A sign that says

Contracts Define Who Is Authorized!

We complete our tour of the reputed places agile fears to tread with a brief stop in the land of contractual relationships. Outsourced work is the primary denizen of the land of contracts. In all but the simplest scenarios, asking another firm to do work for you generates a contractual relationship. In most cases, the contract is a proxy for intimacy and trust that occurs inside a single organization. Fences make good neighbors to keep relationships orderly; in the business world contracts take the place of fences to establish boundaries. Boundaries constrain the free flow of information and ideas, which is antithetical to agile principles. There are four core reasons organizations and practitioners see issues fitting agile into an environment of contracts and outsourcing. None of these issues is insurmountable, but they must be fully addressed in the contract. They are: (more…)

Cultural disconnects are a major contributor to problems in outsourcing.

Cultural disconnects are a major contributor to problems in outsourcing.

Managing risk is one of the keys to success in an outsourcing arrangement.  There are many control mechanisms used to manage outsourcing deals.  Control mechanisms can range from full-scale contract offices, PMO’s, metrics, scorecard reporting, audits, CMMI assessments and on-site oversight teams.  In real life, typically these are applied in combination.

Cultural disconnects are a major contributor to problems in outsourcing that increase as the distance between client and outsourcer grows.  Sounds like a truism, however examples abound even today as organizations fall prey to misunderstandings driven by cultural disconnects.  The misunderstandings that can occur can range for differences in semantics to deep-seated cultural differences.

A tool to manage/minimize this type of disconnect is to co-locate an on-site account management team with the outsourcer.  This type of arrangement provides an avenue to mitigate cultural differences, translate both intent and words and mainly to build trust.  All positives; however darker possibilities exist, and as personal observations prove, they do happen!

On-site management of outsourced projects provides a number of impressive benefits that other forms of control do not provide.  The first and most important of these is a simple visible presence that reinforces that work is important.  Secondly, an onsite presence can provide a bridge between cultures (both organizational and sociological cultures).  Further, a presence provides a mechanism for translation, and for ironing out semantic differences quickly and efficiently.  Finally, an onsite presence is a basis to build a common history and understanding, which yields trust.

A powerful tool with equally powerful drawbacks: what happens when an onsite lead or team loses perspective?  I participated in an assessment of team that supports a group of outsourced applications.  During initial discussions it was impossible to determine who worked for the outsourcer and who worked for the onsite account management.  Collaboration you might ask?  True, but only if the arrangement is structured as such and all parties perceive it that way, which was not the case.  The on-site team had lost perspective and aligned themselves with organization they were overseeing, an application of the ‘Stockholm Syndrome’.

When an onsite team gets too close, they lose perspective, and they begin to believe they are part of the company they supposed to interface with.  When perspective is lost, who will they advocate for the project or how will a critical point of translation be interpreted?   Even if the closeness is merely an appearance, it will be difficult for others to understand how to act.

How do the best make co-located teams work?  The best observed application of the techniques begins with the sourcer deploying a cross-functional team.  The skills that are required include project management, business and systems analysis.  The very best include personnel with both facilitation and negotiation skills (negotiation is more typical). All team members require a strong sense loyalty to their company.  Note that if the work is ’offshored‘ (not just outsourced), then the team members must have command of the local language.  The rational for teams rather than an individual is two-fold:  The first is that a team can field more skills.  The second is that a team is far less likely to “go native” than an individual (teams create their own support structure).  Note, using teams is a best practice only if the amount of work supports it.  Smaller outsourcing agreements may not have the luxury, which means they must roll all of these skills into a single individual.

Despites the downside risks, co-locating sourcer and outsourcing teams of any size are a best practice.  How organizations structure their co-location program to keep the personnel fresh and useful is what separates the wheat from the chaff.  Observed tactical best practices to maintain the crispness of on-site teams include:

  • Rotation of personnel (not everyone at once unless there is only one person) re-enforces the attachment to the parent company.  A secondary form of rotation includes making a spot on the team a step on a job progression.
  • Leveraging PPQA reviews provides an assessment of whether the outsourcers processes are being followed.  Non-compliances are identified and an action plan is put in place for remediation.
  • External audits, using models such as the CMMI, ITIL or ISO Standards, provide a far more formal reading of whether processes are followed (typically with more consequences if they are not).

On-site teams are a best practice for reducing the risk of an outsourcing agreement, but it is a best practice that has a downside unless they are carefully managed.

A slightly different sort of model...

A slightly different sort of model…

Governance is a balancing act between ensuring what has been contracted is done in the manner stipulated and asking so many questions that you get in the way of your sourcer. Organizations use many techniques for creating a balanced approach to governance. Techniques range from developing your own governance structure to using process models. Whether or not you engage consultants to help develop a contract, using a model (or models) as the discussion framework is an effective method to jump-start governance.

Why are models so effective? Initially a model provides a common set of constraints that all parties can agree to without much consternation. How can you argue with a model that is regularly billed as an industry standard? Models such as CMMI, COBIT, or ITIL are certainly well accepted and are usually effective if the parties express clear goals for their use. Models are practically ubiquitous in sourcing arrangements, which usually makes the meat of the discussion not whether, but which, model will be adopted. (While outside of the scope of this discussion, the choice is important as each model focuses on different constraints.)

