Category Archives: Workforce Optimization

Attrition in IT Outsourcing firms

There is no magic bullet to this problem. This has been a burning issue for several outsourcing firms and many of them have used innovative methods to retain talent. My observations looking for the some of the biggest reasons are manifold. The scorching market for job seekers during the last decade (it has slowed down a bit during the last two years) was among the biggest cause. When there are fewer talented job seekers to fit a rising wave of outsourcing from west, the tendency to jump ship for wage increase is immense, this was so rapid that recruiters often sat outside their outsourcing rivals poaching on their trained pool often just asking for their last payslip and giving them a fat raise and an immediate offer to join. Some firms have been paid the severance that the old employers applied, or dangled carrots in various forms to entice them to quit.

The recruitment teams are not trained as well to screen the candidates, the evaluation was poor to identify bad hires before they start. Sharing of information on why someone left their last job was just not available. All the recruiter was looking for was short cuts to fill their open slots that went begging with billing tied to them for incentives.

If there is one platform all the outsourcing companies join hands it is this one. So much that they have joined forces to share information on candidates via a common database that provides lot more information than the background verification.

Again some level of attrition is expected – somewhere in the range of around 10% is okay since you do want to hire some fresh talent, swap skill sets, etc. However the range of 20% and above which was the case for couple of years steadily is not acceptable. Outsourcing firms typically follow the pyramid model where they want to keep very talented, employees that follow their culture and willing to building a long term career. They welcome resources to leave that are underperforming and those that don’t fit into their scheme of things.

Attrition is also caused by lack of good Infrastructure where an hour to two is spent commuting each way, lack of transportation facilities e.g. Bus, Car, lack of amenities in the buildings, poor leadership on teams, not so meaty assignments where resources get struck with dumb roles just because they continue to be billable and client likes them do the same thing till they need much against their career aspirations. Also remember the resources pool is often in the age group of anywhere from 21 to 35 which forms the highest block and they often are moving targets with marriage or joining spouses, going for higher studies, migrating to other cities or changing professions, venturing into self-employment etc. One more reason is not finding an onsite assignment, come to think of it, a very small percentage of the large pool gets to go onsite, so the rest are left to finding it on their own often moving into firms that won large contracts recently or are known to rotate their resource pool.

The rate of attrition at all levels of outsourcing providers in several hubs has seen a fall in the range of 25-50%, in the last two years, mostly due to a fragile global economy. An uncertain global economic environment, together with cross-currency fluctuation. This has compelled employees to adopt a wait-and-watch policy, leading to a sharp decline in the attrition levels in the IT-BPO sector, which has been grappling with a talent crunch due to a shortage of competent managers at the middle and senior management for quite some time. This has led to a fall in hiring activities, bench strength and a high employee retention rate can been seen at almost across all levels of management.

It has come as a blessing in disguise, considering that human resource is the key to the success of this knowledge-intensive industry. Employees are wary of switching over jobs due to continued apprehensions of the economic slowdown being likely to continue for some more time till the economy really warms up and Europe gets back on its sound footing. The fact that is not likely to happen very soon means outsourced providers can breathe some relief with lower levels of attrition till it lasts.

Bottom-line there is no one good reason why this attrition occurs, often several of the above play a factor, sometime there are one or two dominating factors that nudges the percentage a bit either for good or bad.

Clients can alleviate some of this by providing a conducive environment, treat the consultants on par with their own employees, encourage their consulting pool to achieve the same levels as their own, provide work life balance, conduct surveys to find out what makes them tick, bridge gaps by encouraging visits from both sides, provide rewards and recognition, competitions to encourage their show of talent, rotate resources to keep them motivated – there are many more creative ideas that clients use to keep their consulting pool from their outsourced providers ticking which directly translation into billing efficiencies.

In one of my next blogs I will throw more light on how this subject means hidden costs.

