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October 1999, Vol. 12, No. 10

Outsourcing

Managing Outsourcing Expectations:Productivity Benchmarks, Baselines, Service Levels, and Other Quandaries

Michael C. Mah 6

An Effective Strategy for Managing Outsourcing with MeasurementHoward A. Rubin 17

Using the CMM for Contract Requirements and Managing Outsourcing

Norm Hammock 25

Offshore Outsourcing:The Alternatives, Key Countries, and Major Challenges

Marty McCaffrey 29

Offshore Outsourcing:“They Lived Happily Ever After”? or “Something Wicked This Way Comes”?

Roger N. Gaunt 35

When Outsourcing Costs More Than It SavesPrins Ralston 40

www.cutter.com/consortium/

2 October 1999 Vol. 12, No. 10 ©1999 Cutter Information Corp.

center has grown to include the mainte-nance of existing legacy applications and,in recent years, application developmentand systems integration. In some cases, itincludes all of the development, integration,maintenance, and operation of the IT infra-structure, so that the outsourcing vendortruly becomes a long-term, strategic partnerto its client organization.

But because the outsourcing activity hasbecome so large, expensive, complex, andmission critical, the risks have grown also.Several mega-deals have collapsed, leavingboth the client and the outsourcing vendorembarrassed and frustrated. Even a medium-sized outsourcing project is prone to prob-lems and outright failures. As a result, it hasgradually become more evident that carefulmanagement of expectations � by bothparties � is crucial before, during, and afteran outsourcing contract is signed. This issueof the Cutter IT Journal looks at those manage-ment issues from several perspectives.

Mah points out, for example, that in orderto have an effective outsourcing contract,measurement and benchmarking arecrucial. As he observes, �If you didn�t havea successful metrics program before, you�dbetter get one now.... These issues will berepresented in your contract, and it�s vitalthat the goals be both reasonable and

quantifiable.� He also notes that industrybenchmarks and baselines can be useful,as long as the data is current and validated.Indeed, a competent outsourcing vendorshould have its own baseline data from thelast several projects that it has managed.

Howard Rubin continues the discussion ofmeasurement-based outsourcing manage-ment and warns that many of the outsourcingfailures have been caused by a set ofperformance measures that did not alignproperly with the business needs of allparties, were so inflexible that they couldnot be changed to adapting needs,presented unrealistic performance targets,or did not cover the complete scope ofwork covered by the agreement. He alsonotes that some outsourcing metrics act as�lagging indicators� by reporting resultsreactively instead of providing a �look ahead�view of performance. And he concludes byarguing that �metrics information must beused as a common currency of communica-tion and not viewed as overhead. Thereforethe collection of information that feeds themeasurement system must be nonintrusiveand highly automated.�

Next, Norm Hammock discusses theSoftware Engineering Institute�s CMM as thebasis for negotiating contract requirementsand managing outsourcing. Rather thandiscussing it in the abstract, he provides abrief overview of a real outsourcing projectat BellSouth in which the CMM was used asthe basis for determining which softwarepractices would be defined and practiced inan organization of 2,000 practitioners. The�lessons learned� portion of Hammock�sdiscussion will prove valuable for anyoneelse who may be thinking of using the CMMas the basis for an outsourcing relationship.

In recent years, there has been a greatdeal of interest in offshore outsourcing. It�sstill a relatively small part of the overall

Introduction

Ed Yourdon

Over the past decade, the concept of outsourcing has not only become popular, it has become a �mega-business.� As Michael Mah points out

in the first article of this issue, outsourcing is expected to generate over US$150 billion in revenues by 2003. What was originally viewed as a conve-nient way to have someone else take over the burden of running a data


industry � India, for example, generated$2.7 billion in outsourcing revenues in 1998,when the overall market was approximately$100 billion � but it has been growing at arate of more than 50% per year for the pastsix years. Our next author, Marty McCaffrey,reviews a number of alternative forms ofoutsourcing, ranging from unsophisticated�body shop� services to offshore develop-ment centers and joint ventures. He alsodiscusses some of the outsourcing countries.While India continues to have the highestvisibility, the outsourcing industry in coun-tries such as Ireland, the Philippines, andIsrael is now growing rapidly. And asMcCaffrey points out, �China, Russia, Brazil,Ukraine, Egypt, Malaysia, Pakistan, andseveral Eastern European countries are inthe early stages of developing an outsourcingindustry.�

Next, we look at two examples of offshoreoutsourcing, one supplied by Roger Gauntand the other by Prins Ralston. Gauntdescribes the experiences of an unnamedFortune 50 company that blundered badlyin its first attempt to outsource a legacyapplication overseas. Several years later, asecond effort was undertaken, with Gaunt incharge. As with Hammock�s article, Gaunt�slist of �lessons learned� and summary ofcultural issues in offshore outsourcing areenormously helpful for anyone about toembark upon a similar venture.

Finally, Prins Ralston discusses some reac-tions to government outsourcing policiesin Australia � and in so doing, points outthat we should remember the �law of unin-tended consequences.� In theory, one canestablish an outsourcing relationship with avendor of any size; a small project, forexample, might be well-suited to a smallvendor that operates in the same geograph-ical vicinity. But the trend, as in the case ofthe Australian government, is toward out-sourcing for mega-projects and mega-deals,

which encompass large numbers of projectsover a long period of time. The result is thatoutsourcing vendors are going through thesame consolidation process that we�ve seenin a number of other areas. Vendors likeEDS, IBM, CSC, and Andersen have beengrowing ever more gigantic, while medium-size vendors have been struggling to alignthemselves with the giants and/or to reach acritical mass so they won�t be stepped on bythe giants. Meanwhile, the small 10-person,50-person, and even 100-person shops aregetting swallowed up � or, in the case ofRalston�s homeland of Australia, fading away.

There is no question that the giant out-sourcing vendors have the advantages ofsize, sophistication, global presence, andfinancial strength, but the smaller vendorsare often more flexible and responsive andcan sometimes provide a level of innovationthat the stodgy giants cannot or will not.The Australian government�s approach tooutsourcing, which favors the multinationaloutsourcing giants, has stifled its own up-and-coming �native� outsourcing industry.The Australian experience may serve as acautionary tale for the IT industry in NewZealand, Canada, and even England andcertain regions of the US. If client companiescontinue to favor the outsourcing giants,small and medium-sized vendors � the�innovative edge� of the industry � mightwell wither and die.

After looking closely at outsourcing thismonth, we�ll turn our attention in Novemberto knowledge management. As always, wewelcome your feedback and comments;you can reach us by phone, fax, or e-mail.

Get the Cutter Edge free: www.cutter.com/consortium/ Vol. 12, No. 10 October 1999 3

Ed [email protected]/consortium/

Editor: Ed Yourdon

Editorial Board: Larry L. Constantine Bill Curtis Tom DeMarcoPeter HruschkaTomoo Matsubara Navyug MohnotRoger Pressman Howard RubinPaul A. StrassmannRob Thomsett

Cutter IT Journal� (ISSN 1048-5600) is published 12 times a year by Cutter Information Corp.,37 Broadway, Suite 1, Arlington,MA 02474-5552 (+1 781 641 5118,or, within North America,+1 800 964 5118; Fax +1 781 6481950 or, within North America,+1 800 888 1816; Web site:www.cutter.com/consortium).

Cutter IT Journal� covers thesoftware scene, with particularemphasis on those events thatwill impact the careers ofinformation technologyprofessionals around the world.

Editor: Ed YourdonPublisher: Karen Fine CoburnManaging Editor: Karen PasleyProduction Editor: Barry MaloneyClient Services: Megan Nields

©1999 by Cutter InformationCorp. All rights reserved. Cutter IT Journal� is a trademark ofCutter Information Corp. Nomaterial in this publication maybe reproduced, eaten, ordistributed without writtenpermission from the publisher.Unauthorized reproduction in anyform, including photocopying,faxing, and image scanning, isagainst the law. Subscriptionrates are US $485 a year in NorthAmerica, US $585 elsewhere,payable to Cutter InformationCorp. Reprints, bulk purchases,past issues, and multiplesubscription and site license ratesare available on request.


To the editor:I was delighted with Richard Zultner�s article on Critical Chain Project Management(CCPM) in the July 1999 issue of the Cutter IT Journal. The principles behind this approachaddress current concerns of project managers and appear to provide some hope for relief.In practice, small tasks with strict deadlines only tell us when it�s time to panic and startdoing the work. They do not ensure that the project is going to be delivered on time, nordo they provide a reliable estimate of when it�s going to be delivered. CCPM advises:compress your tasks� duration, and get rid of deadlines and multitasking!

But will this magic work? I think there are at least two issues worth considering very care-fully. First, it is widely accepted that many projects experience considerable overrunsbecause of already excessively compressed schedules (especially in the early stages ofarchitectural and component design). Why this late rework? According to analyses carriedout in real projects using system dynamics (SD) simulation models (which are particularlyeffective at diagnosing this phenomenon), late rework is primarily due to poor quality inthe early stages. Among other factors, schedule pressure works as a major �catalyst� in thisprocess of hurting quality. Now, if you apply CCPM to your project, you will be compressingyour tasks� duration even more � say, by 40%. Couldn�t this lead to even lower quality,more late rework, and a never-ending Critical Chain?

Secondly, CCPM focuses on ensuring that the work progress never stops in the CriticalChain of tasks (which is derived from the resource-constrained critical path of the CPMnetwork). However, what if the Critical Chain changes throughout the project? WhileCCPM gives low statistical probability to this event, it can happen in the real world. I believethat the perspective of a static single Critical Chain can be dangerous. If a noncritical chainto which little priority is given in early planning later becomes critical during implementa-tion, it can easily jeopardize the whole project. While a dynamic view of a changing CriticalChain is not considered by CCPM (unlike CPM, which promotes near-critical path analysis),in practical project planning this phenomenon should be considered.

CCPM addresses some important outstanding issues of project planning. It draws our atten-tion to some of the limitations of the traditional PERT/CPM approach. However, I believethat CCPM needs to be checked against the arguments that motivated both the oldapproaches and the new ones, such as the SD-based approach. Perhaps it can even becombined with these.


Letters to the Editor


I look forward to hearing more about practical results, lessons learned, and furtherimprovements of CCPM.

Sincerely,

Alexandre G. RodriguesDepartment of Information SystemsUniversity of Minho, Portugal

Richard Zultner causes still more comment with his treatment of benchmarking in the4 August 1999 issue of the Cutter IT E-Mail Advisor. There Zultner observes that organiza-tions can find many, if not all, of the �best practices� an expensive benchmarking studywould recommend in a simple college textbook. He writes:

�Recently, I was at a client who had just finished a major benchmarking study. I wascurious to see if the findings could possibly be worth the time (and expense) the study hadcost them.... That evening, I went to the university bookstore in town � [and] purchasedthe textbook used for their primary software engineering course.� Back in my hotel room, Iwent through the text and managed to locate all the best practices the benchmarking studyhad so laboriously (and expensively) �discovered.� It took me less than three hours.�

To the editor:

The same situation that Mr. Zultner describes with IT benchmarking could easily occur inother disciplines. Prior to entering the software field, I used to edit medical literature for theUS Public Health Service. If Mr. Zultner had undergone a full annual medical examination, itis very likely that every problem the physician and lab analysis found would be describedin standard medical texts. If the conditions were fairly common, the recommended thera-pies would be available from the literature also.

The point Mr. Zultner seems to miss is the ancient medical aphorism that only a fool wouldtry to diagnose his own condition. It is very hard for personnel who work in a company tocarry out an objective self-diagnosis. This is why doctors go to other doctors when somethingserious occurs. This is why lawyers hire other lawyers to defend them in major lawsuits.

Benchmarks and assessments are diagnostic studies. After such a study, it is normal tofollow up with a therapy program. This is true for medical practice as well.

What a benchmark can reveal is the specific set of client problems that need remediation.This is what a medical exam reveals: exactly what problems need therapies.

In both benchmarks and medical diagnosis, the clients are not likely to be objective andcareful in analyzing their own conditions.

Sincerely,

Capers JonesSoftware Productivity ResearchBurlington, Massachusetts, USA



“CAN SOMEONE DO I.T. BETTER THAN WE CAN?”

That is the question for many corporations.Understanding IT alignment and productivityissues is becoming increasingly vital inhelping CEOs and CIOs decide on whetherto outsource and, if so, what should beoutsourced. If they pursue the course,expectations will be high. These expecta-tions are likely to manifest themselvesthrough specific service level agreements(SLAs) within an outsourcing contract. It isvital to get these expectations right andeffectively manage contractual promisesand their associated risks.

IT outsourcing can be broken into threegeneral categories, in descending order of�ease of predictability� and ascending orderof risk:

n IT infrastructure (data center and otherhardware assets)

n Maintenance of existing legacy (i.e.,mainframe) applications

n Application development, comprisingnew systems and major releases

The above three categories exhibit a broadspan of work. This ranges from what can bedescribed as production-like work tocreative work. In this regard, IT infrastruc-ture might be described as routine and stan-dard, new application development ashighly creative, with legacy maintenancefalling in between.

In short, if an organization were to consideroutsourcing, a safe course would be to farmout that which is routine and repeatable.This would free up a company�s internalintellectual resources to concentrate on itscore competencies: the new systems tomeet the future IT needs of the corporation,in what is becoming an increasinglycompetitive marketplace.

In one example of the role of IT as a corecompetency, Fred Smith, CEO of FedEx, hasfrequently described the company�scomputer systems as perhaps being moreimportant than its planes. He marveled atthe work done by IT designers: �You�retalking about people who are worth afortune,� he said.

COMPANIES ARE TURNING TOOUTSOURCING IN DROVES

Like it or not, outsourcing is here to stay andis growing. International Data Corporation�s(IDC) U.S. and Worldwide OutsourcingMarkets and Trends, 1998-2003 [1] reportstates, �Worldwide outsourcing services isfast on its way to blowing by the $100 billionmarker. In 1998, spending topped $99billion. By 2003, it will explode to more than$151 billion. The majority of the spendingwas in the US, which accounted for 52% ofthe total at $51.5 billion, expected to rise to$81 billion by 2003.�

6 October 1999 Vol. 12, No. 10 Get the Cutter Edge free: www.cutter.com/consortium/

ManagingOutsourcingExpectations:Productivity Benchmarks,Baselines, Service Levels,and Other Quandaries

by Michael C. Mah

© 1999 by QSM Associates Inc. All rights reserved.


If IT is essential to your competitiveness,then outsourcing must be done with greatcare. In moving toward outsourcing applica-tion development and maintenance, someCEOs and CIOs are turning over the systemsthat run their companies to an outside entity.This action may be justified by those whodo not see IT as a core competency. Somemight argue that this incurs a certain risk;others might say that if they don�t outsource,the world will leave them behind.

Some of the reasons for outsourcing are:

n The driving down of costs, the conver-sion of fixed staff costs to variable costs,or some other aspect of costflexibility/reduction

n The need for additional IT systems-building capacity (e.g., the serviceprovider brings in a team of 500 peopleto reduce the backlog)

n Faster access to staff resources trainedin new technology, without having tohire additional inhouse personnel

n A barter arrangement, whereby theclient and vendor swap some mix ofservices and assets

n Shortened schedules, lower defectrates, or some combination of theabove; in short, �higher productivity�

By outsourcing, executives who may havebeen frustrated with their own IT effortsmight be saying they�d rather �switch thanfight.� Perhaps sitting at SEI CMM Level 1,they�ve had a crisis of confidence in theirown IT group, having experienced firsthandthe overruns described in studies like theoft-quoted Standish Group �Chaos Report.�As Michael Dell once observed, �Outsourcingis almost always a way to solve a problem acompany hasn�t been able to solve itself.�He continued, �Nobody knows what [IT

people] do, and why they do it. The solution� outsource IT to a service provider, andhopefully they�ll fix it.�

So along comes a supplier promising loftyproductivity gains that will bring the client to�best in class.� �We�ll deliver the same ormore IT services for 20 percent less,� avendor might say. And the expectations areset into motion.