Each model brings with it a defined vocabulary and a set of processes that direct communication and activity. These common definitions provide the basis for governance while minimizing the work needed to arrive at an agreement. Whether recognized or not, the creation of a common vocabulary and process set is the single most important value that a model provides.

But there are problems with using common models such as CMMI or ITIL to create balance. The first is a temptation for one party to view the model as a goal unto itself. The second is that no individual model covers all of the elements of more complex sourcing arrangements. The size and complexity of governance provisions required are generally correlated to the size and complexity of the sourcing deal. As a result, complex sourcing arrangements often require using more than one model.

The balanced scorecard popularized by Kaplan and Norton provides a conceptual framework for establishing balance. Leveraging one or more of the popular process models such as the CMMI and ITIL, along with the balanced scorecard, creates a dominant tool set for providing balance in complex governance relationships.

Whether two or more organizations are involved in sourcing discussions, culture is a major determinant of governance structure. The act (or art) of balancing a sourcing contract is an intricate translation of multiple cultures into a set of covenants and agreements that must reflect the human factor. Individual needs and goals are important in an organization but are dwarfed by the goals of groups or constituencies. Constituencies can include senior management, users, unions, IT, and vendors, and organizational goals act as links between constituencies. Balance must include recognition of the overarching goals; the balanced scorecard is a tool for making sure this recognition occurs and is built into the governance process.

Balance provides focus that aligns monitoring and enforcement. Monitoring and enforcement are interrelated in their simplest forms. Monitoring is merely the process of watching for what you want to happenand enforcement is the mechanism to make it happen. In some cases, monitoring and enforcement are dealt with in the same process. An analogy for monitoring and enforcement processes is the speed trap, which monitors speed and at the same time is an enforcement tool (unless totally hidden). The tactic is enabled by the laws and tools. Sourcing uses similar monitoring/enforcement dichotomies. Cost and budget are monitored. Enforcement is accomplished by using accounting tools enabled by the contract.

Individual contracts refine the framework of a model, anchor the sourcing arrangement and provide the basis for any discussion of balance. The contract defines what is important (to all parties) and how the goals will be monitored and enforced. Cost of the governance structure is a part of the balance discussion. Implementing models, monitoring, and measurement processes are not free. But using models is the most efficient means of pursuing balance within sourcing contracts.

Models provide a focus for establishing a balanced approach to governance and as an equally important benefit, models provide a standard set of role definitions. Each of these areas is critical to creating an atmosphere in which communication can occur. The combination of models and enabled communication provide a platform from which organizations can construct a balanced governance approach.

Interaction of team members yields productivity.

Interaction of team members yields productivity.

Over the past eight days we reviewed the myths of outsourcing.  It has generated more than a few responses and Skype conversations, and I missed two myths. I suspect that I have missed many more and stand ready to add to the list.  The missing myths revolve around teams. Teams are a normal feature of all IT organizations, whether we build or maintain code or are network engineers. Outsourcing changes the effectiveness of any team it touches.

Myth: “Distributed teams must leverage waterfall techniques.” The rational for this myth is often attributed to time zones, language or accent differences.  But, distributed teams comprised of members of both the outsourcer(s) and the outsourcee can work in a collaborative, dare I say, Agile manner. The distributed nature of the team makes working as a team significantly more difficult. This is even truer when organizations are newly mixed. Most of the potential complications impacting communications can be solved by:

  1. Identifying and focusing on a common goal,
  2. Concentrating an effort to personalize each team member, and
  3. Synchronizing the work processes.

Myth:  “Distributed teams are just as efficient as those that are co-located.” We discussed the impact of distributed teams  on making decisions. Distributed teams must expend significantly more effort to stay synchronized, if for no other reasons than the length of the communication lines.  A distributed team needs more time and effort to communicate than the same team would need if they were sitting in the same room.  That extra effort typically reduces productivity. For example, if one function point of functionality required 40 hours of effort to deliver before outsourcing and then when the work was outsourced it took 30 hours to deliver a function point, the organization would have become more efficient. Anything that decreases the amount of effort needed to deliver a unit of work increases efficiency. In outsourcing scenarios, organizations often redefine  efficiency to mean the ratio of output to cost. One of the primary reasons organizations choose to outsource is to lower the cost basis of work. The reduction in cost is interpreted as an increase in efficiency, which may or may not be true. For example if a function point requires 40 hours to deliver before and after outsourcing, the labor efficiency would not have changed. However if the cost for the function point originally was $4,000 USD and then after outsourcing the cost falls to $3,000 USD, the cost efficiency would have improved. The rational for shifting from effort efficiency to cost efficiency in this scenario is that an organization focuses on measuring the efficiency of how it uses its own resource to deliver output.  Money is the resource being used in the case (really a combination of money and internal effort to manage the outsourcer). Ignoring effort efficiency hides potential issues that could be exposed if the cost of developers between the outsourcee and outsourcer normalizes.

A note on the idea of efficiency: While measuring efficiency is important, a more important measure is effectiveness.  Effectiveness measure the value delivered per unit of input (effort or cost based on the discussion above). I am sure I have not explored all of the myths of outsourcing. What are the myths that you have seen? For example, have you seen the terms outsourcing and off-shore conflated?

