Onshore, Offshore, Nearshore….That’s Not Really the Question, Says IBM

Building an outsourcing strategy simply on the basis of lowest labor cost, or best talent, or geographic proximity is an outdated approach that will lead to unhappy results. …

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Building an outsourcing strategy simply on the basis of lowest labor cost, or best talent, or geographic proximity is an outdated approach that will lead to unhappy results. But if plunking down a team in the middle of the Amazon jungle and making them all wear top-hats produces the best results for your client, then get that team to the jungle and start handing out hats.

In our recent conversation with IBM’s Cameron Art, General Manager of Application Management Services, the Amazon or top-hats never came up, but he did offer lots of advice for anyone in the client-services business — and some fresh perspective on where the outsourcing industry is headed. Art’s domain includes delivery centers in East Lansing, Michigan, USA, as well as Latin America and other “shores”, providing mainly application development, testing, and maintenance.

Here are seven key observations from a man who lives “in client space”:

1. Do not be intoxicated by low labor costs

“Chasing wage is yesterday,” Art says. “Chasing productivity is today. As far as I can see, into the near future, the focus on outcomes and on the ability to boost productivity is what drives the most value for our clients. There are times when I see clients supremely focused on wage per hour, and I do think that can be a valid way to evaluate a provider or location, but it’s just a sliver of the outcome you’ll receive. What the client is really interested in is not ‘That hour cost me $45′ but ‘What did I get out of that hour?'”

“People have always wanted good outcomes, but there was a time in this industry when we were drunk on wage. The perception was that focusing on wage was a no-brainer. That lasted for two or three years at least. But if you look at analyst data, you can see that the average number of defects in the industry ramped up during this time [the early 2000s in particular]. We got a little bit overexcited as an industry about the effect of taking the wage down, and so productivity suffered.”

2. It’s a balancing act

Cost is still at the forefront of clients’ minds, Art says, but the point is to achieve balance. “Those clients with greater experience definitely see the need to balance dollars per hour with things like productivity, quality of outcomes, and total cost of outcomes. I think if we look at the industry overall and the data coming out around productivity and elements such as quality, amount of re-use, and speed to market, it is clear that a tipping point has happened”.

“As with anything in technology, swinging the pendulum too far one way or the other carries risk. I would liken it to replacing multiple legacy systems with SAP, but then if you customize that package extensively — without balance — the SAP implementation could re-create the problems that you had in the prior systems — and end up being more costly to implement or maintain. My comment on wage-based evaluation being a valid aspect to evaluate on is in the context of that balance. You can have double the people at half the cost and miss the balance and your goals”.

IBM’s magic formula for balancing cost and outcome, Art says, is based on “our experience and our ability to apply that experience to varying sets of clients and call out the appropriate balance. When you look at IBM being one of the largest or the largest ADM vendor, one of the largest software developers, and arguably the most global service provider, we have plenty of experiences to analyze, and we use those analytics to customize our approach to each client based upon their individual technical, process, and cultural environments”.

3. “This is a team sport”

All the talent in the world won’t lead to happy results if that talent isn’t well-managed, or can’t work together. Art uses the analogy of an all-star baseball team versus a championship team. The all-star team is loaded with talent, supposedly the best at their positions. The championship team might have two or three big names, but it also has a bunch of lesser-knowns. The difference is that the championship team knows how to work as a team, as a cooperative unit, and how to exploit the talent it does have. The all-star team lacks the “maturity level of interaction” that results in championships, Art says. “Everyone on the championship team knows where their partner is going to go and how they’ll react. The shortstop knows how the second baseman will flip the ball to him in a double-play situation”. Communication and chemistry between players makes the difference between being heroes and being goats. (Anyone who remembers the 2004 American League Championship Playoffs knows this is true).

The ideal mix blends inexperienced workers who can be trained in a particular way of doing things with skilled workers who bring experience and perspective.

But the bottom line is: “Clients are looking for outcomes rather than talent,” Art says.

4. Look for skills and partnerships rather than simply geographic location

With a globally integrated network of centers, Art says, IBM “can chase wage anywhere on the globe.” But a couple of years ago, the company started looking at whether specific types of work “would lend themselves to more efficient, more predictable outcomes by leveraging a US center”. IBM started evaluating a number of sites and locations. Big Blue chose East Lansing, Michigan, for several reasons: The main ones, Art says, were “the supply of talent and the amount of highly skilled resources, a really supportive partner in the state of Michigan, and a partner in Michigan State University and other schools and facilities”.

“I wouldn’t say we focused as much on geographic elements as we did on available skills and partners [when selecting East Lansing]. One thing we’ve learned as this industry has matured is that clients have become less sensitive to creating some distance between themselves and where the work is done. With the amount of work being delivered remotely, our industry overall has become more comfortable with some geographic distance.”

Art agrees that there are situations where time-zone alignment is attractive: “Things like production support or go-live support, where there’s a lot more sensitivity to the timeliness of the response” – you don’t want to move those across the world. Similarly, some types of collaborative software development are best handled in locations where conversations can happen as needed. “Timely work should be in your time zone,” he says. Conversely, things like test-script development that don’t require instant or ad-hoc communication “are logical to move to different time zones”.

5. Have a horse on every shore

Nearshore, farshore, offshore, onshore. “In an ideal situation, you shouldn’t have to choose one or the other. You should have both,” Art says. “The reason you hear folks lobby for one shore or the other is they tend to have a horse in a particular race”. But what you really want is a horse in each race, he says, so you “don’t have to optimize on anything but the outcome for the client”.

“Selling one shore over another to me is a fool’s errand carried out by those that have limited shores to pick from. We have a horse in all these races. I educate the client on the right place for them”.

6. The human cloud floats above everything

Cloud computing will have a revolutionary effect on application development, and many of its underlying concepts “will seep into the management side of outsourcing”, Art says. But the more important thing is leveraging the human cloud.

“The biggest requirement is for us to have the ability to interconnect as many skills and talents as we can and have the tech support to distribute work or requirements to the right skill sets wherever they may sit in the world. We’ve been operating in a globally integrated environment for many years, and that has forced us to develop the technology to support finding the right skills at the right time. We leverage technology in a huge way to deliver the human cloud to our clients. Cloud capability enables us to pull the right skills but also it allows us to collaborate”.

7. Clients want change

“Our industry is one in need of a shake-up”, Art says. “The experience of clients is driving a recognition that any of these relationships are exactly that — relationships between two entities, each having the potential to add value. From a purely relationship perspective, collaborative sourcing between two active parties will be an avenue that many clients pursue”.

“At the end of the day”, Art says, big changes “are driven by clients and vendors that are willing to challenge what and how value has been driven in the past. I know clients are ready — They have been pushing this”.