Choosing the Right Software Outsourcing Model

By Thomas Gordon

Executive Summary

All too often IT organizations spend the majority of their efforts analyzing the external factors of an outsourcing relationship, with minimal time spent understanding how this new development model will impact them internally. This article focuses on how organizations can reorganize their teams and internal processes so software outsourcing has a better chance of living up to its promise.

Software outsourcing holds a lot of promise for businesses today, whether it’s the promise of lower costs, higher quality or faster time-to-market. However, for many organizations outsourcing can remain just that – more of a promise than reality. Organizations today often struggle with the complexity that outsourcing can bring, as they lack the structure, processes or skill sets that allow them to adapt to this new paradigm.

According to DiamondCluster International’s third annual Global IT Outsourcing study, over three-quarters of the Global 1000 plans to increase their use of IT outsourcing this year, with software outsourcing being a large portion of that. Whether cause or effect, this rise in software outsourcing is forcing many businesses to dig into what elements form a successful outsourcing arrangement. It’s not just about picking the right supplier or establishing effective Service Level Agreements (although these are important). Much of the success rests in how the initiating or “acquiring” organization defines the outsourcing relationship, and how they structure their internal teams and processes to make the most of the model they’ve chosen.

Choosing the Right Model

The first step towards successful outsourcing is identifying the type of outsourcing model that best fits the organization’s objectives. Most enterprises fail to recognize this, or at best, tend to take a one-size-fits-all approach. As a result, many of these engagements begin with mismatched management expectations and a relatively high risk of failure.

Outsourcing models can be best described in terms of the relationship between the Acquirer (i.e. the organization procuring a service) and the Supplier (i.e. the organization providing the service to the acquirer.) There are three distinct models for software outsourcing - Staff Augmentation, Valued Supplier, and Trusted Advisor. Each of these models varies in the level of partnership between the Acquirer and Supplier.

  • Staff Augmentation
    This approach is best suited for organizations that are only looking for extra resources that provide incremental capabilities missing in the acquiring organization at a perceived low cost (i.e. a testing resource.) Such acquiring organizations typically view their suppliers as “vendors.” The contract resources are assigned directly to existing project teams and have limited interaction with senior executives within the acquiring organization. As result, organizational and cultural compatibility between the Acquirer and the Supplier is not critical in this model. However, despite the tactical nature of the need, it is important that organizations do not adopt a “commodity” mindset where every new resource need is viewed as an independent transaction.
  • Valued Supplier
    Outsourcing situations that adopt this model are characterized by joint project teams that are comprised of members from both the Acquirer and Supplier organizations. Quite often, these teams are co-led by Acquirer and Supplier project managers. In these engagements, acquirers invest and focus their efforts to ensure better teaming and a more tightly integrated environment with the supplier organization, and suppliers provide their best resources to the team. This model tends to require a complementary blend of cultures where disputes are managed through defined issue / risk management processes and rarely end up needing to be escalated to “the contract.” The Valued Supplier model is most effective when the acquiring organization is mature, having successfully integrated supplier organizations through other Valued Supplier engagements or multiple Staff Augmentation engagements.
  • Trusted Advisor
    This model represents the highest level of partnership, and can potentially lead to the most value for both the Acquirer and the Supplier. In these types of engagements, the acquirer’s and supplier’s cultures and resources co-exist in a complementary and respectful manner. Both the supplier and acquirer organizations bring value to the working relationship and each understands the value contributed by the other. Each organization works cooperatively to produce outcomes that are managed through complementary performance measurements. These measurements are put in place so each organization can operate most effectively and efficiently according to their respective business goals. This model is best enabled by mature organizations where objectives and expectations are well understood, documented and proactively managed.

Any one of these models may be the right answer, depending on the specific objectives of the software outsourcing engagement. It is also important to note that the model choice should be specific to the outsourcing situation, and not to the organization. In other words, an organization may adopt more than on model across its range of outsourcing needs. Organizations may also find themselves starting with a Staff Augmentation model and gradually evolving to a Trusted Advisor model, as they develop a better understanding of the Supplier’s capabilities

Establishing the Foundation for Success

Selecting the right model for an outsourcing engagement is only part of the battle. After the model has been defined, acquiring organizations need to address four key levers that provide the foundation for effective partnerships with the outsourced service provider.

  • Aligned Roles and Responsibilities
    Defining roles and responsibilities is critical in any distributed development environment. However, this is even more important in an outsourced environment where responsibilities are often split across the Acquirer and Supplier. In addition, the acquirer organization must make a conscious effort to recognize, define and revise roles and responsibilities so they can successfully execute and manage the outsourcing relationship.

