Outsourcing to innovate




When “outsourcing” first became a buzzword, it referred to a specific type of offshoring: tapping cheap labor in developing countries like India to handle low-value back-office IT projects and services. But as the global economy becomes increasingly high-tech and complex, offshoring is evolving into a path to innovation.


“Companies traditionally outsourced simple peripheral projects, fearing that large and complex projects would not be successful. They assumed vendors didn't have the talent to execute projects involving innovative, advanced technologies.”

—Vimal Kumar Khanna, mCalibre Technologies, New Delhi, India

“Companies traditionally outsourced simple peripheral projects, fearing that large and complex projects would not be successful,” says Vimal Kumar Khanna, founder and managing director of mCalibre Technologies, a mobile advertising predictive analytics software company, New Delhi, India. “They assumed vendors didn't have the talent to execute projects involving innovative, advanced technologies.”

As organizations scramble to exploit new technologies increasingly central to business strategies, they're outsourcing larger, higher-value projects to specialized IT vendors—and treating them as equals capable of strategic innovation.

“It's now about developing new products and adding innovation to the tech life cycle through relationships,” says Atul Vashistha, chairman of The Neo Group, an outsourcing services consultancy in New York, New York, USA, and author of The Offshore Nation.

In other words, the decision to outsource isn't primarily financial—it's an extension of a firm's core strategy. With the right vendor and project management approach, innovation and outsourcing can go hand in hand.


Supply and demand is one driver of outsourcing's evolution. After increasing just 0.4 percent in 2013, global IT spending is expected to rise 3.1 percent this year to hit US$3.8 trillion, according to Gartner. That means an increase in projects, yet companies are struggling to find the talent they need to deliver new initiatives. Ninety percent of U.S. executives and 94 percent of U.K. executives say it is “challenging” or “extremely challenging” to find workers with the necessary skills, according to Silicon Valley Bank's Innovative Economy Outlook 2014.

Caught in this difficult environment, software-development companies are turning to outsourcing as the path to innovation and growth, says Balazs Fejes, senior vice president and global head of financial services at EPAM Systems, a global software solutions provider, Zurich, Switzerland. Many organizations that laid workers off and stopped investing in IT teams during the global recession are now eager to leverage new technologies to grow their business and meet customer needs, he says.

“They know that cloud, big data, digital and mobile will take them to the next level—but they don't have the talent in-house to deliver these projects,” Mr. Fejes says.

Many nimble organizations are avoiding the time-intensive process of building project teams for specific projects by outsourcing projects instead. The result: Offshore vendors can now point to globally recognized products they have built—“highly complex and large projects, including full-fledged product development,” Mr. Khanna says. That gives other organizations the confidence to outsource additional projects involving innovative, advanced technologies.


When outsourcing high-value projects supporting expansion into new business domains and technologies, however, companies shouldn't rely on the back-office project management playbook they might have used with vendors a decade ago. Instead of handing the vendor rigid project plans with predefined specifications and deadlines, Mr. Khanna says, they should approach project management as a collaborative process. That means involving the vendor in project planning and creating avenues for frequent communication with the project team so problems can be addressed before they derail progress.


Viewing vendors as strategic partners who can execute a project without being micromanaged “takes a more mature project management approach” that can be more time-consuming. “The old way of managing these projects didn't result in success. You need to build trust so you can focus on moving toward common goals.”

—Mike Gretczko, Deloitte Consulting LLP, New York, New York, USA

“Each phase of the project must be planned in consultation with the vendor team, not just imposed upon them,” he says.

Organizations also have to engage offshore vendors much earlier in the project planning stage and use this time to build relationships, says Mike Gretczko, principal at Deloitte Consulting LLP in New York, New York, USA, a PMI Global Executive Council member. In the past, outsourced project plans were established with little or no feedback from the vendor, which would then be held accountable for executing project tasks on schedule. That often led to conflict.

“Now the project management process is much softer,” Mr. Gretczko says. “Outsourced project plans still have milestones and schedules, but it is a more collaborative process.”

Instead of focusing on specific tasks vendors must complete, organizations need to view them as strategic partners who can execute a project without being micromanaged. “That takes a more mature project management approach,” Mr. Gretczko says. Such an approach can be more time-consuming, but it builds trust. “The old way of managing these projects didn't result in success. You need to build trust so you can focus on moving toward common goals,” he says.



The days of picking an outsourcing destination based on price alone are over. Along with modernizing their project management approach with offshore vendors, organizations need to change the way they select and evaluate them. In an environment where speed to market is critical, working with a vendor who lacks experience or skill—usually the case with the lowest bidders—substantially increases the risk that a project will not be delivered on time or that it will fail to meet the outsourcers' goals.

Cost considerations must be balanced against a vendor's capabilities, experience in the market and fit with the company, says Atul Vashistha, chairman of The Neo Group, an outsourcing consultancy in New York, New York, USA. Mr. Vashistha and Vimal Kumar Khanna, managing director of mCalibre Technologies in New Delhi, India, offer this advice on choosing the right partner for the right project.


