sourcing and vendor vol. 6, no. 4 myths of … › media › 40925 › dcg article...or outsourcing...

Myths of Outsourcing

by Thomas M. Cagley, Jr.

As organizations use outsourcing to manage numerous factors ranging from

cost containment to capacity management, it’s clear that the use of sourcing

as both a tactical and strategic tool is not a short-term phenomenon. Time

and experience have led to the accumulated outsourcing lore, which is

based on a mix of opinions, facts, and urban myths. This Executive Report

aims to help separate fact from fiction.

Sourcing and VendorRelationships

Vol. 6, No. 4

http://www.cutter.com

About Cutter ConsortiumCutter Consortium is a truly unique IT advisory firm, comprising a group of morethan 100 internationally recognized experts who have come together to offercontent, consulting, and training to our clients. These experts are committed todelivering top-level, critical, and objective advice. They have done, and are doing,groundbreaking work in organizations worldwide, helping companies deal withissues in the core areas of software development and agile project management,enterprise architecture, business technology trends and strategies, enterprise riskmanagement, metrics, and sourcing.

Cutter offers a different value proposition than other IT research firms: We give youAccess to the Experts. You get practitioners’ points of view, derived from hands-onexperience with the same critical issues you are facing, not the perspective of a desk-bound analyst who can only make predictions and observations on what’shappening in the marketplace. With Cutter Consortium, you get the best practicesand lessons learned from the world’s leading experts; experts who are implementingthese techniques at companies like yours right now.

Cutter’s clients are able to tap into its expertise in a variety of formats includingcontent via online advisory services and journals, mentoring, workshops, training,and consulting. And by customizing our information products and training/consulting services, you get the solutions you need, while staying within your budget.

Cutter Consortium’s philosophy is that there is no single right solution for allenterprises, or all departments within one enterprise, or even all projects within adepartment. Cutter believes that the complexity of the business-technology issuesconfronting corporations today demands multiple detailed perspectives from which acompany can view its opportunities and risks in order to make the right strategic andtactical decisions. The simplistic pronouncements other analyst firms make do nottake into account the unique situation of each organization. This is another reason topresent the several sides to each issue: to enable clients to determine the course ofaction that best fits their unique situation.

For more information, contact Cutter Consortium at +1 781 648 8700 [email protected].

Cutter Business Technology Council

Access to the

Experts

Tom DeMarco Christine Davis Lynne Ellyn Jim Highsmith Tim Lister Ken Orr Lou Mazzucchelli Ed YourdonRob Austin



mailto:[email protected]

by Thomas M. Cagley, Jr.

Myths of OutsourcingSOURCING AND VENDOR RELATIONSHIPSADVISORY SERVICEExecutive Report, Vol. 6, No. 4

Organizations use outsourcing asa tool to manage many factorsranging from cost containment tocapacity management. It’s clearthat the use of sourcing as botha tactical and strategic tool is nota short-term phenomenon. Noris it a single method or process.Outsourcing now encompassesa wide range of scenarios, fromCOTS products, farmsourcing,1

and ASPs to what is consideredclassic outsourcing.

Time and the accumulated experi-ences of many individuals haveled to the development of a richoutsourcing lore, based on a mixof opinions, facts, urban myths,and politics. In this highly charged

arena of the 21st century, it hasbecome difficult to determinewhat’s true and what’s merelyopinion — and more importantly,whether knowing the differencematters.

Most of the myths that haveevolved around sourcing optionsare constructed upon individualgrains of truth. Unfortunately,many of these grains of truth havebeen wrapped in hysteria or mar-keting spin, swelling them to manytimes their original size. Siftingthrough this morass by applyingthe correct level of due diligenceis important when deciding howto source your IT activities. Failureto perform the necessary duediligence is a failure of fiduciaryresponsibility.

This Executive Report presents fivemeta-categories that are used to

isolate and expose the mythsof outsourcing. Each category,described briefly below, containsnumerous myths and legends thatare explored in detail in individualsections of the report.

The five high-level categoriesof myths, as shown in Figure 1,are as follows:

1. Theory of More. Sourcingoptions are a tool to achievehigher productivity, faster timeto market, better quality, orsome combination of the three.

2. Laws of Determinism. Higherlevels of process or disciplineinevitably will lead to a specificoutcome of sourcing decisions.

3. Impact of External Pressures.Business pressures spawn spe-cific types of sourcing decisionsand can be addressed either

1Farmsourcing, also known as rural sourcing,is the practice of establishing operations in,or outsourcing work to, areas in the US wherethe cost of living, and therefore wages, isrelatively low.


through strategic or tacticalsourcing decisions.

4. People as an Asset. Peopleand organizations are highlyintertwined in both the sourc-ing decision process and thechances for success.

5. Been There, Done That! Whileeach sourcing scenario isbased on a set of beliefs anda willingness to address risk,each is also very different.

Within each category is a set ofmyths — some true, some false.The reality is that most fall some-where in between depending onhow you perceive truth and espe-cially on how you construct yoursourcing arrangement.

In the sections that follow, we pre-sent and assess the myths that fallinto each of the above high-levelcategories. Winnowing throughthe chaff will provide a basis fora set of actionable truths.

THE THEORY OF MORE

Why do organizations outsourcework? It certainly is not to evis-cerate the workforce of the com-pany; simply, it is to get more with

less. Using a popular businessmantra, the goal is to delivera product faster, better, andcheaper. In essence, outsourcingis all about more: more function-ality, more productivity, morequality, more profit, and moremarket share. This first groupof myths relates to this “Theoryof More.”

The Theory of More is built on theexpectation that more functional-ity will be delivered faster andwith higher quality. Central tomost of the myths in this sectionis the following question: Howdo you know you are getting the“more” you wanted?

The single most prevalent tacticfor measuring this “more” isbased on anecdotes. Stories aboutspecific projects or componentsare related as measured fact: theproject cost less, was faster tomarket, or had fewer defects.Compounding the use of an anec-dote to represent a larger truth isthat many of these truths are builton perception rather than on care-ful measurement of attributessuch as size, effort, duration(the refrain typically is that

measurement takes time andeffort), or defects that can becompared to a baseline (internalor external).

Let’s now delve into the specificmyths relating to the Theory ofMore.

Myth: “We have only one goal inmind for outsourcing, and that isall we need to measure.”

Reality: Not in a million years!

Organizations occasionally get fix-ated on a single result and meas-ure for this result to the exclusionof all others. This pattern almostalways generates irrational resultsfrom the point of view of oneparty in the sourcing equation.Simply putting everyone involvedin the sourcing equation willattempt to maximize the returnon a single measurable item in thecontract. Simple, straightforwardbehavior, right? The problem isthat by focusing on one measurein a complicated environment, thebehaviors that are generated arenot typically what were originallyexpected and may not yield theexpected value to the organizationthat is outsourcing the work.

22 SOURCING AND VENDOR RELATIONSHIPS ADVISORY SERVICE

The Sourcing and Vendor Relationships Advisory Service Executive Report is published by Cutter Consortium, 37 Broadway, Suite 1, Arlington,MA 02474-5552, USA; Tel: +1 781 641 9876 or, within North America, +1 800 492 1650, Fax: +1 781 648 1950 or, within North America, +1 800 888 1816,E-mail: [email protected], Web site: www.cutter.com. Group Publisher: Kim Leonard, E-mail: [email protected]. Managing Editor: Cindy Swain,E-mail: [email protected]. Production Editor: Pamela Shalit, E-mail: [email protected]. ©2005 by Cutter Consortium. All rights reserved.Unauthorized reproduction in any form, including photocopying, faxing, and image scanning, is against the law. Reprints make an excellent trainingtool. For information about reprints and/or back issues of Cutter Consortium publications, call +1 781 648 8700, or e-mail [email protected].

VOL. 6, NO. 4 www.cutter.com

Figure 1 — Myths of outsourcing.

Laws of Determinism

People as an Asset

Been There, Done That!Myths of Outsourcing

Theory of More

Impact of External Pressures





The following is an example of thetype of behavior that measuringfor a single goal can cause: Amajor outsourcer noted that theeasiest way to increase productiv-ity was to reduce the project workthat it allowed to enter the IT shopit had acquired (the relationshipis statistically measurable andpredictable). The contract wasfocused on productivity, but theoutsourcee certainly did notexpect to get less functionalitydelivered when the contract wassigned.

A better approach is to leveragemeasurement techniques such asthe balanced scorecard. The coreprinciple is the need to develop adefinition of success that creates aframework to provide informationabout value. A single metric can’tdefine value without being proneto manipulation (intentional orunintentional). The use of a score-card requires deft selection thatenhances the behavior that bothpartners anticipate and wish topromote.

Myth: “Productivity of outsourcedwork is higher than that of inter-nal projects.”

Reality: It depends on thedefinition of productivity.

