A CISR-CIO Study

Part 2 of a three-part series about outsourcing strategies and success models, defined in original research by MIT's Centre for Information Systems Research and CIO (US).

Working with offshore partners requires CIO oversight and strong capabilities on both sides.

Reader ROI

• Why co-sourcing alliances fail 37 percent of the time
• The three must-dos for a successful co-sourcing alliance
• Why offshoring relationships take a long time to develop

The first time Farrell Delman outsourced application development to an IT services company in India, the relationship was far from the mutually beneficial partnership he had hoped for.

As president and CIO of the Tobacco Merchants Association (TMA), an information aggregator and distributor for the tobacco industry, Delman needed an outsourcer to develop a content management system to handle the organization's ever-growing library of electronic information. So in 2000, he signed a contract with a large IT services provider in India that said it could complete the project for just $US256,000, instead of the $US1.65 million it would cost TMA to do the work in-house.

Unfortunately, the outsourcer had little experience with content management systems, Delman says, and developers spent much of their time learning on the job on TMA's dime. The outsourcer had underestimated the amount of work it would take to develop the application and, therefore, had underbid, he says. "A lot of what they considered their 'design' of the application amounted to attempting to fit round pegs into square holes in order to save time and money," recalls Delman. The size of the vendor was also an issue. It had several big customers, but TMA wasn't one of them. Despite frequent trips to India, Delman felt ignored. What attention was paid to TMA was focused solely on coding, he says. "The people assigned to the project were very skilled in IT, but they didn't spend a lot of time getting to know our business model," says Delman. And given that TMA's business depended on this content management system, that was a problem.

Ultimately, the project came in on budget. But that was the only bit of good news to be had. The project took seven months longer than expected to complete. The content management system was not aligned with the business needs of TMA and lacked the flexibility Delman was seeking, he says. And ongoing maintenance for the application proved difficult and expensive.

Delman's experience is not unique. He was attempting to pull off what Jeanne Ross, principal research scientist at MIT's Centre for Information Systems Research (CISR), calls a "co-sourcing alliance", in which client and vendor jointly manage projects - usually application development or maintenance work that goes offshore. Unlike outsourcing deals in which a CIO hands off a discrete piece of commoditized or repeatable work to a vendor - what Ross terms a transaction relationship - co-sourcing alliances rely on a symbiotic relationship between client and vendor. (To learn how CIOs should approach transaction relationships, see "Simple and Successful Outsourcing" in the November issue of CIO.)

Co-sourcing works out for the client 63 percent of the time, according to a recent study by CISR and CIO (US). Transaction relationships, by comparison, have a 90 percent success rate. (A third type of outsourcing identified in the CISR-CIO study, strategic partnerships, works out half the time but goes sour in the other half of cases.)

The mistake that CIOs such as Delman make with co-sourced projects is failing to set them up as partnerships in the truest sense of the word. Co-sourcing, which draws on both the vendor's specialized technical knowledge and the client's deep business knowledge, succeeds only when both parties have strong capabilities and the relationship is set up so that those capabilities can mesh for the greater good.

Co-sourcing that is treated like anything but a team sport is bound to fail, says Ross. Delman says his vendor did not bring the right technical skills and brushed aside the client's knowledge of the business. The project was a bust.

Despite less than stellar success rates, CIO interest in co-sourcing alliances remains high. And why not? Done right, you can gain access to a vendor's highly trained technologists and project managers when you need them, while actually saving money and retaining a level of management control. The trick lies in setting yourself up for success. CIOs who want to make co-sourcing work must first ensure that both they and the vendor have the right capabilities, then set expectations and governance processes for a mutually beneficial alliance, and finally revisit those expectations and management rules to sustain value throughout the relationship. It may not be easy, says Ross, but "it's totally achievable".