In a widely cited report1, the Gartner IT consulting

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1 C O V E R F E A T U R E Successfully Outsourcing Embedded Software Development Joseph W. Rottman University of Missouri-St. Louis A large US company successfully outsources embedded software development after applying people- and project-focused practices developed from a prior failed attempt. In a widely cited report1, the Gartner IT consulting firm estimates a 50 percent failure rate for offshore outsourcing initiatives. In another study, IT projects sourced offshore received a 33 percent satisfaction level. 2 Despite this dismal news, the Meta Group IT consulting firm forecasts that the annual offshore outsourcing rate will continue to grow at 20 percent, reaching $10 billion in Why are US firms willing to face such risks to exploit the perceived benefits of outsourcing to remote locations such as India and China? A large US company, not discouraged by its first failed attempt at offshore outsourcing, capitalized on that experience to build a global development model designed to improve quality, shorten cycle time, and decrease development costs. The company s first failed attempt exceeded project budgets, decreased software quality, and left projects unfinished. In its second offshore attempt, however, development costs decreased 10 to 15 percent compared to onshore costs, large government-mandated regulatory projects completed in less time, and internal IT staff morale increased. RESEARCH METHOD A Fortune 100 manufacturer of industrial equipment with more than 75,000 employees in 20 countries referred to here as Universal Industrial Consortium (UIC) participated with 30 other US firms in a US outsourcing study. 3 In the study, 13 Fortune 500 firms, two privately held firms, three offshore intermediaries, seven law firms specializing in offshore outsourcing contracts, and eight offshore providers participated in more than 120 interviews in the US, Canada, and India. Despite dis- playing the greatest strategic use of offshore outsourcing among the 15 US companies studied in this project, UIC still suffered setbacks in its first offshore endeavor. UIC s successful outsourcing practices are built upon its Six Sigma certified Software Center of Excellence. More than eight hours of interviews were conducted with SCE members, including the engineering supervisor a Six Sigma black belt and the manager. Additionally, members of UIC s largest offshore partner participated in 10 hours of interviews in Bangalore, India, to provide the vendor s point of view. Participants included the vice president of outsourcing solutions, the associate vice president of the delivery center, the group project manager, senior project managers, and the delivery team members partnering with the SCE at UIC. UIC S OFFSHORE EXPERIENCE The SCE at UIC employs a staff of approximately 150 and has an annual IT development budget of roughly $32 million. SCE members develop and deploy embedded software systems that are highly integrated into the manufacturing and operation of UIC s core products. The SCE embarked on its offshore venture in late 2000 with the hope of exploiting the significantly lower development costs available overseas. With few goals other than to cut costs, the SCE selected small projects for its offshore engagements. One of its first forays a small pilot employing two offshore employees sought to integrate a new GPS steering system into one of its larger product lines. UIC partnered with a large Indian vendor and automatically placed all employees offshore to take the greatest advantage of the labor rates. It tasked the offshore /06/$ IEEE Published by the IEEE Computer Society January

2 vendor with the design and creation of embedded software to control the steering systems and interface with the GPS satellites. The project required new software tools, interface systems, and processes for both the SCE and vendor. In the end, this project failed to produce any deliverables and was ultimately completed in-house, well behind schedule, and over budget. The GPS project proved typical of the many failures UIC encountered. The extensive rework necessary to correct inaccurate and incomplete applications, the failure to meet project deadlines, and budget overuns disappointed business sponsors of the outsourcing effort. Looking back, the SCE manager and his staff underestimated the need for extensive transferring of domain knowledge surrounding product, process, and market as well as expertise in managing an offshore project. According to the engineering supervisor, It didn t succeed. We would get something back and it didn t do what we wanted it to do and we would have to redo the whole thing. We weren t very good at being outsourcers and the model of throwing a document over the wall and having a supplier magically give us what we want in the end didn t work. Hourly onshore costs are typically three to four times higher than offshore rates. Despite its failures, UIC saw promise in some aspects of the overseas engagements. For example, as offshore employees became more experienced with embedded software and how UIC interacts with business units, the quality of code improved and turnaround time shortened. These improvements, coupled with the SCE staff s increased confidence in their abilities to manage remote employees, helped them convey a sense of optimism about the offshore venture to senior management. Using the lessons it learned, the SCE relaunched its offshore effort in January UIC put forth a more measured, carefully thought-out second attempt, as its project selection and knowledge transfer showed. The SCE selected projects that presented well-defined deliverables, utilized familiar SCE tools and skills, and consisted of tasks in which vendors had expertise. Realizing the critical importance of the knowledge transfer process for embedded software development, SCE structured the engagements so that most of the offshore vendor s employees could spend time onsite at UIC prior to working on the outsourced projects. The