Outsourcing. A Paper by SQA. Contributors: Revision 0.13 September 15, John J DeMassi Tony Troppito Ann Danby Paul German

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1 Outsourcing A Paper by SQA Revision 0.13 September 15, 2004 Contributors: John J DeMassi Tony Troppito Ann Danby Paul German The purpose of this paper is to shed light on outsourcing as a potential solution to IT organization and project challenges. This paper describes outsourcing s challenges and advantages. Copyright 2004 Software Quality Associates, LLC The information contained in this document is provided for the use of our clients and associates. You have permission to reuse this material provided it is accompanied by the following attribution: Outsourcing, Tony Troppito, John DeMassi, Ann Danby, Paul German, Software Quality Associates, August 2004

2 Introduction Outsourcing has always been an important option for the development of software products and services. Geopolitical changes abroad and economic necessities at home merged in the 1990 s to facilitate an explosive growth in the use of outsourced technical resources for the development of software. In the late 90s this trend came to full fruition as companies found it hard to engage technical resources to fuel their development organizations; later the economic downturn drove many companies to seek less expensive alternatives to U.S.-based technical workforces. The shortage of skilled technical labor in the mid 90s initially fueled the use of US and European outsourced development and quality assurance Professional Services Organizations. This trend made it acceptable for corporations to rely on outsourced, or contracted, teams for implementation and management of their technology infrastructure. Later the economic downturn combined with a rapid increase in the number of well educated, resourceful and ambitious people residing in or emanating outside the classic North American and European high tech markets. Through this combination of factors it became acceptable, and at times preferable, to take advantage of outsourced professionals. Through outsourcing, companies could take advantage of highly skilled labor on an as needed basis without incurring carrying costs when those skills were not needed. The lower per worker costs of offshore resources helped fuel the outsourcing of technology infrastructure to teams located outside of the U.S. History Outsourcing, off-shore or on-shore, is not a new phenomenon. Outsourcing has been occurring in the manufacturing sector for many years. In fact whole economies have been built, and processes perfected in the Asian countries, beginning with Japan for manufactured goods and later followed by the move of high tech manufacturing to Taiwan in the 1980s. However, initial manufacturing outsourcing had its problems. Anyone who can remember the 1950 and early 60s recalls when Made in Japan was synonymous with cheap and poor quality Never-the-less, throughout the 1970s and 80s Japanese production costs remained dramatically below U.S. costs while the quality increased, eventually equaling or exceeding those of their U.S. counterparts. Manufacturing quality standards were written by people whose experiences in the field came from the rebuilding of Japan from the 1940 s through the 1970 s. After Japan, a string of other countries added their resource pools to the market, each in turn contributing to keeping manufacturing costs low. The movement of computer hardware manufacturing to lower cost offshore facilities reinforced the technical communities in those countries. The expansion of worldwide consumption of computer solutions further generated demand for local technology experts for the development, installation, support and maintenance of localized solutions. By the 1990s the growth in computer related education and training provided today s hot beds of Copyright 2004 Software Quality Associates, LLC Page 2 of 14

