Offshoring IT Projects : why some perform better than others? : Reasoning of performance differences on offshoring activities of two Avanade business units.

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Offshoring IT Projects: Why some perform better than

others?

Reasoning of performance differences on offshoring

activities of two Avanade business units

September 2014

Kivanc Ozuolmez

10429832

Thesis Supervisor: Prof. Dr. John B Cullen

MBA

Amsterdam Business School

University of Amsterdam

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Abstract

Outsourcing has been around for centuries and practiced by many sectors, where sub-contracts were issued, especially around non-core functions. It didn’t take too long organizations to adapt outsourcing practices to the procurement of information technology (IT) services (Hirschheim & Lacity, 2000). Although for some companies and management levels IT outsourcing is seen as a necessary component for a firm's IT strategy (Linder, 2004), from its beginnings it was widely perceived as a cost-cutting tool. This cost-cutting view challenged outsource service provider firms to find out new and cheaper ways of working. The labor arbitrage, and large pool of IT skilled man power around Asia Pacific area attracted executives for years to exploit and offer more competitive rates to their clients.

From executive level view, offshoring offers great benefits as cost cutting, flexibility and around-the-clock working services. In contrast, studies show that, in practice, offshoring is much more challenging than only working with a remote team. Reasons have widely studied around cultural differences, skill pools, innovativeness and team dynamics.

This study looks at the brief history of outsourcing and offshoring, and with the case study, focuses on the reasons of different client project structures, from a outsource and offshore service provider point of view.

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Introduction

Kakabadse notes “the notion of outsourcing – making arrangements with an external entity for the provision of goods or services to supplement or replace internal efforts – has been around for centuries.” (Kakabadse, 2002). Tax collection in ancient Roman Empire was one of the earliest occurrences of outsourcing. The practice has remained popular in the manufacturing sector, in format of sub- contracting part of assembly line to “other organizations and locations where the work could be done more efficiently and cheaply” (Vaze, 2005).

It didn’t take too long organizations to adapt outsourcing practices to the procurement of information technology (IT) services (Hirschheim & Lacity, 2000).

Although for some companies and management levels IT outsourcing is seen as a necessary component for a firm's IT strategy (Linder, 2004), and from its beginnings it was widely perceived as a cost-cutting tool.

Since cost concerns were the main drivers for high level management for their IT outsourcing decisions (Vaze, 2005), creative business models model “offshoring” is developed in the early 1990s.

Companies like IBM, Oracle, General Electric and SAP have tired taking advantage of wage arbitrage, and skill pools of the global market, and started IT offshoring with software work to development centers in low wage countries. Hirschheim et. al notes that “in 2000s, former development countries such as India and emerging nations in Eastern Europe began to establish themselves as outsourcing vendors in the global market of IT services and companies like Tata Consulting, Infosys, Wipro, Satyam, HCL-Perot and Patni Computers started offering genuine offshore outsourcing solutions” (Hirschheim, Heinzl, & Dibbern, 2006).

Offshore outsourcing of IT services, thanks to global supply, has become a widely adopted practice for many global organizations, especially in the labor- intensive domain of application services (Winkler, Dibbern, & Heinzl, 2008). Not only large organizations, but mid-size organizations also joined outsourcing their IT needs. The worldwide market size of IT outsourcing is estimated reaching $288 billion in 2013, a 2.8 percent increase in U.S. dollars from 2012, and with forecasted increase by 4 percent for 2014 and 2015 (Gartner, Inc., 2013)

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In contrast, some researchers i.e. (Hirschheim & Lacity, 2000) have found that outsourcing has not always yielded the benefits that organizations had hoped for. This has led to numerous normative strategy proposals to help organizations achieve success (Cullen, Seddon, & Willcocks, 2005) (Linder, 2004). Some other researchers also found out; in offshoring models more overhead results higher costs (Kuni & Bhushan, 2006), labor forces are as liquid and can be lost quickly due to competitive labor market in service provider regions (Farrell, 2006), competition is increased by the new entrants (companies and countries) into offshore markets (Narayan, 2006), quality is not as high as intended, and projects take more time than was expected (Herbsleb, Mockus, Finholt, & Grinter, 2001) This research aims to identify variables and finding out possible reasons of financial performance yields on IT projects offshoring, reasoning if offshoring is still a viable option for IT services, and organizations, and how those differentiate based on the internal organizational factors as well as external domestic markets.

