In an article I published sometime ago titled The Optimum Sourcing Model, I discussed the common variations that companies use when looking to establish the right outsourcing model for their organization. I wanted to expand on this a bit further as a result of recent conversations with two different large global financial services companies.
Here I go with some obvious statements so please be patient. Outsourcing is still hard. Outsourcing still represents many challenges and moving parts that are typically not accounted for from the onset of an engagement. Even more difficult is the captive model that some companies use. While it is designed to provide more ownership and control, in some cases it ends up being treated in a similar fashion to a standard outsourcing relationship and in turn removes the “competitive advantage” it was meant to deliver.
One model that has been around for some time and is often overlooked is the Offshore Development Center or as it is affectionately called; ODC. This model is generally used for developing, testing, and deploying software offshore with the benefit of having a core, dedicated team and infrastructure. The idea of a core team means that there is the benefit of maintaining an external outsourcing relationship but having an internal or captive-like attachment to the team since they are designed as an extension of your organization. In other words, the best ODC setups look more like employees vs. vendors.
Let’s talk about the ODC in more detail. The ODC model is designed to be more cost-effective than simply outsourcing a project. The team is managed by a local Project Leader following the customer’s expectations and instructions. An ODC commercial structure means that the customer pays a fixed fee monthly with an agreement to deliver either one large project or a set of projects. This also means that an ODC has an annual review cycle to adjust rates if needed, conduct performance evaluations, assess total quality and align the investment with the company’s overall budgeting process, as would be done with any entity within the business.
The customer’s advantage with an ODC model is that they can truly operate this team as a natural extension of their own and gain more visibility and control over costs. It also means that establishing a process and discussion for extracting more value is now possible. Due to the nature of how an ODC works and the commitment of the core team, there is typically more flexibility in how the team works, how it introduces new methodologies and approaches and how it can be setup to take on a stronger focus on business value vs. just working software.
ODC characteristics include:
- A dedicated core team
- A dedicated area or facility that houses your corporate brand and culture
- A dedicated infrastructure (hardware, software aligned with your business)
- A dedicated security policy that meets your requirements and regulations
- A dedicated education and training program
- A dedicated HR program
- Team flexibility to scale up or down as needed without increasing costs or subverting the budget
Keep in mind that some may liken this to a BOT (Build, Operate, Transfer) model and while some ODC setups do transition to this, it is not necessary and can be quite expensive. The BOT approach is, in effect, a form of an ODC (apologies for all these acronyms) but the distinction of actual ownership is important. The comparison is similar to leasing vs. buying a car. Both may require similar cash outlay upfront but the lease offers the advantage of change more frequently with less cost instead of the buying option which puts you in a more restrictive contract with the added joys of depreciation.
The table below represents a high-level contrast between a traditional outsourcing arrangement and an ODC arrangement. The table reflects how the customer-supplier relationship is affected and what are common scenarios. You will likely have others to add if you currently outsource at any scale but these are perhaps the most common contrasts when discussing an ODC.
What else can a customer expect from an ODC?
- The supplier can offer an improved commercial model because visibility and commitment are improved
- The supplier’s total cost of operating is reduced in an ODC and the customer can/should benefit from this savings
- The supplier is more engaged and interested in understanding output and outcomes so more value is derived that maps to the customer’s goals
- Significant improvements in retention rates thus lowering the traditional challenges or attrition
- The ODC core team principle means that over time learning curves are shorter and time to market is faster
- The time spent in developing BIDs and RFI/RFPs is shortened or completely nullified, thus more time spent on delivering value
- Flexibility in staffing allows rapid adjustments and keeps the work moving
- Team learning and cultural integration changes focus, improves overall quality
- Supplier can better prepare for work; resource and capacity planning improved, demand better understood
- Knowledge transfer is better managed and executed, retained and used across the team and customer organization
Working principles for an ODC need to be designed and diligently followed. These include three important areas:
ODC Steering Committee
- Represented through an agreed governance and escalation model that involves senior management from both sides as final decision making authorities
- Quarterly reviews to monitor ongoing work, make adjustments and ensure that the cultural mindset is being adopted and maintained
- Annual review for joint strategic business and technology planning
- Clearly defined roles and rules of engagement to ensure consistent and frequent communication and collaboration from each side
- Face time between key roles in each location (planned, quarterly visits each way are critical to the success of these relationships) – out of sight, out of mind is a recipe for failure
- Well defined communication processes to exchange important and needed information with stakeholders, i.e., weekly reports, corporate social media platform and so on.
- Defined measures and metrics that communicate value for the business not just software metrics; dashboard tracking approach is common
- Common language definitions that are specific for this relationship, i.e. what do we mean when we say done? what does great look like for the relationship, for the project, for the business?
- Defined processes for how knowledge is transfered/managed, how IP is handled
In an economy where most are cost conscious but still see outsourcing as a critical and necessary part of their strategy, forming an ODC might prove to be an effective way of introducing more agility into the outsourcing relationship and in turn deliver greater long term value. Any organization that is outsourcing needs to understand the models that are possible and available and not be sold strictly on the one they are presented with by a supplier. The best suppliers (not necessarily the biggest only) will openly embrace an ODC model since it also helps them build the longevity in the relationship they seek.