Been there, done that, got a picture, part 2.

Been there, done that, got a picture, part 2.

Myth:  “Outsourcing arrangements can be managed as business as usual.”  This is a myth that is common among rookie organizations that have avoided reading the literature or gotten lucky on one or two small projects.  While it must seem like a truism, outsourcing models can not be addressed as if it were business as usual. Change is expensive and risky.  Managing all sourcing options in the same manner will in the long run yield the same results as you have today.  The fact that most (if not all) outsourcing agreements are based on a contract makes this kind of work different.  The concept of how the internal IT department manages outsourced work shifts from a line management model to a more disengaged model.  Users trained to partially specify requirements, then ask for changes, will need to learn that changes cost real money.  I have seen more Agile models applied to outsourced projects.  These methods hold great promise when applied to relationships of differing levels of discipline (typically the organization sourcing the work is lower while the outsourcer has a higher level of discipline).   The use of high-touch components of methods such as eXtreme coupled with high documentation methods to facilitate communication across groups have been found to be useful in building bridges between different organizations.  Using these modified approaches makes sense if cost is not the primary driver of the relationship.

A corollary to managing outsourcing as business as usual is that all outsourcing options can be managed in a similar manner.  If there were no process differences between sourcing options, the decision process would be moot (or at least very different than it is today).  Process differences require different management tactics.  The difference in communication methods in offshore models and staff acquisition models are significant.  Process differences require different management methods to produce the cost, quality or productivity differentials we expect.

Myth:  “We have used staff augmentation models before.  How different could outsourcing be?”  This myth is another variant of the business as usual myth.  Internal line managers managing personnel in the staff augmentation or bodyshop models, trying to apply line management techniques to outsourcing models, significantly reduces efficiency and effectiveness.  Acceptance of this myth causes organizations to try to over-manage their outsourcer.  The over-management is reflected in two typical scenarios: In the first scenario organizations create voluminous contracts that seek to specify (in detail) how outsourcer is to do their work.  This causes the project to lose the effectiveness and efficiency expected (if you were that good at doing and managing these types of project why did you outsource it?).  The second scenario is when the firm outsourcing the work directly tries to manage the outsourcer’s personnel.  Thankfully, this scenario is becoming rarer.  It isn’t even worth making this mistake to learn from it.

Myth:  “Our outsourcer is good at managing projects; we will let them handle it.”  This is a final variant of the business as usual myth.  Adherents to the “hands off” approach typically use the same method for internal projects.  They view the outsourcer as an extension of their own staff.  The approach is similar to the classic cartoon where a blackboard is filled with equations that lead to a box titled “a miracle occurs” before emerging in an outcome.  Sourcing arrangements cannot be approached in a hands-off manner.  Contractual relationship must define how to manage the sourced projects.  Management must include all parties to be effective.  The organization that has placed the sourced work must intimately know the status of the project in their portfolio regardless of who is managing the project.

Myth:  “One for all and all for one”.  In the ‘60s, there was a saying “different strokes for different folks.” A different source for different needs.  A package for a base, outsourcing for core functionality enhancements and support and a business team.  Complex scenarios are required to make the IT department of the 21st century run.  In the end, remember that “one size fits one” does not work in all scenarios.

Myth:  “All or nothing.”  Nothing should or could be further from the truth.  Multiple partial sourcing (mps) is an effective means of addressing todays varied IT needs.  MPS is not the lowest cost option; it requires aggressive management, nimble contracting and excellent internal project management.  Large projects or programs are assembled (much like Lego or objects) can often require multiple-sourcing scenarios.  Project management must combine the best of the hands-on approaches with the controls typically viewed as rigid or bureaucratic to keep all projects pointed into the wind.  All or nothing/one-size-fits-all scenarios reduce the effectiveness of the outsourcing options.

Myth:  “I can hire one firm and get rid of all of my IT headaches.” There are large outsourcing firms that can offer across-the-board solutions and leverage multiple sourcing models.  The allure of one-stop shopping is very strong for some.  Replace a whole cog with a whole cog.  Frankly, in a few cases this might be a good answer; however, in the majority of cases it is an overreaction that trades one set of problems for another.  Depending on how much work gets redirected, it may leave you with the inability to deal with work that must be closely held.  In most organizations, IT is a repository of project management skills. Getting rid of everyone in IT will impact the ability to monitor projects or act as technical interfaces with your clients.  While the large sourcing firms can offer a dizzying array of services, it is rarely circumspect to outsource your whole IT department or place all of your work in one organizational basket that you do not control.

Myth: “External sourcing is equally applicable to all type of projects.” There is an old adage: “If the only tool one has is a hammer, everything looks like a nail.” If you have no residual IT organization, go to the next myth: “This ain’t gonna help.”

Some type of projects make more sense to source internally:

  1. Exploratory projects where the requirements or solutions might be unknown.
  2. Projects developing or building on proprietary knowledge. While it is highly unlikely you can not control all knowledge leaks, why tempt fate by adding more potential leaks.
  3. Projects developing core but non-proprietary work.

This final point continues to be controversial. There is a ongoing discussion within the industry that suggests that core work can and should be outsourced if it is built on non-proprietary knowledge. The passing of control for the support of core work can lead to a feeling of loss of control.