This work is structured by a start of market and literature analysis, explores the history and previously addressed challenges and benefits of outsourcing as well as offshoring. It continues with case study of Avanade, and analyses how outsource service provider companies experience offshore practices with an inductive and exploratory data search by interviews and combines with data analysis. The discussion and conclusions combine the findings of both literature review, as well as case study.

Research Mechanism

My research starts with focus on the external factors; literature review, market trend search and historical analysis of overall IT outsourcing practice. This helps to develop a theoretical, heuristic framework and thereby allowing for a focused analysis of IT offshore outsourcing. At data gathering and factor evaluation, my research focus is on internal dynamics around; management teams approach to clients, bad/good experiences of offshoring, task and resource allocation, as well as organizational structure from employee pool point of view. Therefore, this research makes use of both inside-out and outside-in approaches and is based on exploratory data research as well as literature and referral search and conducting semi-structured meetings with managers and representatives.

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Measures

IT outsourcing literature uses two common ways of measuring success defined by Dibbern et. al “(1) the realization of initial expectations and (2) the level of overall satisfaction.” (Dibbern, Goles, Hirschheim, & Jayatilaka, 2004). On the other hand, literature defines reasons for offshore outsourcing as; cost savings, accessing skilled and qualified resources, receiving good quality of service and increased flexibility. (Carmel & Agarwal, 2001). Carmel and Agarwal also highlights “In contrast to domestic outsourcing, strategic considerations play a less significant role for the offshore outsourcing decision and only become relevant in later stages. Aligned with literature, this study will measure success in offshore outsourcing by four measures; reduction in costs, quality of resources, increased flexibility, and quality of services (Grover, Cheon, & Teng, 1996) (Lee & Kim, 1999). These four indicators, at the higher level, sum up to overall satisfaction of outsourced projects and services (Goles, 2001) (Grover, Cheon, & Teng, 1996).

Figure 1: Research structure

Outsourcing

Although resources identified many reasons for organizations outsource IT, the growth of IT outsourcing can be attributed to two primary phenomena: (1) a focus on core competencies and (2) a lack of understanding of IT value (Lacity, Hirschheim, & Willcocks, 1994). First, motivated by the belief that sustainable competitive advantage can only be achieved through a focus on core competencies, the management of organizations have chosen to concentrate on what an organization does better than anyone else while outsourcing the rest. As a result of this focus strategy, IT came under scrutiny. The IT function has been viewed as a non-core activity in organizations; further, senior executives believe that IT vendors possess economies

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of scale and technical expertise to provide IT services more efficiently than internal IT departments (Hirschheim, Heinzl, & Dibbern, 2006). Second, the growth in outsourcing may also be due to a lack of clear understanding of the value delivered by IT (Lacity, Hirschheim, & Willcocks, 1994). Though senior executives view IT as essential to the functioning of the organization, it is viewed as a cost that needs to be minimized. Believing that outsourcing will help meet the IT needs of the organization less expensively, organizations have chosen to outsource.

Offshoring

Generically, the process of outsourcing service providing activities to another country than the service consumer’s country is often referred as ‘offshoring.’ There are several other terms for offshore outsourcing appearing in the business lexicon in recent years. Offshoring to the companies or subordinates in nearby countries (in terms of physical proximity) is generally referred as “near shoring” (Hirschheim, Heinzl, & Dibbern, 2006). This term describes scenarios such as a Western European based company outsourcing to Eastern European countries, or Russia, represents the fact of offshore outsourcing is a way of moving work to another country, “and not necessarily moving across oceans or relocating work half way around the globe.” (Loomis & Moore, 2005).

“Other terms that might be heard in discussion of offshore outsourcing are “best shoring”, which describes a scenario which clients of an outsourcing company can choose to have their work completed on-site, off-site, domestically, or offshore; and the term “dual shoring”, an outsourcing model that includes work being done in several geographically dispersed locations in order to create 24-hour work cycles and take advantage of particular labor strengths in various locations.” adds Loomis and Moore (Loomis & Moore, 2005).

Regardless of the terminology, the fundamental idea behind offshore outsourcing is moving part of the value chain (generally not the core business functions) to lower cost locations and exploiting labor and skill arbitrage. The competitive market forced the companies to find ways to control costs, and therefore pushed them to try offshoring practices, and the advances in digital communication and telecommunication made the remote work practices possible (Loomis & Moore, 2005).

