June 28, 2004, 1:20 PM — 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. Just ask Group 1 Software Inc. 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 Lanham, Maryland, data quality and direct marketing software maker, King quickly reassessed Group 1's offshore outsourcing strategy and -- complying with the company's rigorous project approval and management process for offshore contracts -- limited the financial exposure of the aborted relations to under approximately $100,000 each.
Despite these setbacks, King has achieved success with offshore ventures; but he is by no means alone in experiencing failed outsourcing projects. In fact, his case is typical for IT executives pursuing outsourcing relationships, experts say.
"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 LLC, an IT advisory and research firm in New Canaan, Connecticut.
As with marriage, making an outsourcing project successful requires considerably more effort than simply saying, "I do."
Foote and other IT executives believe offshore project success requires self-examination on the part of the client company to clarify goals and expectations, rigorous project-management discipline, and an understanding of how best to manage communications with everyone involved.
The first step in making an outsourcing relationship work is to analyze your company's outsourcing expectations, says Tony Greenberg, CEO of Ramp Rate^Rate LLC, 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?"
There are legal and regulatory questions to consider as well, Greenberg adds, citing the financial reporting requirements of the Sarbanes-Oxley Act and the medical and insurance reporting requirements for HIPPA (Health Insurance Portability and Accountability Act).
Oftentimes, the best course of action is to stay at home.
"Companies also must realize that ultimately the vast majority of outsourcing is done cost efficiently in the U.S. 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 U.S. postal service regulations," King says.
According to many who 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 Inc., a Fremont, California, provider of hosted supply-chain applications, says that a truly successful outsourcing initiative will produce advantages beyond mere cost savings. Michlowitz, who had managed WorldChain's relationship with Sierra Atlantic Inc., an offshore service provider with programmers in India, left WorldChain after it was acquired by Optum last month. He is now an analyst of military supply chain issues at Booz Allen Hamilton Inc. Michlowitz has held a number of executive positions in IT and says guidelines and lessons learned at WorldChain apply in many situations.
"When you are in a company with demand variability, outsourcing provides burst capacity," Michlowitz says. 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, according to both users and service providers. "It's no use using good people for the wrong purposes," Michlowitz says.