Myth:  “One-time projects cannot be outsourced.”  Recently, the subject whether it made sense to outsource one-time projects reared its ugly head.  Can anything really can be one-time unless liquidation occurs in the days after implementation. The working definition I have settled on is that all functionality is new and it will never be enhanced or maintained.  The questions to ask when determining whether you should outsource include:

  • Whether your organization has the expertise required?
  • Do you need to build the expertise for the future?
  • Will the project use strategic or create strategic knowledge?

The number of times you are going to do a specific project does not rise to the same importance level as these questions.  The goal is to determine whether you need to do the project for strategic reasons.

The other “‘one-project” type is the “one-off” (like something done before).  This project type yields to the same logic.  It is critical that you develop a strategy based on the infrastructure and knowledge capital needs of the organization to filter which project should be considered for outsourcing.  A strategic filter will ensure that sourcing decisions are goal driven rather scenario driven.

Myth:  “External sourcing options are fire and forget.” Why would not knowing the intimate status of internal projects be acceptable (arguably it might actually be considered project management malpractice) and is it okay not to know the same level of detail about projects done externally?  This myth seems to go hand in hand with “they are more mature, therefore know better.” Thankfully, I see this phenomenon happening less often, perhaps because people typically don’t let it happen twice.  Unwatched projects wander.  Wandering projects have all sorts of problems such as scope creep.  Capers Jones has been quoted as saying that projects with over 5% scope creep per month end up in cancellation or litigation 90% of the time.  The expediency of communication and monitoring is a simple cure for all but a systemic case of project wandering.

Been there, done that, got a picture.

Been there, done that, got a picture.

Individual sourcing examples reflect a number of popular myths about outsourcing.  These also provide a fertile ground from which to learn from those that have done it well and those that have done it less well.  Some of the following myths are related to those presented before.

Myth:  “IT is like a factory — raw materials and plans go in and product is delivered.” The factory analogy has been with us for a long time, evoking the images of assembly lines.  Components are cobbled together into a product that can be delivered.  Conceptually, the idea is alluring, bolstered by the use of objects, components and COTS product, but the analogy only works to a point (assuming your processes actually leverage items that can be assembled).  There is still a great deal of creativity, integration and customization required to deliver a functional product to users.  In applications that can be assembled, a more accurate analogy would be that of mass customization.  A common core is presented with a custom wrapper that meets specific business and competitive needs.  The mass customization view could easily be accomplished by the assemblage of multiple subprojects using all common sourcing scenarios and embracing the use of creativity.

A further problem with the factory analogy is the myriad of one-time projects, designed and developed to address rapidly evolving needs.  These do not make sense in an assembly line or mass customization model and are much close to the model of craft labor currently employed in most IT organizations, regardless of where they are deployed or who is actually doing the work.

Both the craft labor model and the mass customization models require skilled, intelligent labor forces with close relationships with their users.

Myth:  “Sourcing is like buying pencils, I fill out the request and resources appear.”  Sourcing work is substantially more complex than that of the routine acquisition of most common tangible items.  Complexity causes the need for significantly more upfront definition and management.  Additional procedures in the acquisition process must be developed. These include gathering needs from internal stakeholders while not ignoring the knowledge that can be gained from the purchasing model which includes the knowledge of contracting, controlling payments and leveraging  the power of the RFI process to drive out in-depth information.  Interesting firms regularly leverage all of the ancillary process to develop sourcing agreements, then fall prey to business as usual (or worse yet, merrily paying invoices without linkage to delivery) when managing the process.

A corollary to this myth is treating outsourcing like purchasing services or staff augmentation.  The acquisition process must reflect the need to assess a broad range of skills to requirements of a project or group of projects.  Processes described in the Supplier Agreement Management (SAM) and Integrated Supplier Management (ISM) process areas in the CMMI provide a standard framework to help focus on organizations on developing and managing supplier relationships.

Myth:  “Changing sourcing options is a quick fix for the chaos going on in my IT department.” This myth is a variant in the quest for a silver bullet (no vampires need apply) for improving IT.  Organizations are affected by failures within their IT organizations for reasons too numerous to be addressed here (see the Chaos Report for an exhaustive discussion).   Using a sourcing solution to correct problem/problems within your IT may actually be the right answer; however, if it is used as proxy for actually managing, it is exactly the wrong answer.  Outsourcing makes a lot of sense when used to address specific needs or knowledge holes.  Using outsourcing options to address systematic management problems typically only serves to change the enemy.  This is most true when staff acquisition models of outsourcing are used.  These types of changes force the outsourcer to deal with the problem rather than addressing it himself. When using outsourcing as a tool to address perceived chaos or management issues with an organization, the first step should be a deep self-analysis.  Are you just trying to make someone else deal with a hard management problem?

When outsourcing is done to alleviate problems caused by the interaction of IT and the user community most organizations find that separating the two communities will not solve the communication problems and could even exacerbate them by making the communication lines longer. Interestingly, you can buy time to make organizational changes through outsourcing.  Change often introduces a honeymoon period that can be used to solve the real problem in a less direct manner.  Given the number of sourcing options, if you can create one honeymoon after another you could avoid solving your problems for a very long time.

