Outsourcing vendors often use “blended rates” to calculate the monthly / quarterly amounts due by their customers. Simply put, the blended rate is an hourly rate that applies to any single team member, regardless of seniority, from the less experienced developer to the most senior manager, with the possible exception of the top management.

Beware!

The apparent advantages of blended rates are increased invoice readability, better cash flow predictability, and the illusion for the customer that they are getting the most senior resources at a very attractive price.

What usually happens is the opposite.

Blended rates are first determined by averaging the average hourly rates of the initial team, a team that usually comprises a higher percentage of senior individuals to help reduce the learning curve and the transition times.

Chances are that, after a few months, the vendor will start pulling out senior personal from the team, and replace them by less experienced ones. Some vendors have become experts of this, and decrease in quality will happen very gradually.

When changes in quality become visible, a common solution is to add more senior individuals to the team; a solution that yields in a rapid increase in quality, to the customer’s satisfaction.

And a few months later, … ditto: senior members are replaced by less senior ones, etc.

While blended rates make sense for larger teams, they do not apply to smaller teams. If you are a small to mid-size business, stay away from them. Make sure instead that you are provided with means to know every team member, their qualifications, and their true participation to the development effort. If you do not feel up to the task, go for fixed price agreements; they are a much better way to pay the fair price while reducing the overall risks attached to IT outsourcing.

Remi
www.vsisoft.com

Business | 2 Comments »

Market Wire recently posted an article presenting the IT outsourcing trends for 2009, according to the IAOP (International Association of Outsourcing Professionals) predictions.

While most points come at no surprise, I have a harder time agreeing with the first one: Outsourcing will stay closer to home.

“With available labor from layoffs in many industries and tightened risk profiles of companies, especially in the financial services industry, companies won’t have to go far offshore to find talent. Planned initiatives by Barack Obama and increased government spending on infrastructure projects could lead to more domestic outsourcing, particularly for construction, real estate and technology, IAOP predicts. Outsourcing destinations such as India and China will be challenged by the closer-to-home locations.”

There are 3 different reasons given here:

1. The massive lay-offs in the financial services are creating available qualified manpower, hence reducing the shortage of talents

2. The new Administration is likely to create incentive programs for keeping jobs inshore

3. Nearshore destinations (Mexico, Costa Rica, etc.) are to gain momentum on offshore destinations (China, India, Eastern Europe, etc.).

Let’s address these reasons from an IT industry’s perspective.

• First, it is obviously clear that lay-offs mean more people on the market. The real question is though: do these people have the technical expertise most hiring companies are looking for? The shortage observed in the USA is mostly for developers with in-depth experience in advanced techniques, like RoR, Lamp, WEB 2.0 platforms, multi-media, etc. I am not too sure how much of this required knowledge a developer coming from a large financial institution possesses.

• Second, I am an avid supporter of president elect Obama, and I obviously agree that it makes sense to keep jobs inshore when possible; but I have to go back again to my point regarding the shortage of talents. A company, especially a SMB, can only hire a person if she/he already possesses the profile they are looking for. The new Administration might come with strong incentives to hire local resources, but I doubt SMBs have the luxury of hire people who do not already have the required technical experience, especially this year.

• And finally, I do not even understand the debate nearshore vs. offshore. China and India have become popular destinations not only because they are less expensive than the USA, but mostly because it is easier to find talents there. Bear in mind that the US produce 70,000 engineering graduates per year, when India graduates 450,000 and China 600,000.

From our company’s standpoint, we offer resources located in both China and Mexico, so my opinion is not dictated by corporate interest. We actually tap into our nearshore resources when our clients need to communicate many times a day with their remote team. Other than that, China seems a much better choice, thanks to the number of talents and the variety of profiles available.

Let me hammer this again: if we want to reverse the nearshore/offshore process in the IT industry, there is only one thing we can do: change our education system.

Education is among the major challenges of the New Administration. However I am now confident that many of the much needed changes can finally take place. “no child left behind” must become a reality, not only low-level propaganda from the soon previous Administration.

Yes we can, indeed!

Read the full Market Wire article here

Remi
www.vsisoft.com

Business | 1 Comment »

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

Business, China | 4 Comments »

Technology Partners International Inc. (ATPI), a TX-based consulting firm, estimated that close to $100 billion worth of large outsourcing contracts are due for renewal by 2008.

According to ATPI, US companies are about to spread mega-deals from large single contracts over multiple, smaller providers, a blow to all large outsourcing firms.

While the IT outsourcing / BPO market will continue to grow at an average 8% in 2008, according to the Gartner Group, the year might mark the end of the current “one-size-fits-all” outsourcing model.

Far too often, leading providers have applied the brute force approach to outsourcing: “throwing people at a problem”, especially by tapping into their cheaper pool of talents (India, China, etc.). This model has reached its limits and has finally started to fade away.

New customer/relationship models are emerging, centered on flexibility. Says Julie Giera from Forrester Research, “customers want an outsourcing offering for IT and Business Process Outsourcing that evolves, or “flexes”, as their needs change over time.”

Market leaders might be slow to embrace this new model; an opportunity of a lifetime for smaller size providers to make it to the next step.

Remi
www.outsourcing-vsc.com

Business | No Comments »