GETTING AN ADVOCATE TO HELPNAVIGATE THE RISKS

In an article entitled �Outsourcing: TheGreat Debate� [2], Rob Thomsett of theThomsett Group articulates several keypoints to consider before outsourcing.Among his recommendations, Thomsettcounsels:

n If you can�t measure it, don�toutsource it.

n If you can�t manage it yourself, don�toutsource it.

n If you can�t make it legal and binding,don�t outsource it.

n If you can�t understand it, don�toutsource it.

n If you can�t lock the outsourcer intoprofit sharing, don�t outsource it.

Another way to phrase the above is:

If you do decide to outsource IT,measure, manage, and understand it.Make your agreements and servicelevels legal and binding, and negotiatean agreement that shares both theprofits and the risks.

How to do this? A few things becomereadily apparent. The mix of required skillswill change, and new, critical disciplinesmight need to be put in place. Issues arecomplex and multidimensional, and you



may need an advocate in several areas.These include:

Software MeasurementIf you didn�t have a successful metricsprogram before, you�d better get one now.You�ll need to understand how to measureIT and software productivity and communi-cate it effectively to senior management.These issues will be represented in yourcontract, and it�s vital that the goals be bothreasonable and quantifiable. The phrase, �Ifyou can�t measure it, you can�t manage it,�is even more true with outsourcing.

You�ll need to benchmark supplier perfor-mance, year over year. You�ll need toquickly establish your own project database.This will enable you to quantify your ITsupplier�s performance and ensure thatproductivity goals are being met over time.You don�t want to experience your produc-tivity going down � you hired experts tomove it up.

You�ll need to acquire valuable skills in soft-ware estimation and tracking/control. Evenif this is primarily the responsibility of thesupplier, you�ll need your own capabilitiesfor strategic planning and to verify thevendor�s promises. You need to know if it�spadding its estimates or overpromising. Thiswill help you negotiate deadlines.

Contract Negotiation and ContractGovernanceA good contract and a good governancestructure are critical. You�ll need to have aneffective team that is knowledgeable aboutboth sourcing issues and negotiation reportto the senior executives. In short, theremust be a strong sourcing function and aneffective relationship management frame-work. Be sure you have access to strongaccounting and legal resources. Rememberthat some of the world�s largest sourcingsuppliers emerged from the industry�s

dominant accounting and legal firms. Inorder to keep a balance and not be dis-advantaged, you�ll need equal contract,legal, and sourcing advice.

In certain cases, the relationship mightbecome strained, especially if there was apoor relationship management frameworkin place initially. You�ll need skills in disputeresolution and mediation. This will promotecommunication and collaboration in two-party, multi-party, and multi-issue negotia-tion, leading � one hopes � to resolution.

TechnologyIf the outsource deal is large, and most ofyour former IT staff now wear badges thatsay something like �KPG Computer GlobalData Services Consulting,� be aware thatmuch of what used to be your IT �intellec-tual capital� has been transferred to yoursupplier. The risk is less if a smaller per-centage of your IT was outsourced.

Your remaining team will need differentintellectual capital, including subjectmatter expertise in technologies currentand future, addressing such areas as client-server, distributed computing, Web-based e-commerce, mainframe COBOL, frameengineering, and reuse. One IT manager,whose Fortune 100 employer outsourcesprogramming but retains all else, noted thatcritical business and IT knowledge of thedivision�s core system had to be kept closeto the company. This system and its archi-tecture had been the heart and soul of thedivision�s manufacturing, marketing, anddistribution chain. It had people with 15 ormore years of that subject matter expertise.That kind of intellectual capital, knowledgeof the �blueprints,� absolutely could notreside offshore with programmers inBangalore. It had to stay in house.

Project management skills will be vital, butat the level of comanaging the direction and


If you didn’t have

a successful metrics

program before,

you’d better get one now.


strategy of your critical projects with yoursupplier/partner. You and your supplier arepilot and copilot. The instruments anddisplays you need will have to be sophisti-cated, not like the management frameworksof the old days. It�s a whole newoutsourcing world.

In all these areas, it�s wise to enlist the helpof specialists to serve as your advocates.They are valuable sources of this expertise.As your advisors, they should assist with theevaluation, assessment, selection, andimplementation of an outsourcing strategy,both before and after a supplier is selected.

With regard to metrics and productivitybenchmarking, your goal should be toquickly implement measures to supportservice levels in order to make yourcontracts reliable. An advocate in this areacan serve as an independent third party toassist both client and provider with anobjective assessment of year-over-yearproductivity. Some can even furnish refer-ence benchmarks from industry that can beplaced �on the desktop� of both client andservice provider, providing an �enabling�metrics technology that can save you fromhaving to reinvent the metrics wheel.

If a service provider suggests that you �justuse our benchmark method,� look closely.You have too much at stake to leave it to a�trust me� method on a multi-million- orbillion-plus-dollar outsourcing deal whileyou�re in the infatuation phase. I hate to sayit, but these kinds of �marriages� might callfor a prenuptial contract with a trustedadvisor to assist.

“YOU CAN TEACH A BUSINESS PERSONABOUT I.T., BUT YOU CAN’T TEACH AN I.T. PERSON ABOUT BUSINESS”

As I discussed above, a new body of skillsis required to effectively manage anoutsourcing deal. Along these lines, someone

once observed, �From experience, we�velearned that it�s easier to teach businessprofessionals about IT than to teach ITprofessionals about business.� One companyeven explored training its business peopleabout IT, using a 10-day �IT certification�course.

In response, one IT contracts managementspecialist came right out and said, �I thinkthat�s plain wrong.� Another IT manager,who now heads up a team of IT metrics andestimation specialists that oversees hiscompany�s supplier, added, �Sure, you cando that, if you want to get run all over.�Both are involved in an outsource contractof over 1,500 IT staff, valued at roughly $4billion over 10 years. They spoke from first-hand experience.

These IT professionals went on to describethat the skill mix changed, and that althoughone might not find all the desired skills in asingle person or couple of people, you couldassemble a balanced team with the criticalknowledge of IT architectures and contractand supplier management skills.

OUTSOURCING LEGACY MAINTENANCE

IT applications outsourcing generallyfocuses on two areas: maintenance oflegacy systems and development of newapplications/enhancements. Outsourcinglegacy maintenance is considered the lessrisky of the two.

Certain prerequisites might be valuable tomaximize the chances of success inoutsourcing legacy maintenance. Forexample, if it is assumed that this �routine�work falls into a classification of a servicecommodity, then it should be well-defined,structured, well-documented, and operatingwithin the status quo. In fact, some havedescribed legacy maintenance as keepingsystems running until they�re retired.


If a service provider

suggests that you

“just use our benchmark

method,” look closely.


Therefore, if you intend to take this route,first �tidy up your shop� or have the out-source supplier work with you to achievethis. Contract with the supplier for an initialperiod to assess your process and performa �root cause analysis� of process bottle-necks, before signing on to a long-term deal.Perhaps the initial deal could be a one- tothree-year contract with an option to renew.

It�s been my observation that most legacymaintenance contracts focus on cuttingcosts as a primary goal. These are known as�headcount deals� � that is, do the work of100 people with 80, with no schedule slips.The intent is often to shrink the percent ofIT maintenance from some figure like 60%-65% down to perhaps 50%, 40%, or lower. Ifthis is your goal, the resultant savings maybe staff hours that can be redeployed tobuild new systems.

Benchmarking Legacy MaintenanceAny organization considering outsourcingshould get a productivity baseline that quan-tifies the organization�s proficiency, whetherit�s legacy maintenance or applicationsdevelopment. Ideally that happens beforeoutsourcing. If not, it should be initiatedbefore or during the due diligence phase,when contractual commitments such asscope, productivity targets, and pricing areestablished.

For the type of �factory� work encompassedby legacy maintenance, certain metrics withlinear dimensions (read: ratios) may beuseful. Factory classes of work, such as lightbulb manufacturing, banging out steel rodson a production line, automobile produc-tion, and the like, lend themselves to beingdescribed in units such as output producedper person-month of effort, or per unit cost.IT help desk requests, broke-fix requests(operations support, when those beepers gooff at 2 a.m. if a batch system goes down),

and maintenance work requests might alsobe described in these units of efficiency.

However, where the nature of the workoverlaps to �enhancements,� there is aprogressively higher degree of this type ofwork having R&D, or problem-solving, attrib-utes. This is due to the iterative aspects ofidentifying a problem, identifying a rootcause, designing a solution, implementingthat solution, and testing. In this arena, thesimple ratios of productivity may begin tobreak down, and more sophisticated mech-anisms are required.

In the meantime, for routine maintenance,ratio-based metrics may be useful. Thenumerator of this ratio, amount of function-ality, is sometimes represented in functionpoints (FPs). However, it is a myth to believethat this measure is the sole valid measureof system size. Some IT organizationsbecome disheartened due to the notion thatthey must use function points. They do not.

While FPs can be useful, other measures ofsystem size might be: the number of workorders, change requests, modules andpercent changed, components, frames,objects, or the amount of new, modified, ordeleted source lines of code. However, toobtain productivity in this manner, all of thefunction points or all of the code or all of thebroke/fix or change requests for a giventime frame (say, a year) would have to becounted. Measuring all of this output is adaunting, labor-intensive overhead task.

A viable alternative might be to performsome form of statistical sampling, gatheringdata on a select group of projects in theportfolio. The objective would be to verifythat costs are going down, schedules areshortening, functional throughput is rising,or some combination of the three, with the same or better system availabilityand reliability.



“Peopleware” and Loss of “Goodwill”The issues discussed above are just someof those facing organizations consideringthe outsourcing of legacy maintenance.However, there are a few other points worththinking about.

Inhouse IT departments often have anunwritten degree of �goodwill,� or commonloyalty, in place within the organization.That is, there are inevitably those requests,�favors,� and wishes that are accommo-dated by an IT staff that is part of the corpo-rate �family.� These relationships producewhat could be considered �invisible prod-ucts.� They are the day-to-day fixes andenhancements that come from a tightly knitgroup of people on the same team, with along-standing relationship and sharedhistory from years of working together.

Outsourcing carries a risk of this goingaway. You�ll need to consider that peoplebeing outsourced might view this action asa betrayal. After years of loyal and dedicatedservice, the company they considered�home� shoved them into an uncertain andpossibly destabilizing situation with regardto their professional and financial future.

After outsourcing, there might be little goodwill left. There might be outrighthostility. Requests that, in the past, wouldhave been accommodated under goodwillmight now be subject to debates as towhether they are contractually in scope,during which valuable time is lost. Loss ofthis reaction time might be critical in arapidly changing industry. The claimedbenefits of outsourcing, such as �depth onthe staffing bench,� access to numeroustools and techniques, and highly matureprocesses, might be offset by time lost fromin-scope versus out-of-scope debates.

On the flip side, an incoming serviceprovider can offer personnel in smaller IT

shops a chance to blend with a larger,cutting-edge firm, bringing new opportuni-ties for learning and professional advance-ment. In this case, outsourcing might be apositive experience.

OUTSOURCING APPLICATIONDEVELOPMENT

If outsourcing legacy maintenance iscomplex, outsourcing new applicationsdevelopment can be geometrically moreso. The challenge stems from the fact thatyou are now moving from what is consid-ered routine and repeatable to the exactopposite.

Indeed �project work,� as described byThomsett [2], is not routine. It is unique. Ithas a long time frame (usually months). Itis creative, nonstandard, not easily measured,and intended to change the status quo. Itwould include building the next �killer app�that could propel a company into newarenas or elevate its competitiveness inits line of business. In short, project workis R&D.

Partly for this reason, while outsourcingroutine maintenance can lend itself to the�megadeals� observed in industry (usually 5to 10 years long), new applications do not.In many cases, corporations are choosing tokeep new development in house. If they dochoose to outsource, many elect to do so ona project-by-project basis, allowing them-selves flexibility.

Project work might also involve the researchand selection of packages to be purchasedand modified to meet required functionality.While not likely to be in the �killer app�category, this means of IT delivery might beappropriate in certain instances. In thisrespect, you�re essentially implementingsoftware reuse � reusing someone else�s�off the shelf� code. The R&D aspect of this


People being outsourced

might view this action

as a betrayal.


work is slightly different. There will likelyhave to be new functionality written, plusmodifications, plus bridge and interfacecode to other applications. Keep in mindthat, in some ways, changing and testingsomeone else�s code might be more diffi-cult and complex than doing the same typeof work on your own systems.

Why Productivity Ratio Metrics(Functionality per Person-Month) Don’tWork for Application DevelopmentThe quick answer is that ratio metrics withlinear mathematical relationships breakdown when applied to R&D-like projectssuch as application development, whichexhibits nonlinear behavior.

What is this nonlinear behavior? Put simply,it means that you can�t cut time in half byapplying twice the people, for example. Thisnotion only works for factory-like activitiesthat are simple and repeatable. It breaksdown when applied to research-intensive,problem-solving engineering disciplines likesoftware applications development. Theseapplications are deadline and time critical.Traditional metrics like output divided byunits of work effort or cost omit time!

Studies by the QSM organization usingmodern-day data on application develop-ment projects (not just the industry data ofyesteryear) demonstrate this fact. Here�s asummary-level finding: data shows thatdoubling a team from, say, 10 to 20 membersdoes not cut time in half. The nominal timecompression is about 20%, all other things(such as scope) being equal. But this speedcomes at a price in reliability. Defects riseas much as six-fold. This 6x rise is notsurprising, given that every doubling ofstaff results in a 6x rise in communicationcomplexity, when mapped to the number ofcommunication paths between members ofthe team. More communication complexitymeans more risk of miscommunication,

which manifests itself in the design and thecode. In summary, there is a �20/200, 6x�rule, which states that doubling the staffmay cut the time by 20%, but with six timesthe number of defects.

This makes for complex scenarios whendealing with SLAs for application develop-ment. In short, there are four key parametersto manage in a balanced fashion:

n The amount of functionality.

n The time to complete the building ofthis functionality.

n The effort in work-hours, work-months,or work-years. (This is related to cost.)

n The reliability of the system in the initialone to three months of deployment.

It�s no surprise that these represent what isknown as a �minimum data set,� put forthby both QSM and the Software EngineeringInstitute.

WHAT ALL THIS MEANS TO A BALANCED SCORECARD

This means that if you�re an organizationlooking to outsource, you need to prioritizewhere you want your �productivity� gain. Inote this in quotation marks deliberately,because a productivity gain means differentthings to different companies. To one, itmeans get to market faster. For another, itmeans keep time the same, just cut costs.To another, it might mean lower costs, butraise quality and system availability. To yetanother, it means all three. You get thepicture; it can mean many different things.