Myth:  “Outsourcing is only a stopgap measure to increase productivity.” Get over it, the world has changed.  Outsourcing is a primary tool used by CIOs to manage their portfolio of work.  While it may not be a perfect tool, it is useful a tool for more than just managing productivity.


People Are Critical

People Are Critical


Hand Drawn Chart Saturday

Part 2 (Part 1)

Myth: “Change does not need to directly address culture.”  Considering culture as a black box into which sourcing changes can be inserted and functionality returned is a falsehood that most everyone recognizes, but very few directly address.  Culture refers to the cumulative deposit of knowledge, experience, beliefs, values, attitudes, meanings, hierarchies, religion, notions of time, roles, spatial relations, concepts of the universe, and material objects by a group of people in the course of generations through individual and group striving.  Bottom line, people are what they learn.  Each change is a learning opportunity.

Myth:  “Our outsourcers staffing issues are not our problem.”  Why?  One of attractions to outsourcing is the belief that the outsourcer is a black box composed of processes performed by interchangeable cogs.  The reality is that staffing headaches are yours regardless of where they occur.  Turnover immediately reduces productivity as jobs are re-learned.  Even in a fixed price contract, personnel turnover can have effect.  The loss of productivity that the arrangement was based on could require the outsourcer to take a loss or trim work that could be viewed as overhead (like testing or reviews).  Quality can and does suffer.  Other longer-term issues include the possible transference of knowledge capital and job knowledge.  These issues are not new; they exist even in a non-outsourced scenario. Unless addressed contractually, however, you will not have input into the safeguards of required for your piece of mind.  Safeguards to protect your knowledge and job-level continuity are important.  If turnover is pervasive, simple safeguards provide little value.  Include a measure of turnover in the monitoring portion of all agreements.  Explore how your outsourcer intends to safeguard your knowledge capital, then make sure it happens. In the hotbeds of offshore outsourcing, the level of growth has been phenomenal.  Competition has created an environment where job switching is the norm.  I performed a quick survey (non-scientific) at a recent speaking engagement to test this hypothesis.  I asked those in the audience from mainline outsourcing firms to stand.  Then I asked how many had changed firms in the last five years.  The sample size was approximately 60 people.  Twelve people in the sample had not changed firms in the last five years; further, five had been in the business less than one year.  Anticipate the pressure on the goals of your contract from turnover.

Myth:  “After we decide on a sourcing model and trim our staff, internal turnover is a backburner issue.”   Turnover is a vexing problem for all areas of an organization but particularly with IT organizations where learning curves are steep.  Turnover can sap the strength of an organization by allowing critical knowledge to escape or act as a vehicle for change.  It can open slots for new ideas and technologies to be integrated into an organization as new people are added.  Internal turnover always continues after outsourcing work.  Retained employees will feel threatened (re-read communication myths) and will consider leaving.  Plan for continued turnover.  Focus retention efforts on those within the organization that are thought leaders in the areas that are critical for your well-being.  Use the slots of those who leave to bring fresh ideas into the mix and to bolster knowledge where you need it.  A skills and knowledge inventory is best practice used in the transition process.

The organizational impact of internal turnover caused by sourcing decisions is an unknown.  The literature is replete with claims and counter claims.  It is easy to believe the impact of change (sourcing merely being one type of change).  Active management of who stays and who goes is relatively easy when the organization is choosing.  In scenarios of attempting to influence a bottom tier to leave, the impact is less well understood.  While there are some organizations that have used the process to continually reinvigorate their skill pool, the control over their over the process is far from certain.  For example, an organization annually force-ranks all IT members, earmarking the bottom 20% to an active process of being managed out of the organization.  The emptied slots are refilled, and Darwinian competition begins anew.  In late 2003, the organization announced that in 2004 they would fill the emptied ranks offshore.  The 2005 forced ranking will therefore come from the 80% that made the cut in 2004.  Turnover immediately jumped, and, as is typical, the majority was from the top performers.  Interestingly, HR and senior IT leaders of this organization were surprised. Focus groups with line project managers expressed that result was as they had predicted.  All sourcing actions must be viewed in terms of entire organizational culture to be in least bit predictable.

Myth:  “Turnover is an issue only when we use offshore outsourcing.”  All sourcing models are subject to turnover and will have an impact on the level of turnover in retained personnel.  Offshore sourcing vendors have as high (or higher) turnover rates spurred by stiff competition.  Staff acquisition models suffer above-average turnover rates; people always react to change with change.  The use of COTS packages has the least impact on turnover unless you have built your shop on the premise that developers are at the top of the food chain.  Spend time anticipating how change will impact your turnover rates and focus on how you can ensure business and technical knowledge continuity.

Myth:  “Outsourcing work and staff helps avoid the responsibility to keep our staff trained.” Outsourcing options have long been used as a tool to mitigate organizations’ need to train (cost avoidance) or build potentially transitory skill sets.  When a need to address a specific method or technology is identified as urgent (where or when did planning occur), sourcing choices become an effective method for addressing the need.  Organizations providing sourcing options can very specifically identify the expertise they can bring to the table.  Most track training and expertise at a granular level as if they were code modules.  The goal is to bring the best solution to bear (and deliver it in the most efficient manner therefore driving up the profit margin).  The use of outsourcing as tool to avoid planning the migration of skills needed to support your IT needs is a strategic mistake and will lock you into using outsourcing models.  Being locked into any model puts you at risk that you will not be able to react to change.

