. In this case, the outsourcing service provider was unable to deliver on time.

The timeline for the project, however, was immovable. Commitments had been made, publicity had already started, and many organizations inside and outside government were gearing up for on-time delivery of the software. Business risks included: loss of credibility, financial loss from media and other public programs, and potential legal liabilities from non-governmental groups that depended on timely delivery.

In response, with less than 2 weeks before the deadline, the government's project manager convened a war-room to define a course of action. We decided that the technical side of the project would need to improve. Key people were fired, a new management team was hired, and a new timeline was created. At the same time, the business objectives of the program were slightly modified, wording of some of the public communications were slightly changed, and a restricted set of functionality was identified as "Phase I" of the project.

Two days before the deadline, the smaller set of deliverables in the new Phase I were delivered. The project was declared a success. The new team then delivered what was promised, on a timely basis. And the government's project manager ended up looking like a hero.

This was a vivid case where the business risks were clearly identified and managed. Doing so allowed the project to be declared a success while giving the technical side time to do what they needed to do. And the project survived what may have been very ugly repercussions.


In the next article, we will look at ways to identify business risks, including a simple technique to mitigate them before the outsourcing project starts.

I'm back --- with new direction and information

Hi, everyone. Sorry for the long gap between articles, but I was thinking.

The response to the earlier articles was great. Many people called or e-mailed me with positive comments. Some were willing to work with me professionally. So, everything seemed to be good.

But my purpose in writing these articles was to provide concrete value to managers who are responsible for outsourcing. In this respect, I was not satisfied with the depth of information provided. The question, however, was: how do I provide this depth without being too technical?

So began my 6-month hiatus. The good news is that I now have what I was looking for. The following series of articles should provide strong, usable information, presented in a business context that can be understood (and hopefully applied) by anyone involved in an outsourcing engagement.

The US Government's Picture-Perfect Outsourcing Success - Completely Inside the US

Several years ago, I had the wonderful opportunity to work on a project for a large US federal government department.

The client works in a number of different areas and all too often, different words are used to mean the same thing. Some people might use a colloquial term, others might use the formal scientific term, and there may be differences in spelling. Also, some terms may refer to a similar, but not exactly the same, thing as other terms.

The client needs to think about all these different variations when formulating policies or investigating claims. But the number of variations is so large that no one can reasonably be expected to know them all.

They decided to create a master "meta-data repository". This is a central dictionary and thesaurus of all the terms used by the client. Maintaining this repository is a difficult, tedious job that requires a great deal of organization, discipline, and rigor. It is very easy to slip up in this work. A mistake, however, can result in untold damage.

The job of creating and maintaining this repository was given to a large military contractor. I will refer to them as the "Prime Contractor" in this article.

They created what I still consider an awe-inspiring CMM Level 3 facility in Virginia to handle the work.

Before I describe the facility and why you can profit from knowing about this case study, it is important to describe the CMM/CMMI.


Relevant History of CMM/CMMI

Decades ago, the US Air Force (USAF) was spending and losing a lot of money on large software projects. They wanted to know the root cause and also wanted to know if there was a way to assess the capabilities of their contractors before a contract was awarded. Carnegie-Melon University worked with the USAF to build what was eventually called the Software Capability Maturity Model (SW-CMM or just CMM).

By looking at how software was developed the CMM team was able to identify Key Process Areas (KPAs) that were critical to the success of a large project. They determined that if an organization were to master and maintain each of these KPAs, the chance of success for a project would be maximized.

They also determined that different organizations were at different levels of maturity in terms of the software process. Level 1 meant that the organization could deliver results once. Level 2 meant that this success could be repeated. Level 3 meant that the processes were mature, documented, and could be relied-upon to produce consistent, successful results. Levels 4 and 5 were for much more sophisticated environments such as secure military projects and large NASA initiatives like space shuttle systems development.

So, a Level 3 certification is gold for most clients looking to outsource a mission-critical software development effort.

More recently, CMM has been replaced by CMMI (CMM Integration). Instead of focusing on just software, CMMI now covers business processes and integration within, throughout, and beyond an organization.

To find out more about CMMI, please visit their website: http://www.sei.cmu.edu/cmmi/general/

So, the Prime Contractor for my client had this CMM Level 3 certified facility that blew me away.

They knew, because of the KPAs that they had defined, that when a new term was introduced, it had to go through the following steps:

1. It had to be catalogued.
2. It had to be researched to find similar terms.
3. Impacts on existing the client's computer systems had to be determined.
4. Impacted software had to be re-written, tested, and deployed.
5. Post-deployment support had to be provided.