Once you decide what it means to you,research on software life cycles tells youthat it is much harder to shorten schedulesthan it is to lower costs. Time is stubbornlydifficult to compress. Even more so whenwe experience the three-headed dragon of



applications development: scope growth,requirements change, and staff turbulence.Anyone experience those lately?

So if it�s, say, three times more difficult toshorten schedules for a fixed amount offunctionality than it is to lower costs oreffort, then consider that weighting whencreating your balanced scorecard. Youmight reward this level of performancemore so than cutting costs. Many compa-nies want to operate at �Internet speed,� butwhen you look at their SLAs, all the incen-tives are on cutting headcount and loweringcosts. What�s your priority?

IF INDUSTRY BENCHMARKS ARE THEANSWER, THEN WHAT’S THE QUESTION?

The question is, �How does our perfor-mance compare against other companiesthat build and maintain software?� Indeed,if competition is the name of the game,then answering that question might be ofinterest to you. If so, there are a numberof metrics firms that will provide this typeof information.

If you obtain statistics like these, makesure that they�re current. Older data is notvery useful. Ask the firm how the data isobtained, how it is validated, and howconsistently the measures have been used.

Some firms will even make industry trend-lines, or benchmarks, available to you onyour own desktop. That might be importantto you if you want to easily compare yourown data against the competition.

Better yet, build your own productivitybaseline and trends. Say that at the begin-ning of an outsource agreement you wantto have a productivity baseline that repre-sents �the state of the business� at the timeof contract signing. It�s possible to baselineyour own schedule, cost, and reliability

performance. �But we don�t have anydata�,� you say. Chances are that it�s there,you might just need a jumpstart from a firmthat knows how to help you. From there, youcan compare how well your service providermeets target service levels on cost, schedule,and reliability every year. While these aren�tthe only elements of a balanced scorecard,you�re in the dark on critical performancecriteria if you decide to omit them.

If you really find that there is no informationavailable on your own projects, try andmake the best of it. Ensure that this sad stateof affairs doesn�t continue, especially nowafter you�ve decided to hire someone who�ssupposed to improve something. Agree oncommon measures moving forward. Set aframework in place. Measure starting now.Then, when the numbers start coming in,you�ll know if you�re seeing performanceresults in the top quartile, second quartile,or, heaven forbid, the lower third or lastquartile.

Keep in mind that it�s unreasonable to expecta service provider to hit �best in class� in alldimensions. It�s more reasonable to expectthat if it cuts costs, for example, it may noteasily demonstrate �Internet speed� duringthis time. When�s the last time you sawa staff reduction of 30% and had shorterschedules be the result? Again, what�s yourpriority?

THE PRODUCTIVITY J-CURVE AND SERVICE LEVEL AGREEMENTS

The J-curve, for those who have not hadthe pleasure of experiencing it firsthand, isa drop in productivity after some event,such as an outsource transition, followedby a gradual rise. This can happen forvarious reasons, including staff churn, amomentary drop in morale, root causeanalysisofprocessbottlenecks, requirements


Many companies want to

operate at “Internet

speed,” but when you

look at their SLAs,

all the incentives are on

cutting headcount

and lowering costs.


turbulence, or a combination of these. Shortand shallow J-curves can be tolerable, withshort-term pain acceptable in the interestsof the long term. On the other hand, longand deep J-curves can be excruciating.

The J-curve may initiate its downturn beforethe actual signing of an outsource agree-ment. Some theorize that during earlyoutsource forays by a company, the J-curvedrivers might start in motion. The bottom ofthe curve is seen sometime during theactual transition, which may last anywherefrom several months to a year or longer.

The issue with regard to service levels is tobe consciously aware of the J-curve�s poten-tial existence and to tailor the initial servicelevel targets accordingly. Your outsourceprovider might have the most optimistic andpositive intentions when it promises some-thing like �immediate productivity gains of17%, starting on Day 1.� However, if duringthe transition productivity actually takes ashort-term dive of 17%, then both you andyour provider suddenly have a 34% shortfalldispute on your hands. There will be screamson both sides of the table. During this time,cool heads will have to prevail. You�ll needto rely on all the negotiation, relationshipmanagement, dispute and mediation, andproductivity benchmarking and metricsskills you can muster.

Work hard to not get yourself in this difficultposition in the first place. The shockwave ofthe J-curve may be less likely when legacymaintenance is outsourced, when the teamthat is outsourced is less than 25% of IT, orsome combination of the above. It is morelikely � perhaps guaranteed � on applica-tions development and major enhance-ments, and when most if not all of the ITstaff are outsourced, with a major transitionof staff from the client to the incomingoutsource provider.

CASE STUDY: ONE ORGANIZATION’SDECISION ON A MAJOR APPLICATIONDEVELOPMENT PROJECT

Moses Levy, a general manager of supplychain and logistics systems at a majorretailer, described an interesting scenariothat illustrated several of the key decisionson �project level� outsourcing of a majornew application. This scenario involvedpotentially hiring an outsource vendor tobuild the system, with the vendor supplyingan incoming team of its own professionalsto provide additional capacity for this partic-ular project. Another outsourcing approachis for a vendor to supply a specified numberof IT professionals on an ongoing basis.These skilled professionals can then beutilized to build whatever the client wantsthem to build (or maintain) over the courseof, say, a year, two years, or five years.

In this case, the project was the creationof a new system that involved a massivechange to many of the company�s coresystems, under a brand-new technologyplatform. The system had to be donequickly. Outsourcing was a valid option forseveral reasons. The company did not haveall the necessary skills in house. Notoutsourcing would have required rampingup the skills. By the time this ramping wouldhave occurred, it would have been too late.The risk of ramping up and possibly doingthings wrong was too high. And there was aneed to get started as soon as possible.

Good, Fast, Cheap. Pick Two!Levy faced two potential scenarios: (1)outsourcing the entire project to the serviceprovider (vendor), or (2) partnering with thevendor and comanaging the project. In thefirst option, the supplier offered to meet a12-month deadline, deploying a staff of over100 people. While this was intended tomake the deadline (assuming everythingwent right the first time), it was deemed too


Long and deep

J-curves can be

excruciating.


expensive, in the range of $27-$30 million.Furthermore, Levy�s company anticipatedthat reliability would be inadequate duringthe first critical months of the system�s beingplaced into service.

How did the company know this? Byevaluating the supplier�s proposal with acomputer model. The development strategyput forth by the supplier was �cloned.� Theproject�s desired functionality was �sized,�and the staffing, schedule, and cost attrib-utes were duplicated on a screen.

From there, critical parameters such asphase times, overlaps, peak staff, ramp rate,and effort expenditures were benchmarkedagainst industry trends. Levy compared themetrics to industry data to determine if thepromised schedule was faster, on the norm,or longer. He did the same for effort, cost,peak staffing, and quality. This gave histeam a framework to explore all of theimplications on multiple dimensions andsanity-check them, assessing the risks ineach domain.

Sometimes this proactive �forward analysis�results in the client and supplier consciouslychoosing where to accept the risks andmaking the deal. In the end, this deal wasnot made. It was deemed too expensive;the promise of achieving a 12-month deliverywas offset by the high cost and risk of poorreliability. Most importantly, outsourcingwould not have provided the level of controlthat the organization wanted on this verycritical project.

The outsourcing that Levy�s company chosein the end involved a team of providers, eachof which had a demonstrated expertise onspecific pieces of the required system. Levyand his IT organization retained the role ofintegrator and systems management.

And while speed and time to market wasimportant initially, the question arose as to

whether the first supplier could really haveperformed at that aggressive pace. Whenpressed as to whether it had achievedanything at that level before, the supplierreplied that it didn�t have any past metricsdata. In the end, the question was, �Doesthis really make sense?� All emotions aside,common sense had to rule. There were toomany uncertainties to bet the company on,in spite of the allure of a vendor promise tomake something happen fast.

GETTING THE CRITICAL INFORMATIONYOU NEED

Given the reality of the J-curve and dubiousvendor promises, what can you do toachieve the productivity gains they seekfrom outsourcing?

n Create a strong sourcing group.Outsourcing is tricky terrain; it is mostlikely to succeed when an �A team� withgood skills is in place to look at all theangles, whether you outsource or not.This team needs to report directly tosenior management.

n Get an advocate. Strengthen your teamand save time by bringing in expertisefrom firms with proven knowledge inevaluating sourcing, including itscontractual elements.

n Know your IT capability and get yourown productivity baseline. How canyou assess whether someone can doIT better than you if you haven�t bench-marked your own productivity? Measurequickly on a select group of applicationsthat are critical to your business. Again,having an advocate that can empoweryou with proven methods and serveas an outside advisor can give you thenumbers you need to make an informeddecision and save time.



n Assemble an internal �SWAT Team�on metrics. It doesn�t take a lot. Get theteam trained on how to do a bench-mark. Typically you�ll need a groupcomposed of 0.5% to 1% of the IT orga-nization. Therefore, an IT department of300 persons could be served by 2 to 3full-time measurement personnel. Thisis small pence to provide senior execu-tives with critical information on a $36million IT department at prevailing rates.Their work will form the basis for multi-million-dollar contractual service levelsif you do decide to outsource.

n Get your own baseline and update ityear over year to assess whether yourcontractual goals are being met. Youcan do it yourself; some of the bettermetrics firms can teach you how to dothis. Or you can call a firm in on an as-needed basis to serve as an indepen-dent advocate.

n Ask your service provider to show youits baseline. Hey, the vendor wantsyour business, so have it prove its trackrecord to you with its metrics. Say what?The IT supplier replies that it doesn�thave any metrics data? Hmmmm.

n Pick your priorities. What do you wantto encourage? Is �Internet speed� yourgoal, or is it reducing costs, or havingstellar reliability? Do you want all of one,or some of all three? How does each ofthese priorities weigh against the other?Based on your answers, tune yourbalanced scorecard and service levelsaccordingly. Beware the J-curve!

n Take it one step at a time. The leastrisk involves outsourcing a portion oflegacy maintenance. The other extremeis to outsource both maintenance and

all of new development, transferring allof your IT staff to an outsource provider.Know the degrees of risk for thesescenarios and everything in between.Make an educated and informeddecision.

ADDITIONAL READING

DeMarco, Tom. Why Does Software Cost SoMuch, and Other Puzzles of the InformationAge. Dorset House, 1995.

Mah, Michael C., and Lawrence H. Putnam.�Software by the Numbers: An Aerial Viewof the Software Metrics Landscape.�American Programmer, Vol. 10, No. 11(November 1997).

Mah, Michael C. �Software Metrics forWinning Proposals.� In Proceedings of theTPI Outsourcing Conference. TPI, 1997.

Putnam, Lawrence H., and Ware Myers.Industrial Strength Software. IEEE ComputerSociety Press, 1997.

REFERENCES

1. International Data Corporation (IDC). U.S.and Worldwide Outsourcing Markets andTrends, 1998-2003. IDC, July 1999.

2. Thomsett, Rob. �Outsourcing: The GreatDebate.� Cutter IT Journal, Vol. 11, No. 7(July 1998), pp. 11-21.


Michael Mah is managing partnerwith QSM Associates, Inc., special-ists in software management,productivity benchmarking, esti-mation, and project control. As aprincipal with QSM, Mr. Mah haslectured in North America andthe Far East. He is also a seniormember of the Cutter ConsortiumIT Alignment Team and Year 2000Services Team, headed by EdYourdon. His lecture topics includeoutsourcing, reuse, softwareprocess benchmarking, processimprovement, metrics, riskmanagement, and softwareestimation.

With over 17 years of industryexperience, Mr. Mah has advisedFortune 500 companies, commer-cial organizations, and govern-ment agencies and has been acontributing author for publicationssuch as Software DevelopmentMagazine, American Programmer,Cutter IT Journal, Year 2000 Journal,and Application DevelopmentTrends. He holds a degree fromTufts University, Medford,Massachusetts, USA.

Mr. Mah can be reached at QSMAssociates, Inc., ClockTowerBusiness Park, 75 S. Church Street,Pittsfield, MA, USA, 01201. Tel: +1 413 499 0988; E-mail: [email protected];Web site: www.qsma.com.


n Do not align with the business needsand objectives of all parties

n Are so inflexible that they cannot beadapted to changing needs

n Present unrealistic performance targets

n Act as lagging and not �leading� indica-tors, in that they report results reactivelyinstead of providing a �look ahead�view of performance

n Do not cover the complete scope ofwork covered by the agreement

n Do not consider the natural performanceevolution of an agreement from transi-tion to maturity/steady-state evolution

In short, the measures selected to guide anoutsourcing agreement essentially play therole of �performance engineering targets�that reflect the time-varying needs andperformance opportunities of the businessand technical communities that are parties

to the agreement. In this context, an appro-priate metrics set is one that:

n Reflects the entire set of metrics speci-fied in the company�s own balancedscorecard

n Uses a scoring algorithm that focuses oncontinuous performance improvementacross all scorecard dimensions

n Incorporates an internal performancetarget adjustment that is aligned withthe evolutionary life cycle of the agree-ment itself � ranging from transitiongoals, to performance managementgoals after transition, to flexible �engi-neered� performance targets after�steady-state� goals are achieved

n Incorporates a parallel work outputmetric such as ITWUs (IT work units)

THE CONTEXT FOR MEASUREMENT

Furthermore, for an outsourcing agreementto be deemed successful, all parties to theagreement must accrue the expected bene-fits � business leverage for the client andeconomic and relationship success for theprovider. To enable the benefits to accrue,a proactive, forward-looking oversightmechanism must be in place to ensure thatthe outsourcing provider is operating in aperformance �zone� that will provide theclient with the business value it expected inentering the outsourcing agreement.

Outsourcing oversight metrics � keyperformance-monitoring parameters thatmust be built into the outsourcing agree-ment and assessed on an ongoing basis �are the answer (see Table 1). These metricsform an end-to-end measurement systemembodied in a measurement architecturethat addresses all critical issues linkingtechnology organization performance,key contract parameters, and business

Vol. 12, No. 10 October 1999 17

An EffectiveStrategy forManagingOutsourcing withMeasurement

by Howard A. Rubin

Lessons learned through outsourcing successes and failures of the pastindicate that a �critical failure factor� of an outsourcing agreement is the

selection of a set of performance measures to manage the agreement that:


performance. Such a measurement systemprovides all parties to the agreement �ranging from those running the business tothose in the development, maintenance,and operations organizations � with indica-tors and gauges to assess their currentposition relative to their own goals. Thisinvolves providing needed information onkey metrics that shows their rates of changeand how their performance links andrelates to metrics for the other stakeholders.

