Creative Outsourcing Relationships Can Benefit Strong Offshore Providers
The market for outsourcing services can be an intimidating place for businesses. The lure of high quality output and cost savings can be very strong. But this lure is often tempered by the very real risks that a buying business faces.
To enter an outsourcing deal, is the beginning of a relationship between two companies. The relationship may be a long and productive relationship. It may be a mildly successful relationship. It could also be a tedious relationship, filled with mistrust, miscommunication, and spectacular failure.
Buyer Beware, Outsourcing Risks Lie Ahead
In this outsourcing relationship, both the buyer and the seller face risks. A buyer faces the risk of non-performance or poor performance. Non-performance will quickly escalate into two problems for the buyer:
- Delay to Market for a Product or Service
- Increased Cost of Development, to Remedy Non-performance
A seller faces the risk of non-payment for services. A seller may invest time and effort into building a product or performing a service, which is slow to be compensated for, or not compensated for at all. In addition, if a project is slow to be delivered, the seller may earn a bad reputation within the industry.
In the case of software development services, the risk for the buyer is often greater than the risk for the seller. Reasons for this include:
- Contract Terms are Often Negotiated Before the Problem is clearly Defined
- Sellers are Quick to Engage in Rent-Seeking Behavior
- Buyers Absorb Most of the Risk for Project Failure in a Traditional Contract (Sellers Have Less at Stake)
The end result is bad for business and bad for future product development in general. For instance, even if a buyer realizes it is in a bad position, it is often hard to switch providers (to a new seller). This will surely compound existing project delays and increase overall cost for development.
Three Options for Business Outsourcing
With this worry always looming, buyers must invest significant (upfront) resources to locate an adequate service provider. Consider three options available to a buyer, when a new e-business web portal is to be developed
- Contact a Well Known Seller Within the United States
- Contact a Lower Tier Seller Within the United States
- Contact an Offshore Outsourcing Seller
Contact a Well Known Seller Within the United States
There is an old adage that "nobody was ever fired for going with IBM". IBM has a stellar reputation as a service provider. They have clearly differentiated themselves as top performers within the services industry.
However, as a result of it's stellar reputation, IBM is able to consistently maintain very high consulting rates, that are geared towards Fortune 1000 buyers.
Contact a Lower Tier Seller Within the United States
Contacting a lower tier provider will almost always keep costs below what IBM would charge. However, as a buyer, this cost savings comes with increased risk. A company with a lower profile will be able to avoid complete accountability for projects that failed in the past.
Contact an Offshore Outsourcing Seller
In many cases, the perceived risk of contacting an outstanding offshore provider is even higher than the risk of contacting a lower tier local provider. In particular, the fear of catastrophic failure can outweigh the significant economic advantage.
Clearly, a large portion of current software services outsourcing will go to a category 2 provider. However, given the general risk of project failure, as often quoted from the Standish Group, the selection process calls for a significant amount of caution. Caution leading to interviews, reports, and other investments of time and resources, that should be factored into the total cost of the project.
Offshore Software Developers Can Differentiate with Creative Outsourcing
To counteract the perception of being high risk, a competent offshore seller must look to more creative outsourcing strategies. Strategies that reduce the risks that a buyer will face. A seller that can propose a creative, risk eliminating outsourcing contract solution will have the chance to stand apart from the countless offshore providers. In addition, it will be able to win against lower tier onshore providers through cost of service advantages.
Look Ahead to Future Outsourcing Wold Articles
Future articles on Enterblog will examine a number of creative outsourcing solutions that can be used by software services companies. The solutions to be featured include:
- An ASP (Application Service Provider) Model that Licenses the Final Product to a Buyer
- Use of a Neutral Third Party to Oversee the Outsourcing Process
- Granular Project Delivery and Payment
- Proactive Project Multi-sourcing
- Use of an Open Source Delivery Model