Each of these KPAs were pre-defined and streamlined. As members of the team, we had to execute each step precisely and in the right sequence. There were additional KPAs related to our training, performance assessment, computer maintenance, and so on.

Even the KPAs for rewriting software were incredible. At the time, I considered myself to be a master of a software engineering tool called Oracle Designer. In theory, I knew, you could use this tool to take care of KPAs 3 and 4 above. But I had never seen it done.Any time we generated a software application using Oracle Designer, we always had to make changes before deployment.

At the Prime Contractor, however, there was no such thing. We used this tool flawlessly and were able to take new terminology through its cycle within 2-4 days.


I bring this example to your attention to illustrate the level of sophistication that can be developed.

The Prime Contractor, I am sure, spent millions upon millions of dollars to develop their CMM Level 3 facility.

When I created a software development facility in 2000, we knew it would take a lot of money, and up to 10 years before reaching the point where we could even consider asking for Level 3 certification.

It just takes this type of investment to build the capability to deliver results. This is true for software and non-software processes, similar to what the Prime Contractor was doing. The payback is definitely there. The client, after paying very large outsourcing fees to the Prime Contractor, was able to save more than a few million dollars every year.


The point, though, is that you do not have to make this type of investment. Companies all over the world have CMMI and other certifications. They have already done the work. They have already made the investment. All you have to do is talk to them and organize yourself so that you can benefit from their investment.

In the next article, I will give the example of one such company in India. And if I am successful in contacting the right person, I will give the example of a company in the US that is doing similar things outside the software industry.

Challenges Facing an Outsourcing Provider in India

In early 2000, when the dot-com boom was still going strong, I went to India to set up a software development center. At the time, I had started 3 dot-com companies and had verbal commitments totaling several tens of millions of dollars.

India was buzzing. The economy was good, the computer industry was booming, and everyone with a high school education was at least thinking about getting into the field. New Delhi, the country's capital, was not, by any stretch, a high technology center. But even there, computer training institutes were popping up all over. And everywhere I looked, people were starting their own software development companies.

A bit of perspective is needed so that the rest of this article makes sense.

India has a population of 1.2 billion. That means that if you combined the population of the US and Europe, then added the US population into the mix again, you would still be short 100 million (or roughly the population of Mexico). India's middle class is larger than the entire population of the US, and roughly 3 times the total adult work force there. So, the potential pool for talent is staggering. Producing more than 2.5 million engineering graduates every year, there is still a shortage of engineers in the country.

Companies all across the country were tapping into this potential pool. Money was being invested, resources were being re-deployed, and salaries were jumping by double digit percentages every year. A software developer earning Rs. 25,000 per month could jump to another company fairly easily --- and realistically expect a 25% pay increase.

People were hungry to do well in the outsourcing industry. Companies were hungry to cash in on different outsourced services. Communications and physical infrastructure was being built by both public and private organizations. People were learning languages, taking intensive accent training classes, and learning new skills that would be needed by foreign clients. It was really hard to sit still.

And this was just New Delhi. I had just arrived from New York City. By comparison, NYC was a sleepy walk in the park. Mumbai was much, much more dynamic than Delhi. And Bangalore, Hyderabad, and Chennai were reportedly more exciting than Mumbai in terms of outsourcing.


So, in this environment, with the stars all seemingly aligned to benefit outsourcing organizations, what kinds of issues would an outsourcing provider face?

Believe it or not, Recruiting is at the top of the list. Finding the right talent at the right time is difficult for any company in almost any environment. Employee Retention is also right up there. The top issues faced by outsourcing providers are:

1.Recruitment
2.Training
3.Performance Management
4.Consistent Service Delivery
5.Technology Management

Do these seem familiar?

People, especially outsourcing providers, like to mystify the outsourcing process. As long as outsourcing is a “difficult” thing, they can charge more money and take more liberties.

The fact, however, is that no matter where you go, you will run into these problems. How do you find and retain good talent? How do you measure and reward performance? How do you ensure that your team's output is consistent and good quality? How do you maximize the value of your technology investments?

When you outsource, however, you have two organizations with the same issues. The difference is that both have different resource constraints because they are physically in different locations. While you may have trouble finding a computer programmer, the outsourcing provider may be in a place that has an abundance of them. Similarly, you may have your pick of financial analysts, but the outsourcing provider may have to pull teeth to find even one.

Your success will be in defining what you lack and then look for an outsourcing provider that can fill this need.

Then, your focus needs to be on making the relationship work. Keep in mind that your outsourcing provider faces their own challenges. Instead of hiring a magical company that can solve all your problems, what you are looking for is a provider that can work with you, develop synergies, and partner with you to resolve your problems.