3 manufacturing and IT including such places as India, Korea, Singapore, Malaysia, Philippine Islands, Taiwan, China and Eastern Europe. Throughout the 1990s, the Asian Pacific countries increasingly produced larger numbers of skilled technology workers. In the early and mid 90s these people relocated to the U.S. and Europe to apply their skills and knowledge. With the advent of the Internet and advances in communication technology, companies leveraged these people to further develop and broadened relationships between European/U.S. technology companies and the growing non- Euro-American technical population. By the mid 1990s, it was not uncommon for Asian companies to market their less expensive resource pool to U.S. companies; usually by moving the workers into the U.S. for short periods of time to accomplish specific projects. At the same time many companies in the U.S. and Europe invested in the facilities and infrastructure to create remote development centers. The relationships, technologies and infrastructure grew exponentially through the Internet boom. Today, more and more companies are actively seeking the promise of abundant resources, access to specific skills, and lower costs associated with IT Outsourcing. In today s economy, India, China, and Eastern Europe have become the new factories for IT Outsourcing professionals. The Outsourcing need The recession during the first few years of the new millennium saw high tech companies downsize, right size, reengineer, lay-off, and restructure more people and roles than at anytime in U.S. history. Small companies that still exist and large companies that have trimmed their fat are looking to keep the cost of employees down after paying the higher salaries demanded during the technical resource shortage just prior to the recession. During the recession many companies trimmed development to the point of only being able to maintain their systems. Now, as the economy strengthens, these companies are at that allimportant time where they must decide to build or buy when it comes to expanding their technology investment. Building teams that are cohesive units can be a large daunting task for the remaining management team. For many managers, outsourcing has become the preferred alternative to building and maintaining an in-house IT group. The expectation is that it will be cheaper and less management intensive to outsource new development, and eventually, maintenance of existing systems, to other companies and countries. However, without the proper research, negotiation, communication, and project infrastructure, ROI may not be demonstrated and may in fact be a net loss. When and why should a company consider outsourcing? When should you start thinking about outsourcing? That is an easy question. You should always be evaluating the potential costs and benefits of outsourcing. That is not to say that cost alone or ease of management should influence your decision to outsource. However, outsourcing Copyright 2004 Software Quality Associates, LLC Page 3 of 14

4 should form one of your options as you evaluate the alternatives for accomplishing the corporation s business and IT goals. Why is it so important to consider outsourcing? In the August 15, 2003 issue of CIO magazine, (see Stephanie Overby writes in her article titled In or Out?, Many of this year's CIO 100 honorees cited sourcing choices as part of their overall portfolio of resourceful practices. Some employ traditional infrastructure outsourcing while others send application development work as far away as China. Some are bringing IT work back in-house, while others are turning to ASPs. Most are utilizing a combination of inhouse and outside sourcing options to successfully meet business demands. Outsourcing is primarily being done to save money while taking advantage of skills not found in abundant supply inside the company. Maintaining the competitive edge, staying ahead of the curve, and positioning ourselves for a successful run are all buzz phrases that boil down to controlling costs while increasing skills. It is generally accepted that when done right, offshore outsourcing provides cost savings through the reduction of salary and infrastructure related costs. However, even U.S. based outsourcing can save costs when it is used to provide resources only when they are needed. In either case savings can also be realized when the outsource supplier is used to provide very senior resources or domain experts for a bounded period of time. This allows the hiring organization to avoid employing specialized resources, with salary and infrastructure costs that continue after the real need for the resources comes to an end. Considerations before starting outsourcing As with any new project, outsourcing should begin with a plan. This will help arrive at the right set of tasks to outsource and provide a basis for selecting an appropriate outsource partner. In the developing the plan, consider your company s business objectives, internal development processes, costs, project requirements, typical project risks and long term needs. If you understand the issues you face, you can use this understanding to help determine what to look for in an outsource vendor. Evaluate the strengths and weaknesses in your organization. Particularly consider the areas of process and oversight. Outsourcing a piece of a project may not be the answer if your projects suffer from process related problems. Throwing different, or more, people at the problem won t necessarily give you better results. And, if you have process problems today, outsourcing may only magnify them. Perform a financial assessment of your current costs. Understand what it takes to deliver the services and enact the existing processes. Once you baseline these costs, it becomes possible to compare prices not just among outsourcing providers but also between outsourcing versus in-house solutions. Determine what your current and future service level requirements are. If you don't already have internal service level agreements, this is a great opportunity to put them in place. Understanding the service level allows you to better specify what you expect from the Copyright 2004 Software Quality Associates, LLC Page 4 of 14

