Inverted U--critical success factor in global outsourcing projects
Anshoom Jain, PMP
Corporate America, if it ever decides to build a unified symbol for itself, Phoenix, the symbol of rebirth from ashes, would be the natural choice! Who else can but Corporate America, can boast of overcoming several recessions with a glowing recovery after each! Phoenix like behavior of Corporate America is unparalleled. Corporate America has repetitively demonstrated that it truly is the Economic Super Power of the world; each recession and the followed recovery leaves a very strong and positive impact globally. Why not! Corporate America is one of the select few that represent a glowing example of thought leadership! It stands at the very top of the corporate food chain. But for us, the world would still be using Abacus for counting and postal services as probably the only means for written communication. Corporate America's abilities to conceive and implement technologies to simplify human life are legendary. The road to corporate success however has not been easy; a boom followed by bust with probably another boom in the making!
How do we achieve this so consistently?
Corporate America's hallmark is its relentless desire and ability to achieve organizational growth. We persistently look for avenues to enhance productivity, thereby profitability, stockholder value and organizational growth. Now, we all know that sunrise is followed by sunset, as the sunsets over America it rises over Asia. Thought leaders that we are, we have gone to the extent of harnessing even this natural phenomenon to our advantage! We utilized this phenomenon of nature to our advantage, to boost productivity by having almost a 24-hour workday. Retaining our core competencies in-house and local, we pioneered global outsourcing! Smart-sourcing, focus on core competencies and globalization as a result of our thought leadership is almost second nature to us.
Back in the early 90‘s, anticipating growth for US goods and services, Corporate America went on an in-sourcing rampage, demanding more of everything in-house including more employees, more infrastructure, etc. As local availability reached its limits, we developed globally relationships. We demanded and got more workforce from all over the globe into America. If the early 90‘s was the era for in-sourcing, late 90‘s was the era for local outsourcing. In-house resources and infrastructure was stretched to its limits, Corporate America outsourced its IT tasks to niche players within the US utilizing their people and infrastructure to achieve it's business goals. This was local outsourcing at its peak! While local outsourcing provided the catalyst for short-term growth, it also brought in its own problems. With local outsourcing came local costs; costs that were comparable or even higher then in-house costs; resulting in higher costs of our goods and services.
If the 1990‘s represented “many to earn and few to feed”, the paradigm for the new century could well become “many to feed and few to earn”. Budget squeeze became the norm and effective utilization a necessity. Organizations needed to bring down costs and optimize available revenue sources. Corporate America once again turned to its powerful and ever dependent weapon in its arsenal – Information Technology to reduce operational costs.
How can we squeeze savings from our current IT budgets? The answer: Go Global! Having built a solid rapport with global IT resources during the 90‘s, we turned the same relationships to our advantage. This time around, instead of bringing the global resources to the United States, we sent out work across borders.
Global outsourcing has its own benefits and justifications such as faster project turn-around, more bang for the buck, gaining competitive advantage through follow-the-sun concept, etc. The most important and often the least spoken benefit of global outsourcing is its ability to allow in-house resources to focus on core competencies. We don't outsource our thought leadership, nor do we outsource strategy formulation; what we do outsource is implementation of our vision.
While global outsourcing is a lot in press these days, the concept of global outsourcing is not new.
Household names in Corporate America have long since adopted a global strategy, establishing self-sufficient local operations including self-sufficient IT teams overseas. These organizations could (and some have been) reaping the benefits of global outsourcing much faster by sending IT tasks across to their Asian offices. For the rest of us, we look at partners around the globe!
Thought leaders that we are, we extended the concept of home office for employees to include our strategic partners or global vendors. We asked our strategic partners to base their teams around the globe, thereby reducing our local costs and increasing stockholder value. This model of global outsourcing is widely adapted for well-defined work and a quantifiable measure of success e.g. back-office processing, call centers, IT support/maintenance, IT application development etc. As always, leadership roles including that of strategy formulation, business analysis, program and vendor management are retained by the US organization while outsourcing its implementation overseas.
Planners have realized that developing a comprehensive blueprint for global outsourcing is a highly involved exercise. Besides a strong long-term vision and the ability to realize this vision, it needs in-depth knowledge of what can be delegated without loosing focus of our core competencies. Developing the blue print for outsourcing needs to account for the entry, implementation and exit phases of the initiative.
Benchmark for success
The first question any outsourcing planner needs to answer is why are we outsourcing? Are we doing it reduce costs, faster project turnaround, need for specific technical skills, etc.? Independent of the reasons for outsourcing and the model adopted, planners must answer key questions like which milestone in a project do we outsource, where do we outsource, how big a project do we outsource, how do we measure performance, what is the backup plan, when (or how) do we bring the project back in-house and finally what NOT to outsource. These are complex questions; there are no correct or wrong answers and only hindsight to tell if one was correct or not and getting it right the first time the “secret sauce” for success.