Training is a significant component of most IT budgets.  The size of the line item in the IT budget is driven by many factors ranging from the rate of change in the software portfolio, the age of the technological platforms, the rate of internal turnover and corporate policies.  Shifting from an internal sourcing model to an external does not dissolve the need to be involved all together.  If you are using a model that is going to use a single or stable group of outsourcers, you must define your expectations and make sure they are followed by your outsourcer.  You may not directly bear the cost (or savings) or responsibility; however, if your outsourcer’s personnel gets stale, your solutions will become stale, the turnover will increase, potentially negatively impacting all of the reasons you originally had for the decision.

Myth: “IT workers must continually retool to avoid outsourcing.” This myth is both true and false at the same time.  It almost goes without saying that the fast pace of change in the IT world does not seem to be slowing.  Skills age and unless replaced the person holding them becomes less employable (this is true in almost all professions).  At an individual level, continued retooling will not cause anyone to avoid being outsourced.  The need to change sourcing options is a macro-level decision driven by globalization rather than any individual.


Unlike a dog, people’s loyalty needs to be earned.

IT is not all about technology; the most critical component is the people that create functionality. As has been noted, productivity has been the engine of the world economy for at least the last decade.  The continual introduction of new technologies plays a major role in generating the productivity gains our economy needs.  Many technologies require workers to acquire new skills to design and operate the processes they engender.  The new skills require not just greater computer use but also more complex decision-making skills (a circular process that smacks of perpetual motion machines).  This results in inducing a reshuffling of workers with different sets of skills across jobs.  Globalization and improvements in telecommunications have created a scenario where reshuffling means that jobs flow to the geographical area lowest cost (education, language and security requirements taken into account).  Job and skill churning has created greater job mobility for skilled workers.  While this has a short-term negative impact within job categories, it creates substantial sharing of information and knowledge across organizations and countries.  In the long run, this benefits the global economy. The juxtaposition of people, organizational culture and the churning of jobs and skills provides a fertile ground for outsourcing myths.

There are so many of these myths that we’re breaking it into two parts.

Myth:  “Our employees are loyal to the organization; they will understand that change is needed for the organization’s well being.” Loyalty is an often-used term that describes relationships between an organization and its employees. Depending on your point of view, loyalty means many different things.  When used by an organization, the term typically means that an employee acts in a manner that enhances the bottom line.  From an employee’s point of view, it means that the business will take care of/support them if they put the organization on the top of their internal priority list.

Sourcing decisions can and do have an impact on loyalty. Sourcing decisions can significantly reduce loyalty.  Reduction in loyalty can negatively impact productivity, quality and time-to-market, if loyalty and morale are linked or if loyalty and stability of the workforce are linked.

Loyalty and trust are inter-related.  Most organizations with change processes prescribe communication as a tool to manage loyalty by building trust through the judicious use of information.  The broad-based, open communication required to build trust and loyalty is not typically considered possible while determining a sourcing strategy.  Open communication while a tool build trust with your employees can also disrupt the negotiation process by exposing too much information to the sourcer.

Myth:  “Loyalty is an old concept.”  Does loyalty matter?  In tight labor market or in situations where your internal knowledge is important, the answer is obvious; in other scenarios, perhaps not.  Many organizations do not consider how to address loyalty across the entire organization.  They decide it does not matter or focus only on the groups that are most intimately impacted with a particular change.  Progressive organizations leverage and promote loyalty across the whole organization, not just their retained IT personnel.  Team building techniques are used to build inter-group relationships. Interfaces are a means of spreading the organizations message and to actively manage loyalty, but to be effective they must be build on the inter-personnel relationships that comprise trust.

Myth:  “Communication is merely spin control and is needed only when change is imminent.”  Back in the days when I worked in the corporate world, we could always tell when something was up.  The presence of the corporate communications group became overbearing.  It was the signal to update my resume. Communications is a long-term method to build trust, turning it off and on implies a level of disingenuousness that is hard not to recognize.

In order to be effective, communication must be focused on providing all constituencies within the organization (internal and external components inside and outside of the effect areas) with the understanding of the sourcing strategy and its requirements. Communication is a powerful tool for managing change.  The value is reduced if it becomes a predictor of change or is perceived as disingenuous.

Myth:  “Time heals all wounds.” Corporate memory is an important component in understanding the impact of sourcing decisions. Managing perception of each project that uses sourcing is important in making the process work.  A CIO related his first experience in using sourcing to me.  This experience formed the foundation to his approach for using sourcing. It was merely one project, and all his subordinates admitted it was flawed.  The wrong project was chosen, and the relationship between the company and its source was actively undermined.  The outcome was inevitable; however, what has been remembered is that it didn’t work. Therefore it probably will not work in the future.  The options available to this CIO have been severely hamstrung.  As a side note, the story among the employees is that sourcing strategy can be manipulated at the cost of a single project.