IT Outsourcing – the magic percentage

What is the magic percentage of the IT outsourcing mix ? All firms big and small have found it elusive to decide. You always start small – most firms do so, however once they reach a critical point, they don’t realize when to take a step back and see if they are at optimum. Some don’t even realize they have already crossed the threshold for their set up. The eagerness to benefit from low cost is what kills the golden goose. Once companies see the costs going down rapidly with outsourcing they continue down the path of accelerating, not realizing what they already started to lose e.g. subject matter expertise, skillset that took ages to develop, the leadership and management abilities, local availability against offshore presence, cultural sensitivity, punctuality, time to market, competing with their peers etc. these are just a few.

It is not often that you come across CFO’s who often dictate the percentage with an eye on the balance sheet than on the continuity of the business while the CIO / CTO and their business folks reel under the duress of taking a hit and people at the fore front of execution and customer service pay the price. It is important to review once you reach the percentage that is optimal for business. For call centers it can be high, for KPO / BPO type of arrangements it can be larger than other modes of IT outsourcing with some transition and monitoring of key SLAs. However staff augmentation in complex technical and niche areas like product development, testing, Research and Development, prototyping, Engineering are some of key examples to pay attention to and stop when you reach the critical mass. It is easy to fall a prey to short term financial goals rather then seek a long term objective of sustaining and growing the business using IT outsourcing as a tool.

There are several cases where clients went renewing their 5 to 10 year contracts couple of times only to realize they lost everything they had connected with IT, they very own competitive spirit, time to market, raising IT budgets and were at the mercy of their IT outsourced providers who had more interest in making money than their clients ability to prosper. For them the mantra was simple, if not you I have dozens lining up like you to save. Then these companies go back to their drawing board, invest in high end consulting to draw a roadmap which will take several years of investment to gradually undo the damage they did to themselves.

Collaboration tools do help to achieve higher percentages however there is a limit on exploiting it even with high levels of maturity. Also consider the time zones. If your resource are on the other side of the globe, and though work your time zone to some extent that is not enough to guarantee full-fledged support you need and is not an excuse to ratchet up the percentage outsourcing.

If you are already in an outsourced environ revisit your optimal percentage, and make sure you have checks and balances to stay there and leverage efficiencies. Having a bloated outsourced environment will have hidden cost, instead work your tolerance given the nature of business and the responsiveness you need. Average ratio of your full time employees to contractors should be monitored closely to ensure the span of control is not sacrificed, it can be high in some areas like call center, KPO, BPO where supervision is not entirely needed with some management support, while collaborative development, R and D, Testing, Training and other niche areas needs ratios to be capped to achieve efficiencies and benefit from outsourcing.

Types of contracts in IT outsourcing

There are 3 basic types of outsourcing agreements

a) The Standard Vendor Agreement – for one-off or pilot or long terms, sometimes called MSA or Master Services Agreement

b) The Partnership – for short-term projects it could be fixed price bid, or staff augmentation etc.

c) The Alliance – for long-term projects – sometimes called Relationship, Technology partner as well.

Many of the contracts fall under one of these umbrella for sure. There are many more by different names that both clients and their outsourced providers have tried to come up with but they all are different names to help them socialize with their fraternity.

The standard vendor agreement is the most common – most often it covers a gamut of services and could have sub-contracts for various services with a rate table. I mentioned on my previous blogs how rates work – tiered, blended etc.

Some firms give up their infrastructure for upkeep with defined SLAs while keeping the application development under their control for better control of their products and applications. Sometimes the assets are also transferred or assets are owned by the principals while outsourced providers help manage them. Legacy applications are at times outsourced completely for maintenance with SLAs to concentrate on core production platforms and services. KPO and BPO are again best taken up differently with more specific SLAs. Call centers being unique need a separate set of SLAs as well.

The bottom line is to do as much research as possible upfront before signing these contracts. Start slow and don’t fall into the trap of signing an omnibus contract. The cookie cutter approach of one rate fits all services is not worthy though some IT providers are selling it. Engage a consultant, do your due diligence and go with what is appropriate for your business keeping in mind the size, complexity, maturity, experience, depth of the IT provider etc.