Outsourcing, more than anything else, is a partnership with an external organization that has resources that you lack. Working with this in mind will do a long way toward guaranteeing your success.

My Experience With Offshoring Insurance Operations

I worked with one of the largest US health insurance companies for just under a year. My job was to manage the commission operations for their existing systems while the regular staff focused on a large software implementation. Most of my team was in the US and we had one offshore resource in India.

The client had committed to reducing their on-site head count and increase the amount of work being done offshore. Our group was part of this initiative. So, part of my job was to find ways to take operations work and move it offshore.

We started planning in May, and finally by September, we had hired an additional 6 resources in India. Their performance, however, was dismal. To make things worse, the biggest selling season for the company was coming up in mid-November. An estimated 30% of the entire year's sales occurred between November 15 and December 31 every year during what is called “open enrollment” season.

Having 7 people sitting idle during this period was unacceptable. And on top of everything else that was happening, we got a ton of new work in late September that absolutely had to be completed within 6 weeks.

With this background, I was sent to India on September 29. My mission was to see if I could get the team up to speed and productive in 4 weeks. Management had pretty much lost their faith in the offshore model and this trip was a last-ditch effort to salvage the team. Actually, failure on my part would have meant that our team would not be able to manage the open enrollment volume. This failure would have repercussions throughout the organization.

On paper, we had 4 weeks to deliver results. Practically speaking, however, we had only 1 week to restore confidence. So, we had to show results immediately.

To address this, I focused the team's attention on the following capability areas:

1. Assign responsibilities based on competencies.
2. Develop competencies for core activities.
3. Improve client interactions.

Sitting in the US, it looked like our team was grossly incompetent. When I got there, however, I discovered that the team members were actually very bright and more than competent. They just needed direction and some hand-holding to perform at the expected level.

By focusing all of our attention on these 3 capability areas, we were able to demonstrate value to management within the first 2-3 days. By the third week, we had already accomplished 90% of what we had planned. And after I returned, we successfully managed a greater volume of business, with dramatically fewer issues, than the company had done just a year before, when all of their resources were on-site.

This was possible because, out of the 84 capability areas that I normally look at, we were able to focus our attention on just 3. And this focus allowed us to deliver great results in just days.

Welcome to Outsourcing Readiness

Welcome to the Outsourcing Readiness Blog.

In the same way that the telephone became a necessity in business in the 1950s and 1960s, outsourcing is now a necessity. The question is not "Are you outsourcing?". Instead, it is, "How well do you use outsourcing to remain globally competitive?".

If you own or manage a business, non-profit, or government organization, you already know how hard it is to find and retain good people. A really good illustration of how the world is changing can be found on the following YouTube video:
http://www.youtube.com/watch?v=cL9Wu2kWwSY

What I found particularly relevant was about a minute into the video. It talks about how today's learner (18 years old) will have 10-14 jobs by their 38th birthday, and 1 in 4 workers have been with their current employer for less than one year. This is a clear indication of what we are facing in world today.

Also, the way people look for and use information is changing at blinding speeds. This means that you have more and more ways to reach your target market. You also have more and more competitors coming at you from all over the globe.

Do you have the time and knowledge to keep up? I do this for a living and it is really difficult to stay abreast of the changes.


In terms of day-to-day operations, are you aware of what others in your market are doing?

From Delta Airlines and the IRS to your local accountant, organizations are increasingly outsourcing their finance and accounting functions. Compare an American bookkeeper who charges $10-$15/hour to a team of bookkeepers in India or Hungary that charge $5. You get the same quality of work and instead of depending on one person, you have an entire team.

Not only that, if you choose the right vendor, this bookkeeping work can turn into financial analysis, annual report preparation, Sarbanes-Oxley compliance, and more. Each new outsourced service gives you a bigger competitive advantage.

Plus, you get a bonus benefit from your outsourcing success: Your organization becomes more flexible, leaner, and better able to do joint ventures with global partners. So, cost savings aside, you build the ability to take your products and services to more people in more places.

Instead of globalization being a difficult, oppressive reality, you can turn it into a vehicle to build greater prosperity and stability in your own organization. On a personal level, in a market where globalization is king, you build a profile that says you are desirable in different industries and different countries. Anyone that is good at managing outsourcing relationships is worth their weight in gold now.

The purpose of this blog is to share your outsourcing experiences with others so that we can all learn and grow. I will share examples of outsourcing. I will analyze the success or failure using various measures (there are over 84 measures that I look at).

If you share your experiences as well, we will have a richer and more valuable resource for all. I look forward to your participation.

If you need to get in touch with me directly, please send an e-mail to pawan@outsourcingreadiness.com