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A brief look at the history of Offshore Outsourcing

Domestic outsourcing of IT work dates back to creation of EDS by Ross Perot in 1962. Perot’s business model, as described on the EDS corporate website, was “selling idle time on IBM mainframes to the companies that could not afford to purchase a mainframe.” Perot’s business model proceeded to build into a company, and he sold it to $2.2 billion after 22 years.

According to many critics, Eastman Kodak’s arrangements in 1988 with three IT services providers to handle the majority if its IT operations is seen as the first move of strategic outsourcing. This arrangement signaled a market changer approach in outsourcing and was an exemplar of moving away from low-level outsourcing to a much higher level where IT operations as a whole could be outsourced (Loomis & Moore, 2005).

Mid-1980s witnessed major steps in IT offshoring; U.S. hardware and software companies started using offshore labor for low-end work. Loomis and Moore explains this period as “such as motherboard production, language localization, and the creation of printer and device drivers. In the early 1990s, Jack Welch created a plan to move General Electric forward by utilizing Indian resources. GE had a long history in India, having built the country’s first hydroelectric plant in 1902, and establishing International General Electric there in 1930 to sell GE products and services. Because of that familiarity with India’s business climate, culture and infrastructure, Welch felt confident in GE’s ability to move IT work there and announced his ’70-70-70’ plan. The plan called for 70% of GE’s IT work to be outsourced, 70% of the outsourced work to be done offshore, and 70% of the offshore work to be done in India. Because of GE’s prominence in corporate America, and Welch’s status as one of the leading captains of industry, this move to offshore sites for the execution of IT work garnered considerable attention, and became one of the early milestones in the establishment of offshoring as an accepted business practice. “

Although GE took an important step to India, it was a wholly-owned subsidiary. The first offshore outsourcing deal was marked by Xerox and EDS in 1994, a $3.2 billion contract. Loomis and Moore states; “This was an event that some would describe as the validation of the practice, and the initiation of offshore outsourcing“.

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Year 2000 in IT industry and pre dot-com bubble period was perhaps witnessed the largest move to offshore outsourcing on IT projects and practices became viable and business processes.

Loomis and Moore explains this period as “The need for massive code writing and repair as the new millennium approached caused many companies to look abroad for resources as the domestic labor pool proved too small to accomplish the task. This idea of Year 2000 as the tipping point in the movement of IT work to offshore sites is borne out by the fact that virtually no Fortune 500 companies were offshoring IT work in 1990, and by 2002, 50% to 70% were outsourcing some IT functions offshore. A recent Forrester Research study indicates that roughly 40% of Fortune 1000 firms are outsourcing offshore, and there are strong indications that the percentage of companies offshoring falls as the size of the companies decreases. While some smaller firms do move IT work offshore, the practice remains primarily a large-company phenomenon” (Loomis & Moore, 2005).

Global Market trends in Outsourcing and Offshoring

The labor and skill arbitrage exploiting by offshoring, it looked like a perfect model for the IT outsourcing, since it well satisfies senior executives view of cost minimization and technical expertise and for more than a decade. With support of communication technologies, tools, and processes, western project teams liked offloading their support activities.

Although, the team performance and output quality were questioned many times, and academic literature also looked at the team dynamics of offshoring practices around innovation, impact of cultural differences, and individual values (Levina & Vaast, 2008) (Winkler, Dibbern, & Heinzl, 2008). Challenges always existed with offshoring practices, but in many cases, those were minor issues for senior management in comparison of provided benefits by labor wage arbitrage.

Since the market in service provider (offshore) countries are maturing, supply of professional skills facing challenges in fulfilling demand for the projects coming in, the wage gap between emerging and advanced economies has shrunk significantly, and will continue so till 2030 (PWC, 2013) (Karan & Selvaraj, 2008). Figure 2 shows; relative to the US and the UK, the emerging economies are all projected to show significant convergence in wage levels by 2030 – even if precise speed of convergence is uncertain.

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Figure 2: Global labor cost projections

Service buying countries

(DATAMARK Inc., 2013) indicates that outsourcing providers love the big fish, Fortune 500 companies, with scores of outsourceable FTEs and straightforward labor-arbitrage deals with attractive margins. But in a saturated market, these deals are harder to come by.