Companies embarking on outsourcingshould apply measurement in the context of:

Contract initiation actions

n Baselining current performance

n Benchmarking current performanceagainst industry performance

Contract �goal-seeking� activities

n Designing and implementing ameasurement system that will providethe necessary �telemetry� (i.e., collec-tion of metrics as part of the naturalwork processes) that will enable theparties involved in the agreement toactively monitor, manage, and navigate


Workstream Activities Outcome(s)

Perceptualmapping andrapid baselining

n Construct list of measures needed as perceived by both parties

n Inventory currently available data/assess data quality

n Analyze contractual agreement business value goals/assess measurement coveragen Create baseline

Metric baseline of current performanceestablished in minimum time frame

Benchmarkanalysis

n Identify industry groups/company types to be included in benchmark

n Construct benchmark analysis by overlaying baseline data on external performancedata

n Analyze and report on current performance vs. external performance

Assessment of degree of “stretch” ofcontractual goals; potential foridentification of additional performanceimprovement opportunities

Measurementsystem design

n Link internal IT measures to business outcome measures

n Identify progress/navigational measures

n Create overall measurement system incorporating contractual performancemeasures, progress/navigational measures, linkage to internal business measures,linkage to external business measures

n Identify and define all measures, data sources, collection and analysis tempos, andend uses

n Create system dynamics simulation

Organizational IT “flight deck”designed for monitoring andmanagement of contractualperformance parameters from bothtechnical and business perspectives;expectations of business outcomes ofthe agreement fully charted; simulationenvironment available for “what-if”analyses (optional)

Implementation n Definition of roles and responsibilities for enacting measurement system

n “Wiring” the organization Mechanism for contractual reportingand proactive performancemanagement in place

Continuoussupport

n Ongoing acquisition of data based on required data collection tempos

n Ongoing tracking against contract targets and “trajectory”; assessment (usingmodel) of impacts of deviations from performance expectations

n Ongoing comparison against benchmark database

n Data-driven performance coaching

n Monthly analysis of progress/performance

n Quarterly management briefings

n Annual assessment/report

Third-party continuous analysis,assessment, and coaching in support ofcontractual objectives

Table 1: The role of metrics in outsourcing


to its performance targets from bothtechnical and business perspectives

Performance target attainment actions

n Continuous measurement support forthe entire duration of the agreementin the form of real-time updates of per-formance data as it is generated

n Creation of a continuous, forward-moving baseline

n Real-time monitoring of position relativeto the attainment of and movementtoward contractual goals

n Periodic (monthly) formal managementreviews on progress

n Quarterly benchmark analysis againstexternal industry performance

n Production of annual performancereport

THE OUTSOURCING “LIFE CYCLE”

In addition, measurement must be appliedin the context of the outsourcing �life cycle.�This is the series of stages that an agree-ment/contract goes through from its initia-tion to steady-state operation. The stagesare as follows:

Initiation/TransitionThis is the first stage of an outsourcingagreement. During this stage, asset turn-over and personnel transition take place.Typically, a new management structure anda new management team are put in place.Such transitions are also typified by per-sonnel turnover and loss of organizationintellectual capital; there is also a potentialfor performance degradation. This is aperiod of intense learning � therefore,learning curve effects have a major impacton organizational performance. The learn-ing that takes place has to do with both

the assimilation of an organization and itspersonnel into a new management struc-ture along with the learning required by theorganization to adopt and adapt to newprocesses.

From a measurement perspective, theperformance objectives of this life cyclestage are to:

n At minimum, maintain base perfor-mance levels

n Establish a performance baseline

n Show positive movement toward perfor-mance improvement in alignment withthe goals of the overall agreement

A general failure of many agreements is thecreation of unattainable and unrealistic tar-gets for this period as a result of neglectingto consider the characteristics of this lifecycle stage.

Performance ManagedAt this stage in the life cycle, assimilationof assets and staff is complete. The newmanagement structure and requisiteprocesses and practices are also in opera-tion. By getting �beyond the learning curve,�the organization is ready to develop theability to enact performance improvementtargets that have specifically been set in thepost-transition context.

From a measurement perspective, themetrics in this life cycle stage should befocused on:

n Articulating performance targets in alldimensions

n Providing a �moving snapshot� of keyperformance indicators

n Identifying current status

n Assessing position relative to targets

n Tracking movement toward targets



n Providing �alerts� to identify criticalaction areas

n Using leading, not lagging, indicators

n Identifying expected bands of accept-able performance

n Communicating quantitative aspects oforganizational goals in terms of targetsand performance improvement

The key aspect of this life cycle stage is thatit is where the organization learns how tomanage its performance and track move-ment toward its performance targets.

Performance EngineeringAs outsourcing agreements mature, it istypical that performance targets set in theinitial agreement will no longer be validbecause of the potential for both businesschange and technology change that wereunforeseen in the initial agreement. There istherefore a need to be able to establish alinkage between business performance andtechnical performance on an ongoing basisand, through this linkage, to develop newtechnical performance focus areas andtargets. This is performance engineering.

From a measurement perspective, themetrics focus at this stage is to:

n Establish a linkage between businessand technical performance

n Identify key metrics focus areas andthe rate of performance change neededto sustain the desired business perform-ance outcomes

n Shift the metrics focus to rate of changeand not absolute targets

By enacting performance engineeringthrough metrics, the organization�s focusis on business alignment, outcomes, andchange itself. The result is an agile IT

organization with the innate ability torepeatedly attain the level of performancerequired by the business.

AN OUTSOURCING OVERSIGHTMEASUREMENT ARCHITECTURE

In terms of the measures themselves, thecore outsourcing oversight measurementarchitecture provides for three fundamentallevels of metrics that are tracked in threeplanes (the levels can be extended toprovide greater granularity for more complexorganizational structures and their inter-faces). The three measurement levels are:

n Business performance measures,which focus on the key indicators ofoverall business success and relate tothe business vision and strategy

n Internal business IT customermeasures, which focus on the perform-ance of the IT organization in termsmeaningful to the internal businesscustomers and link to the key businessperformance measures

n Internal IT measures, which focus on(1) the IT technical performancemeasures that link to the internal ITbusiness customer organization, and(2) the internal or causal factors thatimpact technical performance itself

The three measurement planes are:

n The target plane, in which goals arespecified and rate of movement towardgoals is tracked

n The causal plane, in which the measuresthat must be tracked to reach the goalsare tracked

n The external calibration plane, inwhich internal measures can becompared against external benchmarks


By enacting performance

engineering through

metrics, the organization’s

focus is on business

alignment, outcomes, and

change itself.


The top level focuses on business perfor-mance and provides the basis for themeasurement of business value. A typicalframework used at this level is the BalancedBusiness Scorecard, which focuses onfinancial measures, customer measures,organization learning and improvementmeasures, and internal process measures.Quite simply, the highest-level metrics areindicators focusing on enterprise objectivesfrom the financial/shareholder, customer,internal process, and organizational learningviewpoints. The internal customer measuresand the internal IT measures must bealigned with the goals embodied in thehighest level of the architecture.

DEFINING THE METRICS

Identifying the right metrics requires ameasurement design process:

Step 1: Identify all audiences for measure-ment and all measurement stakeholders.

Step 2: Analyze the measurement needsof each audience and stakeholder. Deter-mine how they would assess whetherproductivity and quality has improved � dothey focus on a business perspective, a tech-nical perspective, or both?

Step 3: Produce a map cross-referencingaudiences to needs. Produce a map cross-referencing needs to candidate metrics.Produce a map cross-referencing candidatemetrics to acquisition methods.

Step 4: Trace from top-down and bottom-up.

Step 5: Organize the metrics into stake-holder groups or �dashboards.�

As stated earlier, the second and third levelsof the architecture address the views of theinternal IT customer, the consumer of ITservices within the enterprise, and theinternal IT measures themselves. Each of

these levels is typically segmented into sixmeasurement areas. These are productivitymeasures, quality measures, workflow andprocess measures, cost measures, align-ment measures, and human resource(people) measures.

However, the measurement system mustcontain more than targeting or destinationmeasures to be meaningful and have animpact. It is the �causal� measures � thesecond dimension � that are critical forenabling and making change happen. Thecausal measures relate to the things thatmust be monitored/managed to reachthe goals on the targeting indicators. Forexample, to increase productivity andquality, rework must be monitored. In thetargeting dimension, the current level ofproductivity and quality will be representedby indicators. In the causal dimension,those things that influence productivity andquality will appear. For example, in softwaredevelopment, rework is a major productivitydrain and is an indicator of quality. Therefore,in this dimension, rework and the elementsthat drive it should be tracked.

A GENERALIZED OUTSOURCINGOVERSIGHT METRICS CONTROL PANEL

The basic control panel contains �gaugeclusters� that address nine critical dimen-sions of outsourcing oversight. Theseareas for measurement oversight areequally applicable to all the dimensionsof outsourcing � from the data center, todesktop management, to application devel-opment and support. The areas covered are:

n Finance/budget: focuses on costmanagement and on-budget delivery ofservices and work products and theability to deliver on budget

n Customer satisfaction: focuses on thecritical attributes that generate satisfaction



with IT services and work products byinternal business customers

n Work products delivered: focuses onthe quantification of the amount ofservice or work products provided in agiven time period

n Quality: focuses on the objective andmeasurable aspects of quality ofservices and products

n Time/schedule: focuses on criticalservice, product, and project timeframes and the ability to deliver on time

n Business value: focuses on measuringthe attainment of the outcome of theoutsourcing agreement in terms of thefinancial/shareholder view, the externalcustomer/marketplace view, the organi-zational learning and improvementview, and an internal process improve-ment view


Measuring the amount of work done byan application development and supportorganization and measuring the amount of�product� produced/delivered by such anorganization have proved in the past to beboth difficult and elusive. Such measuresare critical, however, because in the worldof IT, perhaps the most commonly askedexecutive questions are related to them.Examples of these questions are:n Are we using our IT organization

effectively?

n Is the IT organization efficient?

n Are we spending the right amount on IT?

n Are we getting value for our IT dollars?

n Are we doing more work than last year?

n Are we doing more with less � or lesswith more?!

n Are we doing the right work?

While function points may be useful forquantifying the work product size andchange in size for a particular set ofclasses of systems, they don�t cover allaspects of �work.� Among other tasks, ITorganizations provide user support andhelp desks � clearly activities for whichfunction points are not the most usefulmeasure.

There are also many other places wherefunction points may not apply, such asobject-oriented development, component-based development, or small maintenance

tasks that involve computation changes.Do function points even pick this up? Howdo technology updates (e.g., moving fromone database or operating system toanother) fit in?

Clearly, the �capture ratio� of functionpoints is low. Capture ratio relates to theamount of coverage of IT work types thatcan accurately be counted by functionpoints. The lines of code (LOC) metricfaces similar problems. And if you moveto the world of objects, specialty metricssuch as Chris Kemerer�s Metrics forObject Oriented Systems Environments(MOOSE metrics) don�t cover the rest ofthe �territory.�

There does not seem to be a way to use asingle metric to express the amount ofwork done by an IT orga-nization. There also doesnot seem to be a way toexpress the amount ofwork products producedby an IT organization. If wecan�t compute either ofthese, we cannot computeoverall efficiency and willdefinitely have difficultyanalyzing effectiveness.

However, if you accept thenature of the problem �an IT organizationperforms many differentwork types and eachmay have its own �natural�sizing measure � theproblem can be solved

using measures of work output.

Work Output MeasurementFocus for the moment on the notion of�throughput.� Throughput is defined asthe amount of material put through aprocess in a given period of time. Viewthroughput as something that is discernibleor visible to the customer or user of aprocess in terms of process inputs andoutputs. From a customer vantage point,these inputs and outputs are reallyrequests and results (work productsdelivered in some form to the customer).

Figure 1 expresses this idea in a wayanalogous to the way that an applicationboundary is drawn around an application

Continued on page 23.

MEASURING IT “THROUGHPUT”: IT WORK UNIT METRICS

Throughput in IT(Applications delivery function perspective)

Figure 1: Throughput in IT

Results

IT

Users

Internal Work

Results

User/IT boundary -throughputmeasurementvantage point


n Operational service levels: focuses oncritical service tempos, availability, anddelivery of work products

n Human resources: focuses on changesto the skill inventory and internal jobsatisfaction

n Productivity: focuses on the efficiencyof the production and delivery of workproducts

As a direct byproduct of the creation of anoutsourcing agreement, each gauge clustermust have target or destination measures.These indicate the goals of the agreementand may focus on a single value or multiplevalues, each linked to a point in time.

Each gauge cluster must have ratemeasures. These focus on the direction andrate of movement toward the aforemen-tioned targets. These direction and rate


Continued from page 22.

in traditional function point analysis. Whatthe customer sees represents only aportion of what goes on. �Inside the box�internal work, which is not visible to thecustomer (although the customer may bepaying for it), is also performed.

From a customer perspective, this internalwork should not be measured. However,from an IT organization�s perspective,the ratio of customer-visible work, orthroughput, to internal work clearlyrelates to IT efficiency and its overallprocess yield.

Let�s return to the definitionof �throughput.�The amount of material put through theprocess in Figure 1 is essentially the totalvolume of work performed. The volumeof work performed is a function of thetypes of work requested and the size ofthe requested work expressed as somesort of units.

Possible work types include new systems development, platform migration,adding of new functionality to existingsystems (adaptive maintenance),improving existing functionality (perfectivemaintenance), fixes/repairs (correctivemaintenance), report generation,preventive maintenance, support functions,production support, and more. Remember,these are categories of work that may berequested by a customer. It is important tonote that work types are not static. Newones may emerge over time.

Internal work types, by the way, includerelease control activities, technologyupgrades, disaster recovery, and so on.

This list, too, may grow over time.

Using this simple work type based modelwe get:

Total Work Performed=Volume of Work Requested

(Executed)+Volume of Internal Work

Throughput (as viewed by the customer)=Volume of Work Requested

(Executed)

Computing ThroughputThe previous equations are not really�satisfying� in that they are too high-levelto be useful. To be able to compute�volume of work requested,� more detailis needed.

Before going on, let�s review the proposalproposed. First, draw a �box� around ITand called it the IT/User Boundary. Thenidentify all work types (requests andresults) that move across the boundaryand also those that don�t.

Using insight gained from the functionpoint measure, it appears that a logicalnext step and parallel would be to beable to count the number of occurrencesof each work type and multiply it by aweight to get an overall throughput scoreor volume. This, in effect, is what is donein function point counting � identify eachfunction type, multiply by a weight, and dothe overall computation.

However, in this case we do not have�weights,� and just counting the numberof occurrences of each work type doesnot do justice to the varying size of eachrequested work type. What can be done?

The function point method, particularlythe work of Charles Symons on MK IIFunction Points, provides the neededinsights to enable the completion of thecomputation framework for throughput measurement. Tackling the problembackwards, let�s first concentrate on the�weights.� In the traditional function pointmeasure, the weights used were deter-mined by trial and error. In Symons�smethod, the weights are calibrated.

Therefore, I propose that for each worktype, the weight used should be theaverage delivery rate per size unit of thework type. Of course, this approachrequires us to come up with a size unit foreach work type. To deal with the issue ofa size unit for each work type, I use theconcept of a �natural size� unit. In simpleterms, this is the size unit that best fits thework type � it is discernible, measurable,and auditable. This means that for somework types, the size unit is function points.In other cases, it could conceivably belines of code. In another � the help deskperhaps � it may be the number of hoursspent on serving the request.

In essence, computing throughputinvolves, at a high level:

1. Identifying all the natural work types

2. Establishing a size unit for each worktype

3. Establishing a delivery rate for eachwork type to be used as a weight (hoursper size unit)

4. Computing the weighted sum of all thework volumes (this is size times rate)


Howard Rubin is a pioneer inlinking IT investment to businessvalue. His current research isfocused on using metrics inmodels to produce business andsoftware process flight simulatorsand navigation systems for soft-ware projects. Dr. Rubin is chairof the Department of ComputerScience at Hunter College, presi-dent of Rubin Systems Inc., editorof Cutter Information Corp.�s ITMetrics Strategies, and a memberof the Cutter IT Journal EditorialAdvisory Board. He has publishedmajor software engineering booksand papers on metrics and quality.Dr. Rubin is internationally recog-nized for his work in the areas ofsoftware process dynamics, soft-ware metrics, the business valueof technology, and project naviga-tion. He has provided expertadvice and analysis on large-scaleproject management, oversight,and outsourcing.

