Managing Offshore Outsourcing Programs

Renowned researcher and writer Professor Mary Lacity discusses how best to manage an offshore outsourcing program.

by Joseph Vales, Kerry Ann Vales

Professor Mary Lacity is the highly respected and widely followed Professor of Information Systems at the University of Missouri-St. Louis. For more than 15 years, Professor Lacity has researched the information technology and business process outsourcing marketplace. A prolific writer, Professor Lacity has coauthored five books and scores of journal articles, white papers, and research reports. In recognition of her academic accomplishments, Professor Lacity received the Outsourcing World Achievement Award sponsored by PricewaterhouseCoopers.

Today, Professor Lacity continues to break new ground in identifying the issues that transform the outsourcing market. Her current focus is on offshore outsourcing, and in this part one of a two-part interview, she discusses several of her findings.

JV: The IT services industry has benefited for years from the research conducted by academia and the analysts of major research firms. Are there any differences in how academia approaches their research?  

ML: We both serve the marketplace, but we typically take different approaches. The research from the leading analyst firms tends to be future orientated: focusing on trend data and where the market is going. Academic research tends to be based on empirical data: what actually is occurring in the market and what are the actual customer experiences. Academic and research firm approaches are both valuable, but we focus on different issues.  

JV: How receptive is the outsourcing community to the academic approach?  

ML: I think the industry is very receptive as we get asked all the time to do presentations to customers. We consistently get feedback from buyers that they appreciate our analysis of customer experiences. We can offer them proven practices that are working, point out the bad practices that should not be implemented, and identify the trends they should closely monitor.  

JV: Over the last 15 years, your research has covered a wide spectrum of technology issues that have shaped the market. When did you and your team begin to focus on offshore outsourcing?  

ML: About 18 months ago, we began to closely follow the debates in the media over the movement of white collar jobs going offshore. The issue had become very emotional and few firms had a clear roadmap on what was working and not working. Seeking guidance, the buying community asked us to focus our research agenda on how to best implement and manage an offshore program and what capabilities they should seek from an offshore vendor.  

JV: When did you start this research?  

ML: Dr. Joseph Rottman, an Assistant Professor at the University of Missouri, and I began our work in January of 2004. We started with Fortune 500 companies and interviewed multiple executives within the organizationfrom CIOs to program management directors to project leaders. We asked what they expected from their offshore suppliers and how well the suppliers met their expectations. Joe followed that up by traveling to India to interview the suppliers there. We wanted to understand the different challenges and perceptions each of the stakeholder groups have about the relationship.  

JV: Was there a strategic issue that you focused on when interviewing buyers?  

ML: Yes, we asked a series of questions to determine how a chief information officer developed and implemented a global sourcing portfolio. A key finding of our research was that corporate executives are still sorting out offshoring issues and many are at the early stages of the learning curve. Our research identified four phases of the learning curve and most of the customers in the Fortune 500 are still in phase two: where offshoring is primarily driven by cost saving benefits. Very few firms have gotten to where offshore outsourcing is a strategic issue.  

JV: Did you see any differences in the approach used by buyers that would lead one firm to build a captive organization and another firm to work directly with a third-party provider?  

ML: We primarily found that if you are not in an IT business, you started your offshore program using a fee-for-service model. So if you are an insurance or financial service company, you basically hired a third-party supplier to do the work.  

JV: Did you see any differences in the ability or receptivity of offshore providers to serve clients based on the size and scale of the third-party provider?  

ML: Yes, we see big differences. Right now, the large offshore providers are focusing on winning large contracts from multinational buyers. In part, this is driven by financial pressures to sustain extraordinary growth rates and generate high ROIs for their investors. In contrast, many of the North American buyers are not ready to offshore large projects that drive their technology or business process operations. So many corporate buyers have turned to, what I call, Tier Two offshore suppliers. These are suppliers that are aggressively seeking this business, have excellent management structures, and are delivering service excellence. So far, their U.S. customers have been very delighted with these Tier Two players.  

JV: Did you see any differences between how corporate buyers managed offshore providers versus domestic contractors?  

ML: One of the biggest surprises was how the Capability Maturity Model (CMM) was impacting the delivery of services by offshore providers. Normally, CMM is a mark of quality, but our research found that buyers see the CMM process as adding costs to their offshore programs. They struggle to see the value of the additional processes required by the CMM model and that in an offshore environment the model primarily benefits the supplier.  

JV: What about the cultural issues?  

ML: The biggest complaints we received from U.S. customers were that their offshore providers would not express when they didnt understand something and they did not communicate when a project was behind schedule or delayed. Another cultural issue was that for many offshore executives, the customer was always right. Offshore executives did not challenge U.S. managers even when they knew they were wrong. As a result, most of the U.S. companies we interviewed went to weekly project reporting meetings and weekly transfers of work.  

JV: Is there a certain level of management needed to supervise the offshore effort?  

ML: Offshore programs are usually managed through the program management office, just as you would manage domestic suppliers. The key person responsible for keeping a project on schedule is the team leader or project manager. Frequently, project managers are frustrated because of their inability to get business units to sign off on documents or database administrators to finish schemas. These frustrations are also often compounded by time-zone differences. So one of our recommendations is for the program management office to empower project managers in some capacity to keep the project moving and get other stakeholders committed to meeting deadlines.  

JV: In selecting an offshore provider, what should a corporate buyer look for?  

ML: Professors David Feeny, Leslie Willcocks, and I have developed what we call the 12 Supplier Capabilities Model. Too often, U.S. customers have made the mistake of comparing suppliers based on their resources: head counts, staff skills, facilities, data centers, etc. We believe thats a big mistake. Instead, you have to look at the suppliers capability to transform those resources into services that add value to the customer.  

JV: How does the corporate buyer determine how well a supplier delivers on those 12 capabilities? How can he use your research findings to be able to make the right decision?  

ML: I think this is where the intermediaries are a big help to U.S. customers. I think that all of the U.S. customers we looked at use a third-party consulting firm. These firms have profiles of over 250 offshore suppliers large, medium, and small firms alike. I think they are really good at helping customers determine the pool of suppliers that best meets their needs. In Part Two of the interview, we will discuss in more detail the 12 Supplier Capabilities Model developed by Professors Lacity, Feeny, and Willcocks.