Since our company operates on a market of outsourcing services, it’s natural that we constantly think about how this market actually behaves. What are the drivers that put decision makers to outsource? What are factors that keep them away of outsourcing? What criteria define the choice of an outsourcing destination and selection of the partner? Of course, there are certain well known factors, which by far predefine the choice on the global landscape. However, being a service provider focusing on a Finnish market, we are mostly concerned about the specific behavior of Finnish CIO’s and sourcing managers. I have to admit that making empiric conclusions out of our own experience has been somewhat difficult, mainly due to often strange decision-making logic in many situations observed in practice. Many times we saw that the logic of the certain decision contradicts with quite obvious facts. One may say that own experience does not usually provide the most neutral grounds for generic conclusions. That’s why it was great to see a neutral survey focused on a Finnish market to be recently published. I’m talking about the “European IT Outsourcing Intelligence Report 2011: Finland” conducted in May-June 2011, in the frames of the All-European ITO research by IT Sourcing Europe, UK. This report is based on the survey of the 227 Finnish companies that either outsource their software development / IT functions to an external service provider, or develop their software/IT solutions in-house. At last, I can refer to an external data source when bringing some of my own thoughts public. So, further on I’ll try to mix my own observations with the key findings of that survey.
Quantity vs. quality issue
According to the survey, Finland appears to be the country of relatively small ITO contracts and small-scale projects. Well, that’s not a surprise; this fact is well in line with our own observations. But now we know it for sure: more than 80% of the survey respondents admitted having only 1 to 5 specialists in the outsourced teams. The rest of respondents have reported to use outsourced teams of less than 20 specialists. So, even the largest Finnish companies outsource in quite limited amounts. I guess Nokia was not among the respondents, but the rule seems to apply to almost all other IT-outsourcing in Finland. Anyway, the fact is that teams are really small by global measures. Sadly enough, this fact has one obvious consequence. It is hard to expect global service providers to serve Finnish customers with the highest available quality of resources. The only way to obtain high enough level of customer care is to establish a partnership with niche players. Most Finnish companies seem to realize that, since according to survey the dominant majority of Finnish outsourcers are partnering with vendors who are less than 50 employees by headcount. Moreover, vendor's global footprint and reputation as well as the level of quality certification (e.g., ISO, CMMI, etc.) are the least important factors in choice of the outsourcing partner. That is not a surprise either, since very few service providers of below 50 people in size can afford themselves matching very formal and inflexible procedures of a quality certification. However, the necessity of partnering with smaller service providers puts outsourcers in a situation when the choice has to be done based on less structured criteria. Most obvious ones among such criteria are, naturally, peer references. Indeed, according to survey, more than 85% of ITO service buyers used peer references in order to find their current ITO partner. Vendor’s direct mailing or telemarketing campaigns worked well for only 15% of Finnish ITO buyers, and slightly less than 25% did online research. Furthermore, applying less structured criteria leads to increasing risks. According to our own experience outsourcing projects too often bring a disappointment in the end, since quite frequently customers call our senior consultants to clean the mess caused by their original service provider.
Actually, our most successful customer relationship in terms of cumulative turnover has started when we’ve managed to convince the customer about one simple thing. A large service provider, which is used to run ODC’s for global customers, would probably never provide same quality of services to much smaller scale customer. By quality of services I first of all mean quality of human resources, both technical and managerial. How can one expect similar effort to be put by a service provider on customer relationship management to serve customers that differ by order of magnitude in volume of purchased services? It doesn’t take a prophet to realize this fact. In our specific case a customer has already chosen the destination, and we’ve used this “quantity vs. quality” argumentation to differentiate from much larger and well known competitors within the chosen destination. The result of proper choice by the customer is 3+ years of successful non-stop cooperation, which survived very challenging phases including personnel negotiations and a couple of mergers and acquisitions on customer’s side. We have put all our efforts to provide customer with best possible resources, which were searched not only internally, but from outside of the company as well. In fact, almost whole team except the on-site team lead was built using carefully selected human resources acquired from outside. Best skills available on the market targeted to the specific customer requirements. Would this be ever possible in case of a larger provider? Very unlikely, I’d say.
In the beginning of our business we have closely cooperated with large outsourcing “kitchens”, so we have seen how the situation looks like from inside. Bigger players usually have some resources on the bench, ready to start new projects immediately. As one may suppose, those people are not likely to be provider’s best talents, but often just random choices from a pool of resources available at the moment. In contrast,
NED has a different model of selecting the personnel for new projects. We usually build teams from the scratch around one highly qualified senior consultant; so-called “key person”. Our HR department is constantly monitoring Russian and Finnish markets for potential key persons. In this selection process we put strong emphasis on evaluating technical skills and practical hands-on experience of candidates. Evaluation is performed by active senior consultants and is based on comprehensive technical interview involving practical questions on specific areas of expertise. Candidates should also have fluent English, good communication skills, as well as certain personal characteristics enabling them to become a key person in our cooperation with the customer. Only after those criteria have been matched the selected key person can be offered to the customer. If customer approves a new consultant, we can offer an option of building the near-shore team around him. Usually we have a pipeline of several evaluated consultants in our areas of expertise ready to start a new assignment in the time span of 2 - 4 weeks.
