Fortune corporations have been using outsourcing companies for a long time. GE, American Express and the likes have enabled the creation of a giant industry, led today by India followed by China.

Outsourcing agreements between American industry leaders and their suppliers, often Indian companies, generally span over several years and are worth dozens when not hundreds of millions of dollars.

Over the years, tier-1 Indian suppliers have mastered the art of maximizing their profit on these agreements, thus enabling their rapid expansion and wealth.

It was not too much of a problem as long as they were dealing with industry giants, which have the capability to closely oversee their offshore contracts and operations. The situation is totally different with SMBs, which cannot afford to see their monthly bills go through the roof, or witness considerable decrease in the quality of the deliverables.

Below are some suggestions that SMBs should follow when selecting their supplier:

• US agreement: Make sure the agreement is between two US companies. If anything goes wrong with a foreign entity, it will be much harder to take any legal action: your Bangalore or Dalian based provider might not care much having an agreement governed by US laws, since losing there would not really impact their global business. They would care much more with a contract governed by their local laws; however in this case, do you have the financial breadth to go defend your case in India or China?

• US management: The same goes with the management. Make sure your provider’s senior executives live in the USA. If there is a major crisis, there is no time to travel to Mumbai, Omsk or Beijing, hire a translator and have to deal with different business practices. Ideally all business and technical decisions should be made in the USA, without requiring any green light coming from the offshore base

• Work methodology: Do not let your supplier embark you in complex processes, like CMM for instance. Like most SMBs, you are certainly under intense market pressure, and unlikely to dedicate the amount of time and resources required by these heavy approaches. It is critical that your provider master Agile methodologies. Agile provides with the highest level of flexibility, and allows for a truly incremental approach. In addition, progress can be better monitored, and problems detected as soon as possible

• Moving resources around: it is unfortunate, but many outsourcing companies would rapidly replace the senior resources originally assigned to their client by very junior ones. This is how they maximize their profit. The good news for SMBs is that the average development / support team is small enough that you can make sure resources are not reallocated without your permission

• Fixed price: If possible, go for fixed price contracts. Your provider might be reluctant to commit, especially when the specifications and workload are unclear, but it is usually possible to segment the work in such a way that fixed-price contracts become possible

• Experience: Work with people who have a proven experience in your field of expertise; I am talking about technical expertise and domain expertise. When signing a contract, offshore companies will assign in priority their “on-the-bench” resources, even if they are not totally qualified for the job. Make sure your provider will assign the right resources, and if not available hire them

• Attrition rate (employee turnover) is a major problem for many offshore companies, especially in cities like Bangalore. Ask your provider about their employee retention program, or even better about the preventive steps they take to avoid any loss of productivity / knowledge when employees resign

• IP protection: if you have an extremely sensitive IP, think twice before sending the work abroad. And if you need or want to go offshore anyway, split the knowledge between several providers, or ask your provider to assign the work to different teams located in different regions or countries

• Do not be greedy: You can be sure of one thing: you will get what you are paying for. Know the limits of your supplier. If you go over the limit, they might still take the contract, but will assign less resources, or less qualified resources, and pay less attention to your account overall.

I hope it will help prevent some deadly mistakes. Do not hesitate to contact me if you have any question or comment.

Remi
www.vsisoft.com

Posted by Remi on Thursday, January 8th, 2009 at 2:01 PM.