The streets of Bangalore

The streets of Bangalore

Why do organizations outsource work? It certainly is not to eviscerate the workforce of the company; it is to get more with less. More functionality, more productivity, more quality, more profit and more market share.  The first group of myths cover the “Theory of More.” The Theory of More is built on the expectation that more functionality will be delivered faster and with higher quality.  Central to most of the myths in this section is: How do you know you are getting the more you wanted?

Myth:  “We only have one goal in mind for outsourcing and that is all we need to measure”.  Organizations occasionally get fixated on a single result and measure this result to the exclusion of all others.  This pattern almost always generates irrational results. For example, a major outsourcer noted that the easiest way to increase productivity was to reduce the work that they allowed to enter the IT shop they had acquired (the relationship between the amount of work entering the shop and productivity is statistically measurable and predictable). The contract was focused on productivity, but the outsourcee certainly did not expect to get less functionality delivered when the contract was signed. By accepting less work the developers are able to focus on one thing at a time rather than multitasking yielding higher productivity (effort per unit of work).  A better approach is to leverage measurement techniques like the balanced scorecard.  A single metric can’t define value without being prone to gaming (intentional or unintentional).  The use of any scorecard requires deft selection that enhances the behavior which both partners anticipate and wish to promote.

Myth:  “Productivity of outsourced work is higher than internal projects.” Changing productivity is a common goal of sourcing decisions.  This myth is a variant of the infamous “the grass is always greener…” truism. The classic definition of the productivity equation is the amount of output created per unit of input; a software example would be the number of function points per month of effort.  Data from multiple consulting organizations indicate that outsourcing productivity is lower but the cost basis substantially lower.  The second definition (false definition) substitutes monetary value for physical units of output, or the dollar value of software created per effort month.  Reducing the cost of software would increase the net value.

Myth:  Deciding on an outsourcer based on  a specific CMMI® maturity ratings because it is believed that  a higher maturity level equates to higher productivity. When productivity is measured as units of output per unit of work, there have been numerous studies of organizations assessed at CMMI Maturity Level 5 assessments that show lower productivity than comparable non-CMMI Level 5 organizations.  This strongly suggests that the relationship is not direct or that other factors might be effected by the attaining the high levels of discipline required to achieve CMMI Level 5.

Myth:  “The reduction in labor costs created by off-shoring is all that matters when developing a cost profile.”  This myth has been debunked in many articles.  Labor costs are only a component of the costs that should be considered.  Communication and travel costs must be layered into any sourcing equation.  Other areas that affect the bottom line costs include differences in quality (cost impact can go either way), oversight costs (add-on cost),  infrastructure costs (add-on cost) and the cost of lower productivity.  If the sourcing equation contained labor as the only component, there would be little or no discussion.

Myth: “The quality of software delivered by outsourcers is higher than internal projects.”  Unlike productivity, where the answer depends on the definition used, the data on quality collected in project assessment does not bear this myth out when quality is defined as defects delivered.  While there are many anecdotal stories of higher quality when quality is measured by external consultancies, the data is lower than equivalent internal projects.  One explanation of the differences between the anecdotes and measured data (other than ascribing it to salesmen) is that troubled projects tend to be measured (only a slight overstatement).  Another is that the measures of quality and satisfaction have been intertwined.

Myth: “We can agree on a contract now and then agree on how to measure it later.”  The success criteria for the sourcing decisions need to specifically documented, agreed upon and measured.  Success criteria typically are complex and have more than one single driver.  Understanding the relationship between individual success criteria is mandatory.  The interrelationship can cloud the impact of a sourcing decision.  An example is the inter-relationship between work entry and productivity.  Slowing the entry of work to the team or “shop” will cause an immediate increase in productivity.  You need to ask yourself whether your success criterion elicits the right response for your needs and provides predicative data.  To quote a dear friend of mine, Gail Flaherty, “How will they know?”  Contractually, any sourcing agreement must  address how everyone will know whether or not the goals are being addressed up front.

Myth:  “Measure what is easily seen so it won’t add significantly to the overhead of the contract.”  Tracking success or performance should not be limited to easily quantifiable data.  Based on your goals for sourcing work, determine the factors that predict success.  For example aren’t behavioral components such as morale, experience and turnover typically significant predictors of success which can provide explanative information for performance?  These are hard to measure but important. CMMI Ratings and quantitative data are merely proxies for behaviors which explain how people actually work.

Myth:  “Measure everything so we can control the vendor and see problems before they happen.” Measurement is like chocolate; there is a right amount that satisfies (and may actually have some health benefits) and an amount that will weigh you down.  Finding the balance that allows you to monitor and control your sourcing arrangement without giving away the benefits is still an art.  It should be pointed out that if you have made the effort to negotiate and stipulate success criterion in the contract, you must take the time to measure.  Just don’t overdo it!

Myth:  “Productivity and knowledge capital of the firm at large will be unaffected by sourcing work outside the organization.” This is a myth for no other reason than no one really knows if it is true or not.  Productivity has been the backbone of the U.S. economy since the mid ‘90s.  Three major components drive productivity: capital deepening, knowledge and multifactor productivity (MFP).  MFP reflects the joint effects of many factors including research and development (R&D), new technologies, economies of scale, managerial skill and changes in the organization of production.   Contracts must  contain methods for capturing and returning knowledge capital so that it can be used to continue to fuel the productivity engine.

Myth:  “Choice fuels competition, innovation and efficiency.” There are many assumptions built in: perfect knowledge, free competition or low barriers to entry and exit — to name a few.  The degree to which these are true influences the benefits derived from choice (or at least the risk of making a choice).  Organizations that have outsourced all or part of their IT organization need to understand and identify the benefits and risks of their choice (in a perfect world they would lock in the benefits and mitigate the risks) early in the process due to the barriers that contracts and dislocation of jobs entail.  Understanding how your contractual decisions impact basic economic tenants can’t be ignored.

A corollary to this myth is “More choices yield a better decision.”   Too many choices can create a scenario where analysis paralysis occurs or, equally as evil, a fractured non-optimal answer.  This type of crisis creates a condition where it becomes more and more difficult to make a decision because of the fear of losing out on something better.