Cost vs. productivity issue
One of the most interesting findings of the survey is the way non-outsourcing companies describe factors that keep them away from outsourcing. More than 50% of respondents said they are afraid that outsourcing will eventually cost more money and “headache” than in-house development. Indeed, if one simply calculates direct costs of outsourced services (especially on-site) provided by mature enough partner, it’s very comparable with in-house development costs. So, if one does not see difference in productivity, there’s no bigger reason to outsource, because according to the survey, the top driver of the outsourcing decisions in Finland is reduction of operating costs. Well, it might be less flexible with own staff, but much more manageable. In addition, the competence stays in house. That’s how the typical IT manager thinks. The productivity factor is often neglected as developers are most often considered as average “resources”. Sometimes it’s hard to understand, but nowadays in IT recruiting procedures become more and more human oriented. Technical aspects are often evaluated on a very superficial level, with very insufficient effort put on evaluation of technical skills. Good old nerd culture is not respected anymore, as developers are mostly evaluated by their social and communication skills. However, there are huge differences in skills, workability, motivation, and, as a consequence, productivity of technical specialists on the market. That’s why I would really prefer having in my team a highly motivated and result oriented senior level outsourced consultant with fifteen years of relevant experience prior to communicable and well socialized but average developer on my own payroll. I claim that the productivity of properly selected external consultant may significantly exceed the one of own personnel, even if they are more or less comparable in terms of technical skills. This may sound unbelievable but from our practice one highly motivated senior consultant can easily replace the team of 2-3 average developers in comparable time span. Does anyone mind gaining such difference for the cost of one own developer? Personally, I wouldn’t. More advanced experience of a consultant usually provides serious reduction in amount of post development problems. Moreover, mistakes and bugs made by own personnel are covered from the own budget, whereas potential flaws made by external consultants are covered free of charge by the partner. And what about keeping the core competence in-house? Who said it cannot be kept, even though it’s hold by the external consultant? Make sure you’ve got skilled consultant on a proper cost level, which on one hand fits your budget but on the other hand keeps your provider motivated, and you may keep going with same external consultant for years. That’s what has actually happened for our people many times. Once customers start using NED’s consultant, they keep holding them year after year. Considering our very flexible contract terms, one may assume that it’s skills and added value that makes our customers to keep using NED’s consultants rather than legal issues.
In fact, our most successful customer case in terms of duration has started when we’ve convinced the customer about the superior productivity of our on-site services compared to customer’s own personnel. As a result we’ve got 5+ years of non-stop cooperation, which has also survived a couple of acquisitions. Contrary to the previous case, during these transformations the ownership has changed so drastically that the whole human interaction interface on the customer’s side has changed. Being put in a situation when we had to convince a totally new organization about the cost-efficiency and quality of our services, we successfully did it. Personally, I value such cases, when we have survived severe transformations in customers’ ownership, the highest. In my understanding this is the best indicator of your real value for the customer.
Another interesting result of the survey is that 43% of respondents think that although outsourcing really saves operating costs, it inevitably increases the project management costs. Indeed, that’s quite close to the truth. In classical off-shore outsourcing model there is always a trade-off between the actual cost savings and the additional management costs. However, this problem may be easily tackled by the proper choice of outsourcing model. For instance, NED’s on-site + near-shore model prevents customers from increasing management costs. In our process on-site consultant, who operates in customer premises as a technical team lead, is also responsible for coordination of remote team. Being deeply integrated into customers’ internal processes and procedures, our on-site consultant ensure seamless compatibility of outputs of remote team with his own outputs and outputs of the customer’s in-house project team, if there’s any. As a result, customer’s own managerial resources are not involved in everyday coordination activities related to the outsourced team. Moreover, increasing volume of outsourcing does not require additional management effort from a customer in the same extent as classic off-shore model does. That’s another source of cost saving in addition to a productivity factor.
In both of the above mentioned cases the scalability factor has played the crucial role. We’ve been able to quickly and flexibly scale our teams up and down both in terms of size and allocation of resources. Especially the latter one has been very important in order to provide our customers with proper resources just on time and right where they were needed at the certain phase of our relationship. The distribution between on-site resources in customer’s premises and remote resources in our near-shore location has been indeed changing quite dramatically during different phases of the customer relationship cycles.
According to the survey, Finnish outsourcers mainly face the following challenges when working with outsourced teams: poor communication with vendor’s project managers and/or development team (71% of respondents) as well as vendor’s inability to understand client’s business concept and goals (another 71%). Again, NED’s process model with deep integration of on-site consultant into customer’s internal processes literally guarantees proper communication level and prevents misunderstanding of customer’s goals and priorities.
For Finnish companies the most important factor of choice of outsourcing destination is available pool of resources. Then come language skills, strong R&D capacity and positive references followed by low service rates. Such factors as geographical proximity, cultural proximity and political stability are the least valued by respondents. It is worth noting that the referred survey does not distinguish specific countries, dividing all destinations by three categories: on-shore, near-shore and off-shore. Currently, among these three destinations, near-shore outsourcing prevails, followed by on-shore model. The top destinations of the future will be again near-shore and on-shore. However, the share of on-shore services is expected to grow in near future. Therefore, it is nice to notice in the end, that NED’s flexible on-site + near-shore service model perfectly fits the observed trend.
Link to survey: http://www.itsourcing-europe.com/uploads/Finnish_ITO_Report_2011.pdf