Changing productivity is a com-mon goal of outsourcing deci-sions. This myth is a variant of theinfamous “the grass is alwaysgreener” truism that has doggedhumankind since the cavemandays. Unfortunately, when askedin an outsourcing arrangementwhether productivity is actually

higher, the answers often rangefrom “I don’t know” to “Produc-tivity is lower, but it costs meless.” At its most basic level, pro-ductivity is a simple concept thatmeasures output per unit of input.Those that answer “I don’t know”are essentially saying they havenot begun measuring productivity.

How the output portion of theequation is measured can swingthis myth from true to false. Asstated above, the classic definitionof productivity is the amount ofoutput created per unit of input; asoftware example would be thenumber of function points permonth of effort. Data from multi-ple consulting organizations indi-cates that outsourcing productivityis generally lower but that the costbasis is also substantially lower,which more than offsets the lowerproductivity.

A second way to measure theoutput is to substitute a monetaryvalue for physical units. Oursoftware example would thenbecome the dollar value of soft-ware created per month of effort.Reducing the cost of softwarewould increase the net value.Therefore, depending on your def-inition of productivity or the wayyou measure, the myth can beeither true or false. It is notablethat it is probably never as trueas you would wish. You needto understand that you are notgetting more output per unit ofwork (productivity is not reallyhigher); rather, you are viewinga change in the cost basis that

might lead to differing decisionsof what to measure.

Myth: “CMMI® ratings are equatedwith higher productivity.”

Reality: False; they are correlated,but there isn’t necessarily a directlink.

When productivity is measured asunits of output per unit of work,numerous studies of organizationsassessed at Capability MaturityModel Integration® (CMMI) Level5 have shown lower productivitythan comparable non–CMMI Level5 organizations. This strongly sug-gests that the relationship is notdirect or that other factors mightbe affected by attaining the highlevels of discipline required toachieve CMMI Level 5.

As with the previous myth, pro-ductivity studies have found somehigh-discipline organizations withbelow-average productivity. Thedistribution tends to be onlyslightly above average. Follow-onstudies with those organizationswith below-average productivityalmost always find processes thatcan be fine-tuned to be substan-tially more efficient.

Myth: “The reduction in laborcosts created by offshoring is allthat matters when developing acost profile for offshoring.”

Reality: False; labor is a majorcomponent but certainly not theonly component.

The truth is, labor costs are onlyone component of cost thatshould be considered. Clearly,communication and travel costs

©2005 CUTTER CONSORTIUM VOL. 6, NO. 4

EXECUTIVE REPORT 33

must be layered into any sourcingequation. Other areas that affectbottom-line costs include differ-ences in quality (cost impact cango either way), oversight costs(add-on cost), infrastructure costs(add-on cost), and the cost oflower productivity. If labor costswere the only component in thesourcing equation, there would belittle or no need for discussion.For example, according to a22 December 2003 article by SteveLohr published in the New YorkTimes: “A programmer in theUnited States would earn about$80,000 a year on average, com-pared with $20,000 or less inIndia” [3]. While the labor com-ponent is compelling, other fac-tors obviously must be part ofthe equation.

It is worthwhile to remember afew simple principles of macro-economics. Work tends to chasethe lowest input cost when allother barriers are removed. Thefaster work flows into areas oflower costs, the faster pressureswill build to normalize the differ-ence. Although fast is a relativeterm, discrepancies are not for-ever. Wage pressure can alreadybe seen in offshore markets likeIndia. Given the current cost of living and workforce size incountries like India, the processof achieving parity is more incre-mental than instantaneous.Constructing entry and exitbarriers will benefit only thoseproviders with a presence insidethe barrier for a period of time(and some economists would

argue that it could weaken theindustry, as occurred with the gar-ment industry). Outsourcing is adouble-edged sword that might ormight not level the playing field inthe long run.

Myth: “The quality of softwaredelivered by outsourcers is higherthan that of internal projects.”

Reality: Mostly true, if you definequality as customer satisfaction.

One of the most oft-cited driversbehind outsourcing decisions isthe search for higher quality.

However, defining the word qual-ity evokes passion even amongstthe timid. Definitions range from“customer satisfaction” to “thenumber of defects delivered witha product” (I would suggest arelationship between the twodefinitions). Perhaps the simplestdefinition of higher quality is“fewer complaints from users.”This definition is intertwined withmany factors other than purequality (defects delivered), suchas meeting delivery dates or deliv-ering functionality that meetsor exceeds user expectations.Including these factors in yourdefinition of quality changes thediscussion and places the focus ofquality on customer satisfaction.The confusion this causes leads

us back to this myth that sourcingand quality are intimately related.

Unless otherwise noted, the defin-ition of quality in this report isbased on the number of defectsdelivered. Therefore, unlike withproductivity, where the answerdepends on the definition used,the data on quality collected inproject assessments does notbear this myth out. While thereare many anecdotal stories ofhigher quality when quality ismeasured by external consultan-cies, the data is generally lowerthan equivalent internal projects.One explanation of the differ-ences between the anecdotesand the measured data (otherthan ascribing it to salespeople) isthat more troubled projects tendto be measured (only a slightoverstatement). Another is thatthe measures of quality and satis-faction have been intertwined.

Myth: “We can agree on a con-tract now, and then agree on howto measure it later.”

Reality: Not in your wildestdreams!

There has been much discussionabout the rationale behind sourc-ing decisions. The most commondrivers are cost reduction, greateroutput, and higher-quality deliver-ables. The success criteria for thesourcing decision need to bespecifically documented, agreedupon, and measured. Successcriteria typically are complex andhave more than a single driver.Understanding the relationshipbetween individual success



Myth: “We can agree on

a contract now, and then

agree on how to measure

it later.” Reality: Not in

your wildest dreams!


criteria is mandatory. The criteriaand measures can be highly inter-related (due to covariance), andthis interrelationship can cloudthe impact of a sourcing decision.An example is the interrelation-ship between work entry and pro-ductivity. Slowing the entry ofwork to the team or “shop” willcause an immediate increase inproductivity. You need to ask your-self whether your success criteriaelicit the right responses for yourneeds and provide predicativedata. Contractually, all sourcingagreements must clearly illustratehow all parties will know whetherthe goals are being addressedbefore the contract is signed.

Myth: “Measure what is easilyseen, so the measurement processwon’t add significantly to theoverhead of the contract.”

Reality: False; the processes thatare easy to measure don’t providemuch new information.

Tracking success or performanceshould not be limited to easilyquantifiable data. Based on yourgoals for sourcing work, deter-mine the factors that predict suc-cess. For example, are behavioralcomponents such as morale,experience, and turnover typicallysignificant predictors of successthat can provide explanative infor-mation for performance? Althoughthese factors are hard to measure,they are important. CMMI ratingsand quantitative data are merelyproxies for behaviors that explainhow people actually work.

Myth: “Measure everything, sowe can control the vendor and

see problems before theyhappen.”

Reality: False; measuring toomuch will cost more than theknowledge you gain is worth.

Measuring is like chocolate: thereis a right amount that satisfies(and may actually have somehealth benefits) and an amountthat will weigh you down. Findingthe balance that allows you tomonitor and control your sourcingarrangement without giving awaythe benefits is an art. If you havemade the effort to negotiate andstipulate success criteria in thecontract, you must take the timeto measure. Just don’t overdo it!

Myth: “Productivity and knowl-edge capital of the firm at largewill be unaffected by sourcingwork outside the organization.”

Reality: Unknown; to quote therobot from the TV series Lost inSpace: “Danger, Will Robinson,danger!” Unless you carefullyplan for the impact of sourcing,you are placing your productivityand knowledge capital at risk.

This is a myth for no other reasonthan that no one really knowswhether it is true or not. Produc-tivity has been the backbone ofthe US economy since the mid-1990s. Three major componentsdrive productivity: capital deepen-ing, knowledge, and multifactorproductivity (MFP). MFP reflects

the joint effects of many factors,including R&D, new technologies,economies of scale, managerialskill, and changes in the organiza-tion of production. Contracts mustcontain methods for capturingand returning knowledge capitalso that the knowledge can beused to continue to fuel the pro-ductivity engine.

Myth: “Choice fuels competition,innovation, and efficiency.”

Reality: Mostly true, but under-stand the assumptions you aremaking.

This myth is built on the maximsof market forces. When an econo-mist uses terms like these, thereare many assumptions built in.Typically these assumptionsinclude perfect knowledge, freecompetition, or low barriers toentry and exit, to name just a few.The degree to which these aretrue influences the benefitsderived from choice (or at leastthe risk of making a choice).Companies that have outsourcedall or part of their IT organizationsneed to understand and identifythe benefits and risks of theirchoice (in a perfect world, theywould lock in the benefits andmitigate the risks) early in theprocess due to the barriers thatcontracts and the dislocation ofjobs entail. Understanding howyour contractual decisions affectbasic economic tenants is critical.