Not all projects lend themselves to global outsourcing. Let's say for example, a bank offering investment and loan products to its clients decide to embark upon a global outsourcing strategy. While it would most certainly outsource processes like website management, software application development, 24 x 7 support, call centers, collecting loan application, etc; it almost certainly NOT to outsource the process of conceiving and designing its investment or loan products. That's its core competency! Outsourcing your core competencies is by no means a good idea, as for the rest – it's the way to go!
Having identified the reasons and tasks for global outsourcing, planners need to lay down measurable success criteria well before initiating any dialog on global outsourcing. In a global economy, with millions of variables that can impact any project, money saved – both direct and implied, is probably the most effective and measurable criteria for success. We tried local outsourcing in the mid 90‘s and saw our costs go up north! Outsourcing across the seven seas is a different story; a strong dollar buys a lot more in the Asian economy. For example, we don't outsource to UK where the conversion rate is not in our favor but we do outsource to Asia where a US dollar goes a long way!
Outsourcing globally will most certain have a favorable impact on ROI if done right! How does one get it right the first time when one has limited organizational experience on outsourcing globally? The answer “think before you act” and then think again!
While there are several users of available dollars, employee costs is undoubtedly the one of the largest and most important user of these dollars, closely followed by vendor management and infrastructure costs. Any reduction of these costs almost certainly results in a measurable success for global outsourcing initiatives. Let's look at the resource model for both in-house and vendor resources first as it impacts the success or failure of any global outsourcing initiative.
Entry and Exit strategy: Resource ramp
Here today…gone tomorrow?
Within Corporate America, too, there are the early adapters, followers and the laggards. Organizations with a strong, sustained revenue stream with a large employee base are the early adapters for global outsourcing; why not! These organizations have the numbers on their side. A significant number of in-house resources means equally high employee costs with a comparable infrastructure and vendor costs. Reduction in these costs will certainly have a direct and positive impact on the company's financials. The leaders have set the trend; identified regions or countries and vendors in these countries to outsource and the Internet is flooded with such success stories.
The followers as always look at the successes of leaders and select similar companies and countries for outsourcing.
The key question now (for both leaders and the followers) is can an organization outsource all of its work in one step to a global partner, close its infrastructure, and terminate its workforce and claim success? Absolutely not! It's like saying “We threw out the baby with the bathwater!”
Take an organization, which has a significant number of employees in IT and related activities, which it wants to outsource. The key question is can it terminate the services of all of these employees the day it awards the outsourcing contract? Absolutely NOT! “Here today gone tomorrow” will almost certainly be first decisive step to failure for a global outsourcing initiative. Then what must it do?
Internal resource ramp-down
Outsourcing essentially translates into a decrease of in-house activities coupled with an increase on the vendor side. Now, lesser in-house work implies lesser number of in-house resources needed. Entry strategy for any outsourcing initiative must include a clear and well-defined plan for re-purposing in-house expertise.
Termination while definitely an option, certainly shouldn't be the first one. An employee, once terminated, takes away not only the associated costs with him/her but also the much needed first hand experience gained on the job. While a physical replacement of an employee can always be found, how does one get back the experience and knowledge of the finer nuances of the project. Project Management methodologies, documentation techniques, etc have matured over the years leading to a smoother handover/takeover, making tasks almost independent of the worker; but it's no replacement for first hand experience. We are not in a “loss-less system”. There is always a certain amount of loss while transferring knowledge from one person to another. Experience, once lost, is lost forever!
That brings us to other options – retraining or relocating employees.
Retraining and\or relocating employees to other job functions within the organization probably are more beneficial; it retains the experience and knowledge base in-house. While this approach is good for both the employees and the organization, its common knowledge priorities change instantaneously. Will a retrained and relocated employee devote the same attention to his/her previous tasks? No! It's normal human behavior.
What else happens if one relocates, retrains or even terminates employee at one go? Let's look at it from the vendor side: the vendor who has been awarded the outsourcing contract.
Let's assume that the outsourcing vendor has been selected based on a very well defined set of vendor evaluation criteria, including technical capabilities, past experience in similar environments, infrastructure, ability to bring in a large pool of technical resources, etc. What's still missing is first hand experience and fine-print knowledge of the existing systems. Who does the vendor's technical team turn to for this? The terminated or reassigned employees!?
It's absolutely imperative to keep in-house resources on-hand during the initial phase of outsourcing. Do we need all the in-house resources to be readily available during the initial phase? No. We can certainly ramp down the in-house resources right from the first day of outsourcing.
Adopting a gradual reduction in allocated resources is much more beneficial for the overall long-term prospects of the organization and the success of any outsourcing initiative. In-house employee termination, retraining or even relocation as a result of outsourcing, should be done very gradually - ramp-down over an extended period of time. Instant success is true only in dreams!