Outsourcing providers are turning to the midmarket (DATAMARK Inc., 2013) which presents a different set of problems. Smaller companies often are not mature outsourcers, so it takes time to build trust and good relationships. The labor economics are smaller, which means companies seek pricing based on outcomes—a tough proposition for big outsource providers comfortable with transactional pricing.

In addition, several other factors work together to shift outsourcing activity back to the service consumer market, or its near shore neighbors: rising wages in China and India as explained above; consumers demanding contact-center service from agents who speak same language and similar accent (American-accented English and Latin American Spanish for US market); and companies preferring to work with outsourcers who are geographically close and within familiar time zones (DATAMARK Inc., 2013).

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Offshore countries

Gartner estimates (Gartner, Inc., 2013) IT outsourcing markets in the Asia-Pacific, and Greater China regions will climb over 13 percent in 2014 and 2015, bolstered by multinational corporations expanding into these markets and positive economic conditions.

In projections at the same report, Gartner estimates (Gartner, Inc., 2013) the growth in key emerging Asia-Pacific economies will be further driven by the Association of Southeast Asian Nations' (Asean) goal to form a common regional market by 2015. This initiative aims to eliminate inter-nation tariffs in Asean, hence, stimulating more trade between nations. In the same context; China, which will see high growth rates as multinational corporations gain traction in the local market. Gartner’s research added that Chinese enterprises were increasingly adopting end-user-oriented services such as helpdesk or desktop services. Projections by many different researchers agree on; service provider offshore countries are evolving into service consumer countries, and respectively, this is expected to have impact on western offshoring practices.

Near shore countries

Near shoring is a relatively new term and often used as the opposite of off-shoring. The first web articles dating back to 2007 use the work near-shoring to describe the ambitious steps taken by HP to bring its outsourcing back to Europe and increase its local work-force to become more strategically competitive (Centrecom, 2013).

With the pricing power of off-shoring destinations like China, India and the Philippines decreasing their competitiveness due to climbing wages and improved worker rights and conditions, in combination of known cons of offshoring as language barriers, cultural differences, data protection and data safety regulations; near-shoring is slowly becoming the wiser business alternative. (Baumer, 2014) (Govil, 2014) (Centrecom, 2013)

European based companies and operations look for options in outsourcing to Eastern Europe; Bulgaria, Estonia, Latvia, and so (Baumer, 2014). For US market, the near shore locations such as Costa Rica, Chile and Colombia become mainstream options (Govil, 2014).

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Case Study: Avanade as IT Outsourcing Services Provider

Avanade describes itself as “Avanade Inc. was founded in 2000 as a joint venture between Accenture and Microsoft to serve an untapped market for Microsoft-focused consulting services. Avanade provides IT services focused on the Microsoft platform for mid-sized to large enterprise organizations, and its operation focus on the global market is served through three geographic business areas - the North America (NA), Europe, Africa, Middle-East, Latin America (EALA) and Asia Pacific (APAC), spanning 70 locations and 23 countries including offshore delivery centers in India, China and Philippines as well as near shore locations as Slovakia for Europe and Brazil for US.” (Avanade Inc, 2014)

Organizational Structure

Avanade is organized around its target markets and its solution offerings: • Target markets - Geographies and Industry verticals

• Go-to-Market Solutions & Offerings

Geographies

Avanade serves customers worldwide in three geographic business areas - the North America, Europe, Africa, Middle-East, Latin America (EALA) and Asia Pacific (APAC), spanning 70 locations and 20 countries. Each of these business areas consists of a number of regions. These include:

• North Americas: North Americas geographic business area includes the United States and Canada

• EALA: EALA geographic business area includes the United Kingdom, Spain, Italy, France, Netherlands, Germany, Norway, Belgium, Sweden, Denmark, Switzerland, Slovakia, Finland, Argentina, Brazil, Morocco, Mexico, and South Africa

• APAC: Asia Pacific geographic business area includes India, Philippines, China, Australia, Singapore, Japan, and Malaysia

Industry Verticals

Since its inception, Avanade has worked with more than 4000 customers across a wide range of industries, including leading Forbes Global 2000 and Fortune Global 1000 companies. Today, Avanade serves over 800 active customers across a wide range of industries including: Aerospace and Defense, Airline, Automotive, Chemicals, Communications, Consumer Goods

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and Services, Hospitality, Electronics and High Tech, Energy, Financial Services, Not-for-profit/ NGOs, Freight and Logistics, Government, Health and Life Sciences, Industrial Equipment, Retail, Travel, Utilities Public Transportation, and Mining.

