An interview with Michael Mah, Senior Consultant, Cutter Consortium;
Editor, IT Metrics Strategies Newsletter

 

Do you think the rapid change, if not turmoil, in the world of outsourcing/offshoring is going to continue to be a struggle for companies?

I believe that though we have certainly experienced a period of serious economic upheaval companies will continue to explore cutting costs through the use of outsourcing. This means more companies will experience a power shift and the "split" between two interest structures. The client has a set of interests for outsourcing, and the vendor has a set of interests for being the supplier. Now you have what’s essentially a marriage of two different corporate cultures.

 

What should companies do to try to create a lasting corporate relationship?

First, don’t rush things. It’s important to set aside the pressures to outsource and consider the long-term impact of the relationship. You need to "date" a little bit. Just as you wouldn’t rush into a wedding without getting to know someone, you must begin a relationship with a supplier on a level that enables you to understand each other’s cultural issues and working styles. That might mean doing a pilot development project with them or breaking a large project up into phases.

If you’re in a downsizing scenario (transferring a function and personnel to an outsourcer), it’s more difficult to do things in phases. That’s where metrics come in. You need to have a baseline of your own productivity and some substantive numbers on their performance. After all, you’re hiring them on the premise that they’re going to be more efficient than your current organization. If you have no metrics evidence of that, you may end up hiring a supplier that doesn’t achieve your goals. You want a supplier whose reach, resources, and technical skills allow them to perform at a higher level than your inhouse staff — and you can’t ascertain that from the marketing literature or a round of golf.

 

What about outsourcing application development projects?

What organizations need to understand about application development is that these projects are really R&D projects, and the contracts need to be created with that in mind. Most companies, regardless of the project, structure their contract as though they were a manufacturer contracting with a factory — that’s a major flaw. You start the relationship on the wrong foot because the performance levels and the balance scorecards don’t reflect R&D dynamics.

For example, you don’t want the contract performance figures to be based on rates of output. Instead, you want to balance measures for quality issues like reliability and defects, as well as speed and cost. You need to strike a balance between all of those, rather than just contract for the maximum amount of code per unit cost. After all, R&D that’s poor quality is of very little use.

Instead of R&D, I’d say "IT solutions"

The fact is, shotgun weddings with bad metrics frameworks create tension and conflict. If, as Tom DeMarco described in his recent Cutter Consortium interview ["IT Personnel Shortages, Litigation, and Busy-ness"], litigation is escalating at a dramatic rate, and some companies are spending more on lawyers than on programmers, that tells us that a lot of companies are setting the stage for this. Everyone’s expectations are awry because they’re using a contract that was designed for outsourcing functions that are repetitive and routine to create a relationship for an R&D function. The contractual elements that people are familiar with are the wrong elements to use in R&D-type projects. Those projects are, in essence, creating something that doesn’t exist today.

A typical example is using cost-per-function-point as a metric. It also might be unlikely that function points are a practical fit as a size metric for things like Web development projects or OO client server applications. That factory-oriented view — just deliver a low per-unit cost (analogous to "cost per light bulb") — is creating major problems and setting the stage for the breakdown of outsourcing relationships that are R&D related.

 

What’s the right way to set up a contract for an application development project?

The R&D portion of an application development project could be on a time-and-materials basis. The design and build could probably be on a fixed-price basis. There should also be a balanced scorecard that includes all of the dimensions for service levels individually and with the proper proportions — time to market, cost, reliability in the first 90 days of deployment, and the business benefit.

You also need to focus on relationship management issues. You can have the best metrics framework in the world, but without good relationship management, you may still end up in litigation. We have to teach people the difference between hardball negotiation before the deal is signed and a completely different kind of negotiation after the companies are "married." The negotiation tactics that most companies use to get to a signed deal can create horrible effects in the relationship after the deal is signed, especially if one party is left feeling exploited.

 

Are you talking about specific training?

Yes, after the contract is signed, there should be joint sourcing-team training on how to negotiate without damaging the relationship. Adversarial, win-lose negotiations are no longer appropriate. You need a negotiation framework that’s designed to preserve the relationship, and you need personnel who are trained in how to have difficult conversations.

The reason for this is, even if you have a decent metrics framework, that doesn’t mean you’ll agree. In fact, accurate measures might highlight huge areas of dispute. So you have to address how you talk about performance, and numbers.
You need to bring in people who understand outsourcing and are informed about organizational dynamics and relationship management, so that you have both subject-matter expertise (in IT) and knowledge about managing disputes in a productive way. One way to do this is to bring in a team that includes both IT/sourcing experts and negotiation consultants.

 

What happens after the training?

There’s no silver bullet in the relationship management arena. It’s more of a continuous process, especially since you’ll have turnover to deal with. You should have an ongoing program designed to maintain the principleds negotiation, or negotiation on the merits. Here you’re learning what’s known as interest based bargaining to create a win-win, versus win-lose. It might take the form of a periodic training program — for example, a series of onsite workshops for both the sourcing teams and the executives on both sides to aim for good outcomes where they jointly create value together, versus claiming value by one side over the other.
This will help you on two levels. First, on the project level, where these negotiations happen weekly, if not daily — on an eight-month project to develop a product the company needs to enter a market, communications are going to be daily, and those people are often in conflict. Second, at the executive level, where they are making contractual commitments between the large entities.

What you’re dealing with in this type of partnering is a fundamental shift in power that requires constant attention. If you do it well, both sides win; if you do it poorly, both sides can be damaged. And the financial cost of two damaged parties in a large-scale outsourcing relationship is staggering. Not only in litigation, but in lost opportunity and bad publicity.

Think about it —two partners who manage this well are going to be at a tremendous market advantage over two partners whose energy is being sapped by internal conflict. In the former scenario, both companies are focused on common problems in the marketplace, working as a team to focus on respective core competencies, bringing their gifts to the table, and aligning their skills and talents in ways that are mutually reinforcing. In the second scenario, you have people losing sight of solving problems and directing their energies at each other with tension and outright hostility, while the marketplace blows by them. The combination of relationship management, metrics, and good dispute resolution is really a competitive weapon.