Having discussed the importance of a gradual ramp-down of in-house resources, Let's look at the process from the vendor side. The issues here are vastly different.
Let's say the vendor is expected to maintain some large number of people for an extended period of time. Should this vendor bring all of the people into the project right from day one? Absolutely not! What would it accomplish if he chose to do so?
For one, it would imply that are two fully staffed teams, one each on either side, expected to do the same work! It certainly will result in confusion, idle time on both sides and, more importantly, the project costs would simply spiral up. That's not why one outsourced in the first place!
Secondly, what about the learning curve for vendor's teams? Even experts need time to settle in; can we expect them hit the ground running - especially when they are a few thousand miles away? No! Any handover/takeover of project needs to be done gradually: each piece big enough to matter and small enough to understand and takeover. Smaller amounts of work transferred enhances the chances of effective knowledge transfer thereby the long-term success of the initiative.
There is the program management aspect to it too! The PMO‘s on either side establishe the processes and methodologies for managing the globally outsourced initiative. It's almost natural that both organizations need to make some changes to its internal project management processes to arrive at a common platform, but these common processes are not tested in a common project environment. It's essential to test these processes and methodologies for a smaller group before a general release.
Let's also look at the impact on infrastructure from the vendor's side. Initiating a project with large teams creates a tremendous stress on the infrastructure, including place for people to work, network bandwidth, etc. Zero to full-strength in short time is a guaranteed nightmare for system administrators and infrastructure managers.
It's absolutely essential that the vendor follow a gradual ramp-up of in-house resources. A spike will certainly ensure an increase in project costs, chaos and almost guarantee failure.
“Eat what you can digest”
So, who enters in the project first – developers (soldiers) or architects/PM‘s (generals) and how fast? As always the generals lead the way to the front – going in first followed by the soldiers! Initiating the project with a small number of PM‘s and architects on either side significantly enhances the chances of success for an outsourced initiative.
What's the magic number of PM/architects to start a project with? How fast do we ramp-up? There are no right or wrong answers here. Look at it from perspective of the outsourcing organization and its international vendor – both have diametrically apposed situations.
The vendor is bringing more people into the projects; internal acceptance is very high. On the other hand, the outsourcing organization has an uphill task. It's giving out work. It needs to retrain, relocate or even terminate resources. Internal acceptance will most certainly not be easy!
There is no magical number to define how many to start the project with or how fast we ramp-up. It's all a question of the organization's ability to absorb change - some are fast adopters, while other slow. For example, Let's say there are two organizations with an identical number of in–house resources, embarking on a similar outsourcing initiative. The early adopter would probably start of with say 30% of initial team size and ramp up (or down) at 25% additional per month of peak resources. The other organization, with a slower absorption rate, could start with just 5% of peak and ramp-up (or down) at 10%! There is no one single magic number here! What's good for the buyer is good for the seller too! (The % listed above is only for illustration purpose and not a benchmark)
Exhibit 1: Resource ramp in entry and exit phase
Exit Strategy - Internal resource ramp-up!
That's correct…Internal ramp-up plan is also an essential part of an outsourcing strategy. Hopefully, one may never need to use it, but not planning for it can lead to serious consequences.
Giving work overseas is just one aspect, agreed a very visible one. But there is another aspect too! It is agreed that going global brings in great benefits, but it can also bring in huge global issues and problems with it too!
Remember the age-old saying - if anything can go wrong…it will!
Business and political relations between two countries are highly interlinked. Good political relations are the first step for business prosperity between two countries; unfortunately the reverse is not always true. Business takes a back seat if something goes wrong on the political arena. For example, a government could impose sanctions leaving business with no options! What would happen to a US corporation if it had put all its eggs in one basket? The corporation would be a basket case itself! Political destabilization is just one of the many unforeseen variables that impact global outsourcing. Then there are the natural disasters to think about, too…SARS for example?
It's the duty and responsibility of global outsourcing strategy planners to see the unseen. Imagine the unimaginable before it occurs and PLAN!
At the very minimum, planners need to have a pool of back-up resources (soldiers) available at extremely short notice to take over the tasks. These may be within the organization, distributed across several projects or even external standby help with ready infrastructure; whatever the model, back-resources is absolutely essential to address the unanticipated need for the developers (soldiers).
What about the generals - the architects and program managers, within our global initiative?
While embarking on an outsourcing strategy, one needs to rigidly enforce the concept of “hot stand-by” within the in-house teams. Each and every key member on the initiative; irrespective of whether he/she is from the buyer or vendor, the buyer must keep a hot-standby; available to take charge at a moment's notice. The hot stand-by while not involved in the daily operations of the project must know the project details at all times.
A well-anticipated backup plan significantly enhances the chances of project success.