5 potential outsource partner. You can also better estimate both the costs of outsourcing and the costs not covered by outsourcing. For example, an outsource vendor may be committing to costs based on a 95 percent service level. If you are currently providing something closer to 100 percent, then either you will have to cover the difference in services or the actual cost of outsourcing will be higher than you anticipate. Consider the risks you incur by sending business processes outside. Once you outsource a process, it can be very difficult to bring it back in-house. So consider all the potential pitfalls, not just the predicted cost savings. Intangible costs, like employee morale, should also be considered. Understand the level and nature of involvement your team will have in the outsourcing of projects and processes. A successful outsource relationship will place a load on your organization. You need to understand this and ensure that your internal team understands their roles and responsibilities. It is important to understand how your team will participate in the relationship and to what level your team will understand the activities and mirror the skills of the outsource partner. Consider what happens if things go wrong. As an outsourcing relationship matures, the partners can become very reliant on each other. None-the-less, this is a business relationship. It can deteriorate at any time for any number of reasons. Having even a very preliminary transition plan can provide significant leverage and viable options if and when the outsourcing relationship needs to change. Finally, make sure that you formally revisit outsourcing decisions on a regular schedule. Prices, skill requirements and service needs change over time. The vendor s personnel and processes may also change with time. Establishing regular formal reviews of the underlying fundamentals, and the relationship, provides a means to catch problems early and make the necessary adjustments. Bringing outsourced projects back in-house It is not uncommon for a company to bring an outsourced process back in-house. This can happen when external resources are used to develop a new product or service offering and the deliverable then moves to an internal group for ongoing maintenance and support. An interesting slant on bringing back projects involves actually moving the project from one outsource provider to a different provider. Another scenario for bringing outsourced projects back takes place in those companies that have established semi-permanent outsourcing relationships. For the companies it is the natural course of business to move projects between organizations as a function of organizational strategy, centers of expertise and load leveling. For whatever the reason, just as with starting the outsourcing relationship, ending the relationship or transferring the project should start with a plan. In fact it is not a bad idea to consider return strategy as part of the original outsourcing plan. At least weigh the likelihood of bringing projects back in-house. Then use this consideration to influence the investment you make in maintaining oversight and managing knowledge transfer between the outsource provider and your team. Copyright 2004 Software Quality Associates, LLC Page 5 of 14

6 In deciding to move projects in-house review the outsource relationship, re-baseline the costs, update the service level agreements, and evaluate additional resource needs and skills. Take a good look at the existing outsourcing relationship. Keep in mind that if your organization has not remained involved in the day-to-day outsourced activities, these activities may be much harder to bring back in-house. In fact, making it easier to end an outsource relationship is a strong incentive for dedicating some level of internal resources to managing the outsource relationship and even participating in the outsource projects. Re-baseline the costs. Understand your costs in the outsourced and in-house scenarios. Add projections of future costs to these scenarios. This helps you understand how much to bring inhouse. Determine the cost of performing development, maintenance, project management, and other activities if they are brought in-house. Keep in mind the savings brought about by removing communication people and processes not necessary when the work in being done by people inside the company. Determine the additional resource needs for performing the activities in-house. Work with your existing team to evaluate the number of new people needed and their fully loaded costs. Consider the impact on employee morale of adding new or different activities into their workday. Develop a detailed timeline for transitioning activities from the vendor. While a timeline is important to any plan, it is particularly important when terminating an outsource relationship. The outsource vendor may not be enthusiastic about ending the relationship. So a detailed milestone driven timeline will help all parties focus on the tasks at hand. Finally, give yourself a cushion of outsourcing/insourcing overlap. No matter how prepared your staff is, it will take time to get up to speed. Overlap your new and old teams to ensure a proper, successful transfer. Don t underestimate the difficulty of successfully completing projects during this transition. Remember, the outsource firm consists of people, and they will not be motivated by the prospect of losing their work and possibly their jobs. Additional considerations The impact, real or perceived, of outsourcing on the jobs of existing employees can be significant. In particular, consider the impact to key employees if their jobs or sensitivities are affected by the outsource transition. These people will require special attention if you want to ensure their retention and cooperation throughout the process. In most successful outsource projects, Project Management remains in-house while one or more other aspects of IT are outsourced. This requires a different form of Project Management than that used for purely in-house projects. This difference often calls for training and new responsibilities for those who are managing the outsource efforts. A further complication is presented by the differences in managing outsourcing to U.S. professional services teams or offshore organizations. Many times an organization will outsource development and not testing or vice versa. This provides an excellent set of checks and balances in the company for work done elsewhere. It is Copyright 2004 Software Quality Associates, LLC Page 6 of 14

