Now That The Upturn is Here

22 January 2004

by Michael Mah, Senior Consultant, Cutter Consortium

After the long winter of recession, the economy finally seems to be growing again — companies are shedding their cautious outlook and as a result, IT departments are investing in capital equipment and services. That’s my sense as I head to the airport for yet another client meeting — my fourth city in two weeks.

There’s something about the clickety-clack of the commuter train that I’m riding. The rhythmic sounds encourage a calm state of reflection as I peck away at the keyboard to scribe my thoughts. Day-to-day mania melts away and I get a better sense of the big picture, or at least part of it. Perfect meditation for writing articles on business-IT technology trends. Here are two things that seem to be happening today from this vantage point.

The Recession Has Left Behind a Swollen Backlog

For at least two, maybe three years, many companies slipped into a deep state of paralysis. IT departments downsized, salaries were frozen, work was outsourced, and new projects were put on hold. Investments in capital equipment, software, and services were drastically cut. And the once mighty tech titans were hammered. For example, from 2000 to 2002, data storage giant EMC Corp. saw a 58% decline in revenues, with similar collapses at companies like Cisco and Oracle. Fortunately today, the economy seems to be awakening, and the big guys are coming back with a vengeance. Intel and IBM just reported record margins and gross revenues in last week’s news. (In part because, during the downturn, they DIDN’T stop investing in R&D — resultant products such as Wi-Fi are now reaping big sales.)

And from an IT perspective, while the drought caused IT demand to slow, it never really stopped. A backlog was brewing. Now that the economy is back, companies want applications RIGHT NOW, but they’re not there! One of my clients is scrambling to build a major new application to sell in this newly invigorated marketplace (now that clients have money), and senior management is absolutely frantic. Why? Because they held off on the project for so long, that even if they had a Mongolian horde available today, they still can’t realistically make their target date. The slowdown left a huge backlog of desired features, and there aren’t enough software engineers to build the product after years of downsizing.

Combine the project growth with a compressed deadline, and you’ve got a serious problem. Knowledge work doesn’t like to be compressed — you can’t cut the time in half by doubling the staff, even if you have them. And if you aim for an aggressive date, trying to cram 10 pounds of features into a five-pound bag, software project physics allow only one place for the pressure to release — higher defects. They’ll have to step on it, but a quality risk is inescapable.

That means they really have to think carefully about their QA strategy. The good news is that a handful of today’s more advanced estimating tools do a really nice job of defect prediction. Management can explore what-if scenarios and plan how to implement better QA and testing, while forecasting how many test engineers they’ll need to get the product out the door. Another fact of life is that they’ll simply have to rethink the project scope. This is deadline-driven estimation — based on a deadline and the available staff, how much stuff can they build? This “reverse estimation” is another capability of today’s new metrics technologies.

In hindsight, another answer might have been to have taken a gutsy risk last year and start the project sooner, but that didn’t happen. Recession paralysis forced the project into a late start. So the lesson here is: if you’ve got a project that you’ll need for next year, get moving NOW.

Companies Will Rethink Outsourcing

During the downturn, IT management got a taste of cheap labor, and so the appeal of keeping inhouse staffs lean while hiring offshore may stay for awhile. But something interesting happened as IT staffs in North America shrank while offshore IT staffs swelled.

Internet-speed deadlines didn’t go away. So what happened? Simple: if you have access to cheap labor that lets you use twice as many Indian programmers to make a tight deadline, you’ll tend to use them. On the other hand, since your North American IT staffs have shrunk, those projects are constrained at a lower headcount limit.

Taken collectively, metrics data from a large batch of recent IT benchmark statistics show an interesting pattern. From small to large, offshore projects tend to use larger teams compared to their US and European counterparts. While costs are still relatively low, projects staffed more aggressively tend to have more defects, not fewer. When you add in the communication complexities from interfacing with teams on another continent and time zone, the net result is 35% to 40% higher defects on offshore projects! A dirty little secret indeed.

That’s not to say that offshore programmers aren’t smart folks. It’s simply a matter of project physics — doubling staff increases team communication complexity by a factor of four or more. The higher miscommunication results in more bugs in the code and that’s a fact. At the same time, doubling staff doesn’t cut schedules in half. Knowledge work is design-intensive — the data shows that a 20% reduction is more typical — but you’ll need more time to deal with the higher bug counts, negating some of the gains.

One thing seems true: many IT shops don’t have enough people today to meet the renewed demand. Some are now hiring again, which is good news. Others are setting up outsourcing deals in which staff augmentation is the model — an outsourcer brings near-shore or offshore staff to the client’s projects. This is an interesting shift compared to the more predominant deals during the recession, when the focus was on downsizing — using outsourcing to transition staff to a supplier and then “leasing back” services (and sometimes giving up vital domain knowledge to another company).

And let’s face it — there are things you can outsource, and there are things you absolutely shouldn’t. In a recent interview, Jeff Bezos, CEO of Amazon said, “By building new technology ourselves, we get to offer a better customer experience. Does that give us an advantage? Absolutely. Now, if we just rest on our laurels, we’re not going to enjoy that advantage. You have to continue to innovate.”

My sense is that the best companies today might use a hybrid strategy. They’ll carefully decide what routine and repeatable tasks might lend themselves to offshore work (like business process outsourcing), while hiring here at home for their IT projects that will yield advantages over their competition in the marketplace.

— Michael Mah, Senior Consultant, Cutter Consortium

© 2004 Cutter Consortium. All rights reserved.