New Model in IT Offshoring
October 19, 2009 by Raj Sheelvant
IT Offshoring continues to grow despite global downturn, but the delivery model is changing according to McKinsey Article titled “How innovators are changing IT offshoring”. The article notes that the widely adopted model for delivering offshore services – staff augmentation, is ceding ground to the more robust managed-services model.
In ’staff augmentation model’ the clients pay for each staff member a supplier adds to complete an IT contract. Clients seek the lowest cost per head, which encourages stiff price competition among suppliers, but gives the vendor limited incentive or accountability for the outcomes and quality, as no specific requirements or deliverables are specified in the contract. But, under the managed-services model, suppliers agree to deliver a specified capability or functionality with a desired level of service for a given price. This model requires a higher level of trust, as clients cede more control to suppliers.
McKinsey Survey (Shown above) displays that client organizations that rely primarily on the managed-service rather than staff augmentation model reap great advantages: the best and most efficient work, the highest satisfaction levels, and the lowest attrition rates among their suppliers’ employees.
I think the IT offshoring model is finally maturing. Staff Augmentation Model is based on old F.W. Taylor observation of manufacturing efficiency. This old manufacturing efficiency model that initially led to manufacturing outsourcing is based on linear productivity improvement. For example: If it takes one person working full time build 10 widgets. Then 4 full time workers are needed to build 40 widgets. Initial manufacturing outsourcings based on these simplistic calculations generally were successful. If you need 40 widgets from your outsourcing partner, use staff augmentation model and ask them to hire 4 outsourced worker. But same thinking cannot be applied to IT or any other Knowledge based work. Can you say if one programmer can produce 10000 lines of code per day, then four programmers produce 40K lines of code? Even if the number of lines grows linearly, can you conclude that 40K lines of code is 4 times valuable than 10K code? (in my opinion lines of code is a wrong metric to valuate productivity but its still a very popular metric). This legacy manufacturing based management thinking has led to failed IT projects and subpar offshoring results again and again. Evolution into Managed service model is a better way of offshoring and measuring success.
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