• Jim Shields

The Price of Control in Outsourcing & Offshoring

Mostly when people debate offshoring & outsourcing they ask the question “Can I retain control?

To my mind the correct question is “What is the price of control?” because for the most part, control is easily achieved…. but you may not want to pay the price.

First thing to look at is understanding what you want to control…. Cost / Quality / Schedule / Content. Funnily enough, these are the things to debate even if it wasn’t being off shored or outsourced.

Starting with the simplest…..Cost

“Money is of no value; it cannot spend itself. All depends on the skill of the spender.” – Ralph Waldo Emerson

  • Customer’s Business Objectives – What are the key business objectives behind the outsourcing drive? For e.g. it could be enhancing customer experience and increase customer lock-ins or enhance customer acquisitions. There could be many such. Based on these key objectives, KPIs need to be defined. These KPIs will be usually reported to the senior management who are more bothered about the business outcome irrespective of outsourcing or off shoring.

And then of course Quality

“Not everything that can be counted counts, and not everything that counts can be counted.” Albert Einstein

  • This one is much harder. In some cases you are going to have measures for quality especially if you are buying in a “best in class service”. By this I mean that you are buying in a service that someone else can do better than you e.g. Travel booking / Payroll services. These mostly will come predefined from the service provider & you are actually paying for the metrics as part of the up front price.

  • Alternatively you have to spend some time developing some metrics… typically at your cost & in your time. Logically you should be doing this even if it wasn’t off shored / outsourced.

  • OK, so lets assume you have some metrics – this is no guarantee of control… it just allows you to judge success. You also need to look at processes & expertise.

  • If you are simply asking someone else to use your (great) process then no problems & no extra cost…. and you already know its limitations & benefits.

  • If you are relying on their process then first off, you will pay for this intellectual property somewhere in the price…. and you need to check it out anyway (at your cost) to see if it will do the job.

  • What if someone else has already reviewed & certified themselves e.g. SEI level 5 or similar…. is that enough? Don’t get misled…. Mostly only their internal processes are audited & certified. This may NOT include what they do for you. E.g. If you are getting test automation done by a big Offshore Outsource company ask explicitly if this process was included in their SEI level 5 audit & ask to see proof.

  • A few questions to ask about expertise would be

  • Do “experts” exist in your outsource company?

  • Will they be working on your deliverable?

  • What is the experience level of the folk working on your deliverable?

  • Is it sufficient?

  • If you don’t get the “right” answer to these questions then you can often pay extra for greater levels of expertise.

OK, so now let’s look at one of the biggies…. Content (and it’s frequent partner Change)

“There is nothing wrong with change, if it is in the right direction” – Winston Churchill

  • Content. i.e. Controlling what you will actually get. This is where how you pay actually gives you different control mechanisms. Fixed Price vs Time & Material control mechanisms are very different.

  • People often default to Fixed Price because they imagine this gives more control…. and it can do for certain things. The earlier examples of Payroll processing or Travel booking etc can be well defined with a predictable outcome & hence well specified from a content perspective and…. (here’s the important point) are UNLIKELY to change.

  • So if you predefine the results well enough then no problem…. right? Well yes, but you may end up spending massive amounts on requirements definition and legal contracts eliminating “what-ifs” & loopholes that try to eliminate or predict change.

  • Sadly these days there are few things are so predictable to predefine….. And some processes are even designed with that in mind e.g. Agile processes by definition have this ability to have a moving target of content & changing priorities built in. This means either building in Contingency or a Change Process (or BOTH)

  • Where there are some unknowns about final result or methodology, then people build in CONTINGENCY into a Fixed Price. This is one of the key differences vs a Time & Material mechanism. In Fixed Price you will pay for the contingency whether you need it or not. In T&M you pay for contingency ONLY if it is used…. and heaven forbid, if the work is actually LESS than originally estimated, then you pocket the difference yourself – it won’t disappear into your outsourcer’s pockets as with Fixed price.

  • Beyond this, you need to work out how to handle any change that has not been built into the original agreement….. i.e. The dreaded Change Order. This is where you decide you need something different or extra vs the original agreement. With a fixed Price mechanism, this ends up as a new estimate that you can choose to buy or not…. but your outsourcer mostly has you over a barrel because at that stage they are often the only game in town & hence they can price high & give you a “take it or leave it” option…. how tough this is depends on your relationship with them & whether you have other future business that you can hold over them.

  • Beware – change orders can cost you more than the original contract…. as the picture below illustrates. (Look at the names of the boats!)

  • Irrespective of whether you go the T&M route or the Fixed Price route, you need enough Governance in place to understand if you have all your content, or whether you are missing some & whether you are on time. This will likely be a further blog topic sometime in the future

Last piece of the puzzle – Schedule

“In preparing for battle I have always found that plans are useless, but planning is indispensable.” Dwight D. Eisenhower

  • Schedule is often linked to content… It is the traditional trade-off or price for getting the right content. Lets look at the cost of being late – traditionally there are two solutions to this. Throw more people and/or money at the problem until it comes back on track… or cut content until it fits in the desired timeframe

  • With the “throw money at the problem” option the big question of “Who pays” raises it’s head. With a Fixed Price agreement, then the outsourcer pays for the extra…. but usually they will have priced in some contingency for this in the contract – so you wont be paying extra, but in reality actually you have already paid for it – both the contingency cost and their due diligence to set boundaries on that contingency cost.

  • With T&M – you pay, but again, only when & if it is required.

SO…. is there a single best way to minimise the price?

Not really, but you need to look at what you are outsourcing or offshoring and see where your problems are likely to be and hence what controls are worth paying for.

One final comment which I will illustrate with a quote from Ayrton Senna…. ”If you’re in complete control, you’re just not going fast enough.”

  • For me, this means that it is possible to put so many safety nets & controls in that you dilute the value of offshoring or outsourcing – which you are often typically doing to either get speed or cost reduction

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