Dr. Rubin has collected data andorganized it into what may wellbe the world�s largest informationtechnology database � more than18,000 projects across 5,000companies. Many of his findingsare summarized in his book TheSoftware Engineer�s BenchmarkHandbook, and in his annualWorldwide Benchmark Report. Inthe area of software measure-ment, Dr. Rubin is the creator ofthe IT measurement dashboardand flight deck concepts.

Dr. Rubin can be reached at P.O.Box 387, 450 Long Ridge Road,Pound Ridge, NY 10576, USA. Tel:+1 914 764 4931; Fax: +1 914 7640536; E-mail: [email protected]; Web site:www.hrubin.com.

measures are, in fact, the navigationalmeasures that are essential for monitoring.

By codifying outsourcing objectives (thebusiness value measures) and the under-lying targets and measures in each of theother areas, an organization will be posi-tioning itself for success.

SCORECARD STRATEGY/EVALUATIONALGORITHM

The typical outsourcing scorecard focuseson comparing results sampled either annu-ally or, on occasion, quarterly, with perfor-mance targets or service level agreementsspecified in an outsourcing contract. A riskin using this approach is that it is relativelyeasy to construct a scorecard (with its asso-ciated scoring method) that would allowtargets to be hit or exceeded in some areas,while in other areas targets are not met at all.

Organizations should use an approach thatfocuses not on the targets and variancesfrom them, but on demonstration of perfor-mance improvement itself across the keyperformance areas. The scoring algorithmshould be based on the percent of perfor-mance measurement areas in which a posi-tive performance change has occurred. Byestablishing a high threshold for a passinggrade (again based on the number of areasin which demonstrable improvement hasoccurred), the measurement methodologyforces us to focus on multidimensionalperformance improvement. This is inessence a metrics realization of the overallperformance engineering approach.

Also, focusing outsourcing monitoring andmanagement efforts on the rate of perfor-mance change itself avoids one of the majorpitfalls of outsourcing measurement �using reactive measures that show under-attainment of goals after the goals have notbeen met. The performance engineering

approach, in contrast, puts the focus on theforward-moving rate of positive perform-ance change. This approach makes itpossible to manage performance improve-ment from a proactive posture. By moni-toring the performance improvement rateitself, IT management is in a position to dothe necessary extrapolation to take correc-tive actions as needed.

MEASURE FOR OUTSOURCING SUCCESS

It must be remembered that the primarypurpose of the measurement systemdescribed herein is communication andcoordination. It is not an �end� unto itself.To ensure success, metrics informationmust be used as a common currency ofcommunication and not viewed as over-head. Therefore the collection of informa-tion that feeds the measurement systemmust be nonintrusive and highly automated� essentially it must be telemetry. And, foreach metric, a data source, acquisition mech-anism, and refresh rate must be determined.

The true challenge in managing multi-yearoutsourcing agreements is to be able toarticulate goals in business terms, to be ableto chart a course toward those goals, and tohave the ability and flexibility to makemidcourse corrections. Using measurementas a tool for communication, coordination,and organizational navigation may be theonly way to ensure success in outsourcing.



Vol. 12, No. 10 October 1999 25

not just to cut costs, but also to achievemore control, flexibility, and predictability.

Outsourcing an IT shop with more than2,000 practitioners was a tremendousundertaking, and BellSouth�s contractmanagement group worked for more than ayear to define and negotiate the deal. Thiseffort included defining how BellSouthwould work with SA and documenting thatagreement in a contract. The contract groupworked with all the groups within the devel-opment shop to identify what would beneeded to select and manage a vendor. Itgathered input from project planners,project managers, metrics specialists,analysts, designers, programmers, testers,implementers, process specialists, andquality personnel.

Each function developed a list of productsand processes that it would require inorder to be comfortable with managing an

outsourcer that was doing the softwaredevelopment and maintenance. This pro-duced over 50 pages of product and processrequirements. It was difficult for us inter-nally to agree on these requirements, muchless reach agreement with the outsourceron this much data, especially since weknew the outsourcer could not becompliant on �day one.�

SIMPLIFYING REQUIREMENTS WITH THE CMM

At this point, CMM personnel were askedto participate. Since both BellSouth andthe outsourcer had personnel who knewand understood the CMM, and each partyhad adopted the CMM as its IT processimprovement goal, the software processdevelopment and project managementrequirements in the contract were reducedto a couple of pages. The key process areas(KPAs) of the CMM define key practices thatmust be defined and carried out. Thuscompliance with the defined industry stan-dard ensured that the desired requirementswould be met.

But convincing everyone within BellSouthto accept this approach was not a trivialtask. The CMM personnel had to show thecontract management group and the indi-vidual groups how their defined needswould be met. In fact, we found that therewere no requested contract items that werenot covered in the CMM! We also had tosatisfy BellSouth senior management thatthe CMM would meet its requirements. Themanagers were somewhat familiar with theCMM, but not in this possible use.

Basically, rather than specify details of howan outsourcer should perform the work, theCMM personnel urged using the CMM as amodel to define what the sourcer shoulddo. This gave the sourcing company theflexibility to provide the expertise it was

Using the CMM for ContractRequirements and ManagingOutsourcing

by Norm Hammock

In early 1998, BellSouth outsourced its software development and maintenance center, primarily a CMM Level 1 organization, to Symphony

Alliance (SA), a joint venture between Andersen Consulting and EDS.BellSouth wanted to gain the benefits of an outsourcer that had softwaredevelopment process expertise. The primary reasons to outsource were


engaged to provide by performing the workthe way it wanted. This approach also gaveBellSouth confidence that it would havevisibility into the products and processesthroughout the systems development life cycle.

After getting agreement within BellSouth,we were ready to discuss and finalize thecontract wording and commitments withSA. This required having the BellSouthcontract team as well as the CMM personnelmeet with the SA contract team and SA�sCMM personnel. Having as our model theCMM, which both sides understood andrecognized as an industry standard, was atremendous advantage in working throughthe contract details. This advantage iswhat allowed us to reduce the 50-pluspages to a couple of pages for this portion ofthe contract.

Meetings of the contract personnel and theCMM personnel also allowed BellSouth andSA to make sure that each side had aconsistent understanding of the CMM, ofusing the CMM for process improvements,and of interpreting the CMM. While theCMM is a well-documented industry modelused by thousands of corporations, CMMassessment teams, led by an SEI authorizedlead assessor, have to apply professionaljudgment when performing assessments.Thus, some room for interpretation exists.

ENSURING CMM COMPLIANCE: FROM STICKS TO CARROTS

Negotiating the process compliance sectionof the contract seems to have been oneof the saner efforts in the development ofthe contract. It seems that, although therewas room for interpretation, starting withan industry-defined model proved very

advantageous. Otherwise, we would havehad to try to get both sides to agree to thewording and interpretation of the 50-pluspages that the different groups produced.Additionally, we would have had to definehow audits or reviews would be conductedto determine if the outsourcer was incompliance with the stipulations.

Basically, it was agreed that SA wouldoperate as a CMM Level 2, and eventuallyLevel 3, shop. We would verify compliancethrough CMM assessments led by a mutuallyacceptable third-party lead assessor, withthe participation of BellSouth and SA leadassessors. Both parties realized that the SEIdoesn�t �certify� the results of assessments,but we both understood and agreed that weneeded some way to confirm that thevendor was operating within the model. Inearly negotiations of the contract, penaltieswere assessed if the vendor failed to complywith the CMM commitments. Because ofthe penalties, we chose to use a third-partylead assessor to perform the complianceassessments. However, late in negotiations,penalties for noncompliance with CMMLevels 2 and 3 were replaced by profit-sharing opportunities once CMM Level 3was achieved.

The rationale for dropping the penalties fornot reaching CMM Levels 2 and 3 was thatperformance measures, such as productivityand defects, were the real objectives and,thus, what should be measured andrewarded. Both sides agreed that CMMcompliance should remain part of thecontract, as both agreed that CMM compli-ance would be the vehicle for obtaining theproductivity and defect improvements.Industry and BellSouth internal measure-ments show a high correlation betweenCMM maturity levels and these measures.




It was easy to say

what we expected,

but how long do you give

the vendor to get there?

MAKING PROGRESS?

As with any large effort that takes a longperiod of time, we had to have someinterim checkpoints. To meet this require-ment, we agreed that BellSouth lead asses-sors would participate in the initial CMMassessments to be performed within SA.Also, the lead assessors would verify thatprocess improvement action plans weredeveloped to address the assessment find-ings and that the process improvementactivities were managed as a project; that is,that the process improvement plan wasactually implemented and the status wastracked and communicated.

After a year of working with the contract,there are some areas that have worked welland some that haven�t. One of the biggestobstacles has been the transition period. Itwas easy to say what we expected, but howlong do you give the vendor to get there?How can you be comfortable it is on track?For instance, do you allow the full time thatyou gave the vendor to reach CMM Level 2for the basic functions of software develop-ment to be in place and working?

A challenge in this area has been that inorder to have visibility into the work efforts,BellSouth wants certain work products andmeasures in the process immediately. Tomeet these requirements, SA must imple-ment certain things quickly. The expediteditems may or may not fit into its longer-range plans of process definition and imple-mentation. Since this has the potential ofrequiring rework and since there is nolonger a penalty for not reaching CMM Level2, there may be more incentive for SA tomeet BellSouth�s immediate requests andless incentive to concentrate on the longer-term commitment of improving theprocesses and reaching CMM Levels 2 and 3.

ASSORTED LESSONS LEARNED

There are a number of other lessonslearned. One of these is that you shouldconcentrate on building relationships andworking together. That is, you shoulddefine and implement a process in whichboth sides can sit down and work outissues. There are many reasons that issueswill arise. There may be a turnover inpersonnel, and people who were notinvolved in contract negotiations will inter-pret the wording in the contract differently.Also, in any effort of this size, there maybe items that just aren�t thought of. This isanalogous to defining a change controlprocess for software projects; that is, youshould agree on how you will negotiatechanges and/or misunderstandings as partof the original agreement, before suchchanges arise.

Another lesson learned would be to allowvarious internal groups to review differentparts of the contract. For instance, as aCMM process person, I saw only the processand project management sections of thecontract and was not allowed to reviewother parts of the contract. After the contractwas signed, the process group was asked tobe involved in monitoring parts of thecontract in addition to the sections it helpeddefine. It turns out that the process groupcould have added value in several otherareas of the contract, just as it did in helpingcollapse the 50-plus pages for process andproject management to 2 pages. There areredundancies in the various sections thatcould have been caught by allowing thevarious groups to review all sections of thecontract. However, there is a tradeoff here.Protecting the proprietary nature of thecontract before it is finalized would defi-nitely be harder if you allowed more peoplereview privileges.


It is awfully difficult for even a relativelylarge contract management group to havethe expertise needed to address all areasof a contract covering such a large andcomplex outsourcing arrangement. Ourcontract group periodically brought inpeople from different areas to help defineand negotiate the various sections of thecontract. It was definitely a challenge tocoordinate input from multiple functionsduring contract negotiations, and it isproving to be just as challenging during theongoing management of the contract. Thisseems to be an area where an opportunityfor improvement exists.

The CMM is a good model for measuringthe capability of a potential software devel-opment partner. However, you must realizethat you are measuring the capability of avendor�s shop that has been in existencefor some time. It may not be easy for thevendor to define and implement its proc-esses and discipline in your developmentenvironment with the same degree ofsuccess that it achieved in its own develop-ment shop. Remember that the vendor isstarting with a majority of the same per-sonnel and processes (formal or informal,good or bad) that were in place prior tooutsourcing.

Rather than the selection of a capablevendor, the harder part of outsourcing maybe managing the vendor�s performance.You can demand and get commitment tothe CMM, which requires the vendor to havea process improvement program and tomeasure to ensure that improvements areactually occurring. However, defining thesemeasures in a way that is agreeable to theclient company and the vendor it haschosen to develop and maintain its softwareis difficult, to say the least. Productivity ishard to measure. Measurement programs

often take a very long time to define, imple-ment, and mature to the point where thedata is reliable. And if you don�t have abaseline that has integrity and is agreedupon by both parties, it�s hard to showimprovement. In the CMM, for instance, aformal and reliable quantitative metricsprogram is not required until CMM Level 4.This is due in large part to the fact thatwhile data gathering and measurementsactually begin at Level 2, it takes time todevelop integrity of the data, understand themeasures, and evolve to a legitimatemeasurement program in which the datameasures actually are used and add value.

In summary, the CMM was used as a model to help select a vendor and toconcisely and effectively define what theoutsourcing vendor should do whilemeeting the requirements of the sourcingcompany for visibility and management.Even though the CMM defines what bothsides desire, the biggest challenge inachieving this seems to be managing thetransition period. BellSouth seems to wantprocesses in place and visibility immedi-ately. SA has to balance its efforts to meetBellSouth�s immediate desires and toimprove its processes for the longer term.Managing outsourcing, even with a well-written contract based on an industrymodel, has proven to be challenging. Weare one and a half years into the contract,and it�s still too early to tell the real degreeof success or failure in the area of processimprovement.

Norm Hammock is a softwaredevelopment process manager andSEI authorized lead assessor withBellSouth Telecommunications inBirmingham, Alabama. He beganhis career at BellSouth in 1975 asan applications programmer. Hehas also worked in electronicdata processing (EDP) auditing,where he earned his CertifiedInformation Systems Auditor(CISA) certification; financialanalysis and planning; and as aninternal consultant, where he ledapplication development teamsthrough the entire systemsdevelopment life cycle.

Mr. Hammock has led the processimprovement program at BellSouthsince it started using the CapabilityMaturity Model (CMM) for processimprovement in 1994. During thistime, he has participated in or ledmore than 40 CMM assessments,including assessments in the US,Germany, and Denmark; fourCMM assessments at Level 5;and work with eight companiesoutside of BellSouth. Mr. Hammockis currently listed as one of theSEI�s most active lead assessors.He has been selected to givepresentations and tutorials atthe last three annual US andlast two European SoftwareEngineering Process Group (SEPG)conferences.

Mr. Hammock holds a bachelor�sdegree in accounting from AuburnUniversity and a master�s degreein business administration (MBA)from the University of Alabama atBirmingham.

Mr. Hammock can be reachedat BellSouth, E8B1, 3535Colonnade Parkway, Birmingham,AL 35243, USA, Tel: +1 205 9771334; Fax: +1 205 977 1300: E-mail:[email protected].



Vol. 12, No. 10 October 1999 29

Business demands for IT solutions havenever been greater or more complex. Theyinclude client-server, data warehousing,ERP implementation (both back office andfront office), sales force automation, knowl-edge management, and the blockbuster �the Internet (intranet, extranet, e-commerce,World Wide Web). The majority of ISmanagers know that there is a tremendousshortage of key qualified IT workers in theUS and that it is growing significantly worseeach year. Given the demand and theworker shortage, offshore outsourcing mayprovide the solution.

There are usually several factors that clientscite for offshore outsourcing. At the heartof all of them is the inability to find qualifiedIT personnel. Clients also mention acceler-ated delivery/time-to-market factors, higherproductivity and quality (often significantlybetter then they can deliver themselves),fixed price contracts, and significantlylower costs.

AVAILABLE OUTSOURCING OPTIONS

Companies have several approaches theycan choose from when deciding to out-source offshore. Often companies use twoor three of these alternatives simultaneously.