A corollary to this myth is “morechoices yield a better decision.”However, too many choicescan create a scenario in which


EXECUTIVE REPORT 55

Measuring is like chocolate: there is

a right amount that satisfies and an

amount that will weigh you down.

Finding the balance is an art.

analysis paralysis occurs or,equally as evil, you get a frac-tured, nonoptimal answer. Thiscreates a condition where,because of the fear of losing outon something better, it becomesmore and more difficult for some-one to make a decision.

LAWS OF DETERMINISM

Determinism is the belief that astate or action implies an out-come. For example, the universeexists because humans exist;without humans, there is nouniverse. Or the earth is flatbecause you cannot see it curve.Numerous outsourcing mythsbuild on this type of thoughtprocess. For instance, “I am a dis-ciplined organization, thereforemy quality, productivity, and/ortime to market is above average.”The question is, do beliefs implyan outcome?

Myth: “Processes imply efficiency.”

Reality: False; process and disci-pline set the stage for efficiencybut make no guarantees.

This is one of the most firmly heldbeliefs in the software engineer-ing world; for example, CMMILevel 5 organizations are efficientbecause they are CMMI Level 5.While processes do imply orpresage an outcome, they’re onlya single step, a framework intowhich other multiple attributesmust be mapped to create an out-come. Other attributes, such astraining and motivation, act asenablers for processes. Selectionof a sourcing agreement based

solely on simple determinismignores the complexity of the realworld. A simple assessment ofCMMI Level 5 does not ensurethat the organization producesfunctionality faster, better, and/orcheaper. When ROI, careers, andthe livelihood of organizations areat stake, we cannot assume thatan input will equate to one outputwithout significant integration.

Let’s set the record straight: thereis no direct relationship betweenprocess discipline and efficiency.The linkage is between goodprocesses and efficiency, betweenusing discipline to replicate ran-dom movements and to replacerandom movement with con-certed action.

Myth: “High process disciplineyields higher quality.”

Reality: False; the driver is notthe process discipline but theprocesses that are being used.”

As with efficiency, process doesnot intrinsically yield higher qual-ity. Software engineering is a setof processes controlled by peopleand fed by requirements, deci-sions, and knowledge (i.e., theinputs into the process). All ofthese components form an equa-tion that yields functionality that auser wants and can use. A prob-lem with any component reducesthe quality of the output. Sourcingscenarios include not only yourproject but also your own staffand the processes you have inplace to interact with the out-sourcer. A person’s interactionwith a process requires ability in

terms of how to use the processas well as knowledge of thedomain and tools. Failure in anyof these categories will defuse thecapability of any process. Auditsor assessments of process capa-bility are good tools to establisha starting point or to measurechange, but they are single-point-in-time measures. Constant vigi-lance is required to guarantee thatcapability and ability are matched.There are innumerable stories oforganizations that have beenassessed at a certain level in thepast and have slipped back dueto changes in management orpersonnel after the assessment.

Myth: “Outsourcers that advertiseproviding higher-quality softwarealso provide functionality faster.”

Reality: False for development(quality and speed are typicallyinversely related) and true formaintenance.

Functional quality is often a con-traindication of time to market(i.e., data indicates that, typically,the higher the required quality,the longer it takes to build). Figure2 illustrates the relationshipbetween speed (time to market)and quality.

The graph in Figure 2 is derivedfrom a sample of projects withsimilar sizes (900-1,000 functionpoints) for organizations withsimilar process disciplines (CMMLevel 3). The goal is to decideon the necessary level of qualitybased on organizational cultureand timing needs.




Maintenance and support of high-quality software applications are aseparate discussion. Here the gen-eral industry data suggests a verystrong relationship between qual-ity and reduced support costs. Ifyour outsourcer will be supportingthe application on a fixed con-tract, it would behoove theoutsourcer to have the highestquality feasible to improve itsmargin. If you pay for support on atime-and-materials basis, considerthe following comment I heardduring a recent process assess-ment: “Why would I want toimprove the quality? I get paid tofix the bugs.”

Myth: “I am reviewing sourcingoptions. One organization canprove it is efficient, and if it isefficient, it must be effective.”

Reality: False; efficiency andeffectiveness might be related,but they are not synonymous.Methods taken to become effi-cient can impact effectiveness.

Efficiency and effectiveness aresometimes thought of as synony-mous (or at least related) terms.Efficiency is typically the result ofrepeatable processes, and thereis a presumption that, given aprocess, effectiveness will springinto being. Effectiveness isdefined as “having an intended orexpected effect” [1]. Measuringeffectiveness typically relies uponthe perceptions of the end user.When a project is delivered andgets the job done and whenthe user feels good, it must beeffective. Processes can helpcreate an environment in whicheffectiveness is perceived as high,

but they can just as easily createan atmosphere in which effective-ness is perceived as low (“I don’tknow why you are doing thatdeliverable — I did not ask forit!”). How an organization reactsto process is driven by results,how well the process disciplinehas been sold, and organizationalculture.

Myth: “I pay for results.”

Reality: False; when it comes toideas and nontangible services,you are typically paying to tryrather than to receive results.

A TV commercial for a majorcomputer consultancy currentlybeing played in the US drives thisconcept home by nearly guaran-teeing results. The creation andimplementation of ideas and ofwhat is nontangible are far lesscertain than installing a server.

Despite marketing claims to thecontrary, reality must intrude;once you have passed from therealm of tangible products, youare usually paying simply “to try.”How many heart surgeons guar-antee an outcome? We have anexpectation of certainty when weoutsource projects or wholegroups of work. Our expectationsof an outcome of a project orwork are grounded by the mes-sages we pass: “This project iscritical,” “Maintenance is routine,”and “Buying a COTS package islike buying a dryer” (I actuallyheard a senior project managersuggest that to his project team).The confusion between certaintyand probability distracts sourcingnovices from putting the controlsin place that are necessary toguide work to a successful con-clusion. Why spend effort or


EXECUTIVE REPORT 77

20 4 6 148 10 12

0

5

10

15

20

25

30

10

15

20

25

30

Defe

cts

per

100 f

un

cti

on

po

ints

Project duration in months

Figure 2 — Relationship between speed and quality.

money on controls if the outcomeis certain?

There are many tactics that areused to help manage work to asuccessful completion. These tac-tics include developing service-level agreements (SLAs) or othermetrics, implementing CMMI, andsimply demanding that our out-sourcers get it right (this tacticusually includes pounding shoeson the table). These tactics aremeans to insulate ourselves fromvariance. None of these tacticsnegate the reality that we are“paying our outsourcers to try,”while actively pursuing risk-reduction strategies. IT, whetherinhouse, outsourced, near-sourced, or package-driven, ispredominately a human game.The human interactions requiredto deliver and maintain functional-ity represent the intersection ofmultiple nonlinear systems. Thetactics we apply are constraintsthat are critical to bringing orderout of chaos; however, we shouldnot confuse order with certainly.

A word of caution for projectteams everywhere: Above I notedthe infamous tactic of “demand-ing,” which runs the gamut frompleading and yelling to whipping.Innumerable studies show thatthis approach doesn’t work; themost recent was published inPsychological Science and indi-cates that “individuals with highworking-memory capacity, whichnormally allows them to excel,crack under pressure and doworse on simple exams than

when allowed to work with noconstraints” [2]. Find other tacticseven if the personnel aren’tdirectly part of your firm.

IMPACT OF EXTERNALPRESSURES

Pressures on a modern CIO areboth the same and different fromthose this position faced a fewyears ago. External pressures aregenerated by many sources: pub-lications, power users, technicallyadept CEOs, and the bottom line.The environment is more com-plex: old organizational pressures,such as having to show financialgains on a quarterly basis, arebeing merged with new twists,such as having little pricingpower. Solving complex problemsin a complex environment pro-vides a fertile ground for develop-ing myths.

Myth: “Everyone else is usingsourcing to affect their balanceand income statements; there-fore, we must do so as well.”

Reality: False; if all your friendsjumped off a cliff, would you?

This argument typically beginsresonating outside of IT and thencreeps in. CEOs and other execu-tives are continually pressured forfinancial results and “educated”by the press, conferences, friends,and neighbors who push options

that might not fit. These pressuresare the same ones that cause theimplementation of orphan tech-nologies. While the exploration ofoptions is a good idea, executionwithout understanding all thepotential ramifications is boundfor trouble (this concept will beexplored in greater detail in latermyths).

Continuing with this myth, the“everyone else is doing it” ratio-nale didn’t make sense when youwere a kid, so why should it makesense now?