Go-to-market Solutions and Services

Business technology solutions as well as managed services which connect insight, innovation and expertise in Microsoft technologies are Avanade’s core offerings. Avanade promises to create innovative solutions using an open, collaborative approach aligning its goals on its clients’ goals on improve business agility, customer loyalty and employee productivity. Avanade offers an optimum blend of skills - backed by tools, methodologies, and best practices that reduce the cost and risk of deployments.

The case

Based on the organization structure above, at the high level view, with the combination of local, near shore and offshore services, Avanade is capable of providing satisfactory service to its clients, in many various team setups, at competitive rates, while still enjoying fat profits. But in contrast, Avanade management team observes offshoring performance (percentage of revenue from offshore projects vs local unit revenue) differs between local units. In more precise wording, Avanade Netherlands is considered underperforming on transferring projects to offshore delivery centers, neither at delivery stages nor later maintenance or service phases in comparison to Avanade UK. Avanade UK is able to offshore its clients’ projects and exploits the offshore marginal and scalability benefits of international assignments, where Avanade Netherlands serves its clients by onsite, local teams.

In order to identify the underlying facts of the perceived difference, several interviews have been conducted, and data has been populated under the topics below.

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Findings

During the interviews, following quotes have been collected as highlights, and grouped in the themes.

Quote Number

Quote Themes

1 “Time to time it ends up as huge problems that the Indian

colleagues don’t say no and they commit to things they didn’t understand or not able to deliver because of lack of knowledge.” (Project manager, NL)

Skilled and qualified resources

2 “I experienced many times that they simply accepted and

said ‘Yes, I will do so’ while they have very little idea on what really is needed. This is mainly they don’t get the large picture, or don’t see the implicit effects of the fact, where you’d expect an engineer to know it by heart.” (Project Manager, NL)

3 “Offshore teams are often pragmatic and prefer short cuts

and straight ways, but we work in a more analytical and structured way.” (Project manager, NL)

4 “The offshore team need more time [to complete a task],

because they design their program in a less structured way […] because they are not able to relate to the whole. […] and don’t anticipate future changes.” (Project manager, UK)

5 “In projects, we prefer assigning repetitive jobs, in tick

bordered templates. Only after that borders, and bold flow diagrams, we can rely on the offshore teams on execution, not for decision making.” (Project Manager, UK)

Skilled and qualified resources Receiving a good quality of services

6 “When you need them, your team of 20+ people are ready

in a week. This is a great and quickest way responding client needs.” (Project Manager, UK)

Increasing flexibility

7 “Once I was in a working-around-the-clock project, and with

teams working in India, Western Europe and America… This I call flexibility.”

Increasing flexibility

8 “When I look at project budgeting, an offshore resource

costs 20% of the onsite resource. […] but how can you asses transition efforts, and rework required due to low quality results?” (Project Manager, NL)

Cost savings

Skilled and qualified resources Receiving a good quality of services

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15 Getting access to skilled and qualified resources

For years, India, Philippines and China are observed as very wide source of skilled and qualified resources. Although statistical numbers show very sharp increase of technically educated university or higher level graduates, and total numbers represent very large sums, The India Skills Report, 2014 (Confederation of Indian Industry, 2014) highlights; at the questionnaire conducted through 100.000 IT and Business Processes employee, “How satisfied are your business leaders with your organization's ability to access talent when needed?” Only 21% of the respondents replied as very satisfied. Leading to conclusion that, the skills at the vast numbers and skills expected by employers have a satisfaction mismatch. Similarly, the quotes above align with the India Skills Report. The western clients and project managers expect to have same skill levels of a western resources in offshore premises. But in practice, as seen in quotes, this is seen as a problem, hampering project outcomes.

Receiving a good quality of services

Since finding right skills is a challenging practice, not able to receive high quality outcomes, innovative results or quality increases is another affect around the similar fact that individual resources lacking high level of technical skills.

Quotes number 5 and 8, in quotes table above, explain the concern of outcome quality. Similarly, Levina and Vaast (Levina & Vaast, 2008) had aligned findings on their research; offshore resources lacking reasoning skills and are very good at repetitive and/or execution tasks. If decisions and reasoning is not left to them, the outcomes result in high quality.