7 also common for companies to completely outsource projects with development and testing handled by different vendors. These separate outsource teams either report up through the company s development and quality assurance organizations respectively, or they are managed through the same in-house Project Manager. In either case, separating the testing function from the development function provides a means to ensure that product development and release issues will surface more quickly. The following graphic from Software Development Magazine provides an interesting look at resources and activities that are typically impacted by moving activities between outsource and in-house teams. The following graphic is taken from Has this Trend Sprung a Leak? an online article by Alexandra Weber Morales in Software Development magazine s January 2004 edition. The table shows the most common positions that companies are outsourcing. Source: October 2003 Software Development survey of 414 engineers and development managers working on U.S.-based projects that were partially or completely outsourced offshore. Found at: Copyright 2004 Software Quality Associates, LLC Page 7 of 14

8 Advantages of Outsourcing Test and Quality Roles Cost saving is not the only benefit of a properly managed outsource relationship. Many companies seek additional benefits such as reduced time-to-market, improved product development process, improved schedule management and predictability, and increased flexibility of staffing models. When quality assurance and testing are outsourced, companies should also be able to leverage the significant benefit that derives from having an outside organization providing insight into the development and release of products and services a kind of check and balance. Costs Quality does incur a cost. Never-the-less a comprehensive quality program can save money when reworks, customer satisfaction issues, maintenance, and support are all considered. Outsourcing is a possible mechanism for employing additional resources at lower cost to implement or extend the company s testing and quality program. These resources can be used to better define, develop, test, and QA a product or service. Companies strive to be profitable. And, Quality Assurance outsourcing is a means to obtain more work for a smaller overall expenditure of money. Reduced time-to-market Even U.S. located outsourcing can help reduce time to market when it is utilized to supply experts and skills not otherwise available inside the organization. Furthermore, in certain circumstances, U.S. outsourcing can be used to pay for resources only when they are needed. This allows a company to save money, and add additional resources as needed to a project. Another benefit derived from U.S. based outsourcing is the ability to have the test team engaged while the developers are at work. This provides for real-time interaction between the developers and testers. Outsourcing the testing to U.S. test teams reduces the cultural issues that arise when outsourcing to offshore teams. Using offshore resources helps by allowing teams on both sides of the ocean to work during their normal working hours. This helps relieve the pressure on the U.S. workforce to work extra hours. When properly managed, offshore outsourcing allows for two shifts of workers to focus on the project. Each shift produces information and deliverables that the next shift can use. A particularly effective model for is the cross-ocean outsourcing of testing for U.S. development projects. This model places some of the test team in the U.S. and some of the team offshore. The U.S. team project manages the test effort, acts as technical test liaison to the development organization, ensures that builds are working prior to engagement of the offshore team, performs testing during the U.S. day, and evaluates and replicates issues prior to involving the developers. The offshore team performs testing during the U.S. evening. Thus, nearly round-the-clock testing can take place with close integration of the development and testing organization. Copyright 2004 Software Quality Associates, LLC Page 8 of 14

9 Better Process and Delivery Predictability An important side effect of properly defining and implementing an outsourcing relationship is the improvement this relationship can bring to defining and delivering products and services. A good outsource relationship is a partnership based on well understood and contractually agreed upon Service Level Agreements (SLAs) between the parties. Well defined realistic SLAs are difficult to articulate when there is not a clearly defined and documented set of processes for the development and delivery of a product or service. It is not uncommon to see outsource professional service companies invest in developing internal and external processes for ensuring the creation and adherence to SLAs for each project they take on. This is one of the reasons so many outsource companies have created and documented proprietary approaches to development, or they utilize industry approaches like RUP, CMM, Six Sigma, etc. None-the-less, for successful outsourcing of quality assurance and testing, it is important to ensure that both partners agree to a well understood and documented set of processes. These processes should cover the full range of interaction between the partner and the processes use within each organization to meet its commitments. Some of the process areas to consider include development life cycle of the product or service, testing strategy, configuration management, and release management. Flexibility of Staff Outsourcing allows a company greater flexibility in managing its staffing needs. Managing through the hills and valleys of staffing becomes the responsibility of the outsource services provider. Issues related to retaining talent across staffing waves cannot be completely eliminated. However, the company does not need to devote nearly the level of resources and emotion to fulfilling and eliminating jobs as staffing requirements change. Outsourcing provides yet another degree of flexibility in the staffing model. Checks and Balances As mentioned earlier, placing quality assurance and testing in a different organization than development can provide you and the project team with checks and balances. Outsourcing quality assurance and testing provides an opportunity to improve the accuracy of status for the development of a product or service. In a properly structured relationship, the outsource team can be relied upon to provide objective status and information. This allows the management team to make more informed business decisions around schedules and quality. Using an outsource test team as a way to accurately monitor the project is particularly important when product development is itself outsourced. When the company decides to develop using outsource providers, it can quickly lose control of a project. Using a test team that is independent of the development team provides a third frame of reference for understanding the actual status of a project and the quality of the deliverable. - The first frame of reference is the outsource development team. The second frame of reference is the Copyright 2004 Software Quality Associates, LLC Page 9 of 14