Today’s business environmentexposes IT organizations to alot of pressure. Peer pressure isgenerated by many sources; acritical pressure typically unmen-tioned is the “whisper” campaigncreated by those looking to gathersupport for their actions (more ofan early-adopter tactic). You canadd to that the pressure fromtrade publications extolling thevirtues of different outsourcingmodels (and to alert you to thepitfalls as well). There’s no doubtthat the topic of outsourcing ishot. The majority of large firmsare using a mix of outsourcingmethods that includes creatingtheir own shops in developingcountries, joint ventures, and/orselling their personnel. As oneslides down the gradient describ-ing organizational size, both theparticipation rate and the numberof available options seem to fall.While everyone may not be usingvaried outsourcing models, quitea few are.



The “everyone else is doing it”

rationale didn’t make sense when

you were a kid, so why should

it make sense now?


To determine for myself how hotoutsourcing is, I selected a sam-ple of five IT periodicals from thesecond week of April 2005 andfound six articles that discussedthe virtues or pitfalls of outsourc-ing or of purchasing COTS pack-ages. The level of exposure isextraordinary and seems to befairly persistent. The noise levelcreates an atmosphere whereactivity is expected. Can a CIO failto act and thus risk allowing com-petitors to capture a competitiveadvantage whether one exists ornot? Decisions driven by a need to“keep up with the Joneses” arefraught with danger. The steadyflow of returnees (i.e., organiza-tions bringing outsourced compo-nents back onshore) is anecdotalevidence of decisions that mayhave been less than perfect.

A corollary to the “everyoneis doing it” myth is the JerrySpringer2 phenomenon: the loud-est and most controversial posi-tions draw the most attention.Attention acts almost as gravitydoes to draw focus and action.Unfortunately, due to the Springereffect, focus is drawn to mythsand legends rather than mere bor-ing facts. Combine this phenome-non with peer pressure, anddecisions can easily be madebased on anecdote. At the veryleast, this corollary serves toprove that there is a lot of vari-ance when outsourcing storiesare compared.

Myth: “The ROI of outsourcingwill improve the bottom line inperpetuity.”

Reality: False; outsourcing willchange the magnitude of ITspending in one fell swoop butdoes not necessarily change theslope of the spending curve.

This myth is slightly over the top.The impact of large-scale out-sourcing on an organization is anopen question. Obviously, thereare benefits to outsourcing ITwork; however, benefits for indi-vidual actions do not extend for-ever. The changes engenderedare slowly subsumed over timein the same manner in whichprocesses pick up extraneoussteps as they age. The processbecomes addictive, and additionalsourcing options must be consid-ered to keep the trajectory of thecost curve going in the right direc-tion. The problem is being ableto recognize when enough isenough. Paul Strassmann haspublished several articles inComputerworld3 based on study-ing corporate balance sheets thatshow a negative long-term impacton companies. This area requiresfurther study. Balancing short-term financial goals with the

long-term health of the firm is justgood business.

Myth: “The business of IT isto create functionality; businessculture does not really affect howwork gets done.”

Reality: False; culture describeshow work is done. Ignore it atyour peril.

Culture has many definitions;at the root, however, culturedescribes how people interpretinformation, how they interact,and how they communicate.These are the nuclear compo-nents of any project. How is itconceivable that differences inhow interactions and communica-tions occur would not affect theoutcome of work? Most experi-enced IT professionals canremember projects where suc-cess or failure hinged on thedefinition/interpenetration of asingle word in a single require-ment. The ability to connect andto communicate is central todelivering something a usermight need.

Myth: “Our IT providers are ourpartners.”

Reality: Usually false; partnersshare a common goal far deeperthan one generated by a contract.

This myth may be the most insidi-ous of all the myths we explore inthis report. The term partnershipis an oft-tossed-about term inthe sourcing arena that coversoutsourcers, staff augmentationfirms, and COTS package pro-viders. Creating a partnershiprequires commonly held goals


EXECUTIVE REPORT 99

2A US television and radio talk show host, bestknown for the tawdry and lowbrow topicsand antics of his guests.

3See, for example, Strassmann, Paul A.“Most Outsourcing Is Still for Losers,”Computerworld, 2 February 2004.

A corollary to the “everyone

is doing it” myth is the

Jerry Springer phenomenon: the

loudest and most controversial

positions draw the most attention.

and a sharing of risks andrewards. These alignmentsare rare.

You know you have achievedmore than a contract when itbecomes hard to distinguishwhether more than one organiza-tion exists. An excellent exampleof a partnership is the IT relation-ship at Dow Chemical. The goalsof both organizations have beenclosely aligned. By spending thetime to carefully align these goalsinto a partnership, all parties canmake the day-to-day choicesthat support reaching the overallgoals without sacrificing thegoals of each organization. Thisis reinforced by relentless meas-urement to ensure a focus on factrather than anecdote. The rela-tionship is the direct reflection ofthe people involved with imple-menting and interpreting the con-tract. Start with aligned goals, adda dash of consistency in manage-ment personnel, followed by time,and then you have the recipe forcreating a partnership.

Simply calling something a part-nership doesn’t make it so. Expec-tations that goals are alignedcannot be left to chance or tostatements made during thesales process. Alignment needsto begin with the agreement ofprinciples, which can flow into amelding of cultures. True partner-ships evolve; they are not createdin an atmosphere of lowest-costbids or single-project sourcing.Don’t use the term unless you trulyhave grown into a partnership.

Using the term “partner” does notcause a partnership to spring intobeing. Actions and beliefs don’tfollow words unless they meet thetrue objectives of all parties. If theoutcomes of a sourcing arrange-ment are not shared by all parties,distrust the word “partner” andthink about using the word “con-tract” instead.

Myth: “Outsourcing lessens theneed and cost to comply withregulatory control measures.”

Reality: False; in reality, distanceand the introduction of multipleorganizations may make it moreexpensive.

After the excesses of the 1990s,numerous new regulatory meas-ures have been formulated tosafeguard the fiduciary responsi-bilities of corporations. IT playsa central role in implementingmany of these regulations. The USSarbanes-Oxley (SOX) Act is theposter child of these regulations.Recently, there was an undercur-rent of discussion that outsourcingmight be a tactic to diffuse thecost and responsibility of regula-tory compliance, such as SOX. Ina recent conversation, Sarah JaneSanders, a SOX consultant withSJS Consulting, criticized thismindset:

Anyone who is subject to SOXand is thinking of using out-sourcing to avoid implementingSOX controls themselves andwho does not require the ser-vice provider to provide, test,and prove compliance is askingfor trouble. If you are outsourc-ing to contract out the compli-ance effort and paying someone

else to do what you ought to,there’s a level of risk inherent inthe choice of service provider.Are you outsourcing to becompliant or to align yourselfwith someone who will assistyou in cooking the books? Evenif you outsource, you have toexercise controls over the ser-vice provider, and the serviceprovider has to ensure andprove that their controls areadequate to protect your corpo-rate (financial) integrity. [4]

On a parallel note, the added costof tracking regulatory directiveswill require your outsourcer tobuild a larger infrastructure tohandle compliance or a con-solidation outsourcer to effecteconomies of scale (smaller firmsmay not be able to absorb theoverhead that regulatory controlsrequire, changing the cost basison which current contracts arebuilt upon). Both infrastructureand consolidation will change thecost basis that the outsourcingwas based on in the long run.

PEOPLE AS AN ASSET

IT is not all about technology,regardless of the language, plat-form, or hardware involved; themost critical component of tech-nology is the people who createfunctionality. A presentation at the2005 SEPG Conference postulatedthat programmers are the high-tech version of blue-collar factoryworkers. Regardless of who doesthe work or where software iscreated or maintained, softwareengineering is an act of creation.Conceptually relegating this type




of work to the realm of an assem-bly line ignores the role of creativ-ity and does a disservice to allparties in the equation. Withouta person, a crowbar isn’t evena tool.

Productivity has been the engineof the world economy for at leastthe past decade. The continualintroduction of new technologiesplays a major role in generatingthe productivity gains our econ-omy needs. Many technologiesrequire workers to acquire newskills to design and operate theprocesses they engender. Thenew skills require not just greatercomputer use but also morecomplex decision-making skills (acircular process that smacks ofperpetual motion machines). Thiscycle results in a reshuffling ofworkers with different sets ofskills across jobs. Globalizationand improvements in telecommu-nications have created a scenarioin which reshuffling means thatjobs flow to the geographical areawith the lowest cost. The costequation is more than just laborcosts; factors such as education,language, and security require-ments (e.g., physical and knowl-edge capital) must be taken intoaccount. Job and skill churninghave created greater job mobilityfor skilled workers. While thishas a short-term negative impactwithin job categories, it createssubstantial sharing of informationand knowledge across organiza-tions and countries. In the longrun, this benefits the globaleconomy.

The juxtaposition of people, orga-nizational culture, and the churn-ing of jobs and skills provides afertile ground for outsourcingmyths.

Myth: “Our employees are loyalto the organization; they under-stand that change is necessary forthe organization’s well-being.”

Reality: True or false; itdepends on how the messageis communicated.