Increasing flexibility and saving costs

The first line managers (Project Managers) from both United Kingdom and Netherlands commented that; the offshore resources somewhat contribute lowering project costs and provide flexibility and agility on responding client needs. (Quote 8). Not every project, but when needed, time zone difference is seen as a big benefit on the offshoring / near shoring (Quote 7).

Although first line managers face with lots of practical challenges in offshoring, they agree on executive view that offshoring is a tool for lowering costs.

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16 Employee structure in Avanade Netherlands and Avanade United Kingdom

Figure 3: Employee pyramid comparison of Avanade Netherlands and Avanade United Kingdom

The employee pyramids for both Avanade Netherlands and Avanade United Kingdom are shown in Figure 3.Avanade Global HR adapted standardized role descriptions, competency

levels and skills on each level. Therefore, it can be assumed that same level of role does similar job in project assignments in UK, or in NL, or across all Avanade offices. Therefore, the pyramids above didn’t require adjustments for misinterpretation of the levels, and represents the employee distribution across levels in May 2014.

Avanade suggests a well-shaped triangle pyramid in realizing client projects (Avanade Inc., 2013). Depending on the project size, project team pyramid is shaped as a manager or director at the lead, supported with group of Analyst at the base, and other levels in proportions, in between as shown in Figure 4.

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Figure 4: Advised Project Team pyramid (Avanade Inc., 2013)

During the interviews with project managers, it has been verified that project managers find this team pyramid well working, and acknowledged that this is how project teams are generally staffed.

Considering Avanade Netherlands’ well shaped employee distribution, as shown in Figure 3, it’s more likely to provide advised project team pyramid on projects, with its own local resources.

In contrast, during interviews, Avanade UK project managers highlighted that, they face with resourcing issues for project teams, especially on Analyst level in local assignments. In many projects, they try filling the gap by offshoring part of the project.

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Discussion

Research interviews, in support with literature, suggest that offshore outsourcing is a way of having flexible teams. Both service level managers, as well as executives enjoy the fact that resources can join or leave the projects very quickly and results as beneficial flexibility of the team structure.

Labor arbitrage, and cost savings have been observed as one of the primary benefits of offshoring for years. Although market analysis reports, as well as some literature suggests that, the gap is closing, and labor arbitrage is no longer a reason for outsourcing, service level managers sees it offshore resources are still cheaper than local resources (in hourly rate comparison). The service line managers argues about repetitive (and wasted) efforts, and low quality outcomes of the offshore teams. It could be the fact that; executive managers calculate the cost of low quality work and therefore see no cost savings, where line managers focus on those as fully separate items.

Overall, literature as well as interviews are aligned on difficulty of finding good skills and as a result receiving good quality deliverables out of the offshore teams. Innovative thinking, reasoning and decision making are considered as lacking skills, and therefore tasks requiring those generally don’t yield expected outcomes (Levina & Vaast, 2008). Both research data and literature also agree that, repetitive tasks, execution of detailed flows and designs are well achieved by offshore teams. It can be derived from both literature and interviews that, iterative tasks in IT outsourcing; i.e. deployment, testing (execution of test cases), (1st

line) support, can be successfully handed over to offshore teams.

As shown in quotes in the findings section, project managers from Avanade UK are more positive and experienced in working with offshore teams, and highlight issues as challenges to overcome. Although exact numbers couldn’t be gathered due to confidentiality concerns, the Avanade UK employee pyramid in organization units, and project team structure pyramid show a clear gap on at the Consultant and especially on Analyst level. During the interviews, UK project managers referred, they’re likely to staff their projects from offshore teams, especially for consultant and analyst levels.

In contrast, the Dutch project managers mentioned that, they generally fulfil project resourcing from the local resource base, where the large base of Analyst and Consultants can

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satisfy needs. Since the incentive of project manager is to deliver the project in budget, if project budget covers local resources, project manager has almost no incentive to take risk and challenges of offshore transition.

As offshore resourcing would be a way to increased profit margins, and resource scalability, and the offshore teams perform well for iterative tasks, Avanade Netherlands is leaving money on the table by not exploiting this pool properly.