Professional ServicesUnder this approach, an offshore vendorprovides the client an on-site software engi-neer who is then assigned to fill a staffopening. This approach is frequently termed�body shopping.� Major offshore vendorsmake substantial investments in trainingand screening their personnel prior toassignment. Today, professional servicesstaffing is a major part of many offshorecompanies� business. For Indian companies,it has been the largest segment of their busi-ness and accounts for over 45% of theindustry�s export revenues. Contracting forthese services involves companies�obtaining an H-1B visa for the worker. Itshould be pointed out that US companiesdo not save any money on the engineersthey hire under this visa. By law, they arerequired to pay the prevailing wage in thegeographic area or within their companyfor the position filled. There are hefty penal-ties and restrictions for companies that donot comply.

Individual Software Project OutsourcingIn this case, clients outsource the develop-ment of a specific application. Reasons forthis type of project vary from time-to-marketurgency, to lack of inhouse expertise, to costsavings. These projects typically runfor several months and entail severalperson-years of effort. Part of the projectwork will be done offshore, and there willbe an on-site team that is often 50% to 60%of the overall project loading. These are notthe most efficient projects because of thecontractual resources and effort required foreach separate project. From the vendor�s

OffshoreOutsourcing: The Alternatives, Key Countries, and Major Challenges

by Marty McCaffrey

Offshore outsourcing. It�s a term we hear more frequently these days, and a growing industry. In India, which is the largest supplier of IS

outsourcing services, the industry�s export revenues have grown from US$30 million annually in 1989 to over $2.7 billion in 1998. Growth has beencompounding at a rate in excess of 57% per year for the past six years.


perspective, these efforts offer the opportu-nity to get its �foot in the door.� They maybe a good approach for the initial clientexperience with offshore outsourcing, toevaluate a vendor or as a precursor to alarger effort in the future.

Offshore Development CentersFor this type of project, the vendor providesall the infrastructure requirements and aspecified number of full-time IT personnelto a client center. Part of the vendor teamwill be located on site at the customer�sfacility. The client typically only furnishesunique hardware and software to thevendor. The processes, methodologies, andstandards of the offshore center may bethose of either the vendor or the customer.These are longer-term commitments of atleast three years or more and generallyrequire a minimum ramp-up to 50 softwareprofessionals within the first year. Someclients have expanded their centers toseveral hundred software engineers. This isthe fastest-growing segment in offshoreoutsourcing, and it is the approachpreferred by most vendors.

Joint Venture with an Offshore VendorThis approach entails setting up a separatelegal company in the vendor�s country toproduce a product. A 100-person companyis about the minimum size. Financial andstart-up expenses in the first three years canrun $3 million or more annually. Clients typi-cally bring the first work to the joint venture.A key advantage for the client is that itdoesn�t have to do everything from scratchitself. The client can leverage off the vendorpartner�s existing infrastructure, experience,processes, and local reputation. The clientalso avoids much of the bureaucratic hasslewith local and state governments in devel-oping nations. Joint ventures were espe-cially popular in India in the late 1980s and

early 1990s, when foreign majority owner-ship of a company was prohibited.

Wholly Owned SubsidiariesThese centers typically require severalmillion dollars in investment. The clientmust meet all the legal and businessrequirements, deal with the bureaucraticauthorities, and develop the infrastructureresources. Wholly owned subsidiaries cantake from two to three years to be up andrunning if a factory is built. Several coun-tries, including the Republic of Ireland,Northern Ireland, and India, have favorableinvestment and tax policies for such plans.For example, over 60 high-tech US compa-nies have established wholly owned subsid-iaries in Ireland. Some of these centers arededicated to leading-edge research anddevelopment for their companies.

THE OUTSOURCING VENDOR COUNTRIES

At present, four countries are leaders in off-shore outsourcing: Ireland, India, Israel, andthe Philippines. The outsourcing industryin these four nations is mature and of sub-stantial size, the infrastructure resourcesrequired for success are in place, and thegovernments are frequently supportive.There are several other countries where afew innovative companies have gone andset up shop to tap the available softwaretalent or recruit for staff augmentationpurposes. Many of these new countries areinitiating government-supported projects.

But first, a brief caution before I proceed. Ithas proven difficult to gather data on thevarious countries� software industries. I�veused documents, reports, business andnews periodicals, and Internet Web sites, inaddition to personal interviews withindustry and government representatives.Some available data may be statisticallyunreliable, biased, or skewed. Therefore, I


A key advantage

of joint ventures is

that the client doesn’t

have to do everything

from scratch itself.



When it comes to IS

offshore outsourcing

capabilities, India is

the superpower.

recommend that the reader use thesefigures only to get a rough sense of the stateof the industry in each country.

Republic of IrelandA $5 billion software industry has sprung upin the Emerald Isle. It is the second largestexporter of software in the world. There areover 100 multinational-owned softwarecompanies in Ireland, and the governmentprovides incentives for companies locatingthere. These include employment, training,capital, and R&D grants, as well as taxincentives.

The Irish software industry has an excellentreputation for quality. Much of the Irishwork is localization and manufacture ofbusiness software. Localization consists ofadapting packaged application software(often developed in the US) for French,German, Italian, and other markets. Irelandhas 60% of the European business applica-tion software market.

With a highly educated technical workforce of over 15,000 English-speaking soft-ware professionals, Ireland is culturally theclosest to the US and logistically easiest toaccess. There are about 10 Irish servicecompanies, of which several have 150 ormore employees. At present, only a fewcompanies are doing business in the US.Approximately 3,000 graduates with com-puter and technical school degrees enterthe work force each year. Over the past twoyears, the labor market has gotten muchtighter, and there presently is little excesscapacity. The cost for a software engineerjust out of college runs in the $20,000-$25,000 range.

Northern IrelandNorthern Ireland is looking to expand itsoutsourcing business. Several multinationalcompanies have recently set up centers

there. The government provides tax,training, and R&D incentives. NorthernIreland presently graduates about 2,000computer graduates each year, and its soft-ware industry only absorbs 1,000. Thusthere is an excess of 1,000 per year, many ofwhom leave the country. The industry has areported turnover rate of less than 10%, oneof the lowest worldwide.

IndiaWhen it comes to IS offshore outsourcingcapabilities, India is the superpower. TheNational Association of Software Companies(NASSCOM) lists over 750 software exportcompanies. Many of these are small, but thetop 25 companies have approximately 59%of the total market. There are over 250,000software professionals throughout India,with at least half most likely working in thesoftware export industry. Approximately60,000 new computer science and engi-neering graduates enter the field each year,with starting salaries of $4,000 to $6,000.About 25% of graduates enter the exportsoftware industry.

For the past decade, the Indian national andstate governments have played a visionaryrole for the software industry. They haveliberalized most software business policies,exempted software and hardware for theexport industry from import duties, devel-oped software technology parks for start-upcompanies, provided world-class satellitetelecommunications capabilities at competi-tive rates, and even provided incentives forISO 9000 and SEI Level 3 certification. Noneof the other countries discussed here has acentral point of reference or data on its soft-ware industry that even closely compareswith that provided by NASSCOM, the Indiansoftware trade organization.

The Indian software export industry hasmade a concerted effort to become a world


leader in quality. Earlier this year, 109 com-panies had received ISO 9000 certification,and an additional 76 companies expect tobe certified by December 1999. Manycompanies are now aggressively pursuingSEI-CMM certification. In fact, India has hadfive companies reach CMM Level 5, out of10 total companies in the world. These fivecompanies thus are in the top 1.2% of over800 companies that have been assessedsince 1993.

The US is the Indian industry�s biggestcustomer, accounting for 58% of the market.Europe is second, with 21%. Leading Indiancompanies provide comprehensive trainingprograms. English is widely spoken andthe language of education and business.India falls in the Asian area culturally. Infra-structure in the country as a whole is sub-standard, but the software industry hastaken the necessary steps to ensure its basicrequirements.

The Indian software export industry facessome serious challenges. One is thecontinued high rate of growth. Will theindustry be able to sustain its high qualityinitiatives and reputation under growth of50% or greater per year? Another problemalready evident is finding experienced andqualified project and program managers.This is perhaps the most serious challengefacing the industry. The high rate of projectpersonnel turnover is a third serious issue.Officially estimated in the high teens, manysources acknowledge it is probably around30% per year.

PhilippinesThere are a number of Philippine softwareservice companies that have entered theUS outsourcing market. These are firms thathave been service providers for Philippinebusinesses and are generally severalhundred professionals in size. They havebuilt a good reputation for quality work. The

Philippines has 30,000�50,000 software pro-fessionals, and it is estimated that another10,000 are working overseas. A bright spotfor this industry is that approximately 17,000people with associate or B.S. degrees inIT are entering the work force each year.This should ensure a good foundation forindustry growth. College graduates generallycommand a salary of $6,000 to $8,000.

Philippine companies have developedexcellent training programs, and theirEnglish communications capabilities areexcellent. English is used in higher educationand in business. Infrastructure capabilitiesare good. Culturally there are strong tiesbetween the US and the Philippines, butit is first an Asian culture. High personnelturnover, rapid growth, and adequate capitalfunding for growth are all challenges forthis industry. At present the governmenthas played only a minor role in promotingthe industry.

IsraelThis country�s software industry has beenbooming. It has a work force of 20,000programmers, 10,000 of whom are workingfor software houses. Salaries are near USrates. Former Soviet Union immigrantsprovided a major influx of engineering andscientific talent in the early 1990s and haveprovided some excess manpower. English iswidely spoken.

The Israeli software industry had sales ofover $1.5 billion in 1988. Software exportswere estimated at $700 million and growingat 25% per year. These exports tend to bepackaged and custom application products.There has been much work on leading-edgeproducts and technologies. Israel hasbecome a major center for multinationalcorporation software centers, and the Israeligovernment has supported joint ventures.Infrastructure is excellent, and the industryhas good financing.




The biggest challenge is

if your vendor is

from a nonnative

English-speaking country.

Other Potential Countries and Nearshore CompaniesChina, Russia, Brazil, Ukraine, Egypt,Malaysia, Pakistan, and several EasternEuropean countries are in the early stagesof developing an outsourcing industry.They have primarily been sources forrecruiters seeking experienced and trainedsoftware personnel for staff augmentation/professional services staffing. In many ofthese countries, the national governmentsare taking steps to support and expand thesoftware industry. Many countries have smallsoftware companies of 25 to 100 peopleseeking to provide outsourcing services.Some are tied to small US service compa-nies. They have helped to address thetremendous shortfall of qualified IT profes-sionals in the US and Europe, and somehave the potential to play a much larger rolein the future.

Nearshore outsourcing involves softwarework that is being done by companies inCanada, Mexico, and the Caribbean islands.The Canadian national and provincialgovernments are promoting their softwarecompanies as well as themselves as a placeto locate. Some US service providers havelocated facilities in Canada. Because of thecurrency exchange rate, there is the poten-tial for about 30% in cost savings. Mexicoalso has a few service companies that haveentered the US market. One company hasover 2,000 employees, with more than 500dedicated to US projects. In addition, a fewIndian companies have been consideringlocating facilities in Mexico. Both Barbadosand Jamaica have seen outsourcing soft-ware facilities spring up.

Work can be done at nearshore facilitiesat a significant cost savings over US rates.Another big plus is that, with their geograph-ical closeness, clients are often able to flyin and out the same day for meetings.This will usually facilitate more face-to-face

meetings, which improve communicationrichness and are critical in softwaredevelopment.

Another alternative is to consider one of theseveral US service companies that haveestablished offshore development centers.

THE CHALLENGES OF OFFSHOREOUTSOURCING

Many of the general challenges in outsourcinghave been well documented and apply tooffshore outsourcing as well. In addition,there are three major issues for offshoreoutsourcing that should be addressed. Thefirst is dealing with language differences,both written and spoken. Software develop-ment is all about good communications,and English has become the standard foroffshore software development projects.Even for vendors from English-speakingcountries, communication can be chal-lenging. There are different meanings ofwords and usage. But the biggest challengeis if your vendor is from a nonnative English-speaking country. You must keep in mindthat each encounter with your vendors�employees requires enormous concentra-tion and is difficult for them. This includeseven those who have attained a relativelygood comprehension of English. A criticalcomponent of spoken communications isthe body language that accompanies it.

Body language is associated with thesecond major challenge: cross-culturaldifferences. This is a huge and complextopic. Zareen Karani Araoz and Craig Stortigave a fascinating presentation on cross-cultural issues in the Offshore Track of theMay 1999 DCI IT Outsourcing Conference.Key issues included the impact on negotia-tions, decisionmaking, conflict resolution,time, dealing with superiors, desire to saveface, and others. Most client personnel donot fully understand or consider these


crucial issues. Cross-cultural differencespresent a major challenge for most offshoreoutsourcing projects.

The third challenge for the client is a willing-ness to fully commit to the offshore relation-ship. This will take leadership from the topdown. Everyone who has some responsi-bility for the outsourcing deal or has contactwith the outsourcing vendor�s personnel hasto know why the company has outsourced,the extent of the outsourcing, and the bene-fits to the company. Each has to be fullycommitted to making the deal a success.Commitment will mean gaining an under-standing of the language and cross-culturalissues. It entails meeting your vendorhalfway on many matters. For management,it requires taking up to two weeks twice ayear to visit your vendor�s offshore site andto meet with its management and thevendor employees who are dedicated toyour efforts. That�s a challenge!

A question I�m frequently asked is, �Dooffshore projects fail?� Yes, they do.Language and cultural differences oftenlead to serious misunderstandings on aproject. And without full commitment onthe part of all the client�s participants, it justwon�t work. These are the three primaryfactors for offshore project failures, and theyshould be addressed in making your deci-sion whether or not to outsource offshore.

OFFSHORE OUTSOURCING TODAY

Many base their views and decisions onoffshore outsourcing on rumors, hearsay, orexperiences that occurred several yearsago. What you should know is that todaythere are literally hundreds of companiesthat have successfully outsourced projectsoffshore. NASSCOM has noted that 158

Fortune 500 companies were outsourcingwith Indian companies last year. By theend of 1999, one Fortune 20 company isexpected to be utilizing 3,000 software engi-neers provided by several offshore vendors.Of these, 2,000 are located at overseasdevelopment centers. Because of theoffshore workers, this company�s costsavings are estimated to be in excess of$100 million per year. It is also unlikely thatthe company would have been able torecruit this number of qualified softwareprofessionals in our tight US labor markets.Would such a major company havecontinued to expand its commitment if itwasn�t successful?

Offshore outsourcing is challenging. It ismore difficult to manage and will requiremore commitment than a normaloutsourcing project. But the benefits can bemany. It may offer your company the key togetting the critical IT solutions that it needsto be competitive and to do so in a timelymanner. The cost savings may be critical toyour company�s bottom line. The decisionto outsource offshore will require compre-hensive planning, leadership, and commit-ment to be successful, but the benefits areworth it.

Over the past several years the offshoreoutsourcing industry has matured, andtoday it offers world-class software develop-ment opportunities. The necessary telecom-munications capabilities and collaborativecommunication tools are in place. Projectcapabilities have expanded from legacymaintenance projects to state-of-the-art e-commerce, data warehousing, Internet,and ERP implementation and support.Offshore outsourcing is an alternative youshould seriously consider and evaluate inmaking any outsourcing decision.

