Tag Archives: 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.

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.

Handling cultural sensitivities in IT outsourced environment

Pay close attention to culture and adapt yourself quickly. With increased outsourcing percentages across several industries, it is pertinent to know about the culture on the other side. Bringing in experts to talk to teams and sensitize the broader segment of the team that interfaces regularly with offshore resources is a good idea. Almost all of the outsourcing companies, more so the bigger India pure play firms have their own experts who routine put resources thru this grind. The higher your levels greater the emphasis and training on cultural sensitivities. This is part of training curriculam and performance appraisals.

India based call centers for examples have thrust forced watching of baseball, basketball, hockey, football, rugby to know the teams and its more high profile team members. They are encourage to talk about them besides ofcourse daily dose of weather which everyone loves to relate. Dos and don’ts are common practice and circulated widely. Special training is provided to those that are getting ready to fly into a client location.

There is no doubt both sides pay great attention and take pride in their culture and hence the need to ensure appropriate respect and attention is paid. If there are questions it is best addressed with those in the know. There is no dearth of resources to reach out to or using the ever popular internet to Google it outright.

More often it is easy to adapt with some adjustment and accommodation. This is connected to the moral and motivation of team as well. There are lots of examples that I can share ranging from respecting the dressing sense, etiquette, eating habits, punctuality, pronounciation, efficiency, timeliness, discipline, language, behavior just to name a few.

Embedding your resources offshore

This is one of the successful techniques in IT outsourcing and has several benefits. If you can afford the costs this is the fastest way to help develop some good SME skills on your offshore teams, building the camaraderie, sharing expectations, transitioning projects, handing off support, explaining design and development strategy, test methodology just to name a few.

It gets a bit expensive if you are sending few resources from US or Europe for example. For those visiting India, the IT outsourcing hub, Temporary accommodations are not readily available or convenient so you will ending putting your staff in 3 or 5 start hotels which can be much expensive then rooms back home racking up costs. Add to these costs Visa, and healthcare insurance and other incidental costs. Some of the enterprising staff have charged the cost of visiting Taj Mahal also into their office budgets – so keep an eye.

There are lots of clients that do this on a regular basis, often encouraging movement of people on both sides. It depends on how we use this technique. Take for example a large projects with a huge offshore component really merits a visit to transition requirements or design, and set upfront expectations, align teams and establish communications and reporting protocols.

The ability to develop those personal connections is another important benefit. The feedback that you get being physically there is not something you can read in an email or gauge from a series of phone calls or video calls. Inspite of all the collaboration tools, the ability to video conference etc. there is nothing that beats that personal touch and getting the feedback and assessing what you have at offshore – after all that is an extension of your work space isn’t it?

What’s next Inshoring, re-shoring

You will hear more this year on these two terms than ever.  As wages increase in China and India coupled with Inflation, in addition to  unemployment rate struck at slow pace,  US companies will look to seeing opportunities right here in US to bring back the jobs.  Manufacturing is already seeing this trend with what some folks calling this a manufacturing renaissance.  US is getting more competitive now to do business and many top notch companies like Apple, Google, GE,  Boeing, Ford, are expanding already or have major plans to expand.  These top companies flush with cash is another incentive to do so once the economy looks up.
 
If and when the corporate tax rates are lowered the business leaders will welcome this with upping up the ante on bringing back jobs. There are lot of positive trends in place but it will take a while to show up really on the metric charts.
 
There is not much  tracking of the hard numbers on this piece of statistics – how many jobs are actually coming back.  The current best source might be Reshoring Initiative an organization that encourages US business to return jobs home. they are more focused on manufacturing now, now the tide will turn soon – I will place bets at  a modest % start be it in single digits for IT in-shoring or re-shoring what ever you want to title.