Changes in sourcing can affect many people’s livelihoods. I surveyed folks within two organizations that had significant sourcing changes within the last year (both had over 6 months of experience with change).  Over 60% of the respondents felt that overall organizational stability had been reduced.  Additionally, approximately 15% of respondents felt they would leave the company within the next year.

Myth:  “If I don’t let anyone say anything negative . . . “  This is the antithesis of the time heals all wounds myth.  The premise is if we ignore the change, the impact will pass.  This myth tends to take hold in organizations that use rigid hierarchies for managing and control.  In extreme cases, belief in this myth causes the voicing concerns or anger to be viewed as anti-team spirited (forget the grief cycle).  Recently, I have seen these tactics taken a step further with personnel making anti-team-spirited comments being summarily terminated.  While a radical approached, it did serve to stop public discussion (for pretty much everything), but it did not serve to make people forget.  The discussion of how change impacts an organization must be address and managed.  Driving the discussion underground is dangerous and must be viewed a desperate last resort.

Under pressure, sometimes things erupt!

Under pressure, sometimes things erupt!

Pressures on a modern CIO are both the same and different from those they faced a few years ago. The environment is more complex as old organizational pressures, such as having to show financial gains on a quarterly basis, are merged with new twists such as having little pricing power.  Solving complex problems in a complex environment provides a fertile ground for developing solutions and myths.

Myth: “Everyone is using sourcing to affect their balance sheets and income statements; therefore, so must we.” CEOs or other executives have been continually pressured for financial results and “educated” the press, conferences and friends to implement options that then might not fit.  These pressures are the same ones that cause the implementation of orphan technologies.  While the exploration of options is a good idea, execution without understanding all potential ramifications is trouble (this concept will be explored in greater details in later myths).

Continuing with this myth from an even more basic level, “everyone is doing it so should we!”   This sort of pressure did not make sense when you were a kid. Why should it make sense now? Today’s business environment exposes IT organizations to many pressures.  Peer pressure is generated by many sources. A critical pressure typically unmentioned is a whisper campaign created by those looking to gather support for their actions (more an early adopter tactic).  Couple that with trade publications extolling the virtues of different sourcing models. The topic of outsourcing is hot.  The majority of large firms are using mixtures of sourcing methods that include tactics such as creating their own shops in developing countries, joint ventures and/or selling their personnel.  As one slides down the gradient describing organizational size, both the participation rate and the number of available options seem to fall.  Not everyone is using varied sourcing models, but many are. Can a CIO fail to act and risk allowing competitors to capture a competitive advantage where one exists or not.  Decisions driven by a need to keep up with the “Jones” are fraught with danger.  The steady flow of returnee’s is anecdotal evidence of decisions that may have been less than perfect.

A corollary to the “Everyone is doing it” myth is the Jerry Springer phenomenon.  The loudest and most controversial positions draw the most attention.  Attention acts almost as gravity will to draw focus and action.  Unfortunately, due to the Springer effect, focus is drawn to myths and legends rather than mere boring facts.  Combine this phenomenon with peer pressure and decisions can easily be made based on anecdote.  At the very least, this corollary serves to prove that there is a lot of variance when outsourcing stories are compared.

Myth:  “The ROI of outsourcing will improve the bottom line in perpetuity.”  This is slightly over the top. The impact of large scale outsourcing on an organization is an open question. Obviously, there are benefits to outsourcing IT work.  The benefits for individual actions do not, however, extend forever.  The changes engendered are slowly subsumed over time in the same manner processes pick up extraneous steps as they age.  The process becomes addictive, and additional sourcing options must be considered to keep the trajectory of the cost curve going in the right direction.  The problem becomes the ability to recognize when enough is enough.  Paul Strassmann has published several articles based on studying corporate balance sheets that show a negative long- term impact on companies.  This area requires further study.  Balancing short-term financial goals with the long-term health of the firm is just good business.

Myth:  “The business of IT is to create functionality; business culture does not really affect how work gets done.” Culture has many definitions; however, at the root they describe how people interpret information, how they interact and communicate.  These are the nuclear components of any project.  How is it conceivable that difference in how interactions and communication occur would not affect the outcome of work?  Most experienced IT professionals can remember projects where success or failure hinged on the definition of a single word in a single requirement.  The ability to connect, to communicate is central to delivering something a user might need.

Myth:  “Our IT providers are our partners.”  This myth can be the most insidious of all of the myths we will explore.  The term partnership is an oft-tossed-about term in the sourcing arena (covering outsourcers, staff augmentation firms and COTS package providers).  Creating a partnership requires commonly held goals, sharing of risks and rewards. These alignments are rare.  True partnerships evolve and are not created in an atmosphere of lowest cost bids or single-project sourcing.

You know you have achieved more than a contract when it becomes hard to distinguish that more than one organization exists.  An excellent example of a partnership is the IT relationship at Dow Chemical.   The relationship was the direct reflection of the people involved with implementing and interpreting the contract.  Starting with aligned goals, adding a dash of consistency of management personnel and time is a recipe for creating a partnership.