Loyalty is an often-used term todescribe relationships between anorganization and its employees.However, depending on yourpoint of view, loyalty can havemany different meanings. Whenused by an organization, the termtypically means that an employeeacts in a manner that enhancesthe bottom line. From employees’point of view, it means that thebusiness will support them if theyput the organization at the top oftheir priority lists.

Sourcing decisions can and dohave an impact on loyalty. I wouldsuggest that positive changes inloyalty (at least in the US) arefairly inelastic (i.e., hard to influ-ence positively over time); how-ever, loyalty is highly elastic on thenegative side. Sourcing decisionscan significantly reduce the loyalty

of the workforce toward the orga-nization. If loyalty and morale arelinked or if loyalty and stability ofthe workforce are linked, a reduc-tion in loyalty can negatively affectproductivity, quality, and time tomarket.

Loyalty and trust are interrelated.Most organizations with changeprocesses prescribe commu-nication as a way to manageloyalty: building trust throughthe judicious use of information.However, the broad-based, opencommunication required to buildtrust and loyalty is not typicallyconsidered possible whendetermining a sourcing strategy.Although open communication isa tool for building trust with youremployees, it can also disrupt thenegotiation process by exposingtoo much information to theoutsourcer.

Myth: “Loyalty is an old concept.”

Reality: True, but so are conceptslike life, liberty, and the pursuitof happiness. Concepts helpcement a workforce into acoherent unit.

Does loyalty matter? In tight labormarkets or in situations whereyour internal knowledge is impor-tant, the answer is obvious; inother scenarios, it may be less so.Many organizations do not con-sider how to address loyaltyacross the entire organization.They decide it does not matter orfocus only on the groups that aremost intimately affected by a par-ticular change. Progressive organi-zations leverage and promote


EXECUTIVE REPORT 1111

Myth: “Loyalty is an old concept.”

Reality: True, but so are concepts

like life, liberty, and the pursuit of

happiness. Concepts help cement a

workforce into a coherent unit.

loyalty (bidirectional) across thewhole organization, not justacross their retained IT personnel.Team-building techniques areused to build intergroup relation-ships. These interpersonnel rela-tionships are then used as thebasis for interfacing the technol-ogy and project work with theuser communities. Interfaces area means of spreading the organi-zation’s message and activelymanaging loyalty; but to be effec-tive, they must be built on theinterpersonnel relationships thatcomprise trust.

Myth: “Communication is merelyspin control and is needed onlywhen change is imminent.”

Reality: False, unless you wantthe mere act of communicationto be a signal to jump ship.

Back in the days when I workedin corporate IT, we could alwaystell when something was goingon. The presence of the corporatecommunications group becameoverbearing; this was the signalto update the résumé. Top peopleare always the first to bail.Communication is a long-termmethod for building trust; turningit on and off implies a level ofdisingenuousness that is not hardto recognize.

Another rule of communication isthat it must be more than spincontrol. In order to be effective, itmust be focused on providing allconstituencies within the organi-zation (including internal andexternal components inside andoutside of the affected areas) with

an understanding of the sourcingstrategy and its requirements.Requirements need to includegoals for quality and productivity,while the strategy should includeat least a rough outline of howwork will be sourced. This type ofcommunication must be truthful,complete, and constant.

Communication is a powerful toolfor managing change. The value isreduced if it becomes a predictorof change or is perceived as dis-ingenuous. Don’t let it becomethe signal to look for a new job,otherwise critical knowledge andexperience may leave before youhave a chance to stop it.

Myth: “Time heals all wounds.”

Reality: Sort of true; time andeither a corporate lobotomy orturnover make rememberingdifficult.Whether “forgetting”and “heals all wounds” meanthe same thing is a matter ofperspective.

Corporate memory is an impor-tant component in understandingthe impact of sourcing decisions.Measuring the influence of corpo-rate memory requires leveragingtechniques usually found inanthropology (storytelling is apowerful technique for exploringcorporate memory and culture).

Whether it is good or bad, meas-ured or unmeasured, controlledor uncontrolled, memory leaves atrail that foreshadows success orfailure.

Managing the perception of eachproject that uses outsourcing isimportant in making the sourcingprocess work in general and forthe success of specific tactics. Forexample, a CIO recently spokewith me about his first experiencewith outsourcing; this experienceformed the foundation for hisapproach to sourcing. The organi-zation had outsourced a majorproject (the project was plannedto be developed over two yearsleveraging onshore and offshoreteams). Through a comedy oferrors primarily centered on cul-tural misunderstandings and morethan a little passive-aggressivebehavior, the project failed. It wasmerely one project, and all theCIO’s subordinates admitted itwas flawed. A poor outcome wasinevitable; however, the only thingthat all parties remember now isthat outsourcing didn’t work. Thecompany currently has no plansto experiment with offshore out-sourcing; the mindset is that out-sourcing does not fit its cultureand will not work for the com-pany. The options availableto this CIO have been severelyhamstrung. (As a side note,the perceived story among theemployees is that the passive-aggressive behavior of theinhouse team undermined theproject and that concerted effort



Myth: “Time heals all wounds.”

Reality: Sort of true; whether

“forgetting” and “heals all

wounds” mean the same thing

is a matter of perspective.


can manipulate the organization’ssourcing strategy.)

Changes in sourcing can affectmany people’s livelihoods, andit is important to note that theimpact extends to those who arenot directly involved. I recentlyconducted a survey within twoorganizations that had significantsourcing changes in the last year(both had more than six monthsof experience with change). Morethan 60% of all respondents feltthat overall organizational stabilityhad been reduced; additionally,approximately 15% of respondentsfelt they would leave the companywithin the next year.

How sourcing decisions are per-ceived must be carefully managedfrom inception of the idea to theconclusion of the deal. Time healsall wounds only when turnoverchanges the composition of theworkforce.

Myth: “If we ignore the changeand make sure no one talks aboutit, the impact will pass morequickly.”

Reality: Mostly false; it is betterto expose situations that createreal pain and anger so they canbe managed.

This myth is the antithesis of the“time heals all wounds” myth.The premise is that if we ignorechange, its impact will pass. Thismyth tends to take hold in organi-zations that use rigid hierarchiesfor management and control. Inextreme cases, belief in this mythcauses the voicing of concernsor anger to be viewed as being

contrary to team spirit. Recently Ihave seen these tactics taken astep further: personnel who madeanti-team-spirited commentswere summarily terminated.While a radical approach, thefirings did serve to stop publicdiscussion (for pretty much every-thing) but did not serve to makepeople forget. The discussion ofhow change impacts an organi-zation must be address andmanaged. Driving the discussionunderground is dangerous andmust be viewed as a desperatelast resort.

Myth: “Change does not need todirectly address culture.”

Reality: False; culture is the basisfrom which we perceive and com-municate. Not addressing theseareas will lead to misunderstand-ings and failed projects.

Considering culture as a blackbox into which sourcing changescan be inserted and functionalityreturned is a falsehood that mosteveryone recognizes but very fewdirectly address. Culture refers tothe cumulative deposit of knowl-edge, experience, beliefs, values,attitudes, meanings, hierarchies,religion, notions of time, roles,spatial relations, concepts of theuniverse, and material objectsand possessions acquired by agroup of people. Bottom line:people are what they learn. Everychange is a learning opportunity.

Myth: “Our outsourcer’s staffingissues are not our problem.”

Reality: False; your outsourcer’sstaffing issues are your problem.

However, you have less directcontrol over the situation.

Why would anyone believe thismyth? One of the attractions tooutsourcing is the belief that theoutsourcer is a black box com-posed of processes performed byinterchangeable cogs. The realityis that staffing headaches areyours regardless of where theyoccur. Turnover immediatelyreduces productivity as jobs arerelearned. Even in a fixed-pricecontract, personnel turnover canhave an effect. The loss of pro-ductivity that the arrangementwas based on could require theoutsourcer to take a loss or trimwork that could be viewed asoverhead (such as testing orreviews). Quality can and doessuffer. Other longer-term issuesinclude the possible transferenceof knowledge capital and jobknowledge. These issues arenot new; they exist even in anonoutsourced scenario. Unlessaddressed contractually, however,you will not have input into thesafeguards required for your pieceof mind. Safeguards to protectyour knowledge and job-levelcontinuity are important. Ifturnover is pervasive, simple safe-guards provide little value. Includea measure of turnover in the mon-itoring portion of all agreements.Explore how your outsourcerintends to safeguard your knowl-edge capital, then make sure ithappens.

Myth: “After we decide on asourcing model and trim ourstaff, internal turnover is a back-burner issue.”



Reality: False; turnover in thecarefully crafted team that youconstructed to manage and inter-act with your outsourcer(s) mustbe carefully managed.

