The Honeymoon Years

Hatch compares the offshore cycle thus far to the dotcom boom and subsequent bust. In the early part of the decade, "people started screaming offshore. We saw CIOs being forced into offshore outsourcing relationships because of their boards, or executives selecting vendors solely based on their hourly rates," says Hatch. "Ninety-nine percent of them had no real business plan."

"A lot of these initiatives were driven by costs, essentially replacing expensive labour with cheap labour," agrees John Schmidt, president of the Integration Consortium, whose experience with offshore outsourcing dates back to the 1980s when he worked in the Consulting Services division at Digital Equipment Corporation. "But the problem is making [offshore outsourcing] sustainable. The business mind-set is: What can I do in January to save money this year?"

Although many IT leaders understood the effort required in the first year or two to launch an offshore outsourcing relationship, many were not prepared for the long-term effort it takes to sustain the value proposition. "People thought that outsourcing was a panacea to cure all ills," says Testa of Mindbridge. "But we found that while it solves some problems, it causes others."

When Joe Drouin was promoted to CIO of car parts manufacturer TRW Automotive at the end of 2002, he inherited his predecessor's offshore outsourcing relationship with Indian vendor Satyam. The arrangement had originally been sought three years earlier by the company's then-new CEO. For a while, the deal had worked well, Drouin says, but by the time Drouin came aboard it was beginning to show some signs of wear and tear. Some projects were still successful; others weren't. The relationship was managed project by project, using a very formulaic approach for gathering user requirements. "It took a lot of effort to get it right," says Drouin, "and it didn't always happen." The result: missed deadlines, blown budgets and rework. And the developers Satyam assigned to TRW's projects were a mixed bag. "Some were good and some were not," recalls Drouin. "And we'd lose the really good ones whenever a project would finish. So every time we had a new project, we had to start all over with someone who had to learn the TRW environment."

Drouin renegotiated the contract with Satyam to provide a dedicated offshore development centre that would engage vendor staff in long-term commitments to address the turnover issue and remove some of the risk of managing the work project by project. "We started building up a good base of TRW-specific and automotive domain knowledge," says Drouin. "We didn't have to reintroduce ourselves or start from scratch each time." And for the first year after reorganizing the relationship, the offshore outsourcing worked swimmingly.

But it wasn't to last.

Romance Fades

In the beginning of any offshore relationship, both customer and vendor expend a Herculean amount of effort to get the relationship up and running smoothly. "The new customer signs on. There's lots of fanfare and press. All the vendor employees want the gig, and the vendor puts his aces on your team," Hatch says. "They build out new facilities. They buy new software and hardware. The vendor comes in and spends a significant amount of time and money to close the deal."

On the customer side, CIOs and their staffs spend time and money evaluating vendors and putting a new management structure in place to support the offshore environment. A manager is assigned to oversee the relationship, often making repeated trips overseas to oversee vendor performance. "Travelling to India or China or the Philippines every quarter to manage operations or vendor relationships works OK for the first year or 18 months," says Chris Gentle, director of research for Deloitte and Touche. "But when you're doing it for two or three years, it takes a lot out of people."

Several years out, weariness and complacency often sets in, what Gentle calls "offshore fatigue". Mindbridge's Testa recalls that in his shop, problems would start to come up that couldn't be solved with IM or e-mail, and one of his managers would have to jump on a plane to India the next day. "It's definitely fatiguing, physically and psychologically," he says.

The key, says Gentle, is to make sure you rotate new people into the offshore relationship manager position every couple of years to prevent burnout. Satyam's offshore operation for TRW has grown to 150 employees, and Drouin says it's about time he had a TRW Automotive employee on-site in Chennai, India, to oversee the vendor's work. "There's only so much you can do on each visit. They focus on a couple of specific things each time they're out there," says Drouin. "Once you get to this scale, you need someone on the ground day in and day out making sure you get the most from your investment."

Travel is not the only thing that can sap those managing an offshore relationship. TRW hit its ROI sweet spot with Satyam about a year after Drouin set up the offshore centre. Productivity hit an all-time high, with the offshore centre delivering consistently on-time, on-budget, and on-spec projects and support. "But it took us so much effort to get to that level," Drouin says. "Then we kind of backed off, assuming things would run smoothly."

Complacency can set in on the vendor side as well. A Vinod, vice president of IT for a $US1.8 billion manufacturing company that Vinod would prefer not to identify, says that over the years, he's seen dwindling vendor executive involvement in his four-year relationship with Sierra Atlantic, a California-based company with offshore development centres in India. "Early on, when our account was growing, their executives made frequent visits to help cultivate the relationship. There were constant calls and status reports," Vinod recalls. "But over time, executive visibility has shifted quite a bit. Deliverables were never missed. But the visits diminished in frequency and face time with them was reduced."

Vinod continues to push for more involvement from Sierra's executives and advises others in a similar situation to do the same. "You have to demand that," he says. In the event that executives are not responsive, Vinod (who has a small four-person dedicated centre at Sierra in Hyderabad, India, but also pays Sierra Atlantic for additional projects and support as needed) puts his money where his mouth is. "I tell my vendor, if you want to know how the relationship is going from my end, just look at quarter over quarter billing," he says. "If you're making less money on us, you've got something to worry about. Come over and talk to us."

Long after an offshore relationship has ramped up, quarterly meetings between senior-level management at both customer and vendor are a must, Hatch agrees. And if vendor executives aren't asking how they can improve performance, there's a problem. "It's a huge red flag if the vendor isn't coming to you periodically with suggestions on how to optimize the engagement," he says.