How IT Outsourcing global rates play

Many India pure play firms negotiate global rates – the same rates apply wherever the resources work under T&M, staff augmentation type of contracts. Once agreed upon IT firms work on a ratio that will help them drive towards making sure they can still make profits in the competitive market.

The rates are broadly anywhere from 75% offshore and rest on site or even lower at times to 90% offshore depending on complexity. Most operations nature of work is higher in offshore ratio while more complex development will have around 60% or above. support nature of work falls somewhere in between.

it is important to understand the contract and keep an eye on the ratio on the leverage is not unduly benefiting one side. ofcourse there are always ways to negotiate. Also checking weekly or monthly on how the ratios prevail is a good idea.

Lot depends on how big the contract is. Smaller contracts don’t make a lot of difference while large contracts with more than thousand resources will make a good impact on ratios.

Initially the ratio on site would be higher to gain knowledge and as the learning curve improves the ratios start to level off to contractual levels.

How rate tiers work. Flat rate vs. tiered rates

Today many consulting companies have multiple ways of paying their vendors. While a flat global rate is common, tiered rates based on skill sets, levels of experience, location-based, size of contracts etc. play a part in it.

Global rates work well for a large IT outsourcing engagement where companies pay a flat rates irrespective of where the resources are. They do agree to maintain a particular ratio of onsite and offshore to help drive the price advantage and monitor it closely to make sure no party is losing.

Smaller engagements call for tiered rates to benefit from getting the right resources matching the needs while bigger engagements where staff augmentation is the key abs it benefits to have a pool to choose from with some checks and balances on the quality of the resources.

Rates due fluctuate for a variety of reasons ranging from rising inflation on the other side of the globe, forex fluctuations, qualified and niche skill sets where the demand is more, location, experience levels etc. it is wise to lock down rates atleast for a year so as not to negotiate every time. Even though long-term contracts helps, it almost always provides for rate revisions every year.

I have had lots of inquiries on advantages of tiered vs. flat, and to be honest I always recommend using what is good in a given situation, Both have their own merits and demerits. Don’t get locked down in long-term contracts, allow for revisions, and negotiations. My personal preference is to have tiered rates – again just a few up to three is recommended, you don’t want more than three which leads to disputes as to where the resource could fall every time you are trying to hire.

Keep in mind rates differ widely depending on type of work. for example call center operators or KPO resources are paid much less than technology resources. Management resources or consulting one command a premium.

Negotiating is the key. Dont rush into signing contract wihtout thorough due diligence. Rates could swing due to various reasons. Read in between lines the contract to make sure there are no compromises for the rates to be lower.

Roping in a specialist consultant would be of immense help as well to get a second opinion if not first. Talking to other clients and making a reference check is a great idea.

Ultimately there is no cookie cutter rate recommendations, it is all based on specific scenarios.

Provisioning HW and SW for your offshore resources

This is a delicate issue and complicated one at that. With more and more core support moving out offshore there is always a need for vendor to ask for hardware and software from the clients abroad. However there are financial, legal and security issues involved. While the implementation of security protocols in India pure-play firms is very strict, you can install any software with an approval from clients. Some software provides for installs globally via master services agreement, whhile most of the software licenses do not extend beyond the shores of the country where it was legally purchased.

The challenges is with controlling the inventory as well, there are cases where the offshore vendors install hundreds of copies of software without the knowledge and implication on what this means, very few clients have good process in place to monitor SW and HW.

With HW it is even more delicate since the vendor would not support clients HW in some cases – mostly laptops. fixing routine problems, upgrades are a problem. In some cases, the clients end up asking the vendor to buy on their behalf and it ends up as “client funded, vendor owned” the ability to capitalize the purchases is lost in most cases leave alone benefit from pricing advantages if brought onsite.

Some clients treat their offshore centers as extension of their work place. however the vendor site not necessarily would fall under that category even with a MSA. (Master Services Agreement). Even the clients offices offshore will not be covered where the SW or HW is purchased in countries where the license agreements specifically call for using within the shores of the country where brought.

