Choosing an outsourcing partner is a major business decision
Choosing an outsourcing partner is a major business decision that requires profound analysis of the market and thorough preparation from both vendors and their potential clients.
Ole Jeppesen is the CEO and founder of Resiport, the Software Outsourcing Advisory as a Service platform that provides independent, on-demand, matchmaking and advisory to the software outsourcing ecosystem.
With 20 years of experience in the outsourcing industry and profound knowledge of clients’ pains and needs, Ole is the right person to define the reasons why companies outsource, outline key risks and challenges they face and give advice on how to choose an outsourcing partner to ensure fruitful and beneficial partnership.
Interview of Ole Jeppesen, Founder of Resiport by Elena Ruchko from Daxx
1) What are the key reasons for companies to outsource software development in 2017?
Until the end of the recession in 2012 software outsourcing was without a doubt chosen as a way to reduce costs. Since then Companies around the world have leveraged the increasing demand for software products and services. On top of this demand, many of the old industries have started a transformation where IT has become an integral part of almost any business and vertical.
The result is such high demand for qualified resources in especially the USA, the Nordic countries and EU in general; that the most dominating reason for considering outsourcing is the waste amount of skilled labor in the outsourcing provider countries – difficult to attract and afford locally.
Latest research shows that 66% of the markets in the Nordics are served by local Consultants. This leads to much higher costs compared to full-time employees, a workforce locked-in by business contracts. This makes it very difficult, some organizations say impossible, to attract a skilled workforce.
Geopolitical winds and increasing protectionism have been on the rise during 2017. The escalating wages and inability to educate a sufficient number of engineers and developers nationally have neutralized these trends totally, though.
Unlike the pre-recession period, the economic advantages of outsourcing are seen less as a method to reduce costs, but more an enabler to increase revenue and to be first on the market with new products leveraging technologies like AI, IoT, etc.
So, the short version is:
- Skilled resources
2) In your opinion, what factors should a company consider when deciding whether to go onshore, nearshore or offshore?
Very often I get this question in the form of what country to choose, but this question makes much more sense, thanks. Physical travel distance, Time zone difference, and Internet connectivity are probably the most dominating decision factors companies should consider.
In general, one could argue that it is the level and ease of communication the Client organization should consider, i.e. Voice, Visual and “body talk”. Some tasks simply require more communication than others, and even physical presence can be a requirement in order to achieve a flow of understanding unfiltered by communication devices.
The decision is also dependent on the form of outsourcing chosen, i.e. Provider managed projects or augmented team collaboration. The more collaboration needed between Client and Provider organization the closer distance needed, preferably co-location.
Factors and tasks like Agile, Innovation, Research, and architecture often require flawless communication and preferably face to face. The physical distance and time used to attend a meeting, ability to communicate during normal working hours or the lack of internet bandwidth are all factors that should be addressed.
Personally, I outsource to a vendor with a time zone difference of 12 hours. For most Clients that would be a no-go, for others an advantage.
Now, all these factors need to be aligned with present, temporary and future needs. Evil tongues would claim that I just mentioned all the arguments for not doing outsourcing at all, but this is not the case. During the lifespan of the outsourcing concept, it has been proven that it is possible to outsource to any location in the world, yes, even the International Space Station is conducting outsourced research projects.
The only thing Clients should be aware of is that the level of complexity increases for each of these factors and have direct influence on the total cost of service, by some regarded as “hidden costs”
3) When the company wants to find an outsourcing partner, what factors do you usually recommend to consider apart from cost saving?
Well, Elena, you tempt me to give you the analytic approach and tell you about all the external factors and how we use self-service BI to offer our Clients to leverage from hundreds of audited parameters on more than 900 Independent Software Vendors like Daxx that we have registered, but…
In approximately 80% of all managed cases, I actually recommend the company to go back to the drawing board and consider all the issues that need to be addressed internally in the organization before even thinking about outsourcing.
Some CxOs have simply taken the decision about outsourcing due to the restraints in getting local developers and other factors as previously mentioned. What is often missing is the experience and knowledge about the organizational journey it is to outsource.
Often the reasoning for considering outsourcing is that it can’t be worse for the business than planned projects, products and orders that can’t be realized due to lack of resources – but it actually can. The journey often leads to the biggest organizational change since the company was founded.
In the case of pure outsourcing of a single project or product, it all starts with the quality of specifications in order for an external partner to understand. Governance and reporting processes need to be in place and finally qualified and available staff to receive and accept the delivery.
In case of collaboration across borders with a remote team, the human factors are even more distinct. Just a few internal employees rushed into organizational changes without having the interpersonal skills or wish to interface to distant colleagues with another culture or resistance to travel, new way of working, speaking another language, going from introvert to extrovert work, or simply fear of losing the job, are all factors that can have devastating impact on the outsourcing success unless they are planned, handled and communicated upfront.
