Thoughts on Outsourcing

Having worked in different companies on both side of the ocean, I had been mulling over what makes a company succeed in outsourcing. What to outsource and factors to consider before outsourcing. Listed below is a summary of what works and what doesn’t

Commitment, motivation and security: Commitment to outsourcing from the whole team is absolutely required for success of any project. Its vital that the current team looks at Outsourcing as away to augment their strength. Its very easy for organizations to get into US vs Them situation, creating un-necessary conflicts. These can be limited by making sure that the current team is secure in the belief that that outsourcing is a way to compliment their work and not to replace them. Travel, more face time, flat organizations help a lot in these areas.

Competency loss in US: There should not be any loss of competency as a result of outsourcing. The whole idea is to increase competency and allowing the organization move further, faster. The team in US/HQ should be so strong, that if tomorrow the IT location in Asia has to be closed, the team in US can pick up the baton and run with it.

What to outsource ? : Non core business areas. IT , help-desk, admin work, testing, development etc. Any area of work , which doesn’t add value to the business the company in.  Start with those areas and evaluate. Start with support work, then with projects that are autonomous. Say development of tools like time-card or employee expenses etc. There is always a shortage of DBA’s and these can be outsourced to get 24/7 coverage. Helps the DBA’s in US and they appreciate to off the hook at nights/vacations. Target job reqs that are open for years and an equivalent resource could not be found in the US.

Cost: Evaluate the cost every quarter and analyze the cost advantage that the company gains by outsourcing. Is it worth it ? There are some in-tangible costs to outsourcing, like more layers of management. Extra management time spent by leadership, to make sure outsourcing is successful. The salaries in India raise at a much higher rate , compared to US. Cost of outsourcing is a moving target and has to be re-evaluated every quarter. With inflation at 11.5% in a country like India, there is only this much that anybody can do, to ensure that cost remain in control.

Attrition: Be prepared for higher attrition and the possibility that the some of the resource end up coming into US and start working for a competitor. Working at the same “Title” for five years is unheard of in India. Resources in India are very highly mobile, very motivated and are always seeking new challenges. Therefore there is a high possibility that they would leave the company in span of 2 years and work for a competitor in the US.

Innovation cannot be outsourced: If your core business is innovation, outsourcing would be suicidal. You cannot outsource innovation, not even to the next state, let alone a distant country. What ever success the company has today, is a direct result of leadership, innovation and hard-work of the current / past employees and that DNA cannot be transferred to another city/country so easily. The reason innovation thrives in a place like Silicon Valley is because of the eco-system there fosters innovation. That is a reason, people from India thrive in Bay Area and start great business, great product companies.

• Have you heard of any product company from Bangalore?
• How many patents were filed from India in FY08 ?
• There is no question about the quality of resource from Asia. They might be even better, but does the environment in that country or that regional office foster the kind of innovative environment that the company needs?
• Is it easy to replicate the same model there ?
• These questions have to be answered with an Emphatic YES before the decision on outsourcing is taken.

Loss of Resource Advantage: It is very tempting for any company to reduce costs by freezing hiring in the HQ and hiring in Asia. But every potential great candidate you fail to hire in the US is a potential competitor. Every MVP who doesn’t get drafted is a potential game winner for the competitor few years down the line.The current level of success of any company is in no small measure to these heavy hitters, who changed the game. Companies are always competing for the best from the next generation. One should guard against the inclination to hire in Asia at the cost of potential MVP’s in the US. In the battle of resources, companies like Google hire the best, even if they have no defined work for them. Its great to have self-motivated people, because they will find ways to prove their worth and value.

Evolution: Outsourcing is a more like a 10 year plan. It has to be gradual, organization has to experiment and learn at each and every move. Case in point, Oracle India. Started in 1994 , but it really grew in the year 2001, when the economy was down and outsourcing got the management blessings. Today it can be considered the gold standard of outsourcing, with 10K plus employees in the India in almost every domain area. Oracle started with outsourcing Support and Staff augmentation for their consulting business. Over period of time, they improved the process , learnt the best practices and moved to development. Today lot of the teams are self-sufficient and are able to develop quality products based on designs developed in HQ.

Strong Leadership: This is the single most important aspect for success of outsourcing. There has to be strong leadership on both sides of the ocean and preferably old timers. People who have the company DNA in them and can replicate it in the outsourced location. Going out and hiring managers from the market is going to dilute the work culture, adaptation is going to difficult . Depute leaders to India, put them in charge of hiring, mentoring and building teams. Have close interactions, by encouraging travel in the beginning. Unless these are done right, there is a risk that you end up running two different companies , one in Us and one in India. Create an environment to encourage leadership and pick managers in the outsourced location from within the ranks. Once this starts happening, then the organization is almost on Autopilot.

Strong Process: Does the system you are trying to outsource have a well defined process ? Is it too people dependant ? If Yes, then its not a candidate for outsourcing at this time. Outsource systems which are people independent. Management should be tweaking the system and not spending time managing people. Put self-managed people to run the system in the outsourced location, who are go-getters and have proven experience in doing this successfully before.

Learn from success stories: Oracle , SAP, Microsoft, Texas Instruments, CISCO etc  are good success stories in the domain of outsourcing. Their models are worth evaluating and replicating. CISCO is especially interesting because they matured to the extent where they are doing a lot of R&D in outsourced locations. While not recommended for all companies, its a model worth looking at.

Recommended Readings

Crawl, Walk, Run Strategy Leads to Success in Offshore Outsourcing

http://whitepapers.silicon.com/0,39024759,60039273p,00.htm