The fact that provisioning is needed for execution and support makes this a necessary evil. However putting together a good tracking mechanism will save clients from legal exposure, and also benefit from this measure than losing precious funds that can be put to use elsewhere. Also this cost is additional to overall outsourcing budget is important since this could end up being a significant amount.

Getting the best out of consultants in IT Outsourced environment

This topic has been every on every employer’s mind in a IT outsourced environment, How do I get the best of the consultant pool? Span of control, better supervision over the pool, embedding employer representatives on the floor offshore, reporting weekly, monthly etc., fixing accountability and responsibility on deliverables with timelines, routine audits, and check points are some of the techniques.

Not all of these techniques work, what you put in place depends on nature of work and also the maturity of the consultant pool. The junior the pool, the more techniques need to be applied and less as the pool is mature and senior enough, Experience onsite as well helps understand the dynamics and expectations besides knowing the culture of the organization.

Having a good framework of checks and balances avoids surprises, removes inefficiencies to a good extent, assures predictability, and improves morale and motivation on both ends. The biggest frustration of employers that have consultants on their projects is the ability to control output a.k.a productivity. The dream of consultants being on par with their rank and file employees in terms of skillsets and efficiency is out of questions. In some cases a consultant is better than employer if these skills are niche and are needed temporarily. Having a toolbox of techniques to gain efficiencies in an outsourced environment is the key.

Remember consultant’s loyalty is always with the employer and not necessarily with the principal that employs him. Also note all of his personal evaluation is done by the employer based on their standards with little input at times on how the consultant is faring. The consultants are more interested in making sure they are toeing their employer’s line. Very few mature organizations have brought together both to reap the rewards.

Sharing best practices across the board, what is working and what is not in a particular setting is important so everyone with the organization gets benefit from a outsourced engagement and evolve a culture of benefiting from outsourced environment then seeing it as a burden.

Definition of Outsourcing

Outsourcing is the contracting out of an internal business process to a third party organization. The practice of contracting a business process out to a third party rather than staffing it internally is common in the modern economy. The term “outsourcing” became popular in the United States near the turn of the 21st century. Outsourcing sometimes involves transferring employees and assets from one firm to another but not always.

The definition of outsourcing includes both foreign and domestic contracting, and sometimes includes offshoring, which means relocating a business function to another country. Financial savings from lower international labor rates is a big motivation for outsourcing/offshoring.

The opposite of outsourcing is called insourcing, which entails bringing processes handled by third party firms in-house, and is sometimes accomplished via vertical integration. However, a business can provide a contract service to another business without necessarily insourcing that business process

source : Wikipedia

Estimations in IT Outsourced environment

Estimation is one of the hidden costs that eats into your outsourcing costs. More often poor hands offs of scope and requirements result in piquant situation like these. The classic case of missing out on key documentation, missing links in handoffs, lack of attention to details and then the blame game begins. It is extremely important to ensure adequate checks and balances be it via simple team communications using collaborations tools, IM, chat, few phone calls along the way as you progress on estimations thru deliverables be it small, large or medium size projects or just plain simple deliverables.

Be it managed services proposal, time and material, project or program the chances that your estimation is (+) or (-) 5% is almost ruled out. This impacts both sides depending on who went wrong with their strategy.

Check when was the last time you had a project execution right on target 10 (+) or (-). A greater majority of the projects you will see go off the tangent. Precisely due to the above factors. At times the culture of padding every step which exponentially increases the estimates is common. The idea is with so much padding you are going to be successful which is not often the case. Not going into details or following a scientific process to estimate is a risk. Not very project needs to go into a functional point estimation which could be overkill, use plain best practice methods to understand work packets, break down to component level or any lower level that wont fluctuate your estimations Create your own template if you don’t have one and be consistent, run it by a peer, get reviews done and plug in feedback.

Predictable outcomes always comes from good estimations, not to mention quality of the deliverable. Poor estimations run of risk of cutting corners to achieve the end goal.
Writing good estimation needs to be developed as a culture and getting to a point of having offshore teams deliver better estimations is a discipline that will pay huge dividends. It saves time, money and frustrations, helps improve team spirit and motivate teams to do better via customer satisfaction.