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Conclusions

Outsourcing market is likely to continue its growth for the coming decade (Gartner, Inc., 2013) whilst market will be more competitive for outsourcing service provider companies and countries. It is important to recognize, understand and manage dynamics of outsourcing and offshoring, and expectations of clients.

Several project management mechanism have already been adapted to address the needs of distributed teams (Sutherland, Schoonheim, & Rijk, 2009). In addition, findings suggest that not every tasks is suitable to be performed by offshore teams. Therefore, a good filter framework of what and when to offshore should be worked out by service provider companies.

Since access to skills and quality of outcomes are questioned by clients, as well as local service provider firms, addressing frictions and commitment concerns are the key challenges and success factors of Information Systems outsourcing. To address these concerns, firms and executives should find ways to show commitment; share the success, share the blame. Outcome-based pricing—paying for a predetermined business result, and cascading this initiative to teams and individuals (offshore or local)—can be one of the ways to achieve mutual commitment, and yields the best outcomes in all teams.

Similarly, organizations should be structured in a way to exploit offshore benefits for repetitive tasks, while addressing the trend of (innovative) jobs coming back to local sites. The case of Avanade, findings suggest that, Avanade Netherlands is not able to exploit offshoring benefits, but well equipped to support client needs on local level. In contrast Avanade UK lacks the resource pool of technical, hands on personnel, and relaying on offshore teams for those skills are likely to yield poor quality, or unsatisfactory deliverables. Both business units should look for ways to balance both local and offshore offerings.

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Recommendations

This research shows that there is room for improvement on offshore service offerings for Avanade Netherlands, and in contrast, improve onsite (local) offerings by Avanade UK. Below, the recommendations are summarized around four topics;

Incentive alignment (for Avanade Netherlands)

As seen in the findings, and evaluated in the discussion, project managers’ (first line managers that decide team structure or work on the project day by day basis) incentive is on getting things done by; delivering project on time, in budget and with high quality. The project managers are responsible on keeping their project within budget, however, Dutch project managers are not challenged or rewarded for finding smart ways to offshore project tasks. A reward mechanism (bonus or recognition) can be introduced by Dutch Management Team for project managers increasing profit margins, and showing them incentive ways to offshore parts of projects.

Organization structure (for Avanade United Kingdom)

Project managers in Avanade UK are good at offshore practices, mainly because they don’t have enough resources at closer reach to perform tasks. Therefore, they are forced to find ways to make offshore practices work. Although, at the first look, high profit margins, and working offshore structure seem a working machine, it may hide some lost proposals to provide onsite (local) services due to limited number of Analysts and Consultants in Avanade UK team.

To be more competitive in proving local service, Avanade UK should look for balancing employee pyramid by hiring Analysts and Consultants. Many HR practices to recruit fresh graduates, or finding experienced juniors are applicable to recruit these levels, and balance the pyramid.

Task distribution

Literature (Levina & Vaast, 2008), and interviews reveal that not all the tasks have the same transferable characteristics, and involvement of offshore teams yield different results, even success or failure, based on these characteristics. Repetitive tasks, and tasks require no reasoning but execution are defined as easier to transfer and expect good results. In

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Information Systems world, data input, software testing, systems (1st line) support are known in this nature.

Avanade should look for ways to get focus groups and skills aligned around tasks around these areas, and offer very easily accessible internal channels to its onsite project managers.

Outcome commitment is shown to client

Since the quality of the project outcomes are questioned by clients, and clients have bad experiences or hearing horror stories about involvement of offshore teams, addressing frictions and commitment concerns are the key challenges and success factors of Information Systems outsourcing. To address these concerns, Avanade’s Management Team should find ways to show commitment; share the success, share the blame. Outcome-based pricing— paying for a predetermined business result, and cascading this initiative to teams and individuals (offshore or local)—can be one of the ways to achieve mutual commitment, and yields the best outcomes in all teams.

Similarly, designing contracts passing part of cost savings to clients can also help getting clients to same side of the table.

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References

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Carmel, E., & Agarwal, R. (2002). The maturation of offshore sourcing of information technology work. MIS Quarterly Executive, 65-77.

Centrecom. (2013, 9 17). Nearshoring - a sign of our times? Retrieved from Outsource Magazine: http://outsourcemagazine.co.uk/nearshoring-a-sign-of-our-times/

Confederation of Indian Industry. (2014). The India Skills Report. Haryana.

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