Late last year, Ventoro released it’s report on the success of outsourcing (“Offshore 2005 Research: Preliminary Findings and Conclusions“, also reported and summarized in CIOInsight, “Offshore Outsource Savings Can Be Elusive, Survey Shows“, by John Pallatto [July 15, 2005]). In their survey of over 5,000 executives across the world, they found that over half of all offshore outsourcing projects did not save money. In fact, 28% actually cost more than not having outsourced.
IT Cortex had about that number of IT projects failing in their review of the literature from a couple of years back. Most IT projects, whether insourced or outsourced, fail to meet their customers’ expectations. The Ventoro study didn’t limit itself to IT , though. Still, one would imagine that IT related outsourcing would make up a large part of it.
One the biggest problems facing outsourcing projects stems from the cost savings themselves. Most companies determine the size and level of a project or work by its cost. They don’t assign work based upon its strategic value or – following Dr. Elliott Jaques and Lord Wilfred Brown in their ideas of requisite organizations – on a measure of complexity. They simply assign it based on cost. Let’s look at what this does for outsourcing work.
Imagine that a particular project was estimated to cost $700,00 if done in-house. That’s about the size project that should be assigned to Mary. The outsourcer representative says that they can cut costs by 40%. The managers see this and determine that if they send the project to the outsourcer, the project would be a $400k project. Now they can assign it to Bob, Mary’s subordinate. But what changed? The project is still the same work, and in fact is even more complex because they have added the layer of international divides: time, culture and space. Jaques would have argued that only the level of complexity (measured by the longest task necessary to fullfill the role of “Project Manager”) should determine who manages it.
Unfortunately for the outsourcer, they now have a guy managing them on the client side who is one size too small to run the project. He’ll not be able to see the big picture and will start micromanaging the work, forcing bizarre limitations, or continually harassing the workers. The project then fails to meet its cost-savings, if it even completes successfully at all. (Normally, Bob will fail, the company will find a new outsourcer to save the work, and it will be managed by Mary since the project has now become “high visibility”.)
Who was at fault here? The company shouldn’t have been so stupid as to put a guy too small for the job in charge. But the outsourcer should have seen this coming and done something to head it off, including the willingness to walk away from the work if the client manager isn’t sufficiently big enough in size and role to do the job properly.
To be honest, I’m surprised that any of these outsourcing projects actually saves money. The way that IT in India do it is to force incredibly strong requirements gathering processes onto the client, who must completely specify the work to be done. There is very little room for the continuous changes that most companies prefer to do, which is why so much of the work sent to India is low level. It doesn’t have to be: there are some brilliant companies in India who can do amazing work, competitive with the best anywhere, including North America. But because they started with doing Y2K work, the majority of programming houses in India bottom feed on cost, not quality.
It’s also interesting that a large percentage of the CEOs said that they outsource to get better quality. I’ll discuss why that’s true in a later article.
Update: Besides cleverly correcting the misspelling of “Outsourcing” in the title, I have received a note from Mr. Hatch of Ventoro thanking me for the post, a pleasant surprise.