Marty McCaffrey is the founderand executive director of SoftwareOutsourcing Research, a companyfocused on research into the out-sourcing of software. Offshoreoutsourcing is a special area ofstudy. Mr. McCaffrey is the founderand chairman of the OffshoreOutsourcing Track at the semi-annual DCI IT Outsourcing confer-ences. For the past 11 years, hehas also been a visiting assistantprofessor and research associateat the Naval Postgraduate School(NPS) in Monterey, California. Histeaching and research havefocused on software engineeringand program management. Inrecent years, Mr. McCaffrey wasthe program manager for thedevelopment of the largest expertsystem ever developed anddeployed for the US Navy. Prior tojoining the NPS, he was a Marineofficer, pilot, and programmanager. He has a master�sdegree in MIS from the NavalPostgraduate School.

Mr. McCaffrey can be reachedat Software OutsourcingResearch, 17582 Winding CreekRoad, Salinas, CA 93908, USA. Tel: +1 831 455 1818; E-mail:[email protected].



Vol. 12, No. 10 October 1999 35

unbelievably low price. What could be easier?Even knowing that the vendors were fromsuch exotic places as India or South Africawas not daunting. This is the age of globalcommunications, virtual handshakes, andshrinking cultural differences. Right? Right!

Come, take a trip with me to the land ofoffshore outsourcing � a place populatedwith good intentions, smoke, mirrors, andhere and there a genuine gem.

THE FIRST PASS

Offshore outsourcing was not new to mycompany, just to me. There had been anearlier effort to send an application offshore,but it had ended with my company takingits marbles and coming home. While thegood intentions of that first pass paved myway, in retrospect I should have remembered

the ultimate destination of a road pavedwith good intentions�

The available documentation on that firsteffort was sketchy � after all, how often doyou write down your mistakes for the worldto review? Having undertaken that limitedreview, I realized the first problem: thatproject had been undertaken in a �businessas usual� manner. Some details are in order.

Often we Americans, when engaging in anew endeavor, believe we are infallibleand that anything we turn our hand to willhave at least a margin of success, particu-larly at the �get go.� We also tend to believethat all �business� people, regardless oftheir nationality, will act just like us in every�business� situation. Armed with thisunshakable faith, my company had wadedright into offshore outsourcing.

We were the first account for the vendor wechose � hey, we were giving the little guya break! (The fact that it was the breath-takingly low bidder was only a side issue.)We let our new vendor do its own staffing.Unfortunately, our vendor was skilled inclient-server but not mainframe technology,and ours was a legacy application.

But bodies were hired, not all of whichstuck around to even get their first assign-ment. World markets are very tight for goodprogramming staff. No individual need sit onhis or her thumbs offshore waiting for acompany to make up its mind on a directionand get going � not when there are oppor-tunities to come to America. So we lost thegood, the bad, and even the ugly to othercompanies, projects, and countries.

In retrospect � which is always the bestview � we did not have a clear, specificoperational plan put together before webegan the first effort. It was our intent, give

OffshoreOutsourcing:“They Lived Happily Ever After”? or “SomethingWicked This Way Comes”?

by Roger N. Gaunt

I entered the world of offshore outsourcing with the naiveté of the uninitiated. After all, offshore outsourcing was the answer to our prayers:

quality coding at inexpensive prices with no additional headcount, nopersonnel issues, no expensive benefits or overheads. Engage a vendor,deliver specs, and receive in return bright, shiny, production-ready code at an

© 1999 by Roger N. Gaunt. Allrights reserved.


or take, to have the offshore staff do bothmaintenance and development work. Weknew how to measure development mile-stones: the code either works or it doesn�t,and when it doesn�t, you have metrics tomeasure quality.

But maintenance milestones are moreelusive and very subjective depending onwhich side of the ocean you are on.Maintenance also requires more one-on-oneknowledge transfer. This is OK, providingyou keep your old staff around long enoughto effect the transfer. Which we didn�t. Weimmediately redeployed staff, reduced thebudget, and then sat back and waited forthe magic code to arrive. And we waited.And we waited. And we waited. No worryabout smoke and mirrors here; there wasn�teven an illusion.

We never had a functional liaison group inthe US, and now we had no core technicalgroup in the US. What we did have was avery confused offshore vendor and equallyconfused end users in the US. Both groupswere on their own regarding communicatingwith each other, without a common frameof reference. And neither side listened.

The offshore vendor staff (trained in 19th-century British English) often didn�t under-stand US slang, and the US slang slingershad no patience for translating. Offshorevendor personnel thought users were illog-ical, and users thought the vendor staff wereslightly �thick.� This situation does not makefor timely, usable code. In the end, bothgroups were angry, and the differenceswere nearly irreconcilable.

At that point, a decision was made to sendan expatriate knowledgeable about theapplication and about project managementoffshore to see if he could make a difference.My view is that this was a major improve-ment and could in fact have been a critical

success factor: he knew what was wrongand how to fix it. Unfortunately, it was a daylate and a dollar short. The situation wasbeyond recovery, so as I said before, mycompany took its marbles and came home.

THE SECOND PASS

Several years later: same Fortune 50company, same issues, different application,and now we have Sir Roger on the job � thenew knight errant of offshore outsourcing �ready to slay the musty old dragons ofbygone days. (There is a saying aboutpeople who rush in where angels fear totread.) Nevertheless�

I felt and still feel that there is a definiteplace in IS resource planning for offshoreoutsourcing. Offshore outsourcing can allowaccess to additional programming capacity,scarce skill sets, niche competencies, newtechnology, and low costs, and it can shrinkdeadlines. The trick is to overcome themistakes of the past and move forwardbased on those lessons learned.

Interestingly, I discovered early on that notall of my dragons were in a land far, faraway. Several were within the uppermanagement ranks of my own company.Although given the go-ahead to once againtry outsourcing, organizational changescaused commitment at the top to wanebefore long � but let�s not cut to the chaseso quickly. Once again, some details arerequired.

I had been given a charge that I felt capableof delivering; I was on a mission, so nowindmill (or dragon) was too big anobstacle. It never occurred to me that Iwasn�t supposed to succeed (or, that noteveryone was so eager for offshoreoutsourcing to succeed as I was).


I discovered early on that

not all of my dragons

were in a land far, far

away. Several were within

the upper management

ranks of my own company.



Learning from the past, we: 1. Chose a vendor with experience

2. Chose a mid-sized firm � big enough todeal with the foreign governmentbureaucracy, yet small enough toconsider us a major client

3. Chose a vendor based on quality andtime considerations instead of just price

4. Chose an application with a functionalend-user liaison group in place

5. Retained an onshore technical supportpresence of our own staff

6. Arranged for the vendor to keep aminimal staff on site in the US to inter-face with the offshore staff

7. Made infrastructure improvements,including:

n A backup satellite link for our mainterrestrial fiber-optic data line

n Diversely routing the two 64KB lines,so that there was no single pointof failure

n A shared WAN, so that files couldbe shared between shores (thedrive seen on offshore workstationsis the same drive seen on ourworkstations)

n Arranging for voice over data multiplexors so that an extensionin our building could ring at theoffshore site

n Cell phones for the offshore produc-tion support staff so that they couldbe easily reached by US-basedproduction support personnel

n A guest house 10 minutes from theoffshore facility so that staff onproduction support could easily getto work when the severity level ofthe breakage demanded it

8. Relocated the offshore site to thevendor�s corporate headquartersinstead of at a remote branch

9. Advised the vendor regarding changesthat it needed to make in its offshoreoperations (the vendor was orientedmore toward development projects thanapplication maintenance)

10. Developed an offshore staff attractionand retention strategy

11. Developed a hybrid time and material/fixed-cost contract that provided abalance of rewards and penalties andtried to naturally encourage behaviorthat would produce outcomes of benefitto both companies (win-win)

12. Sponsored a trip to the offshore locationby the IS application manager everysix months to motivate staff and observethe operational readiness of theoffshore facility

13. Advised the vendor on key staffappointments

14. Instituted the use of formal projectmanagement tools

15. Utilized a �follow the sun� methodology,whereby the code was being worked on6 days a week, 24 hours a day1

16. Developed a paradigm of onshoreanalysis and offshore development thatworked well

1Offshore personnel developedand modified a prototype each USnight, which US-based personneltested the following day. At theend of the US day, they sent anydesired changes via e-mail tooffshore personnel. The followingmorning, the code was back,changed, and ready for moretesting. This process cut time byone-third.


Ignoring the past, we: 1. Began by outsourcing an entire applica-

tion instead of a small controlled devel-opment project (this decision was madebefore I came)

2. Decided by default that we could notafford offshore representation (�Payhow much? For what? Are you serious?�)(see sidebar below)

3. Stayed with legacy system outsourcinginstead of utilizing our vendor�s opensystem core competency (no reason tomake this too easy!)

4. Never achieved upper managementownership of the objective (Thecommitment to offshore outsourcingwas individual, not organizational �nice concept, but will it work in Peoria?)

5. Never dealt well with the cultural issues,which can have major project implica-tions (see sidebar on facing page)

Have we been successful with this secondeffort? Yes. No. Kinda/sorta. A key applica-tion was successfully outsourced offshore,an ongoing relationship with an offshorevendor was maintained, and a great deal ofmoney was saved initially.

But we were never able to leverage thissuccess to other applications or projects,and without ongoing organizational commit-ment to such new processes, things revertback to the Way They Were.

OBSERVATIONS

Based on my experience, in addition toaddressing 100% of the lessons learned,organizations must be willing and able toovercome the following additional obstaclesfor offshore outsourcing to truly be successful:

1. Fear of loss of control of projects/applications. (Power brokers don�t liketo share.)

2. Real or perceived cultural issues.(Perception is reality.)

3. Fear of the unknown. (Somethingwicked this way comes.)

4. Fear of job loss by inhouse staff (un-American).


REWARD CANNOT BE SEPARATED FROM RISKAn offshore representative (often called an “expatriate”) can help reduce risk substantially, butsuch persons are expensive, and this support cost clouds the incentive to consider offshoreoutsourcing in the first place. The problem is how to justify the cost during the start-upoperation (when expatriates are a very critical success factor) until the offshore volume allowsthe cost to be spread over multiple applications.

Because the benefits of this position are qualitative in nature, it is hard to justify it from a cost-benefit perspective, and thus management is frequently unwilling to fund it. A list of theroles and responsibilities of the offshore representatives can be found below, but probably thegreatest value this person adds has to do with the fact that US contact personnel are typicallynot available during the normal offshore work day. As a result, nearly all communicationbetween the shores is via voice mail, e-mail, or by someone in the US participating in aconference call in the middle of the US night. Unbelievable communication difficultiesresult from:

1. The lack of immediate feedback associated with voice mail (and commensurate delay inachieving resolution)

2. The loss of access to body language (often considered 40% of the communication) whenusing e-mail

3. The fact that the Indian communicator’s command of English and understanding of theapplication are often less than perfect and the American communicator is irritated andhalf asleep

With access to a former colleague serving as an expatriate at the offshore development center,US-based personnel can communicate effectively and efficiently with that individual via voicemail or e-mail, and they can be sure that their concerns will be understood, addressed, andreliably responded to on a timely basis.

In capsule form, the major roles of the offshore representative are to:

1. Provide corporate presence offshore

2. Provide single point of contact for IS Security

3. Manage contract terms and conditions

4. Provide project management consulting

5. Provide early warnings and independent assessments of developing situations before theyescalate or become surprises

6. Facilitate clear communication between the parties

7. Reduce cultural gaps

8. Most importantly, serve as a member of the onshore management team posted offshore toserve as a point of offshore leverage when, as, and if problems occur



5. Fear of loss of intellectual property/proprietary info. (Uncle Sam�s rulesdon�t apply the same way offshore.)

Do I still champion offshore outsourcing?You bet. Global partnerships are the future,with each culture utilizing the best traits theother has to offer. However, the road willnot be easy, nor free from obstacles.

But for those brave souls who can capturethe vision at the right levels of management,the rewards can be tremendous. For itcan be done, God willing and the creekdon�t rise!

THREE MAJOR CULTURAL ISSUES

1. Nonnative English speakers who are expected to speak English will often stay silent rather than ask aboutphrases they do not understand. To fix:

n Distribute agenda in advance to allow for discussion among offshore staff before conference calls.

n Have offshore staff issue draft conference call minutes documenting action items and owners, requestingfeedback within one business day.

2. Assuming that the offshore staff will volunteer information when there are unresolved problems is not wise. To fix:

n Ask follow-up questions.

n Offshore staff should answer implicit questions, providing more than a “yes” or no” response.

3. Eastern cultures operate under different time concepts than the American culture. To fix:

n Be more precise — use “COB Today” rather than “ASAP.”

n Do follow-ups before the due date.

n Offshore staff should promise what it can deliver and then deliver what it promises, providing earlywarning of change factors.

Roger N. Gaunt earned his Ph.D.from the Graduate School of Artsand Sciences at the University ofVirginia in 1980 and his master'scertificate in project management(PMI Curriculum) from GeorgeWashington University�s GraduateSchool of Business and PublicManagement in 1998. In the inter-vening period, Dr. Gaunt rosethrough the ranks to top leadershippositions in finance, informationsystems, and telecommunicationsat several large commercial andnonprofit organizations.

While the India project describedabove was his first love, he leftwhen it stalled because the partiesinvolved could not agree on avariety of process and cost alloca-tion issues. He remains active as aconsultant in the offshoreoutsourcing area.

Currently, Dr. Gaunt is a Fortune50 company group manager for a400,000-hour aggressive time-linesoftware development project,enhancing 22 applications systemsusing inhouse resources. Whennot at the office, he enjoyscanoeing and his Model A FordRoadster Pickup.

Dr. Gaunt can be reached at P.O.Box 47163, Kansas City, MO 64188,USA. Tel: +1 913 707 0548.


purchaser of IT&T products and services,with around 40% of the domestic market,the federal government recognized that byproviding contracts to local suppliers, itcould grow the industry and provide aspringboard for Australian IT&T companiesto export their products and servicesoverseas.

At least, that was the theory.

In practice, the outsourcing exercise hasbeen less than successful when consideredin terms of industry development. This islargely because it has been administered byeconomic rationalists whose primary objec-tive has been to reduce government outlayswith little consideration of the industryimpact of such an approach. While someAustralian suppliers have benefited fromgovernment outsourcing, these appear to bethe exception rather than the rule. Mostsmall to medium enterprises (SMEs) havebeen bypassed or squeezed out by the newprocess. Contracts have been awardedalmost exclusively to large multinationalcompanies, which have been able toleverage their existing worldwide resources

to achieve better economies of scale thantheir smaller Australian competitors couldhope to match.

