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 | 6 Comments »

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 »

A vast majority of SMBs are either contemplating offshoring part of their IT, or have already done so, often to India or China.

An outsourcing provider focusing on SMBs, I am always trying to refine our market segmentation.

I would classify SMBs looking to outsourcing their development / maintenance into 3 different categories, each of them yielding to very different results:

1. Companies in the first category (the largest one by far) are obsessed by paying the lowest price. I call them the Wal-Mart buyers: they want more for less. When a prospect belongs to the first category, I walk away from the deal, as a deal purely based on cost savings is set for failure. Interestingly enough, the bulk of outsourcing companies are fighting for these customers.

2. SMBs who fall in the second category are often first timers, therefore with a very limited experience of outsourcing. There are so afraid of potential failure that most of the time, they choose a supplier based on its apparent stability: the larger the better. The worst part of this choice is that a SMB is too small to be strategic for a large provider; [I elaborated on this risk last year].

   Being obsessed by the potential downside, they do not pay enough attention to the upside, an attitude yielding to mixed results at best.

3. Companies in the third category usually already have a solid experience of outsourcing, and make their decision based on a series of benefits they want to get from the operation. Unlike the companies of the second category, they want the highest upside possible, and will only work with suppliers that can guarantee their expectations will be met.

This last category is the one on which I focus my efforts; the risk of failure is extremely low, since expectations have been clearly stated at the beginning. In addition, and that is the icing on the cake, there is little competition on these accounts since a very few outsourcing companies are in fact able to demonstrate their ability to deliver.

These customers are fun to work with; the employees assigned to these projects are very loyal and will do whatever it takes to make these projects a success, no need to ask and/or push.

Remi
www.outsourcing-vsc.com

Business | 7 Comments »

SMBs do not necessarily have trivial software needs; some have even very sophisticated and/or diverse ones. It is not uncommon for SMBs to have needs that encompass JAVA and .NET developments, together with technical support for enterprise applications like SAP or NAV, and requests on advanced technologies like Flex or Ruby on Rails.

In fact, chances are the talents are available somewhere someplace. It might be in Bangalore, Shanghai, Sao Paulo or Cape Town.

The difficulty is to get them together. While industry leaders like IBM, TCS or Infosys have access to a wide pool of talents, they are just not interested in SMBs, leaving most of them with little alternative other than looking for the partners themselves, a time-consuming task that generally yields to mixed results at best.

The truth is that the vast majority of SMBs are not equipped to spend time and energy selecting their offshore outsourcing vendors. In addition offshore companies have different business practices, which in most cases are not really up to par with our business standards here in the USA.

My observation is that SMBs should not be the ones looking around for the various outsourcing providers. It should be the task of US outsourcing companies to establish a network of qualified and reliable offshore partners.

A few (not enough!) US outsourcing companies have already engaged into this avenue. SMBs should absolutely work with them; a US-based outsourcing company that provides with:

• Services agreements, ruled by US laws, which cover their various needs

• A local presence, at both business and technical levels, which enables to deal locally, removing cultural differences, language barriers and significant time difference.

And last, all the relations between the US outsourcing vendor and its offshore partners should be totally transparent to the customer.

Remi
www.outsourcing-vsc.com

Business | 4 Comments »