How to Measure Success and Sustain Value

Certainly, a successful co-sourcing project is one that comes in on time and on budget and works well. But evaluating a co-sourcing relationship goes deeper than that.

For State Street's Cristoforo, project milestones are just the tip of the iceberg; a bigger issue is whether his co-sourcing arrangement can be sustained over the long haul. If specific issues arise during a project - say, problems with coding or processes - that's a signal to Cristoforo that a deeper problem could be lying underneath. "It really doesn't matter if you're making deliverables if you don't have sustainability," he says. For Cristoforo, success in this kind of partnership can be measured only over a long period of time: "We've been working with Zhejiang close to five years. We've been with them as they've grown from 15 people supporting us to 300 people. They've proven they can handle all kinds of work, from high fidelity to low fidelity. We have many different development communities at State Street, and Zhejiang is now integrated with most of them." These are all mounting signs of success for Cristoforo.

Back at TMA, Delman compares his co-sourcing alliance with Cordiant to another solid relationship he has. "I view it as a marriage. When something's really wrong, it's obvious. But when things are going well, you don't usually notice it. Sure, some days it's my birthday. And some days my daughter brings home a C to us. But normally things are pretty much like they were the day before," Delman says. "It's the same way with my co-sourcing relationship. Sometimes I'm delightfully surprised. Sometimes I'm a little annoyed because I don't understand why some things take so long when others happen faster. But there's a certain rhythm to the relationship that I'm used to that tells me things are moving along."

Sidebar: The Sweet Spot of Outsourcing

by Jeanne Ross and Cynthia Beath

IT executives entering into IT and business-process outsourcing arrangements seek a variety of benefits, including cost reductions, variable capacity and reduced management time spent on IT. But outsourcing succeeds only if the vendor, as well as the client, achieves expected benefits. Often client and vendor interests are not aligned. How can clients and vendors settle into a "sweet spot" where their interests coincide? New MIT CISR-CIO (US) research has examined 90 outsourcing deals in 84 companies to help executives recognize opportunities for long-term benefits from outsourcing relationships.

The research found that the outsourcing sweet spot depends on the nature of the client-vendor relationship. There are three types of outsourcing relationships:

1. a transaction relationship in which an outsourcer executes a well-defined, repeatable process for a client;

2. a co-sourcing alliance in which client and vendor share management responsibility for project success; and

3. a strategic partnership in which an outsourcer takes on responsibilities for a bundle of client operational services.

The first article ("Simple and Successful Outsourcing", November CIO in this three-part series explored transaction relationships. This article focuses on co-sourcing alliances, describing how responsibilities are shared between the client and vendor, the value that each party seeks and the inherent tensions in the arrangement.

How to Maximize Value from Co-Sourcing Alliances

In a co-sourcing alliance, clients and vendors share management responsibilities, usually for application project initiatives. They draw on both the vendor's specialized technical skills and the client's deep business knowledge.

Client interest in co-sourcing arises from the desire to access lower-cost but higher-quality technology and project management expertise while maintaining control over the project. Vendors seek to develop industry and application knowledge as they deliver expertise at a cost that often mixes local and offshore labour rates. When the client and vendor both have strong capabilities, they create a mutually beneficial arrangement.

The contribution of the outsourcer in a co-sourcing alliance is difficult to isolate from the contribution of the client's employees. For example, Dow Chemical, which deploys project teams with, on average, four vendor employees for every internal team member, has a set of metrics to assess team productivity on factors such as function points. But ultimately, Dow CIO David Kepler notes, the measure of success for the outsourcing arrangement is the project outcome. He considers his alliance a success because alliance teams consistently deliver high functionality on time and on budget. Kepler does not know - or care - whether outcomes would be different if the vendor were not involved. He has an affordable variable staffing model that works.

Co-sourcing alliances present risks to both clients and vendors. For clients, generating value requires relying on vendor expertise, but too much reliance can result in insufficient internal knowledge to apply new technologies effectively. Vendor risk results from the need to teach project methodology to the client. Vendors run the risk of working themselves out of a job as they strengthen their clients' skills.

Understand the Three Types of Outsourcing Deals

Companies can become competent in all three types of relationships. It is important to match specific outsourcing needs with the appropriate type of relationship.

Clients managing transaction relationships as strategic partnerships incur expensive and unnecessary overhead. Co-sourcing that is treated like anything but a team environment is sure to suboptimize outcomes. And clients and vendors in strategic partnerships who refuse to regularly renegotiate will become embroiled in bitter contract battles. In all outsourcing relationships, both client and vendor should target the sweet spot to maximize benefits.

Jeanne Ross is principal research scientist at the Massachusetts Institute of Technology's Centre for Information Systems Research. Cynthia Beath is a professor emerita in the Department of Management Science and Information Systems at the University of Texas at Austin

Sidebar: The Softer Side of Co-Sourcing

Offshoring requires an awareness of cultural differences

Successful co-sourcing is all about client and vendor meeting each other halfway. And that goes beyond the exchange of technical skills and business knowledge. Communication and cultural awareness are also important, say CIOs.

State Street, which co-sources application development with UniverseSoft Technology in China, holds cultural and language classes for its Boston-based employees. "They learn things like how to address their Chinese counterparts, pronounce their names, et cetera," says Jerry Cristoforo, CTO and executive VP of enterprise information and global markets technology services. "The problems that you usually think about with outsourcing - coding, policies, processes - are just the tip of the iceberg. The hidden parts are the values and the culture of the people involved. You have to be sensitive to that if [an outsourcing] program is to be successful."

Michael Agnew, managing director of Omgeo, visits his co-sourcing partner in Mumbai twice a year and never arrives empty-handed. "I bring gifts to my partners. Even though I'm the customer, I take them out to dinner, which is not usually the way things work with clients and vendors," he says. "They know we're happy customers and, knowing they're appreciated, they're inspired to perform. You have to treat your partner the way you would want to be treated."