Service Provider Dynamics in Executing Offshore Leveraged IT Outsourcing Contracts

With some of the recent trends in contracting models, most service providers (and many reluctantly) have moved towards fixed price contracts. For several years most offshore based outsourcing IT service providers worked on time and material (T&M) contracts. This was lucrative and did not require too much of maths — the key was to tap into the huge labor arbitrage opportunity. However with time and increasing competition the contracts have now moved to largely fixed price contracts where the service provider signs up to manage some of the operational risks which otherwise expose the enterprises in a traditional T&M model.

With all this, what are the key operational issues and dynamics that the leadership team at offshore based IT service organizations looking at when executing contracts (excludes business acquisition)?

1. People, People, People! : Having the right skilled people at the right time.  Most providers have a large staff base pyramid but find that each engagement needs to have some rock stars to manage the clutter and run the operations with low skilled staff base. These rock stars are in short supply and are rapidly thrown at the next big engagement that comes in. The new or the squeakier wheels/clients get these rock stars. These are people who understand technology but more important are articulate and “get it” when talking to clients or their onshore colleagues which happens more often.

The other challenge is to handle sudden exit of key staff which can affect quality of service in the absence of good knowledge management practices.

2.  Managing Staff Aspirations: Linked to the people problem is the associated focus of retaining existing staff. Most individuals would like to rapidly move on to ‘management’ cadre in an organization. This means staying technical and finding a future as a senior technical resource is not on the list of most folks. Part of this has been due to the way these organizations used management roles as carrots and part of it is to do with the colonial hangover where having more people reporting to a person is seen as a sign of authority and growth.

3. Onsite- offshore Dynamics : In all offshore leveraged teams, there is a big internal thing that always goes on between the onsite and offshore staff servicing a client. There are several factors at play but in summary the onshore colleagues always have the upper hand in most discussions since they can use the ultimate trump card of “client has asked for this” or “this is important to keep the client happy”. The offshore leadership team is always embattled in managing the team members, staffing issues, pushing back on what cannot be done in the given time/cost etc. In companies which are offshore headquartered in India ( India based IT service providers) the core leadership is out of India though and so the offshore leaders in an account are often closer to the business leaders and more aligned to them. This can be frustrating for the onsite team in such cases especially if they have not previously worked at offshore locations and hence do not have connects with top management at offshore.

The case of service providers which are headquartered in the US or Europe but have large offshore/India presence is queer though. The dynamics there plays out similarly but here the onshore client facing teams almost always call the shots as they are with the client and the company leadership is also based out of their home location.

Other major point of contention is that face/voice time with clients is mostly with and guarded by the onshore teams. Hence the clients are mostly seeing and hearing the onshore staff who then come back and relay the client’s expectations to their offshore colleagues.  The offshore colleagues most often feel that the client could be handled differently but are not left too many choices. Geographic advantage is always with the onshore staff and the client is often oblivious to the underlying dynamics where there are really two organizations at play.

4. Cost Reduction : In both cases, the offshore based teams are tasked with managing cost and reducing it year-on-year. This comes often at the cost of bloated estimates for earlier years of the contract in a multi-year contract, staff reduction causing service quality issues or some truly innovative work in service improvements or development efforts as the case may be. This really is where clients look at fixed price contract to drive such cost efficiency. Knowing this and engaging with the service provider can help enterprises reap benefits of not just reduced cost but better service quality.

5. Recurring Issues: Ask any offshore based manager and they will tell you that they are spending at least 40% of their time firefighting and responding to escalations,  causes of which are 95% of the times the same. There is so much of thematic recurrence but surprisingly these just don’t stop. And the reason : there is not much done in any of these companies to address recurring issues. Of course when there are big fiascoes with huge penalties paid ( like a Unix admin bought  the SAP environment of a F500 client down when testing some script!!!) there is a lot of work done to how this does not happen again but over time the next big issue takes over and the rules/processes made are no longer enforced and checked to maintain compliance. Also due to staff movement laterally, upwardly or externally there is constant churn of people at all levels and so the new set of people would have not lived the big fiasco to understand the gravity of the changes that were brought on. And so life continues as there are so many clients and so much work that eventually many people get thick skinned to some of these.

6. Service Differentiators : Structurally most offshore service organizations were built around the labor arbitrage which scuttled any focus on innovation and differentiators. Money was cheap and opportunities in bundles. Now as service providers seek competitive differentiators in execution they find that this has not been part of their DNA and the going is challenging from having the right people to think on these to having the teams embrace such changes. There are some very serious attempts in the space of automation and improvement in operating models but the hangover of a labor arbitrage regime continues to slow the progress.

7. Delivery Models : Really looking at what would be the best delivery model in terms of quality of service if the cost and long term strategy is not compromised or better still is baked into it. Most companies can play between onshore (more expensive) to a multitude of offshore based locations. Even within India there are several centers to decide from. Aside of locations, the model of delivery — largely dedicated vs largely shared is a key element that all service providers work through. These may not always be clearly mentioned as both sides may make assumptions but this is one big element which affects service pricing, quality, sustenance and really overall alignment of service teams to client’s business.

 

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