Turnover is a vexing problem forall areas of a company, but partic-ularly so for IT organizations withsteep learning curves. On onehand, turnover can sap thestrength of an organization byallowing critical knowledge toescape or act as a vehicle forchange; on the other hand,turnover can open slots for newideas and technologies to be inte-grated into an organization asnew people are added. Internalturnover always continues afterwork is outsourced. Retainedemployees will feel threatened(reread communication myths)and will consider leaving. Plan forcontinued turnover. Focus reten-tion efforts on those within theorganization that are thought lead-ers in the areas that are critical foryour well-being. Use the slots ofthose who leave to bring freshideas into the mix and to bolsterknowledge where you need it. Askills and knowledge inventory isa best practice used in the transi-tion process.

The organizational impact of inter-nal turnover caused by sourcingdecisions is still unknown. The lit-erature is replete with claims andcounterclaims. Based on the lackof consensus both in the literatureand observations from the field, itis easy to believe any claim aboutthe impact of change (sourcingmerely being one type of change).

Actively managing who stays andwho goes is relatively easy whenthe organization is choosing. Inscenarios where organizations areattempting to influence a bottomtier to leave rather than directlyescorting employees to the door,the impact is less well under-stood. While there are some orga-nizations that use the process tocontinually reinvigorate their skillpool, control over turnover out-side the formal process is far fromcertain. Consider the followingexample: An organization annu-ally ranks all IT members andearmarks the bottom 20% for anactive process of being managedout of the organization. Theemptied slots are refilled, andDarwinian competition beginsanew. In late 2003, the organiza-tion announced that in 2004 itwould fill the emptied ranks off-shore. The 2005 forced rankingwill therefore come from the80% that made the cut in 2004.Turnover started immediately,and, as is typical, the majoritywho left were the top performers.Interestingly, HR and senior ITleaders of this organization weresurprised. Focus groups with lineproject managers said the resultwas as these managers had pre-dicted. All sourcing actions mustbe viewed in terms of the entireorganizational culture in order tobe the least bit predictable.

Myth: “Turnover is an issueonly when we use offshoreoutsourcing.”

Reality: False; when job-relatedfears become an integral part ofthe environment, no one cares

whether the jobs are goingoverseas or down the street.

All sourcing models are subject toturnover and will have an impacton the level of turnover inretained personnel. Offshoresourcing vendors have just ashigh (or higher) turnover rates,spurred by stiff competition. Staff-acquisition models suffer above-average turnover rates; peoplealways react to change withchange. The use of COTSpackages has the least impacton turnover unless you have builtyour shop on the premise thatdevelopers are at the top of thefood chain. Spend time anticipat-ing how change will affect yourturnover rates, and focus on howyou can ensure business andtechnical knowledge continuity.

Myth: “Turnover for outsourcersis lower than internal turnover.”

Reality: False; where job marketsare hot, turnover will always bean issue.

Stability of your outsourcer’sworkforce is important. You needto monitor it. In the hotbeds ofoffshore outsourcing, the level ofgrowth has been phenomenal.Competition has created an envi-ronment in which job switching isthe norm. At a recent speakingengagement, I performed a quicksurvey (definitely nonscientific) totest this hypothesis. I asked howmany of those in the audiencefrom mainline outsourcing firmshad changed firms in the pastfive years. Of approximately 60people in the sample, only 12 hadnot changed firms in the past five




years. Further, five had been inthe business less than a year. Youneed to anticipate the pressure onthe goals of your contract fromturnover. Assuming that your out-sourcer is using tactics likebonded indentured servitude(perhaps the only way to guaran-tee no turnover but typically notlegal anywhere in the world) iswasted effort; therefore, planningis important. As a side note, ifyour contract mandates anexpected level of experience, firstmake sure it is relevant to thework you require, then ensurethat provisions are made for inva-sive monitoring. Otherwise youmay not get what you expected.If you don’t specify transparencyat the onset of a relationship, youcan’t be surprised when yourcontact disappears.

Myth: “The outsourcing of workand staff members allows usto disregard the responsibilityto keep our staff trained.”

Reality: False, both in termsof residual staff and youroutsourcer’s staff.

Outsourcing options have longbeen used as a tool to mitigatethe organization’s need to train(cost avoidance) or build poten-tially transitory skill sets. Whenthe need to address a specificmethod or technology is identifiedas urgent, sourcing choicesbecome an effective method foraddressing the need. Organiza-tions providing sourcing optionscan specifically identify the exper-tise they bring to the table. Mosttrack training and expertise at a

granular level as if they were codemodules. The goal is to bring thebest solution to bear (and deliverit in the most efficient manner,therefore driving up the profitmargin). Using outsourcing toavoid planning the migration ofskills needed to support your ITneeds is a strategic mistake andwill lock you into using outsourc-ing models. Being locked into anymodel puts you at risk that youwill not be able to react tochange.

Training is a significant compo-nent of most IT budgets. The sizeof the line item in the IT budget isdriven by many factors, includingthe rate of change in the softwareportfolio, the age of the techno-logical platforms, the rate ofinternal turnover, and corporatepolicies. Shifting from an internalsourcing model to an external onedoes not dissolve the need to beinvolved altogether. If you areusing a model that is going to usea single or stable group of out-sourcers, you must define yourexpectations and make sure youroutsourcer follows them. You maynot directly bear the cost (or sav-ings) or responsibility; however, ifyour outsourcer’s personnel getsstale, your solutions will becomestale and turnover will increase,thus potentially negatively impact-ing all your original reasons for thedecision.

Myth: “IT workers must continu-ally retool to avoid outsourcing.”

Reality: True and false. Retoolingis important; however, it will

not immunize anyone from beingoutsourced.

This myth is both true and falseat the same time. It almost goeswithout saying that the fast paceof change in the IT world does notseem to be slowing. Skills age,and, unless replaced, the personholding them becomes lessemployable (this is true in almostall professions). At an individuallevel, continued retooling will notcause anyone to avoid being out-sourced. The need to changesourcing options is a macro-leveldecision driven by globalizationrather than any one individual.

BEEN THERE, DONE THAT!

Specific sourcing scenarios are afertile ground to expose a numberof popular myths about outsourc-ing; this allows us to learn fromthose that have done it well andthose that have done it less well.

While some of the myths in thissection are related to ones pre-sented earlier, here they arebased on a different point of view.

Myth: “IT is like a factory: rawmaterials and plans go in, andproduct is delivered.”

Reality: Partially true; abetter analogy would bemass customization.

The factory analogy has been withus for a long time, evoking theimages of assembly lines wherecomponents are cobbled togetherinto a product that can be deliv-ered. Conceptually, the idea isalluring, bolstered by the use of



objects, components, and COTS

products, but the analogy works

only 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. For 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 busi-

ness and competitive needs. The

mass-customization view could

easily be accomplished by the

assemblage of multiple subproj-

ects using all common sourcing

scenarios and embracing the use

of creativity.

A further problem with the factory

analogy is the number of one-time

IT projects designed and devel-

oped to address rapidly evolving

needs. These do not fit in with

an assembly-line or mass-

customization model and are

much closer to the model of craft

labor currently employed in most

IT organizations, regardless of

where one-time projects are

deployed or who is actually doing

the work.

Both the craft-labor model and

the mass-customization model

require skilled, intelligent labor

forces that have close relation-

ships with their users.

Myth: “Sourcing is like buying

pencils: I fill out the request,

and resource and functionality

appears.”

Reality: Not the pencils I use!

Sourcing work is substantially

more complex than that of the

routine acquisition of most com-

mon tangible items. Complexity

causes the need for significantly

more up-front definition and man-

agement. Additional procedures

in the acquisition process must

be developed, such as gathering

needs from internal stakeholders

while not ignoring the knowledge

that can be gained from the pur-

chasing model, which includes

the knowledge of contracting,

controlling payments, and leverag-

ing the power of the request for

information (RFI) process to

drive out in-depth information.

Interestingly, many 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 manag-

ing the process.

A corollary to this myth is treating

outsourcing in the same manner

as you would the purchasing of

services or staff augmentation.

The acquisition process must

reflect the need to assess a broad

range of skills for the require-

ments of a project or group of

projects. Processes described

in the supplier agreement

management (SAM) and inte-

grated supplier management

(ISM) process areas in the CMMI

provide a standard framework to

help focus organizations on devel-

oping and managing supplier rela-

tionships.

Myth: “Changing sourcing

options is a quick fix for

the chaos going on in my

IT department.”

Reality: True — if you believe in

silver bullets.

This myth is a variation of the

quest for a silver bullet (no vam-

pires need apply) to improve IT.

Companies are affected by fail-

ures within their IT organizations

for reasons too numerous to be

addressed here.4 Using a sourcing

solution to correct problems

within your IT department may

actually be the right answer; how-

ever, if outsourcing is used as a

proxy for actually managing, it

is exactly the wrong answer.

When used to address specific

needs or knowledge holes, out-

sourcing makes a lot of sense;

however, 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 having

the organization address the

problem itself. When using



4See The Chaos Report from the Standish

Group for an exhaustive discussion (www.

standishgroup.com/sample_research/chaos_

1994_1.php).

