Outsourcing is any task, operation, job or process that could be performed by employees within your company, but is instead contracted to a third party for a significant period of time. Hiring a temporary employee while your secretary is on maternity leave is not outsourcing. In addition, the functions that are performed by the third party are usually performed off-site, but many contracts stipulate that some work is done on-site.
Armenia vs. India
First, I wanted to address the large white elephant in the room. On a recent business trip to Armenia, I was told several times by several different people that Armenian’s were better and smarter then Indian programmers. It was usually followed by “it’s true”, with the dismayed look on my face. I tried to explain to them that according to NASSCOM, the IT–BPO sector in India aggregated revenues of US$100 billion in 2012. The ENTIRE Armenian economy for 2012 was just $18.95 billion.
So the message should be that Armenian Outsourcing firms are highly skilled and have a strong management system. There are so many poorly skilled and managed IT firms in India, you never know what you are going to get. It is difficult to properly evaluate many firms in India because they present a full staff of highly skilled people, but in reality these “staff” are just a pool of sub-contracting freelancers selling their skills to the highest bidder. But that does NOT mean that all firm are like this. I have met some of the most brilliant programmers in the world in India. But most of these firms are already contracted out to firms like Bank of America and actually charge much more than Armenian firms would.
So in my opinion, you have a much better chance of being successful doing your outsourcing in Armenia because it is offering Quality, not Quantity. My personal advice is that if your project is of significant size, fly to Armenia and meet with the firms - it will make a huge difference.
There are many reasons why a company may choose to outsource a particular function of their business. Most managers have the end-result-in-mind that they are going to save time and/or money. Other reasons include:
Resource Shortages Relieved by Outsourcing
A particularly strong reason to outsource involves a shortage of a critical resource. This can be available employees that possess knowledge in a certain area (e.g. engineers), availability of material (e.g. petroleum or minerals) and a labor force at a level and price that will offset the cost of higher prices alternatives.
Outsourcing Provides the Ability to Concentrate On the Core Business
Some necessary, but peripheral operations are outsourced most frequently. This gives the managers the ability to concentrate on the core business issues instead of getting distracted by required, yet minor matters. A good example is a major hospital in our area that outsources its security operations to a third party company specializing in security.
Outsourcing Yields Cost Savings
The prices of labor and/or materials keep increasing and competition keeps forcing prices lower. If there is an outsourcing solution that can save your company money and overcomes the disadvantages of outsourcing, these areas should be investigated.
Outsourcing Provides Flexibility
Seasonal or cyclical demands that ebb-and-flow put varying demands on the resources of the company. An outsourcing contract could provide the flexibility needed to stabilize these varying demands. Example: A business brings in extra accountants during tax season and when being audited by the holding company that owns the business.
Reduce Overhead Costs Through Outsourcing
Some functions require a large outlay of money just to get started. This expenditure could be avoided by contracting with a third party. For example, expanding your call center’s capacity to the point where it exceeds the capabilities of your telephone system.
Creating the Outsourcing Contract
Nearly all IT consulting and outsourcing companies will work under a contract, usually for a specific length of time, or until a specific project is completed (if you’re using the firm for temporary work). The contract is an agreement to perform services for a specific costs - the service level agreement, or SLA, outlines the specific details. The contract itself should include:
Cost and Scope of Work
The contract should specify in plain terms exactly what it is you’re purchasing, and how much you will pay. Don’t get too specific in the actual contract. For example, a provision that support be available every Monday is more suited for a service level agreement. For most services that are ongoing, you’ll pay a monthly rate for a defined period of time.
Work Monitoring/ Governance
Many IT professionals and IT management consulting firms actually advise using governance software - a tool that allows you to evaluate work as it is completed. The service contract should contain provisions that specify what happens if service level requirements are not met, and how requirements will be monitored. Keep in mind that no contract is a substitute for good communication - the best way to make sure you’re getting the services you contract for is regular, clear communication with your IT provider.
The disengagement plan is the “worst case” scenario - what happens if you can no longer work together and need to terminate the contract. This is a very important element of the contract itself, especially in an IT context, where a company has access to your infrastructure and information. Make sure ownership rights, transfers, and other issues are addressed. If your contract is especially large in scope or involves complex ownership and licensing issues (SaaS, web hosting, etc.) it may be a good idea to have an attorney review the document.
Service Level Agreements and Other Concerns
SLA’s specify everything that the contract doesn’t - the “nuts and bolts” of the transaction. Depending on the services you contract for, the service level requirements should be fairly specific, and include concrete information whenever possible (helpdesk available XX hours daily, etc.)
Outsourcing Success Tips for Armenia
Outsource for the Right Reasons
Taking a bad business process and outsourcing it only makes the problem worse. Without a doubt, an outsourcing vendor should add value to your business, but should not be relied upon to fix the problems inherent in your business. For example, if your IT department consistently misses deadlines because users keep changing their minds, outsourcing this function will result in higher costs and higher levels of frustration.
Thorough Vendor Selection Process
Myself and most executives believe that they wished they would have “spent more time on vendor selection and vendor evaluation” before signing an outsourcing contract. The outsourcing decision can be distorted by emotions and manipulated by company politics. A successful vendor selection process will remove the emotions and control the company politics.
Make It Measurable
One of the areas that I have learned most is that I should have defined realistic service levels that align with business goals. If you don’t analyze and define quality measurements and/or service levels, how will you know if your outsourcing vendor is performing to your standards?
After the newness of the outsourcing relationship wears off, it is human nature to sit back and enjoy the ride for awhile. Unfortunately, this leads to complacency and attention to performance can be forgotten. In order to avoid these symptoms, set a timetable to review your outsourcing vendor’s performance. Also, appoint a manager or executive that will be held responsible for the follow up. If needed, send your staff to be trained in vendor management skills and techniques (check with local colleges or universities). This strategy will also yield the ability to deal with unforeseen circumstances on a timelier basis and mitigate the risk associated with outsourcing.
Outsourcing will solve all your problems.
The first outsourcing myth is the biggest. If you have problems in your business, outsourcing does not magically make them go away. For example, I know an IT business that was considering outsourcing customer service because their employees were not able to keep up with the call volume to India. Instead of hiring additional employees they were considering outsourcing. Upon analyzing the call logs, it was discovered that a majority of calls pertained to the software interface for the product (it was confusing and poorly designed). The problem was a poorly designed interface that was causing a large amount of support calls. Outsourcing would not have solved that problem. It would just move the problem from one place to another and maybe made it even worse.
Outsourcing companies will do it better than you can.
There is a perception that any company that performs outsourcing will do it better than you because they specialize in it. True, they are motivated to deliver quick service. But, after the contract is signed (i.e. their price is fixed for the next 2 to 5 years) their motivation is to reduce costs in order to maximize profits. It is possible that the extra money you spend on that back-office service is what gives you the edge over your competitors.
Outsourcing will save you BIG money.
The other perception is that any outsourcing company can also do it much cheaper than you. A majority of this depends upon how well your company negotiated the contract. If the contract contains limitations or maximum levels, penalties may start to be assessed. Suddenly, that “fixed price” contract turns into an outrageous financial obligation of the company.
May the Force be with you…
Outsourcing is a difficult and critical decision. I hope these ideas and tips will help you. In the end, all you can do is be organized, plan well and stay connected - and you will succeed. Other then that, as the say in Star Wars…May the Force be with you.
This post is also available in: Armenian