initial outsourcing effort showed UIC that it needed to spend considerably more time and resources on knowledge transfer. Creating embedded software requires a specialized skill set and manufacturing domain knowledge. In addition to normal coding abilities, embedded software development requires skills not readily available in the offshore workforce. Inherent in the successful creation of embedded software is an intricate and detailed knowledge of the equipment that houses and interacts with the software. Embedded software differs from traditional software in that it resides not only in industrial equipment but in common, everyday objects like thermostats, cell phones, and cars. It is integral to any device that must interact with its environment. The rules for traditional software do not apply to embedded software where speed, power consumption, and interfacing with the specific device are paramount. In its first offshore outsourcing attempt, UIC had underestimated the necessity of knowledge transfer. Miscalculating the need for software developers to understand the intricacies of its equipment and manufacturing processes was a primary reason why the majority of the initial projects failed to deliver on time or on budget and even failed to create executable applications. According to UIC s SCE manager, We had to realize that our Indian vendors did not understand embedded software or even the equipment we manufacture. They didn t even know what our product looked like! Considering the extensive knowledge transfer and training issues associated with outsourcing embedded software development, UIC identified the risks of employee turnover and the need to ensure continuity of service. To mitigate this predicament, UIC overlapped the onshore presence of key personnel. Initially, UIC architects and project leads trained the vendor s leads, who would then typically remain onsite at UIC for six to 18 months. However, hourly onshore costs are typically three to four times higher than offshore rates, and the labor arbitrage deteriorates over time as the employees remain onsite. UIC sought to have 80 percent of vendor employees offshore and to outsource no more than 30 percent of development. However, migrating the trained vendor employees to train other offshore employees created an onsite knowledge vacuum and severed many professional and personal relationships. To address this issue, UIC overlapped the tenures of the vendor s new onsite resource with the existing one for at least three months. Although a monetarily expensive approach, this let the two onsite employees establish common frames of reference, and let the existing employee acquaint the new employee with professional contacts. Additionally, the new employee would be trained by the experienced vendor employee, freeing up UIC s 56 Computer

3 Table 1. UIC s offshore practices. People-focused practices Communicate the offshore strategy to all employees to reduce job loss anxiety Utilize offshore vendors to alleviate the backlogs and free up internal employees for higher-level tasks Train offshore employees as if they were internal employees Overlap onshore project teams to facilitate project- and firm-based knowledge transfer Integrate offshore employees fully into the development team Understand and manage your firm s talent pipeline Vendor- and project-focused practices Manage the project s tasks and milestones more closely than domestically sourced projects Protect intellectual property by unitizing projects into segments Diversify the supplier portfolio to minimize risk and maximize competition Visit the offshore vendor and project teams to understand the offshore environment architects and project leads to engage in higher-level activities. Once more experienced employees migrate offshore, they can then transfer the knowledge to other offshore employees, capitalizing on and expanding the onsite learning. UIC s vendor selection and engagement process also differed in the second round. The failed first attempt showed UIC that establishing a long-term plan with the offshore vendors was integral, while communication was critical during the engagement s due-diligence phase. Specifically, SCE members targeted firms willing to begin the process slowly, knowing that they would need to invest heavily in the knowledge transfer process to ensure success. In the second effort, UIC selected two large Indian suppliers as well as a boutique firm that had previous involvement with embedded software. This proved to be a critical success factor that had been overlooked in the first attempt. The three vendors provided services representing approximately $3.4 million, or 10 percent of SCE s annual budget. The vendors provided about 15 staff members onsite and 35 offsite. The dollar value and personnel have increased in all three engagements. CASE ANALYSIS AND LESSONS The lessons did not come easily or quickly to UIC. According to the SCE manager, The first time we did this (utilize offshore development teams), we thought we could throw the requirements over the ocean and good code would come back. It was a terrible mistake and looking back we really didn t understand our own processes. We had to rethink our entire development process and analyze how we train our own people, how we manage the development process and how we actually develop code. Table 1 shows the 10 practices broadly grouped into personnel-focused tasks and those related to vendors and projects responsible for UIC s success in its second outsourcing attempt. While some overlap obviously exists between the people engaged in the tasks and the individual projects, this grouping helped UIC look at offshore differently than an internally developed application. PEOPLE-FOCUSED PRACTICES UIC understood that to avoid a second offshore outsourcing failure it must implement structured, peoplefocused practices that involved different approaches to communication, training, and staffing strategies. Communication to internal employees The press is rife with accounts of how outsourcing IT development costs people jobs and