▪ Focus on core skills, outsource the rest. With new technologies accelerating the pace of change, companies often lack the in-house skills and experience to deliver leading-edge projects. Rather than hiring employees and learning through trial and error, look for a provider who's done it before, says Mr. Vashistha. Working with an outside expert can lower risks and allow in-house teams to focus on leveraging their core skills.

▪ Experience is critical. If you are outsourcing a high-value, innovative project, a team that has done similar work before is a must-have, Mr. Vashistha says. He advises checking client case studies, interviewing the vendor's project managers and resources, reviewing samples of its work and talking to past clients. “You want to be sure they have the scale and expertise to deliver your work,” he says. “It's not uncommon to find a vendor who's delivered 10 similar projects that year alone.”

▪ Do a test run. For very complex projects involving advanced technologies, consider running pilot projects with a short list of vendors to make the best choice, Mr. Khanna suggests. “It involves additional cost, but the success of the pilot will convince you that the vendor has expertise in tackling your challenges.” After selecting a vendor, make sure the team it used for the pilot is the same team that executes the actual project.

▪ Hold face-to-face meetings. At the start of any project, bring the vendor's team to the office to participate in requirements capture, knowledge sharing and relationship building, Mr. Vashistha says. Then, in the early phase of the project, send a project manager to the vendor's office to oversee early progress. “This shadow/reverse-shadow approach is a good outsourcing practice to make sure the vendor team is doing the work you expected,” he adds.



Mr. Fejes has seen the importance of a mature project management approach up close while executing projects for financial services companies. Outsourcing higher-value projects is especially prevalent in the finance sector, where companies struggle to implement more robust digital and mobile tools for customers while meeting strict regulatory requirements, he says. For this reason, vendors are playing highly strategic roles.

“When vendors act as innovators, they are often the ones to drive the project plan based on a problem the client is facing,” he says.

As an example, Mr. Fejes points to a project his team is currently working on to create a digital platform for a global bank. The bank brought EPAM Systems into the project in May 2013, before a project plan was even created or the minimum viable product was defined, with one goal: It wanted an immersive digital platform that would give the company's high net-worth clients a better customer experience. Mr. Fejes' team took it from there.

“We did the research based on the bank's need, came up with a design and built a business case for the project,” he says.

After client approval, Mr. Fejes used an agile project management approach to assemble 10 technology teams that work simultaneously on different pieces of the digital platform and deliver biweekly prototypes to the client showcasing additional features and improvements. He also has 10 percent of his team co-located at the client site to make sure everyone remains aligned to project goals and that the client provides feedback as efficiently as possible.

“Having a team on-site helps us manage risk and identify new opportunities for improvement,” Mr. Fejes says. The project is on track to be completed in November 2014, on time and within budget.

“[Many organizations] know that cloud, big data, digital and mobile will take them to the next level—but they don't have the talent in-house to deliver these projects.”

—Balazs Fejes, EPAM Systems, Zurich, Switzerland

Such a collaborative approach is critical for innovation-heavy projects with high complexity, but they require a significant time commitment from company stakeholders, Mr. Fejes notes. “They need to make time to work with us and offer regular feedback on project progress,” he says. “That's how you solve issues and deliver the best results.”


The most successful outsourcing strategies include a more collaborative governance model as well, says Scott Bewley, director of managed services for CSG International, Dublin, Ireland. CSGI creates lasting managed service partnerships with organizations in various industries—including media, telecommunications and financial services—to develop and implement strategic technology projects, which help businesses meet growth goals and expand into new markets.

“We focus on using innovative technology to achieve strategic business outcomes for our customers,” Mr. Bewley says.

Like EPAM, CSGI doesn't wait for customers to tell the company what to do. Instead, it works strategically with customers to help them solve business problems. “They come to us for advice on how to proactively drive their transformations with technology,” says Richard Ullenius, vice president of managed services for CSGI, Stockholm, Sweden.

A three-tiered governance model supports CSGI projects. At the top is the strategic governance board, where CSGI leaders provide client executives with guidance on how CSGI technology and services can help them achieve their strategic goals. Beneath that group is the operational steering group, which includes client and CSGI stakeholders who work together to manage current projects and develop joint business plans for specific projects that link to the strategic goals. Beneath these two levels are the working groups who make more day-to-day decisions about projects, track progress and review outcomes.

“We don't just review monthly progress updates,” Mr. Ullenius says.

“This model enables us to work together, drive innovation and find new opportunities for growth.”


From his perspective, Dan Retzer knows it pays to treat vendors as equals. Now the chief technology officer of SunGard's North American securities business, a financial services technology firm, Mr. Retzer spent much of the early 2000s at XcitekSolutionsPlus (later acquired by SunGard) doing what a lot of outsourcing companies did: defining a long list of specifications for projects, sending them to an offshore vendor and waiting for results. “It didn't work, and it ended up creating very adversarial relationships” when vendors didn't meet project goals, says Mr. Retzer, Birmingham, Alabama, USA.


