Most people would accept that there some golden rules in outsourcing. These would include:
- Never outsource a problem
- Always think of Exit at the start
- Never accept the suppliers contract
- Always define scope and service levels
- Contract for outputs, not inputs
- The list goes on and on...
These rules, or guidelines, have developed over time and have become accepted as best practice in outsourcing and would form the basis of advice given by most lawyers and sourcing advisors. So why do so many offshore deals ignore these rules?
To answer this question lets look back at the evolution of most offshore deals. In the 90's many private sector organisations were looking for quick ways to save money - to increase profits and add more to their bottom line. Finance Directors told their IT Directors to cut costs while at the same time deliver the same service, but what could they do? About this time India was gaining the reputation as a cheap location with a highly skilled workforce that could deliver an IT programmer day for a fraction of the price of a UK person. The result - many companies experimented with offshoring IT, usually with some applications development work, starting with simple risk free work, just in case the experiment didn't work. Work started on the basis of a handshake, or sometimes just few phone calls and an exchange of letters or E-Mails with an agreed day rate per FTE. Often no-one in procurement or legal knew about the deal, and IT were certainly not gong to get them involved - delay and procedures would get in the way of delivering cost savings. So IT just got on and delivered with the help of their new Indian IT partner, and the deal was done under the corporate radar.
As time went by, more pressure on the IT department to reduce costs, reduce headcount combined with it becoming increasingly difficult to attract and retain talent. So what did some IT departments do, they gradually put more work offshore. Soon it became the majority of applications development work, then 2nd and 3rd line legacy applications support and eventually 2nd and 3rd line support of those new applications that the offshore partner built. So over a few years starting from offshoring a few heads many organisations found themselves with as much as 20% to 60% of their IT services being provided offshore. And all this supported by the simplest of contracts, E-Mails or letters. But how could this have happened? Was it part of some global conspiracy by offshore suppliers to lure organisations into relationships without contracts? Or was there another answer?
I believe the truth is much simpler, and far less complicated
Why did people look to offshore in the first place? Cheaper and better qualified IT people who could deliver immediate cost savings. "I spent £300 per day on Fred yesterday and will replace Fred with Sanjeev tomorrow and pay £100 per day". If I am only buying heads I don't need to waste time agreeing a complicated contract that will only delay the cost savings, it's just like going into the contracting market - very simple and only needs a simple contract. No need for IP or Exit provisions and why do I need to define a scope or a service level, all I am buying are heads!
And most of these offshore services were bought per head or FTE. And this even though the majority of IT application's development work in Europe was being procured on a fixed price basis - having learnt the lessons of out of control, loosely scoped and managed heads based time and materials IT development projects! Offshore applications development work was, and still is, predominantly bought on a per head basis.
The answer to this puzzle is quite straightforward. Most Organisation's started on their offshoring journeys with a simple objective - to save money, and fast. And did this in a small area - applications development. Few expected the offshore experiment to be so successful and the demand for cheap IT services to snowball. Remember any delays due to procedures, procurement or introducing legal would get in the way of those cost savings. However, the simple heads based deal at the outset grew and grew and grew until.
If you use offshore suppliers to deliver some of your IT services it could pay to look at the contracts you have in place with them. Better to know what you have in place now so you can do something about it rather than continue to expend offshore and find yourself in an even worse situation in a few years time. Encouragingly, most offshore suppliers will also recognize the failings of continuing to use an unsuitable contract to support offshore work that has grown over time.
Tony Adams is a Senior Manager with Alsbridge, the award winning advisors on outsourcing, shared services and offshoring. Tony can be contacted at tony.adams@alsbridge.eu