10 company s own project management team. The company can elect to house the test team inhouse, or it can engage a separate organization to provide the outsourced testing services. The following graphic is taken from Offshore by the Numbers an online article in Software Development magazine s January 2004 edition. The table illustrates the perception held by many companies of the quality of the deliverables produced by their outsource partners. This information provides a strong argument in favor of establishing a quality assurance and testing relationship that is separate from the development partner. Source: October 2003 Software Development survey of 414 engineers and development managers working on U.S.-based projects that were partially or completely outsourced offshore. Found at: The Challenges Outsourcing is not a bed of thorn-less roses. It does present its own set of unique and diverse challenges. Some of these are described here. What to Outsource A significant issue in successful outsourcing is determining those roles that stay in-house and those roles that transition to the outsource team. For example, does project management stay in-house or does the role get outsourced? Is testing fully resident outside the company or does some level of testing remain in-house? This separation of roles has considerable impact on risk Copyright 2004 Software Quality Associates, LLC Page 10 of 14

11 management, the depth of detail in the Service Level Agreements, the nature of the outsource supplier you are working with, and - of course the overall cost of the outsourcing effort. Another interesting factor to consider in determining outsourcing is the importance of the projects and roles impacted by the project. While is not uncommon to outsource critical projects it is more common to keep the critical and most interesting projects in-house and outsource important but less critical work. This approach provides a psychological cushion to the in-house teams. They are entrusted with the most critical deliverables and the outsource team is working on the less critical and frequently less interesting work. The following graphic is taken from Offshore by the Numbers an online article in Software Development magazine s January 2004 edition Source: October 2003 Software Development survey of 414 engineers and development managers working on U.S.-based projects that were partially or completely outsourced offshore. Found at: Managing the Effort The nature, amount, and cost of management associated with outsourced projects directly relate to the Service Level Agreements and the project roles being outsourced. Outsourcing the test team may require less project management in-house than outsourcing the entire project s engineering process. Other management considerations may include generating an RFP for the outsource program, vendor selection, negotiating the contract, contract management, financial oversight, legal oversight, and auditing functions. Vendor Selection Costs The Vendor Selection process is at the heart of a successful outsource partnership. The cost of selecting the right vendor can be significant. Typically one or more senior technical people and senior managers are involved in generating the initial informal or formal plans and RFP. An important step is developing a mechanism to compare different vendors and to compare Copyright 2004 Software Quality Associates, LLC Page 11 of 14

