Outsourcing success needs alignment with your Offshore partner

Outsourcing software development and maintenance to offshore locations has been ongoing for decades. Early adopters were global multi-national corporations, who worked with selected vendors or set up their own captive Global Capability Centers (GCCs). The complexities and overhead of managing offshore development meant that historically only larger corporations were able to benefit from it. However, in recent years, especially with the pandemic induced drive to digitize, a growing number of small & medium businesses are working with offshore IT vendors to execute their digital ambitions.

While offshore software development is generally a mature industry, a surprisingly large number of outsourced projects still experience challenges in terms of time and budget overruns, or poor quality delivered. If your organization is considering, or relatively new to offshore outsourcing, it’s important to realize that ensuring the success of these initiatives is an ongoing effort. Initial vendor selection is a key component of course, but it’s also crucial that your outsourcing partnership is built on a foundation of aligned goals, objectives & incentives, that ensure both parties are working towards common outcomes.

Building a successful outsourcing partnership takes work, and here are some key areas to consider when setting up an offshore outsourcing engagement.

An Appropriate Contract Model

Having the right pricing model in place is more important than it seems. There is no “one size fits all” model of course. Some key factors to consider are the nature of the work, the timelines, the vendor’s capability and the client’s own maturity in offshoring.

Consider the popular Fixed-Price (FP) Model. FP models are best used for projects with extremely clear and well-defined scope. This approach can protect against budgetary surprises, but if you expect your vendor to invest in research or to contribute in terms of innovation, then this is not the best model, as there is no incentive for the vendor to deviate from the basics. This approach is also a poor fit for projects that are highly focused on time to market, as it restricts the agility needed to successfully deliver in such situations. FP pricing models tend to be preferred by purchasing departments, and may often be presented as the best approach when negotiating an offshore vendor contract. Our opinion is that using FP models as a blanket approach may be counterproductive.

Instead, you should take a close look at what your project needs to succeed, and consider if a Time and Materials (T&M) Model is a better fit. T&M projects can be delivered successfully without exceeding costs, but it requires management maturity and effective risk management by both the client’s and vendor’s teams. Some variations on the T&M model are T&M with a not-to-exceed budget cap (NTE) or T&M with milestone based payments. Properly managed, an appropriate T&M model helps improve transparency and agility, and aligns incentives ensuring that both parties are committed to the project’s success.

Whatever the model, ensure that there are objective mechanisms for risk monitoring and risk management. Putting an appropriate delivery assurance mechanism in place ensures that risks are identified early and managed proactively.

An incentive model aligned to objectives

The classic management advice on incentives emphasizes that they should be aligned with the desired outcomes and behaviors. However, as any experienced manager knows, implementing this principle is often easier said than done. The challenge lies in accurately measuring the work being performed and clearly defining what success looks like. For strategic projects and critical initiatives, it is essential to dedicate time and effort to establish appropriate incentives and penalties for vendors.

This involves setting clear, measurable targets for both time and quality. For instance, project milestones should be well-defined, with specific deadlines and quality standards that need to be met. Incentives, such as bonuses, should be linked to the vendor’s ability to meet or exceed these targets. Conversely, some degree of penalties should also be put in place for failures to meet agreed-upon standards or deadlines, ensuring that the vendor’s management and resources remain focused on delivering the desired outcomes.

Thoughtful and well-structured incentives and penalties can significantly enhance the likelihood of project success, benefiting both your organization and your vendors. However regular review and feedback mechanisms are needed to adjust and refine these incentives over time, ensuring they remain relevant and effective.

Continuous alignment of expectations

Successfully delivering on an outsourced project requires two organizations to work together effectively, managing differences in operating culture, time zones, languages and sometimes even on-the-ground objectives, while staying focused on the long term objective.
To achieve success, management on both sides needs to work on keeping expectations communicated & aligned. While the contract tends to list out the high level scope and commercial expectations, it is only one part of the story. Unstated expectations exist on both sides of the relationship and if an effort is not made to understand and address these, the project can run into execution challenges. Expectation gaps can exist not just in terms of the client’s expectation of the vendor, but the vendor’s own expectations in terms of the client’s planning, priorities, responsiveness etc. Given the inherent power asymmetry in a client-vendor relationship, such issues often do not get called out clearly, and it’s the responsibility of key stakeholders to ensure these are addressed in an objective and constructive manner.

Focus on a long term relationship

If offshore outsourcing is a path that you are taking, investing the effort to build a long term vendor relationship will pay big dividends. Like any relationship, it takes commitment and work on both sides. You need frequent and frank communication, with an openness to take feedback and improvement suggestions on both sides. With careful planning and a focus on delivery assurance and execution, you can develop the partnership to share a unified vision, where the vendor becomes a trusted extension of your organization, with both parties working towards the same goals, driving sustained business benefits and competitive advantage.