destroys US software industry innovations. Considering this vitriolic atmosphere, many companies in our study were reluctant to communicate any plans for offshore outsourcing. For example, a Fortune 100 financial services firm did not communicate any of its offshore plans to its employees prior to initiation. The IT staff was shocked to find 15 Indian programmers working in cubicles in their office one Monday morning. The anger and resentment created by this approach was so severe that the CIO had to hold a town-hall-type meeting to explain the strategy and combat the resentment and sabotage caused by the sudden change and lack of communication. To contend with the heated national atmosphere and alleviate fears, UIC deliberately and openly communicated with the development staff regarding outsourcing. Its message was met with more acceptance than others because UIC did not plan to eliminate existing IT jobs, but simply to alleviate its immense backlog. SCE s internal staff responded to the plans to explore offshore outsourcing with optimism and relief. Facing a three-year backlog and a sluggish staffing forecast, employees welcomed the possibility of a decreased workload. According to the SCE manager, My people were tired of working 60-hour weeks. We communicated that offshore was a way to better manage January

4 our project pipeline. Since we were not going to add a bunch of expensive North American resources to meet the demand and then lay them off later, we had to find other ways to add flexibility to our workforce. And so they are not worried about losing their job. They just see this as a way of getting back to some kind of normal 40- to 50-hour workweek, and even more importantly, as a way for them to move up in their level of responsibility. Communicating the goal of utilizing offshore outsourcing as a way to manage the application backlog and not reduce the workforce helped internal development staff understand UIC s goals and how they would impact their own careers and employment. Offshore vendor utilization Many companies use offshore outsourcing to do more with less, not to eliminate jobs. Since 2000, IT operating budgets have remained stagnant, and the percentage of capital spending on IT at our case companies dropped from 50 to 10 percent. The demand for IT services, however, has continued to escalate, causing CIOs to try to increase productivity. Offshore outsourcing, with its seductive labor rates, was an easy sell to these organizations. With its application development backlog, as well as its internal employees preoccupied with low-level tasks, UIC viewed offshoring as the way not only to reduce the excess workload but also to free up its junior staff to learn new skills and be exposed to and take on more responsibilities. Once the offshore engagement was under way and the offshore resources trained, UIC could unload the routine and well-defined tasks onto its offshore vendors and, at the same time, enhance the knowledge base and growth potential of its internal employees. However, UIC had to learn to design the offshore training so that the offshore employees could quickly perform the same tasks with the same speed and quality as internal staff. Training offshore vendor employees Intellectual property protection concerns prevent most CIOs from co-training internal employees with external supplier employees. Besides, the law requires US companies to treat outside employees differently for example, contractors are not invited to all company functions. UIC, however, had little choice. It had to train overseas employees as internal staff to facilitate offshore sourcing. The SCE realized that to effectively utilize offshore resources, the vendors must profoundly understand the internal functions of both the manufacturing equipment and UIC itself. For the vendors to gain such Many companies use offshore outsourcing to do more with less, not to eliminate jobs. knowledge, vendor employees had to undergo the same training as UIC s internal employees. To bring the vendor up to speed on developing embedded software, UIC created a system of vendor-targeted classes that mirrored its internal training sessions. In the second outsourcing attempt, UIC gave the offshore employees facility tours, a new-employee orientation, and courses on engine architecture, production software, and equipment simulation products. It also introduced offshore employees to the overall issues lists, team members roles and responsibilities within and outside the specific areas where they were to be assigned, operating guides for various lines of equipment, quality assurance processes, and all the various manufacturing products and platforms. UIC also familiarized them with various software development tools, the development environment, and embedded development tools. Instructors taught onsite vendor employees these classes in person. For the overseas employees, UIC videotaped how equipment such as electronic-control units function, recorded the training sessions, and streamed them offshore via video. UIC realized, however, that such extensive knowledge transfer carried a considerable risk. A mechanism must be put in place not only to protect the information, UIC s internal processes, and embedded software, but also to reduce the risk of repeating the expensive process in effort, time, and money to educate each offshore developer placed on the project. Overlapping onshore teams In large-scale outsourcing, knowledge transfer frequently occurs by transitioning domain expertise from the client to the supplier. Indeed, most large IT suppliers like Electronic Data Systems and IBM grew through the transition of employees from client organizations. These transitioned employees serve as the organizational memory as they are trained and oriented to the client s processes and culture. But offshore outsourcing differs in that client employees do not transition to the supplier. Thus, knowledge transfer poses a significant impediment. To address this issue, UIC created a process to help ease the knowledge transfer phase and maintain continuity of service with the business units. One of UIC s largest suppliers maintains both program and project managers onsite, depending on the current need level. These managers are key to the engagement s success because they serve as liaisons between the vendor s developers and UIC employees both business units and IT developers. These liaisons receive considerable training and mentoring from UIC s system architects and project leads. When the project necessitates, or when 58 Computer