The anticipated ramp
Unfortunately, giving work overseas does not imply giving up the responsibility or ownership. The outsourcing organization is very much responsible for the initiative. As a part of an outsourcing strategy, planners must also include a model to take the work back. This is not easy!
Outsourcing contracts are normally long term; as a result, in-house resources are transitioned out of the project – retrained and allocated to other tasks or even terminated. Physical infrastructure may be released; terminating costly property leases for example. Right at the initial stage, outsourcing strategists need to plan for the last day of the outsourcing contract. Will the work be brought back in-house? Will it be given to another vendor? How will the transition occur?
While planning this phase, the buyer now needs to look at the vendor's issues. Appreciate and anticipate the issues of ramp-up on the vendor side and plan accordingly. Just as you cannot give large pieces of work, you also cannot take back large pieces; it needs to be done gradually.
Inability to plan for this will certainly have a detrimental impact on the long-term project costs.
Giving out work is a slow process; bringing it back in, even slower; after-all Rome was NOT built in a day!
The other costs!
Outsourcing is a lot about reducing expenses – both direct and implied. Any project, irrespective of its size, besides employee costs, needs to account for other expenses such as infrastructure and vendor management. Infrastructure such as property can always be leased to other units within the same organization or even sold; it's a lot more manageable then in-house employees. Developing an effective outsourcing strategy could significantly reduce vendor management and its associated expenses. Let's look at this more closely.
Vendors by definition may not always be able to contribute to the long-term success of the buying organizations. There are the niche vendors for specific opportunity(s), say technology specific, and then there are strategic vendors (partners). Strategic vendors are those who have demonstrated their understanding of a client's business, processes and have a track record of accomplishments in influencing the client's organizational needs. More often then not, one utilizes the services of a small percentage of its vendor base.
The first step for any organization once it decides to outsource is to identify a global vendor (vendor selection process in itself is an involved and complex exercise it's not the focus of this discussion). It's generally accepted that one selects a vendor (partner) who can deliver value across the breadth of organization's business arena.
For example, Let's take a US corporation with IT staff based in San Francisco, CA; Tokyo, Japan, Frankfurt, Germany, and London, UK initiates its outsourcing plans with its San Francisco operations being outsourced first. Assuming that there are two outsourcing vendors short-listed after due diligence, it's more likely to select the global partner who has operations in the same (or nearby) cities. Besides proximity of both the organizations, it offers the opportunity to reduce the number of vendors that it needs to support.
First amongst equals!
As a result, selecting the right global partner, allows organizations to reduce its vendor base – gradually, over a period of time thereby reducing its vendor management costs.
Outsourcing is like wedding - a marriage between the buyer and vendor, where mutual success is the fruit of this union!
In a marriage, both spouses need understand and accept each other's strengths and weakness to make a marriage successful. It is the same case in outsourcing. Spouses need to share common objectives, respect each other's likes and dislikes, communicate and trust one another to be successful. Just like outsourcing! For the offspring of a marriage to be good, both parents need to work together effectively, providing the right direction and guidance at all times. Exactly what the doctor ordered for a global outsourcing initiative. And finally, just like marriage, outsourcing is a total disaster if even one thinks they can do it alone!
We, in Corporate America, are accustomed to managing people we see everyday, share a coffee regularly, enjoy happy moments and even share grief together. These activities provide the much needed catalyst in building relationships. Now, one fine day, thanks to the executive decree, we are expected to team up with a handful of people who we have never seen, belonging to a culture that's vastly different from our own, and, most likely, taking away work that some of our friends were doing, and, above all, make this relationship a success! Being so accustomed to a work environment with a personal touch, how do we achieve success in a global environment, get the personal touch in teams that are a few thousand miles apart? While there is no doubt about the importance of the technical aspects of project management, the secret sauce to success lies in the ‘softer’ or “human” side of project management.
Technical excellence and people skills are two sides of the same coin – you can see only one side at a time. A technical guru can seldom become an ace people manager and vice versa.
The buyer/vendor relationship for a global outsourcing initiative needs a catalyst – a person on either side has the ability to communicate across organizational hierarchy, adaptability in new and untested waters, aptitude to gaze into the crystal ball to anticipate opportunities and the acumen of a project manager. Who else but a Marketing Program Manager can provide these? As a result, best practices for global outsourcing are a congruence of multi-tier, multi-cultural project management and the fundamentals of marketing.
The Marketing Program Manager is an absolutely essential member of any global outsourcing initiative.
While marriages are decided in heaven, thankfully, in outsourcing we have a choice. We can choose the right partner, a partner who understands our values, speaks our language, and brings in the right ingredients, including a solid entry and exit strategy to enhance the chances of the success for any global outsourcing initiative.
Proceedings of PMI® Global Congress 2003 – North America
Baltimore, Maryland, USA ● 20-23 September 2003