Myth: “Changing sourcing options

is a quick fix for the chaos going on

in my IT department.” Reality: True

— if you believe in silver bullets.


outsourcing as a tool to addressperceived chaos or managementissues with an organization, thefirst step should be a deep self-analysis. Are you just trying tomake someone else deal with adifficult management problem?

If you were a mechanical engi-neer specializing in mechanizinga changing, chaotic process with-out addressing the underlyingproblems, you would quicklylearn that you would rarely besuccessful. Fixing chaos throughoutsourcing options can beachieved only if the problemis encapsulated within the orga-nization or work that is beingoutsourced (and you let the out-sourcer actually manage withouttying his hands behind his back,so to speak).

If problems are caused by theinteraction of IT and the usercommunity, changing the locationof the work by outsourcing willnot solve the problem and couldexacerbate it by making thecommunication lines longer.Interestingly, outsourcing canactually buy you time to makeorganizational changes. Changeoften introduces a honeymoonperiod that can be used to solvethe real problem in a less directmanner. Given the number ofsourcing options, if you can createone honeymoon after another,you could avoid solving your prob-lems for a very long time.

Myth: “Outsourcing is only astopgap measure to increaseproductivity.”

Reality: False; outsourcing is animportant long-term tool.

Get over it; the world has changed.Outsourcing is a primary tool CIOsuse to manage their portfolio ofwork. While it may not be perfect,it is a useful tool for more than justmanaging productivity.

Myth: “Outsourcing arrangementscan be managed as business asusual.”

Reality: False; there is nothingusual about an outsourcingarrangement.

This is a myth that is commonamong organizations that arerookies in using outsourcingand have avoided reading theliterature or have gotten lucky onone or two small projects. Whileit must seem like a truism, out-sourcing models can not beaddressed as if they were busi-ness as usual. Change is expen-sive and risky. Managing sourcingoptions in the same manner inwhich you manage IT today willyield the same results. Sourcingarrangements require disciplinedmanagement internally and exter-nally to produce the differentialsin cost, quality, or productivity thatwere perceived when the contractwas signed. Not adapting yourmanagement tactics to the newflow of work will lead to addi-tional risk and expense as you tryto chase differentials.

The fact that most (if not all) out-sourcing agreements are basedon a contract makes this kind ofwork different than other types ofwork. The whole concept of how

the business relates to the out-sourcer is different. For example,when work is outsourced, theway the internal IT departmentmanages the work shifts from aline-management model to amore disengaged model. Whenwork is outsourced, users trainedto partially specify requirementsand then ask for changes willneed to learn that changes costreal money.

I have recently seen more agilemodels applied to outsourced proj-ects. These methods hold greatpromise when applied to relation-ships of differing levels of disci-pline (typically the organizationsourcing the work has a lowerlevel of discipline while the out-sourcer has a higher level). Theuse of high-touch componentsof methods such as ExtremeProgramming coupled with high-documentation methods to facili-tate communication across groupshas been found useful in buildingbridges between different organi-zations. If cost is not the primarydriver of the relationship, it makessense to use these modifiedapproaches.

A corollary to managing outsourc-ing as business as usual is that alloutsourcing options can be man-aged in a similar manner. If therewere no process differencesbetween sourcing options, thedecision process would be moot(or at least very different than it istoday). However, process differ-ences exist and require differentmanagement tactics. For example,



the difference in communicationmethods in offshore models andstaff-acquisition models is signifi-cant. It would be inconceivablethat they could be managed in thesame manner. Process differencesrequire distinct managementmethods to produce the cost,quality, or productivity differentialswe expect.

Myth: “We have used staff-augmentation models before.How different can outsourcingbe?”

Reality: Much different: trans-lating direct line-managementbehaviors into a more hands-offmodel requires experience andpatience.

This idea is another variant ofthe business-as-usual myth, con-sisting of internal line managersmanaging personnel in the staff-augmentation or body-shopmodels, trying to apply line-management techniques to out-sourcing models; this results in asignificant reduction in efficiencyand effectiveness. Acceptance ofthis myth leads to organizationstrying to overmanage their out-sourcers. This overmanagement isreflected in two typical scenarios,as follows. In the first scenario,the organization creates volumi-nous contracts that seek to spec-ify (in detail) how the outsourceris to do the work. This causes theproject to lose the effectivenessand efficiency expected (if youwere that good at doing and man-aging these types of projects,then why did you outsource?).The second scenario is when the

firm outsourcing the work directlytries to manage the outsourcer’spersonnel. Thankfully, this sce-nario is becoming less common.Simply put, don’t make this mis-take. It isn’t even worth makingthis mistake to learn from it.

Myth: “Our outsourcer is good atmanaging projects; we will let ithandle things.”

Reality: NOOOOOO! If you arenot involved, you will get whatyou get, not necessarily whatyou want.

This is a final variant of thebusiness-as-usual myth. Adherentsof the hands-off approach typi-cally use the same method forinternal projects. They view theoutsourcer as an extension oftheir own staff. Sourcing arrange-ments cannot be approached in ahands-off manner. The contrac-tual relationship must define howto manage the outsourced proj-ects, and management mustinclude all parties in order to beeffective. The organization thathas placed the sourced workmust intimately know the status ofthe project in its portfolio regard-less of who is managing it.

Myth: “One for all, and all for one.”

Reality: Mostly false; most out-sourcers have specific strengths.Match your sourcing optionsto their strengths to maximizeeffectiveness.

Remember the saying “Differentstrokes for different folks”? Well,in this case, it’s a different sourcefor different needs. Today’s large

projects or programs are oftenassembled (much like Legosor objects) and may requiremultiple-sourcing scenarios.Consider a package for a base,outsourcing for core functionalityenhancements and support, anda business team.

Multiple partial sourcing (MPS) isan effective means of addressingtoday’s varied IT needs. MPS isnot the lowest-cost option; itrequires aggressive management,nimble contracting, and excellentinternal project management.Project management must com-bine the best of the hands-onapproaches with the controlstypically viewed as rigid orbureaucratic to keep all projectspointed into the wind.

Complex scenarios are requiredto make the IT department ofthe 21st century run. In the end,remember that “one size fits all”does not work in all scenariosand might be better thought of as“one size fits one” instead. All-or-nothing and one-size-fits-all sce-narios reduce the effectiveness ofthe outsourcing options.

Myth: “I can hire one firm andget rid of all my IT headaches.”

Reality: Maybe, but with a bitmore work, a combination ofinternal and external firms typi-cally will be more effective.

There are large outsourcing firmsthat can offer across-the-boardsolutions and leverage multiplesourcing models. The allure ofone-stop shopping is very strong




for some: replace a whole cogwith a whole cog. Frankly, in afew cases, this might be a goodanswer; however, in the majorityof cases, it is an overreaction thattrades one set of problems foranother. Depending on how muchwork gets redirected, it may leaveyou with the inability to deal withwork that must be held moreclosely to your organization. Inmost organizations, IT is a reposi-tory of project management skills.Getting rid of everyone in IT willimpact the ability to monitor proj-ects or act as technical interfaceswith your clients. While the largesourcing firms can offer a dizzyingarray of services, it is rarely cir-cumspect to outsource yourwhole IT department or place allof your work in one organizationalbasket that you do not control.

Myth: “External sourcing isequally applicable to all typesof projects.”

Reality: False; exploratoryprojects or projects developingproprietary knowledge make sub-stantially less sense to outsourcethan other types of work.

There is an old adage: “If the onlytool one has is a hammer, every-thing looks like a nail.” If you haveno residual IT organization, thenjust move on to the next mythbecause, as they say, “This ain’tgonna help.”

Some types of projects makemore sense to source internally,such as the following:

Exploratory projects wherethe requirements or solutionsmight be unknown.

Projects developing or buildingon proprietary knowledge.While it is highly unlikely thatyou can control all knowledgeleaks, why tempt fate byadding more potential leaks(by becoming organizationallymore remote)?

Projects developing core butnonproprietary work.

This final point may be morecontroversial now than it was afew months ago. There is an ongo-ing discussion within the industrythat suggests that core work canand should be outsourced if it isbuilt on nonproprietary knowl-edge. The primary thread of theargument is that if applications arebuilt on common knowledge, theymust be developed and main-tained at the lowest cost in orderto be competitive.

Myth: “One-time projects cannotbe outsourced.”

Reality: False; frequency is not adriver.

I have always been troubledby the definition of “one time”;can anything really be consid-ered one-time unless liquida-tion occurs in the days after

implementation? The working def-inition I have settled on is that allfunctionality is new and it willnever be enhanced or main-tained. The questions to ask whendetermining whether you shouldoutsource one-time projectsinclude:

Does your organization havethe expertise required?

Do you need to build theexpertise for the future?

Will the project use or createstrategic knowledge?