5 the vendor requests that these liaisons change roles, UIC requires that the vendor overlap their tenures with that of their replacements. This three- to six-month overlap has two major benefits. First, the knowledge transfer occurs predominately between the vendor employees, thus not interfering with the workload of UIC s own architects and leads. Second, the original liaison can introduce their replacement to UIC s business units and IT staff, helping to maintain the social contacts and relationships created during the engagement. Integrating the offshore employees Many firms find integrating vendor employees into their firm s culture and social systems difficult. Our research shows that employees often view offshore vendors with fear and even contempt. For example, the program managers at a Fortune 100 firm had to squelch an flame war between offshore database administrators and the business units, who would have never engaged in such unprofessional behavior with internal employees. The staff didn t feel any connection with the vendor employees. UIC made a concerted effort to encourage and facilitate integration, beyond simple training or knowledge transfer, between internal and external employees. The integration helped to create a team atmosphere that endured even after the vendor employees transferred offshore. According to the SCE manager, We value diversity and try to encourage it, and we try not to build walls among the people who are here to foster the building of those relationships. We make sure that the vendor s employees are invited to birthday parties and happy hours. It helps for the teams to come together. This effort to build relationships between internal and vendor employees has paid off tremendously at UIC. The line between us and them has blurred, and UIC employees view the vendor employees both onsite and offshore as fellow team members who share in the projects successes and challenges. According to the group project manager of a UIC Indian vendor, Of all of our embedded systems clients, UIC has worked the hardest to make our employees feel very much part of the team at UIC. Our C-Sat (customer satisfaction ratings) from UIC show the value of this integration. Our employees have internalized the mission and values of UIC. It is a highly coveted assignment to work on the UIC account. Offshore outsourcing presents considerable challenges to promoting the talent pipeline. Understanding and managing the talent pipeline IT workforce development has become a leading issue facing US CIOs today. A Society of Information Management survey of CIOs cited attracting, developing, and retaining IT professionals as the second most important issue facing IS executives in In response, the SIM advocacy group is conducting research on managing IT workforce development. Staffing challenges compound when US companies outsource IT work internationally while baby boomer retirements cause IT shortages domestically. Additionally, with IT enrollment in US and European universities declining, US CIOs are concerned about where to find the next generation of project managers and subject-matter experts. Offshore outsourcing presents considerable challenges to promoting the talent pipeline. If companies assign the lower-level tasks that help junior personnel gain skills and expertise to vendor employees, there will be a lack of experienced junior staff to promote from within to higher-level positions. To address this concern, UIC analyzed its future personnel needs and incorporated them into its sourcing strategies. In particular, UIC places significant value on grooming its IT architects and project leads internally and rewarding experience and loyalty. By understanding employee advancement within the SCE s talent pipeline, UIC can better communicate its outsourcing strategy to internal employees and maintain flexibility to match uneven demand. Accurately forecasting future workforce demands requires significant knowledge of past human resources trends as well as current staffing constraints. To manage this process, UIC created an intricate staffing model that incorporates current and past project staffing data, internal talent pool information, and projected demand. The system s rules integrate 10 years of staffing history within the SCE and allow significant flexibility. PROJECT-FOCUSED PRACTICES Improved staffing techniques and project management practices contributed most to UIC s achievements in its second outsourcing attempt. Managing projects closely While the salary differential between India and the US is well-known, increased transaction costs considerably higher in offshore sourcing can quickly erode any savings. A recent study that highlighted research from the Meta Group, Gartner, and Renedis stated that offshore outsourcing transaction costs range from 15.2 to 57 percent of contract value. 5 These increases in costs January