Now when Mr. Retzer and his team at SunGard want to outsource a project, they use the planning stage of a project as a time to build relationships with a vendor. In many cases, the vendor brings specialty skills to the table that Mr. Retzer doesn't have in-house.

Some customers' product needs “have been so niche that it drives us to find outsourcing partners that have deep understanding of a specific space, like financial services,” he says.

Many outsource vendors today market themselves as experts in specific business or technology categories, which can add significant value for companies like SunGard. But taking advantage of that expertise requires a more collaborative project management approach through which vendors are treated as experts rather than sources of cheap labor.

This collaborative approach to outsourcing can shorten implementation time and reduce risk because everyone clearly understands the scope of work, says Alex Julian, PMP, senior manager, HSBC Global Banking and Markets, São Paulo, Brazil. Problems arise on high-value projects if the outsourcing company leaves the vendor to work in isolation, he says: “Making the vendor part of your team benefits the project outcome and the company-vendor relationship. Because we know the vendor has all the needed expertise, we have higher expectations for outcomes.” PM


Outsourcing practices have shifted dramatically in recent years. Seasoned offshore vendors have adopted practices allowing them to deliver leading-edge projects, while other vendors have opened shop in untested regions hoping to tap low-cost labor pools and gain a competitive advantage in an increasingly crowded marketplace.

Manuel Ravago, president of research for global IT consulting and research firm Tholons in Las Vegas, Nevada, USA, which produces an annual Top 100 Outsourcing Destinations report, cautions organizations to investigate a country's potential risks—natural disasters, political strife, data piracy—and balance them against the benefits before choosing an outsourcing destination.

Once you choose a vendor, factor any risks into your project plan. “The project management office (PMO) plays such an important role in this process,” Mr. Ravago says. “It makes sure everyone can see the risks that could impact an outsourced project, and is ready to react if problems arise.”


After years of working to establish themselves as outsourcing destinations, Central and South American countries are starting to make a mark. The region's proximity to North America is an asset, along with a deep talent pool. Costa Rica, Brazil, Chile and Argentina all have cities in the top 30 of Tholons' 2014 outsourcing list. Cities in Guatemala, Peru, Colombia and Uruguay are becoming increasingly attractive destinations, Mr. Ravago says.

Sociopolitical challenges in parts of the region should factor into outsourcing decisions, however. “Guatemala has one of the highest homicide rates in the world,” he says. No matter how rich the talent pool, that's a big risk.



Ukraine was for many years an outsourcing darling in Eastern Europe, but the country's recent political turmoil has been “a big problem for clients and service providers,” Mr. Ravago says.

Ukraine's loss of business is Poland's gain. Poland is now emerging as one of the strongest IT and business process outsourcing locations in Eastern Europe, with Krakow reaching the ninth spot on Tholons' 2014 list. “Poland has a rich talent pool, stable politics and manageable costs,” Mr. Ravago says. “It's attractive compared to other countries in the region.” Hungary, the Czech Republic and Romania are also gaining some attention as outsourcing destinations in the region with strong labor pools and low costs.

But outsourcers beware: Data laws are weakly enforced across the region, making intellectual property (IP) and privacy issues the biggest risk organizations face. Some countries are notorious for IP and data privacy violations, Mr. Ravago says. “Many Western service buyers are hesitant to process end-user data in Eastern Europe for these reasons.”



India and the Philippines continue to be the top destinations for outsourced projects. Vendors in these countries are viewed as capable of handling the largest-scale projects at optimal—if not always lowest—costs. To keep budgets in check, many vendors in these nations are expanding into second-tier cities.

Eight of Tholons' top 10 outsourcing destinations are in India (Bangalore, Mumbai, Delhi, Chennai, Hyderabad and Pune) and the Philippines (Manila and Cebu City), and other cities in both countries rose in rank compared with previous years, Mr. Ravago says. Both countries boast experienced vendors, millions of English speakers and stable governments, he notes, but one risk to consider is environmental disasters. When Typhoon Haiyan struck less than 100 miles (161 kilometers) from Cebu City in November 2013, a lot of outsourcing companies got nervous. “It's a risk that could affect your outsourcing engagement,” Mr. Ravago says. “A PMO needs to be aware of it.”


Japanese and Korean outsourcers are flocking to China, which is gaining attention as a hot spot. Dalian, ranked 14th on Tholons' 2014 Top 100 list, is known for its high-value IT outsourcing services. But organizations outside of Asia have been slow to embrace China as an outsourcing destination.

“China is a dark horse for the near term,” Mr. Ravago says. Although Chinese vendors can deliver high-value services and the government has been aggressively expanding English-language training programs for students, many outsourcers avoid the country because of perceived intellectual property risks and concerns about transparency and the political environment. “It's a complicated country, but it's proven that it can be a good outsourcing destination,” he says.