The amount of times you aregoing to do a specific project isnot as important as the answersto these questions. The goal isto determine whether you needto do the project for strategicreasons.

The other “one-project” type isthe “one-off” (based on a one-time project, but just a bit differ-ent). This project type yields tothe same logic. It is critical thatyou develop a strategy based onthe infrastructure and knowledge-capital needs of the organizationto filter which projects should beconsidered for outsourcing. Astrategic filter will ensure thatsourcing decisions are goal-drivenrather scenario-driven.

Myth: “External sourcing optionsare fire and forget.”

Reality: Can you say“malpractice”?

If not knowing the intimatestatus of internal projects is



Myth: “External sourcing options

are fire and forget.”

Reality: Can you say “malpractice”?

unacceptable (arguably, it mightactually be considered projectmanagement malpractice), thenisn’t it also unacceptable to notknow the same level of detailabout projects done externally?Unwatched projects wander.Wandering projects have all sortsof problems, such as scope creep.Capers Jones has been quoted asindicating that projects with morethan 5% scope creep per monthend up in cancellation or litigation90% of the time. The expediencyof communication and monitoringis a simple cure for all but a sys-temic case of project wandering.

SUMMARY

Outsourcing is no longer a phe-nomenon relegated to the gar-ment industry. For IT, outsourcingis a fit in our globalized world.The Internet and other communi-cation tools combined very signifi-cant labor cost differentials; highlyeducated workforces and modelslike the CMMI have enabled workto be done anywhere, anytime.Firms that do not carefully makedecisions about where work canbe done efficiently and effectivelyare risking their very existence.The new world order in IT is fullof risk. Sourcing decisions typi-cally are big-ticket items andplace the livelihood of manyinternal personnel at risk. Under-standing all the ramifications of

sourcing options and decisions isan obligation. The rich lore ofmyths, legends, and facts is basedon grains of truth that have beenwrapped in hysteria or marketingspin. Outsourcing can be a goodidea, a bad idea, the right idea,or the wrong idea. The correctanswer depends on your needsand organizational culture. Gointo sourcing discussionswith your eyes open. Measurewhat is important to you. If youdon’t know how to measure,hire an independent firm thatunderstands how to measure.Remember, if it sounds too goodto be true, it probably isn’t.

REFERENCES

1. The American HeritageDictionary of the EnglishLanguage, Fourth Edition.Houghton Mifflin Company, 2000.

2. Beilock, Sian L., and ThomasH. Carr. “When High-PoweredPeople Fail: Working Memoryand ‘Choking Under Pressure’in Math.” Psychological Science,Vol. 16, No. 2, February 2005.

3. Lohr, Steve. “Offshore Jobsin Technology: Opportunity ora Threat?” New York Times,22 December 2003.

4. Sanders, Sarah Jane. Personalcommunication with the author.

ABOUT THE AUTHOR

Mr. Cagley is a Managing SeniorConsultant for the DavidConsulting Group. He is anauthority in guiding organizationsthrough the process of integratingsoftware measurement withmodel-based assessments toyield effective and efficientprocess improvement programs.Mr. Cagley is a recognized indus-try expert in the measurementand estimation of software proj-ects. His areas of expertiseencompass management experi-ence in methods and metrics,quality integration, quality assur-ance and the application of theSoftware Engineering Institute’sCapability Maturity Model® toachieve process improvements.

His consulting engagements haveincluded clients in software andhardware manufacturing, retail,health services, public utilities,telecommunications, manufac-turing, insurance, financial ser-vices and government agencies.Mr. Cagley is a frequent speakerat metrics, quality, and projectmanagement conferences. Hecan be reached at [email protected]




Wor

ksho

ps

Sourcing and VendorRelationships

Cutter Consortium37 Broadway Suite 1Arlington, MA 02474, USA

Tel: +1 781 648 8700Fax: +1 781 648 1950Web: www.cutter.comE-mail: [email protected]

Gain the edge with the best sourcingand vendor relationship adviceCutter Consortium’s Sourcing and Vendor Relationships workshops are designed to help IT executives create a sourcing strategy as they choose the most appropriate application deliveryoptions, leverage limited resources, hone their negotiation and metrics skills and create andmaintain cooperative supplier relationships.

The workshops can be customized to include client-specific examples, and vary in length from oneto five days to meet all your training needs. Accessing Cutter’s experts gives you the confidencethat comes from relying on the best minds in the industry. Call your account manager today todiscuss a workshop that will ensure your enterprise’s sourcing and vendor relationship success.

Strategic Outsourcing:A Structured Approach toOutsourcing Decisionsand InitiativesIn this workshop, you’ll cover the issues to be addressed in an outsourcing initiative andexamine in detail the seven steps necessary to make a wise decision whether or not tooutsource, to negotiate a sound win-wincontract and to establish and nourish asuccessful relationship.

This workshop will enable you to select thebest project team and outside advisors to evaluate outsourcing; plan/implement anoutsourcing project; and understand howoutsourcing fits with existing vision, strategies,core competencies, transformation tools, etc.You’ll also learn how to draft a request for proposal that encourages provider proposals, select the most appropriateprovider in specific circumstances, negotiatefair and reasonable terms for a positive relationship, draft a contract that covers theimportant issues, transition the factors ofproduction to the provider quickly and effec-tively, monitor the provider’s performanceafter the transition occurs and effectivelymanage the ongoing provider relationship.

Measurement and NegotiationStrategies for Agile Executives This one-day workshop will help you developcore measures that you can use to negotiatebetter outcomes for IT projects, whether theyare outsourced or developed inhouse. You’lllearn how to use lighter, “just enough” metricsto get the information you need in a matter ofdays or weeks rather than the months requiredfor heavier methods. You’ll also gain an

integrated look at the negotiation process fromthe IT perspective. You’ll explore productivitytrends and lessons learned from a metricsdatabase of more than 7,000 completedprojects collected worldwide (includingoffshore projects). You’ll also learn how touse objective standards from metrics data innegotiation scenarios to create more efficientand wise agreements.

And you’ll get the opportunity to conductseveral mock negotiations using skills acquiredduring the workshop.

Applications Outsourcing:Establishing the Proper Service-Level Measures Successful applications software outsourcingarrangements are established on the basis of a contractual partnership, with both sideshaving a vested interest in the success of therelationship. But the outsourcing provider andthe customer can define success differently.That’s why the use of objective, quantifiablesoftware development and maintenancemetrics is a key to the success of the contract.

This workshop focuses on establishing service levels for a variety of application devel-opment, enhancement and maintenanceoutsourcing arrangements. Establishing abenchmark of performance and then linkingreasonable, business-driven service-levelmetrics that monitor performance is theessence of a successful partnership.

Learn the techniques, service-level measuresand management strategies necessary toestablish and support a successful software development, enhancement and maintenance outsourcing contract.




Abou

t the

Pra

ctice Sourcing and Vendor

Relationships PracticeCutter Consortium’s Sourcing and Vendor Relationships Practice provides companieswith objective information, advice, and data that enable them to make sense of allsourcing options. Organizations get advice on how to develop, implement, andmanage a sourcing strategy that frees up scarce and expensive resources so theycan concentrate on development projects that are crucial to gaining or maintaininga competitive edge.

The subscription-based component of this service addresses issues such asmaking the outsourcing decision, structuring outsourcing contracts, relationshipmanagement, offshore outsourcing, service levels, and other essentials.

Personalized consulting help is available to enable you to manage sourcing projectsand relationships effectively, negotiate contracts, develop and implement a metricsprogram, write enforceable service-level agreements, create appropriate pricingschemes, choose an application service provider, and more.

Products and Services Available from the Sourcing and VendorRelationships Practice

• The Sourcing and Vendor Relationships Advisory Service• Consulting• Inhouse Workshops• Mentoring• Research Reports

Other Cutter Consortium PracticesCutter Consortium aligns its products and services into the nine practice areasbelow. Each of these practices includes a subscription-based periodical service,plus consulting and training services.

• Agile Software Development and Project Management• Business Intelligence• Business-IT Strategies• Business Technology Trends and Impacts• Enterprise Architecture• IT Management• Measurement and Benchmarking Strategies• Enterprise Risk Management and Governance• Sourcing and Vendor Relationships

Senior ConsultantTeamEach of the individuals on the CutterConsortium Sourcing and Vendor Relationshipsteam is an expert in outsourcing, offering theexpertise that comes from decades of hands-on, real-world experience. The team includes:

• Eric Buel• Bill Curtis• Carole Edrich• Michael J. Epner• Danny Ertel• Ian Hayes• Tushar K. Hazra• David Herron• Jonathan Hughes• Wendell Jones• Stuart Kliman• Steven Kursh• Michael C. Mah• Eugene G. McGuire• Bart Perkins• Ken Rau• William Ulrich• William A. Zucker


sourcing and vendor vol. 6, no. 4 myths of … › media › 40925 › dcg article...or outsourcing...

Documents