Outsourcing and Management Agility, Part 2

22 April 2004

by Michael Mah, Senior Consultant, Cutter Consortium

In last week’s Advisor, I discussed how agile IT executives can tackle the tough demands for fast and effective decision making when it comes to outsourcing. This entails skillful use of two important disciplines — the command of software productivity measurement combined with modern negotiation practices.

This week, I address some of the “how tos” with regard to the myriad of complex issues in IT applications outsourcing, including offshore labor rates, balanced scorecards, negotiation leverage from productivity baselines, and a new discipline emerging today: alliance relationship management — as well as the roles that software measurement and negotiation play.

It’s Not Just About Offshore Labor Rates

In some cases, the benefits of IT outsourcing can be simply boiled down to things like lower offshore labor rates. This may especially be the case with routine operational tasks that are repeatable and require little human interaction, such as payroll processing.

It’s far more difficult when outsourcing involves the design of IT, such as the creation of new software applications and processes. Aside from cost, the agile IT executive will have to deal with time-to-market and reliability, often using a balanced scorecard.

These dimensions become aspects of the negotiation. It’s vital to understand that what makes this difficult is that they are interdependent. You can optimize one, such as costs, unknowingly at the expense of others, such as time-to-market and reliability. Or you can accelerate a date, but at a higher cost and lower quality.

This is why outsourcing of IT is often more complicated than initially thought — it requires more skills in measurement and negotiation on the part of the agile IT executive.

Areas of Application Outsourcing

There are four areas of applications outsourcing that the agile IT executive must often address:

Staff Augmentation — the supplier provides supplemental staff to the client, and by virtue of this infusion, productivity gains may occur via the incoming tools and processes.

Legacy Maintenance — the supplier assumes responsibility for “broke/fix” maintenance and/or minor enhancements. The client’s own IT staff is freed up to develop new applications.

Staff Transition Deals — the client divests itself of inhouse IT staff by transitioning them to the supplier payroll, who may also employ a blend of offshore or nearshore IT professionals to reduce cost.

Project Outsourcing — the client issues a request for proposal (RFP) and awards the contract to a chosen supplier.

In most or all cases, the client is seeking to lower costs and/or accelerate time-to-market for IT applications. Contractual goals to accomplish all of these dimensions are negotiated as part of SLAs.

The Agile Executive as Chief Knowledge Officer

Poor measurement frameworks plant the seeds for misaligned expectations that can lead to conflict and at the expense of short-term deal-making efficiency.

The agile IT executive has reliable numbers at hand to negotiate strong and sustainable agreements. Acting as chief knowledge officer (CKO), he or she has unbiased intelligence based upon metrics. CKOs are memory keepers with clout.

Prior to, or at the onset of an outsourcing relationship, the agile IT executive creates negotiation (and renegotiation) leverage by ensuring that ownership (or co-ownership) of measures and analysis is part of their IT governance strategy. Measurement is not solely left to the supplier, which can produce a conflict of interest. This may occur if a supplier self-reports on performance that governs payments. The client retains responsibility for measurement and analysis to have final say on whether productivity commitments are being met.

Productivity and Metrics Baselines

Service levels depend upon a reliable productivity base-case at the start of an outsourcing relationship, similar to how one might take cholesterol readings at an initial physical examination, followed by changes in lifestyle, with regular readings to track whether changes are occurring as intended.

Therefore, at the onset of an outsourcing relationship, the agile IT executive establishes a productivity baseline, using a representative sample of recently completed projects across the portfolio. Actual schedules, effort/costs, and reliability of applications projects from small to large are gathered (the SEI four core metrics — time, effort, defects, and size).

This baseline is established by a metrics group, often assisted by the help of a third party, sometimes using automated measurement and estimation tools. The latter are especially useful to produce independent “should cost” estimates, which can be compared to vendor bids. Metrics baselines also serve to sanity-check project targets to negotiate deadlines, costs, and staffing decisions. This provides the client with leverage, and also enables them to validate the productivity assumptions of the supplier.

Practicing Agile Relationship Management

If outsourcing relationships are plagued by disharmony, it costs money — to both sides.

On the other hand, outsourcing relationships that are characterized by sound agreements and reasonable expectations verified with effective relationship management frameworks can produce innumerable benefits to all.

The agile IT executive has the skills to avoid the former and create the latter. It’s by the deliberate and conscious decision to practice effective measurement and negotiation as part of modern relationship management practices.

The result is a common ground upon which difficult substantive issues are easier to discuss. When numbers are reliable, better negotiations and outcomes are possible. When perspectives differ, both sides find a way to resolve potential disagreements in a productive — and not destructive — manner.

The agile IT executive plays a crucial role to make this happen when facing the challenge of outsourcing.

— Michael Mah, Senior Consultant, Cutter Consortium

© 2004 Cutter Consortium. All rights reserved.