12 vendor capabilities against your needs. One approach involves developing documented weighted criteria on service offerings and capabilities, price, management practices and procedures, customer base, and business profile and strategy. From these criteria a selection matrix can be created to capture project items that are important to you and to compare different vendors. As vendor selection proceeds and the field of possible candidates narrows, more of the company s resources may be involved in the selection process. The involvement of legal and financial personnel should not be underestimated. Travel It is important to visit the outsource vendor s facilities. For offshore projects, it is particularly important to schedule regular visits of U.S. personnel to the offshore facilities and vice versa. Whether onshore or offshore, consider that there will at least be corporate culture disconnects. And, for offshore there will be human cultural disconnects as well. These are best understood and overcome through face to face interactions. Visits to the outsource facilities make a statement that you value the relationship enough to invest time in the important areas of getting to know the people, understanding their work environment, and continuously growing your understanding of their challenges. Document the Existing Processes Understand your business processes locally before trying to align another organization with your development processes. The more these are documented, the easier it becomes to both communicate them to the outsource team and to modify them in response to the outsource relationship. If you do not have up-to-date process documentation you can assume that you will invest a significant amount of time in communicating how things work while building the relationship. You can also assume that without documented processes, the early days of the outsource relationship will be filled with misunderstanding, clarifications, and re-work. Cost of Transition The cost of transition both in terms of dollars and time can come as quite a surprise. As well as planning to spend more on travel, consider overlapping staff costs, increasing time spent in meetings, increased time spent on the telephone, and longer initial lead times on getting things started. Transition Plan Consider developing a transition plan that address the various issues discussed in this document. As a part of this plan, identify key transition milestones and their associated documentation and deliverables. Don t forget to factor in time to create and review the transition plan itself. Copyright 2004 Software Quality Associates, LLC Page 12 of 14

13 Manage Communication The role of communication its costs, and procedures can not be understated. When planning for outsourcing, take into account the need for local and remote talent to effectively manage the communication to either U.S. or offshore outsourced workers. Even if the company already performs distributed development, each outsource relationship will need its own processes to ensure clear, accurate, timely communications. Staffing Costs Besides the obvious costs of the outsourced labor, there may be costs associated with letting go of or losing in-house personnel as a result of the movement of projects to the outsource vendor. Increased numbers of project and business coordination personnel may also be required to ensure smooth operation of the outsource relationship. Manage Expectations You have to manage expectations both inside and outside your organization. This is particularly important during the startup phase of the outsource relationship. It takes time to save money and develop efficient processes. If you are involved in an offshore relationship, it may take the team time to iron out cultural differences. Prepare for Negative Reactions to Outsourcing An important risk of tackling an outsource effort is the backlash inside the company from personnel that feel the outsource effort is impacting their future by putting future opportunities or their jobs in jeopardy. This is particularly an issue if the outsourcing takes place either shortly before or after a restructuring of the company. The outsourcing cannot help but be seen as an assault on the income and careers of certain employees. When the outsourcing involves use of offshore resources the problem is compounded by the feeling that American jobs are being moved outside of the country. In extreme circumstance, this may even turn into a public issue. A particular management challenge may arise if employees drag their feet or purposely refuse to transfer knowledge to the outsource team. Companies that have weak or non-existent development standards and methodologies are particularly vulnerable to this problem. Companies will find it easier to transfer knowledge under these difficult circumstances, if they have well documented standards and methodologies that have been adhered to by the development team,. Intellectual Property Control Outsourcing to U.S. firms is fairly well understood when it comes to protecting intellectual property. A significant body of law and good examples of contracts exist to help protect a company from theft of trade secrets, abuse of patents and copyrights, and various assaults on intellectual property. However, it is less clear how a company can defend or protect itself when the abuses are committed offshore. In either case - U.S. or offshore outsourcing - it is Copyright 2004 Software Quality Associates, LLC Page 13 of 14

14 important to have frank and open discussion with your outsource vendor about how to protect your IP during the course of the relationship. It is also important to understand the outsource vendor s use of out-of-country resources. More and more, U.S. and India professional services firms are using resources in other countries to help fulfill their obligations. How can SQA help you SQA provides a full range of strategic and tactical service offerings to help clients maximize the performance and reliability of their business-critical applications and products. By optimizing our client s quality and business processes, and providing quality assurance and testing experts, we help our clients get their applications and products into production faster, more cost-effectively and with increased customer satisfaction. SQA was founded with a 100% focus on providing quality assurance services to organizations nationwide. We provide services in the following areas: 1. Business Process Assurance 2. QA/SDLC Process Optimization 3. Test Automation Excellence 4. Computer Systems Validation 5. Outsource testing Copyright 2004 Software Quality Associates, LLC Page 14 of 14