Not to forget that a low development maturity in the Client organization can lead to a transformation on top of the transition to outsourcing, i.e. a double down on all the parameters that the CxO expected would release his/her internal resources to more business-critical tasks. In the worst case, it is not uncommon to see key employees leave for a more relaxed job or even go freelance.
At this stage, I simply don’t allow myself as an advisor to be pragmatic and guide the company to make shortcuts.
Urging the Client to use an extra month, three or even half a year if needed to solve the majority of the just mentioned issues are often the most important factors for a successful experience
4) What countries are among the most popular outsourcing destinations? What countries are on the rise? Could you share some trends that you observe?
I could start praising European countries like Poland, Ukraine, and Romania for the growth rates seen the last decade. Portugal, Bulgaria, Belarus the Baltics and the Balkan countries are also on the rise.
I would have to do the same for a number of South American and Latin American countries, and not to forget the Far East countries, but…
If popularity is measured in headcount we all have to lie down flat in the dust when I mention India as an indisputable winner of the game.
The very early decisions and strategies laid out in the 70s and 80s by the Indian business community and backed by a determined Indian Government as a way to get the country out of poverty is an achievement and example to follow. As late as last week I just read a small notice that an Indian minister announced new government-backed R&D centers and hubs with a capacity beyond 250.000 IT employees. That is the kind of scale India is capable of, and it somehow put everything in perspective when comparing to other countries, regions, and continents.
The biggest problem European Providers have is that each tiny nation (in a global context) only promotes national business interests and thereby only gets a “voice like a mouse”. Even middle-sized Indian companies have the capacity singlehanded to establish onshore development centers and representations whenever they feel fit. As a natural consequence after the hype about the US H-B1 visa issues, this is exactly what Indian companies do these days in order to spread the global risks and to gain new revenue channels.
5) What outsourcing option works best when a company is looking for ways to minimize expenses but wants to keep control over the outsourced business processes?
Decades ago the “body shopping” term appeared in the software outsourcing ecosystem. It was mostly used as a kind of nickname for low-level BPO and software development being looked down on as “arms and legs” assignments to the cheapest price possible.
The tasks today are much more complex, but the business models are still here, just new names like ‘Cost+’, i.e. all costs of an employee is covered by the Client plus a fixed revenue percentage to the hosting provider.
Nowadays everyone knows that Partnerships, mutual benefits, transparency, and trust are the most important factors in order to get a high level of productivity.
The reason why I mention Cost+ is that I have seen it implemented as a key component in hybrid models and in a way that it actually serves not only the Client but also the service provider.
By partnering with service providers that master DevOps and combine it with a hybrid business model, Clients can accomplish quite a few things even large companies only dream of.
It’s all about finding the partner that suit the clients’ needs, but if the need of the Client is R&D using latest technologies it requires specialists and a dedicated team to implement and maintain the services or products.
Many providers have found a niche where they offer their technology expertise on a per need basis on a T&M model and combine it by hosting a dedicated Client team on a Cost+ model.
The Client gets the best of both worlds and the service provider gets a long-term fixed income and growth from the dedicated team revenue and premium revenue from the specialized team. The Provider furthermore achieves an even more important advantage: Specialization and ability to stand out from the crowd. As the specialization can be anything from technologies like AI, IoT or Opensource, automation, QA, Prototyping etc. the Provider can offer one or more specialized services according to a long-term strategy.
This is, in my opinion, the best overall and proven model that backs a win-win partnership.
6) In your opinion, what are the top 5 questions the company should ask an outsourcing vendor before starting to work with them?
Beside of the 50 – 100 parameters that have to fit even before a Vendor is approached the 5 most used questions to resolve in a due diligence would in my opinion be:
- In your own words, what do you think is the synergy between your Vision, Mission, and strategy and ours?
- How do you think we can move forward aiming at a mutually beneficial partnership based on trust, transparency and with a minimally viable contract, SLA, or SoW that cover both parties interests?
- Do your organization poses special knowledge, IP, products or business opportunities that could add immediate or long-term value to our organization?
- What are your financial goals, margins, and planned changes/expansions
- Do you have one or more clients with a similar portfolio of products/services like ours, and would you be kind and make an introduction?
One of the biggest advantages of a structured but lean pre-selection process is that the company already have secured that the foundation of a fruitful partnership is in place with data-driven decision making before one or preferably more vendors are visited. What remains, and what all parties can focus on is establishing report, evaluate mutual chemistry and with own eyes look for a cultural match and lay the cornerstone for a potential partnership
7) What are the biggest challenges of working with an outsource partner?
Like any kind of relationship, we all have individual expectations to behavior, use of common language and general culture dependent norms.