    In many situations, roles and responsibilities in the acquiring organization shift from “doing” to “managing.” Management roles such as Project/Program Managers, Acquisition Manager and Acceptance Test Managers are important to ensure the timely delivery of the acquirer’s deliverables and acceptance of supplier’s deliverables. In addition to management roles, acquirer organizations may shift their specialized roles from programmers to those trained in requirements elicitation and management, quality assurance or configuration management.

    Once the roles are defined on the each side, the Acquirer and Supplier need to work together to define the associated skills and competencies needed within the relationship. Both organizations must translate that understanding to identify potential candidates. It is critical that there is an explicit agreement ensuring key supplier resources are secured and retained throughout the duration of the engagement. This can be done through “flexible agreements,” which are structured contracts with defined service level agreements and performance metrics.

  • An Integrated Development Process
    Effective outsourcing also requires a fully integrated software development process that extends across the boundaries of the Acquirer and Supplier organizations. This process should define how the employees in the acquirer and supplier organizations need to perform their respective roles and how they should interact with other roles in the team. Organizations should explicitly define the deliverables and workflows required to support the key interfaces between the two organizations. This will help ensure the acquirer’s processes work in concert with and explicitly link to the processes that the supplier uses to perform its own work.

    At a minimum, the acquiring organization should define, manage and enforce the processes for requirements definition and management, configuration and change management, program and project management, and lifecycle quality assurance.

  • Integrated Technology Infrastructure
    Inconsistent performance, less than efficient employees, and ineffective processes are often symptoms of environments where the people and process “issues” have been considered but are not being enforced or addressed. The most effective acquiring organizations also leverage information technology, and specifically Application Lifecycle Management solutions, to enable and automate their vision for a highly optimized software delivery environment. These organizations focus on integrating the components of the technology infrastructure that support the key interactions across the organizations. Core technologies that enable project, and program management, requirements (from elicitation through management and traceability), configuration management, and quality are good places to start. Integrated technical platforms supported by a common, federated repository and workflow engines can also help reduce or eliminate inefficiencies in the acquiring organization and between the acquirer and supplier teams.

  • Compatible Culture
    Cultural compatibility is also critical to the success of every outsourcing engagement. Often, work styles, customs and norms can be very different between organizations, making it difficult to confront issues and manage people. Therefore, it’s important for executives in both the acquirer and supplier organizations to proactively put plans in place to work through this challenge. One size does not fit all. Each acquiring organization should take care to recognize its intent and how it wants the outsourced engagement to work to prevent conflicting cultures from getting in the way of successful software outsourcing.

Each of these four levers is critical to the success of any outsourcing engagement. However, the relative importance of these levers depends on the outsourcing model. For instance, a Staff Augmentation model only requires clear definition of roles and responsibilities for the contract resources. On the other hand, Valued Supplier engagements depend heavily on a well defined integrated processes and cultural compatibility. Finally, the integrated technology infrastructure assumes a much more critical role in all Trusted Advisor engagements.

The Roadmap for Change

Many IT organizations will find that they will need to transform their organization to support effective outsourcing. Achieving such a transformation is often a complex challenge, but organizations can begin by following this four step process.

  1. Define Goals: Start by defining clear business goals and priorities for the outsourcing engagement. Organizations should then conduct an objective assessment of their current capabilities – processes, technologies and people skills – and identify gaps relative to best practice. These gaps should be prioritized in light of the business goals.
  2. Architect an Approach: This phase should be focused on structuring the change program. This includes establishing a program office, creating cross functional teams and defining clear metrics for success that are aligned with the improvement priorities identified in Step 1.
  3. Develop and Deploy a Solution: This is, by far, the most important phase. It is also the longest and most effort intensive. The cross functional teams need to address each of the improvement priorities with solutions that integrate changes to process, technology and people skills. Each team also needs to ensure that their solution is compatible and coordinated with the solutions being developed by the other teams. This phase is both iterative and incremental in nature, especially to ensure that the solutions are validated in pilot implementations before being rolled out widely.
  4. Validate Results: As a final step, organizations should measure the impact of the changes deployed in Step 3 and compare them to the goals defined in Step 1. This step often reveals additional issues that need to be addressed, and these issues form the focus of the next improvement cycle.

If executed well, these four steps can enable an ongoing cycle of continuous improvement for the organization that will systematically improve the performance of their outsourcing engagements to best practice levels, and ultimately create more substantial value for the IT organization and for the business overall.

About the author

Mr. Gordon is a Solution Advisor with Borland’s Consulting Services. He advises Borland’s strategic clients in the application of industry best practices that create high performance Information Technology Solutions. Mr. Gordon has over 20 years of experience in IT solutions delivery and process improvement.

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