6 can be found in productivity loss, infrastructure improvements required to facilitate collaboration between secure systems, and layoffs and retention. In contrast, domestic outsourcing transaction costs range between 4 and 10 percent of contract value. 6 Effective project management can mitigate these risks. UIC created a two-pronged strategy to manage offshore projects, the creation of small tasks to be sourced, and the close monitoring and comparison of internal with external development costs. The first part of the strategy unitized the tasks to be sourced. These smaller tasks typically last five to seven business days and have clearly defined objectives and requirements. Their statements of work are appended to the master service level agreements UIC establishes with its vendors. The segmentation of larger projects into smaller components let UIC control all associated costs and closely manage deliverables and milestones. While this strategy incurs considerable transactional overhead, the SCE manager claims such strict monitoring has more than recouped the transaction costs. By using this outtasking approach, which constitutes over half its outsourced work, UIC can also make direct comparisons between offshore and internal teams the second part of its management strategy, tracking the internal team s cost per task with the vendor s. Many firms cannot compare these costs because they lack internal metrics. Reliance on a single vendor presents significant operational and strategic risks. Protecting intellectual property Recently, reports of sensitive data being stolen or purchased from Indian business process outsourcing vendors have caused increased concern about offshore data security ( To increase safety measures, many Indian vendors create security areas that require a badge and work-related need to gain access. Vendors also have created clean desk policies that control the documents or screens that each user can view. UIC s outtasking strategy is another measure that helped secure its intellectual property. Outsourcing embedded software development represents a significant risk of IP loss. This risk arises from the tight integration of the software being developed and the machinery it controls. UIC s competitive advantage depends on its products performance. While strong legal agreements and even stronger market forces exist to prevent wrongful IP disclosure, UIC further protects its intellectual property by outtasking. It views its IP as a jigsaw puzzle that, when broken into small pieces and distributed among vendors, will be impossible to reassemble. UIC distributes the outsourced work between three vendors and carefully monitors the tasks to effectively distribute the intellectual property. Diversify the supplier portfolio Reliance on a single vendor presents significant operational and strategic risks, including loss of competitive rates, reduced market awareness, and a high concentration of IP within one source. While maintaining engagements with multiple vendors does entail additional transaction costs and management overhead, it successfully mitigates many risks associated with outsourcing. 7 UIC applied a multisourcing model to diversify its vendor portfolio by maintaining active engagements with two large Indian firms that have already demonstrated expertise in the embedded software market primarily in the automotive industry and a small boutique firm that specializes in embedded software development in the manufacturing market. UIC used a preferred supplier approach to various components under production. The existing vendors know when they bid on projects that although UIC seeks to expand its engagements with them, it also demands the most competitive rates. Visit the offshore vendor The final lesson UIC learned in successfully outsourcing embedded software development is to visit the offshore development team. While this might seem obvious, often the costs in money, time, and health concerns prevent US managers from visiting their Indian vendors in one case, for more than two years. When the SCE manager finally traveled to Bangalore, India, to meet with the team, he realized the value of the trip. I can t believe I waited two years to meet the people I have been only ing and seeing in video conferences! I now have faces, and, more importantly, personalities, to go with names and titles. Despite a rough beginning, the 10 practices detailed here have helped UIC create an offshore development strategy that produces embedded software at a lower cost while maintaining quality. These lessons show how both the people involved in offshore projects and the projects themselves must be treated differently from internally developed projects. Even with the high complexities and intellectual property concerns surrounding embedded software development, UIC has used these practices to establish processes that ensure successful delivery and protection of UIC s intellectual property. 60 Computer

7 References 1. A. McCue, Outsourcing Flops Blamed on Tunnel Vision, ZDNet News, 22 June 2005; 2. W.R. King, Developing a Sourcing Strategy for IS: A Behavioral Decision Process and Framework, IEEE Trans. Eng. Management, Feb. 2001, pp J. Rottman and M. Lacity, Twenty Practices for Offshore Sourcing, MIS Quarterly Executive, Sept. 2004, pp J. Luftman, Key Issues for IT Executives 2004, MIS Quarterly Executive, vol. 4, no. 2, 2005, pp S. Overby, The Hidden Costs of Offshore Outsourcing, CIO Magazine, 1 Sept. 2003; /money.html. 6. M. Lacity and L. Willcocks, Global IT Outsourcing, Wiley, M. Lacity, Lessons in Global Information Technology Sourcing, Computer, Aug. 2002, pp Joseph W. Rottman is an assistant professor of information systems in the College of Business Administration at the University of Missouri-St. Louis. His research interests include offshore outsourcing, technology acceptance, diffusion of information systems, and systems analysis and design. Rottman received a DSc in information management from Washington University in St. Louis. Contact him at Rottman@umsl.edu. IEEE Pervasive Computing delivers the latest peer-reviewed developments in pervasive, mobile, and ubiquitous computing to developers, researchers, and educators who want to keep abreast of rapid technology change. With content that s accessible and useful today, this publication acts as a catalyst for progress in this emerging field, bringing together the leading experts in such areas as Hardware technologies Software infrastructure Sensing and interaction with the physical world Graceful integration of human users Systems considerations, including scalability, security, and privacy F E AT U R I N G IN 2005 Energy Harvesting & Conservation The Smart Phone Pervasive Computing in Sports Rapid Prototyping Subscribe Now! V I S I T January