REPORT CONFIRMS SMES’ PAIN

While anecdotal evidence has longsupported concerns within the IT&Tindustry about the deteriorating prospectsfor SMEs, this situation has been high-lighted by a recent federal governmentreport. Prepared by the Department ofCommunications, IT, and the Arts (DCITA),the report surveyed 233 local technologycompanies representing some 7,000employees and a combined annual revenueof $1.2 billion. While recognizing SMEs asthe �engine room of IT&T innovation� inAustralia, the document outlined theirvarious concerns about the outsourcingprogram, stating that �the state and federaloutsourcing agenda is perceived to beinconsistent with the interests of IT&T SMEs.�

According to the report, �IT&T SMEs believethere will be few winners and many losersas a result of government outsourcing poli-cies,� mainly because outsourcing makesit more difficult for SMEs to maintain adirect relationship with existing customerswhile competing against global alliances.�Outsourcing can have a fundamental impacton the SME/customer alliance, breakinglong-established relationships and causingthe SME to access the customer throughthe outsourcer,� the report continues. �Thetrend to outsourcing non-core IT&T systemsis having dramatic effects on industryrelationships.�

While SMEs recognize that external ITcontracts can open up new opportunities forlocal business, only a small number ofAustralian SMEs rely heavily on partnershipswith multinationals, which to date haveshown a preference for forming alliances

When OutsourcingCosts More Than It Saves

by Prins Ralston

When the Australian federal government and some of the state govern-ments first looked at the possibility of outsourcing their information

technology and telecommunications (IT&T) business in the early 1990s,much was made of the potential to use their considerable buying power toboost development of the Australian IT&T industry. Easily the largest




with other multinationals. �The majority ofrelationships with outsourcing providersrelate to the provision of services. Otherforms of strategic alliances are desired bySMEs but are seldom offered by outsourcingproviders,� said the report.

Exactly how the Australian governmentintends to respond to the findings of thereport was not known at this writing,although IT Minister Richard Alston didcomment that SMEs �face an uncertain pathto success as they have to compete withmuch larger companies to be accepted inthe wider IT&T market.�

GOVERNMENT TO BLAME FOR POORIMPLEMENTATION OF OUTSOURCING

The government has come under heavy crit-icism for the way it has handled IT&Toutsourcing, and there are many whobelieve the policy must be changed toprovide for and more clearly favor SMEswhen awarding tenders. One of the mostvocal critics has been Federal LaborOpposition IT spokesperson Kate Lundy,who claims SMEs have been locked out ofwinning major outsourcing contracts by theway they are designed. She said the cost ofsubmitting a tender can exceed A$1 million,which is far more than an SME can affordto invest, only to be overlooked. �Theoutsourcing program has been plagued withproblems, including impossible tenderingtimetables, discrimination against small andmedium-sized enterprises, dubious savingsclaims, canceled tenders, and allegations ofconflicts of interest,� Senator Lundy said.

While no one would question the desirabilityof a significant multinational presence inAustralia, there is need for greater balanceto be achieved between the interests of themultinationals and the needs of domesticplayers. In many cases, multinationals havenot only come in and taken contracts away

from Australian-owned suppliers, theyhave proactively done so with the view toobtaining skilled people, intellectual prop-erty, and valuable assets and resources aspart of the contract. What�s worse, thevarious governments have provided themwith a guaranteed revenue stream fortheir trouble. In the process, the Australiangovernment knowingly threw away thechance to create local service companiesof international size by granting the multi-nationals these strategically significantcontracts. Perhaps naively, the federal andstate governments opted for the �level�playing field and ignored the national andindustry needs.

While governments should be concernedabout, and accountable for, how responsiblythey direct their IT&T purchases to ensure abeneficial impact on the local industry, athird-party outsourcing company does nothave this responsibility unless it is specifi-cally and contractually defined. By givingcontrol of a large slice of the IT&T market toa comparatively unconcerned third party,and a multinational at that, the federalgovernment has removed the sense ofresponsibility for the effect of purchasingdecisions on the local market and lost theability to manage the industry impact. Manyof the SMEs that previously had a supplierrelationship with various governmentdepartments have been shut out of the newoutsourcing contracts under clusteringarrangements and have either gone to thewall or been forced to find new markets.

One SME that has prospered against theodds is Queensland-based Technology One,which supplies leading financial software toAustralian corporations. According toManaging Director Adrian Di Marco, �Themost disappointing thing for us is to witnessthe fall of our industry over the last 10 years.Once we had many Australian competitors.

The Australian government

knowingly threw away the

chance to create local

service companies of

international size by

granting the multinationals

strategically significant

contracts.


Now, all our competitors are multinationals.Once, many Australian companies investedin software R&D and brought new productsonto the market � now, very few.�

Di Marco believes the lack of sponsorshipand support by government is a majorcontributor to the local industry�s decline.�Governments must realize there is asignificant difference between large multi-nationals and the indigenous softwareindustry. The multinationals have no reallong-term commitment to Australia, plustheir profits are remitted back overseas, asis any intellectual property created. Thus itis essential to create the indigenous soft-ware industry,� he said. From an Australianpoint of view, the role of SMEs as the �inno-vative edge� of the IT&T industry meansthat our failure to encourage and supportthese companies has potentially significantconsequences.

ASSESSING THE DAMAGE

To its credit, the current federal governmenthas announced a range of measures to tryand stimulate growth in this sector throughinitiatives such as the Building on ITStrengths (BITS) program, which will befunded by the sale of an additional 16.6% ofTelstra, Australia�s national telecommunica-tions carrier. But while plans for incubatorcenters, test beds, and experimentalnetworks are to be commended, one mustquestion the wisdom of spending millionsof taxpayer dollars to rebuild an industrydamaged by the government outsourcingpolicies themselves. This is particularlyironic in light of the fact that outsourcingitself might have achieved these growthobjectives if greater attention had been paidto ensuring that the process was packagedappropriately and that local SMEs weregiven the right �incubation� to be able tocompete effectively.

One of the problems facing the Australianindustry until now has been the lack ofdocumented evidence about the impact ofoutsourcing. The study released in July bythe federal government was the first tocomprehensively assess the effect of out-sourcing policy on IT&T SMEs in more than10 years. The government has promised amore proactive approach to monitoringits one-year-old cluster arrangement, andthe Australian National Audit office isworking on a report, which is expected laterthis year.

Despite the previous lack of evidence for oragainst outsourcing, a brief comparison ofthe top IT software and services companiesoperating in Australia in 1988 and 1999provides an interesting picture. In 1988, theleaders were, in order, Computer Power,Mayne Nickless, Paxus, CSA, AAP, AndersenConsulting, and ACI (Ferntree), of whichfour companies were Australian and one wasfrom New Zealand. Over the past 10 years,this situation changed dramatically. In early1999, the top seven IT companies operatingin Australia were IBM GSA, EDS, ComputerSciences Corporation, SAP, Interim, BHP IT,and Unisys, followed by Oracle, AAG, Qantas,Mincom, Axis, Computer Associates, DMR,and Praxa. Multinationals with outsourcingas a significant activity now dominate thetop spots, leaving Australian companies,which earned 55% of revenues among theTop 15 in 1988, accounting for only 19% ofthose revenues in 1999.

Throughout history there have been nume-rous instances of stronger nations or entities taking full advantage of lucrativesituations in other countries, resulting inarrangements that have retrospectively beenlabeled exploitative. The challenge facingour more enlightened society is to move toa model that encourages real partneringbetween international entities and local


One must question the

wisdom of spending

millions of taxpayer dollars

to rebuild an industry

damaged by the

government outsourcing

policies themselves.



organizations/governments to maximize theadvantages for all parties. Historically, theAustralian government has taken the viewthat market forces will provide equal oppor-tunities for all. In retrospect, this fairlysimplistic view has not been beneficial forthe local industry, and it is perhaps time fora stronger stance that ensures more favor-able conditions for Australian organizations.

WORKING WITH — NOT FOR —MULTINATIONALS

This is not to say that multinationals areunwelcome. Far from it. But the way inwhich multinationals operate withinAustralia needs to provide more opportuni-ties for the domestic industry to play asignificant role.

The argument that we now live in a globalmarketplace does not absolve multinationalsfrom their corporate responsibility to �givesomething back� when they enter anothermarket. While companies are in business tomake money, there needs to be greaterrecognition of the fine line between profitand exploitation. In recent years, thependulum has swung too far in the directionof exploitation, and it now needs to moveback to a more balanced position.

Clearly, if we in Australia want to grow ourlocal industry and give it equal footing withmultinational companies, our governmentsmust provide targeted opportunities fordomestic organizations. Governments mustchange their outsourcing policies to enablesmaller, innovative IT&T companies tocompete for and participate in outsourcingcontracts. The long-term goal is to helpthese companies grow and eventually beable to compete for work on a global basis.

This approach could mean repackaging thecontracts into more appropriately sized

chunks that local players could handle, orpromoting and facilitating the creation ofSME consortiums that could work coopera-tively to meet the requirements of largerprojects. Whatever approach the govern-ment takes, industry development mustbecome a higher priority in the outsourcingof IT&T projects.

This refocusing by Australia should not beseen as a threat to the multinationals, whichwill continue to have an important role toplay in supplying products and services.However, their role will be expanded to givethem the opportunity to partner with andassist innovative companies in their devel-opment and growth.

History shows that the bright ideas comefrom the smaller, more creative end of themarket. At the end of the day, we will needa diverse range of companies � both multi-nationals and thriving SMEs � to deliver thetechnology innovations that will powerAustralia in the global knowledge economy.My hope is that multinationals operating inAustralia will actively encourage and workwith local SMEs as part of that necessarydiversity � partnering rather thanconsuming � in a process that finallyproduces the benefits outsourcing alwayspromised but has yet to deliver.

Prins Ralston is a consulting solic-itor and barrister in e-commerceand information technology andtelecommunications (IT&T) withthe national Australian commer-cial law firm Clayton Utz. He isalso the managing director ofBusiness Management Consulting(BMC), which provides manage-ment consulting, e-commerceconsulting, business processreengineering, and projectmanagement services in Australiaand the Asia Pacific region. He hasworked in IT&T for the past 18years, the last 12 in various chiefinformation officer and consultingroles in business and government.

Mr. Ralston is national president ofthe Australian Computer Society(ACS), the professional body for16,000 Australians working inIT&T. He is international presidentof the South East Asia RegionalComputer Confederation(SEARCC), which represents 15member countries and has aconsolidated membership inexcess of 300,000 professionals.Mr. Ralston is an active memberof various government andindustry committees and is asought-after speaker andcommentator on IT&T issues.

He holds a bachelor of businessdegree (computing), is a fellow ofthe Australian Computer Society,and a Practicing ComputerProfessional. He also holds abachelor of business degree(accounting) and is a CertifiedPracticing Accountant. In addition,Mr. Ralston has a bachelor of lawsdegree, has completed his masterof laws degree specializing ininternational trade and electroniccommerce law, and has beenawarded an AustralianPostgraduate Scholarship tocomplete a doctor of judicialscience degree in electroniccommerce.

Mr. Ralston can be reached at P.O.Box 40651, Casuarina, NorthernTerritory 0811, Australia. Tel: +61 88947 4330; Fax: + 61 8 8947 2879;E-mail: [email protected].


Edward Yourdon, Editor in ChiefEdward Yourdon, chairman of the Cutter Consortium, is widely known as the lead developer of the structured analysis/design methods of the 1970s. He was a codeveloper of the Yourdon/Whitehead method of object-oriented analysis/design and the popular Coad/Yourdon OO methodology. He is the director of the Cutter Consortium�s Y2000 Advisory and Assessment Service, which focuses on business risk management and contingency planning for Y2000.Mr. Yourdon has been involved in many pioneering computer technologies such as time-sharing operating systems andvirtual memory systems. In 1974, Mr. Yourdon founded YOURDON Inc. to provide educational, publishing, and consultingservices in state-of-the-art software engineering technology. YOURDON Inc. was sold in 1986, and eventually becamepart of IBM. The publishing division, Yourdon Press (now part of Prentice Hall), has produced over 150 technicalcomputer books on a wide range of software engineering topics.Mr. Yourdon was an advisor to Technology Transfer�s research project on software industry opportunities in the formerSoviet Union and a member of the expert advisory panel on I-CASE acquisition for the US Department of Defense. He iscurrently a member of the Airlie Council, a group of high-level advisors formulating software �best practices� for the USDepartment of Defense. Mr. Yourdon has authored more than 200 technical articles and 24 computer books since 1967.His most recent book is Time Bomb 2000: What the Year 2000 Crisis Means to You. His other recent books include Riseand Resurrection of the American Programmer.

Larry L. Constantine divides his time between Australia and the US. A pioneer of softwareengineering, Mr. Constantine is the originator of structured design. He developed the concepts ofcoupling and cohesion, and he introduced such widely used tools as data flow diagrams. His worknow focuses on approaches to improve the usability of software to support rapid visual development.

Bill Curtis is one of the most recognized authorities on software development and human factors incomputer systems. He is cofounder and chief scientist of TeraQuest Metrics in Austin, Texas, a firm thatprovides management consulting and training in process improvement. As director of the ProcessProgram at the Software Engineering Institute (SEI), he led the team that published the CapabilityMaturity Model for Software (Software CMM).

Tom DeMarco is a principal of the Atlantic Systems Guild, a computer systems think-tank with officesin the US, Germany, and Great Britain. He was awarded the 1986 Warnier Prize for �lifetime contri-bution to the field of computing.� Mr. DeMarco�s career began at Bell Telephone Laboratories, wherehe served as part of the now-legendary ESS-1 project. He managed real-time projects for La CEGOSInformatique in France and was responsible for distributed online banking systems installed in Europe.

Peter Hruschka is a principal of the Atlantic Systems Guild, an internationally renowned group ofsoftware and system technology experts. He is a specialist in technology transfer for software andsystem engineering. Dr. Hruschka conducts surveys to determine the capabilities of organizations,constructs strategic plans, offers seminars and workshops for both structured and object-orientedmethods, provides coaching and consulting, and performs project reviews.

Tomoo Matsubara is an independent consultant who works with software organizations inequipment manufacturing companies. Between 1970 and 1991, Dr. Matsubara was chief engineer andproject manager of Hitachi Software Engineering in Japan. He was a primary contributor to establishinga management infrastructure, such as company-wide software metrics, multiperspective projectmanagement systems, and software process assessment, in the early stages of the company.

Navyug Mohnot is executive director of the Quality Assurance Institute India Limited. QAI India helpsorganizations improve software processes and leverage the SEI CMM, ISO 9000, SPICE, and otherapproaches. Mr. Mohnot�s areas of expertise include software metrics, CASE, estimation, and quality.

Roger Pressman is the president of R.S. Pressman & Associates and an internationally recognizedconsultant and author in software engineering. Dr. Pressman specializes in helping companiesestablish effective software engineering practices. He is the developer of Process Advisor, theindustry�s first self-directed software process improvement product, and Essential SoftwareEngineering, a comprehensive video curriculum.

Howard Rubin is chair of the Department of Computer Science at Hunter College, president of RubinSystems Inc., and editor of Cutter Information Corp.�s IT Metrics Strategies. Dr. Rubin has publishedmajor software engineering books and papers on metrics and quality. He is internationally recognizedfor work in the areas of software process dynamics, software metrics, the business value oftechnology, and project �navigation.� He has provided expert advice and analysis on large-scale projectmanagement, oversight, and outsourcing and is the creator of a leading tool for software estimation andplanning.

Paul A. Strassmann has served as CIO of Kraft and Xerox and director of defense information forthe US Department of Defense. Mr. Strassmann is currently CEO of Software Testing AssuranceCorporation, president of Information Economics Press, chairman of Method Software, and a directorof McCabe Associates and Meta Software Corporation. His books include: Information Payoff, BusinessValue of Computers, Politics of Information Management, and The Squandered Computer.

Rob Thomsett of Australia and Canada is director of The Thomsett Company and has been consultingand educating in the area of project management, teams, and quality since 1974. He is the author ofPeople and Project Management. During his 26 years in computing, Mr. Thomsett has continued toexplore the relationship between project and team management and the broader issues of the impactof computing on organizational culture.

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