I have been fortunate to be stationed abroad for a total of 7 years and don’t regard cultural differences as a major obstacle in outsourcing – at the end I actually realized that my own culture is a bit strange, and started asking questions why people in my nation do things in the way we do, why it works for us and why it will never work in another culture.
Due to this experience, I learned that it takes approximately half a year to understand the small nuances and how to prevent escalations occurred due to misunderstandings.
To find the balance between being polite but being understood, being firm without initiating a “them versus us” situation, and simply to communicate, communicate, communicate and have all management and employees do the same – is by many seen as a challenge, especially at the beginning of the partnership period where there in parallel are both technical and organizational problems to solve.
8) How does a company make sure its intellectual property and confidential information are safe with an outsourcing vendor?
First of all, let me point out that there are so few documented cases of IP violations and leaks of confidential information in the outsourcing ecosystem that we simply have to regard it as a myth. Statistically, breaches and leaks is manifold more common internally in the client organization.
Nevertheless, I occasionally work with clients in the defense and pharma industries where there are strong regulations, procedures to follow and personal clearances to be conducted before any staff is allowed to see just a single line of code.
For these cases, there are technical solutions to ensure that all code and documentation are kept on the company premises and all communication/data is on encrypted lines between the developer’s terminal and the company’s servers. i.e. the developer is not able to save one single byte on the local machine.
We should never say never, but if the client has made a data-based pre-selection and a proper due diligence of a vendor and all remote employees and vendor personnel have been selected with care by well-educated HR officers the risk is minimal.
9) Say a company wants to be involved in a hiring process. Do outsourcing vendors provide their customers with this option?
Employees are one of the most valuable assets in any outsourcing setup. I haven’t yet heard of a Client not wanting to be part of some or all of the hiring process for a dedicated team.
In a pure outsourcing setup where the vendor is in charge of managing a project or generation of a product, it is usually up to the vendor to handpick the team. Nevertheless, many Vendors offer Clients to screen the selected team members.
One of the most professional services vendors offer is actually HR services. Recruiting and retention of staff is a core competence that most vendors are proud of. Most vendors offer either templated processes or to use the clients’ processes, procedures, and tools.
10) What tools can help a company organize work with an outsourcing vendor in the most efficient way?
Oh, Elena, this question very much relies on the OS, development language, platforms, methodology/ideology and preference of editor/IDE. I have been around for so long that a good old Vi editor was de-facto, and seen so many tools come and go that I probably have forgotten half of them.
A suitable code editor in combination with a standard version control system is to be regarded as cornerstone tools in any software R&D organization. Depending on used methodology/ideology like Scrum, for example, there are a number of tools to organize and visualize projects and documents. The most important is probably to agree on using a set of tools that both organizations know and rely on. In most cases, it is the Client organization that decides the preferences for a remote dedicated team and the vendor in managed projects.
11) What are the tops risks a company faces when outsourcing and how to mitigate them?
I have been in the software outsourcing ecosystem for more than two decades and taken up roles on all sides of the table, so in my mind, there is no doubt about the top risks a company faces when the decision has been made to outsource.
- I actually regard the lack of maturity, lack of strategic analysis and planning, and relatively little practical experience about outsourcing disciplines in the Client organization as the biggest risk for a company.
- Due to 1) and a rush to get operational the Client often ends up in a transformation and/or organizational change in parallel with the outsourcing startup. This kind of double down on risks can lead to dangerously unpredictable cases
- Last but not least I have seen so many examples of mismatches between Clients and Vendors leading to extremely expensive insourcing of projects/products.
Risk 1 can only be mitigated via external advisory, experienced consultants to get bootstrapped and/or hire experienced personnel and taking the time it takes to obtain needed maturity.
Risk 2 is also a C-level issue in the client organization and can only be mitigated by having a complete overview of every employee in the organization, by knowing the state of every present and planned product/service and finally by conducting a timely transformation before proceeding with the outsourcing setup.
Risk 3 can only be mitigated by data-driven decision making combined with onsite due diligence of potential partners
12) Is visiting the outsourcing locations necessary? How do you think? If yes, how often should a client visit their outsourcing locations?
It is not only advisable for the company management and staff to visit the vendor but also vice versa.
Some companies have a strategy of visits at every major milestone in a project others have a periodic schedule for the visits. 2 – 4 visits per year per key employee is a good practice and a similar number of visits for management and C-level with a duration of 1 – 2 days. It off cause depends on project size and duration plus the number of employees involved in the collaboration. It is probably one of the most rewarding “hidden costs” that even the CFO will recognize as a good investment.
Thank you for these relevant questions, Elena. If you or your readers need some clarifications on the issues we have discussed, you can hardly miss my presence on Linkedin. You are always welcome to reach out.
This article was first published on the Daxx blog the 26 September 2017