Myth: “Outsourcing lessens the need and cost to comply with regulatory control measures.” After the excesses of the 1990s, numerous new regulatory measures have been formulated to safeguard the fiduciary responsibilities of corporations.  Information technology plays a central role in implementing many of these regulations.  Sarbanes Oxley is the poster child of these regulations.  Recently, there was an undercurrent of discussion that outsourcing might be a tactic to diffuse the cost and responsibility.  The consideration is false, in a recent conversation Sarah Jane Sanders, a SOX consultant indicated:

“Anyone who is subject to SOX, outsourcing to avoid implementing SOX controls, and which does not require the service provider to provide, test, and prove compliance, is asking for trouble.  If you are outsourcing to contract out the compliance effort and paying someone else to do what you ought to, there’s a level of risk inherent in the choice of service provider.  Are you outsourcing to be compliant or to align yourself with someone who will assist you in cooking the books? Even if you outsource, you have to exercise controls over the service provider, and the service provider has to ensure and prove that their controls are adequate to protect your corporate (financial) integrity.”

On a parallel note, the added cost of tracking regulatory directives will require your sourcer to build a larger infrastructure to handle compliance or a consolidation sourcer to effect economies of scale (smaller firms may not be able to absorb the overhead changing the cost basis).  Both infrastructure and consolidation will change the cost basis, which the outsourcing was based on in the long run.

Looks pretty flat...

Looks pretty flat…

Determinism is the belief that a state or action implies an outcome. The universe exists because humans exist; without humans, no universe.  Another example is that earth is flat because you can not see it curve.  There are numerous outsourcing myths that build on this thought process. I am a disciplined organization; therefore, my quality, productivity and/or time-to-market is above average.  But, do beliefs imply an outcome?

Myth:  “Processes imply efficiency.”  This is one of the most firmly held beliefs in the software engineer world.  CMMI Level 5 organizations are efficient because they are CMMI Level 5.  However, processes are only a single step, a framework into which other attributes must be mapped to create an outcome. Other attributes act as enablers for processes. Training and motivation are examples. Selection of a sourcing agreement solely based on simple determinism ignores the complexity of the real world. A simple assessment of Level 5 does not assure that organization produces functionality faster, better and/or cheaper.  Let’s set the record straight: there is no direct relationship between process discipline and efficiency.  The linkage is between the good processes, process discipline and efficiency.  The linkage is between good processes and efficiency, between using discipline to replicate random movements and replace it with concerted action.

Myth:  “High process discipline yields higher quality.” As with efficiency, process does not intrinsically yield higher quality.  Software engineering is a set of processes driven by people and the inputs into the process.  Sourcing scenarios include not only your source, but your own staff and the processes you have in place to interact with the sourcer.  People’s interaction with process requires ability both in terms of how to use the process and knowledge of the domain and tools.  Failure in any of these categories will defuse the capability of any process.  Audits or assessments of process capability are good tools to establish a starting point or to measure change, but they are single-point-in-time measures.  Constant vigilance is required to guarantee that capability and ability are matched.  There are innumerable stories of organizations that have been assessed in the past and have slipped back due to changes in management or personnel after the assessment.

Myth:  “Outsourcers that advertise providing higher quality software also provide functionality faster.” Functional quality is often a contra-indication to time-to-market (data indicates that typically the higher the required quality the longer it takes to build).  The relationship between speed (time-to-market) and quality can be expressed:

Untitled2The graph is derived from a sample of a project with similar sizes (900 – 1000 FP) for organizations with similar process disciplines (CMM Level 3).  The goal must be to decide on the needed level of quality based on organizational culture and timing needs.

Maintenance and support of high-quality software applications are a separate discussion.  Here the data suggests a very strong relationship between quality and reduced support costs.  If your outsourcer will be supporting the application on a fixed contract, it would behoove them to have the highest quality feasible to improve their margin.  If you pay for support on a time and materials basis, I commend the follow comment I heard during a recent process assessment: “Why would I want to improve the quality?  I get paid to fix the bugs.”

Myth:  “I am reviewing sourcing options. One organization can prove they are efficient, and if they are efficient they must be effective.” Efficiency and effectiveness are sometimes thought of as synonymous (or at least related) terms.  Efficiency is typically the result of repeatable processes and there is a presumption that given a process, effectiveness will spring into being, Measuring effectiveness typically relies upon the perceptions of the end user.  When a project is delivered, gets the job done and the user feels good; it must be effective.  Processes can help create an environment that is  perceived as highly effective, but just as easily done badly they can  create more overhead than needed.  How many time have you heard, “I do not know why you doing that deliverable. I did not ask for it!.”

Myth:  “I pay for results.”  We have an expectation of certainty when we source projects or whole groups of work.  The expectation of certainty is grounded by messages like “this project is critical, maintenance is routine and buying a COTS package is like buying a dryer” (I actually heard a senior project manager suggest that to his project team).  There are many tactics to help manage variance, for example developing service level agreements or other metrics, implementing CMMI and just demanding that our outsourcers get it right (this tactic usually includes pounding on the table).  These tactics are means to insulate ourselves from variance.  None of these tactics negate the reality that we are “paying our outsourcers to try,” while actively pursuing risk reduction strategies.  Information technology, whether in-house, outsourced or near-sourced or package-driven, is predominately a human game.  The human interactions required to deliver and maintain functionality represents the intersection of multiple non-linear systems.  The tactics we apply are constraints that are critical to bringing order out of chaos; however, let us not confuse order with certainly.