6 Essential Factors to

Maximize the Value

of Outsourcing

Software, Hardware and Product Development Outsourcing is a

growing trend each year for companies both large and small and is
showing little evidence of slowing down. Enterprises are very focused
on achieving operational effectiveness when they outsource: cost-
reduction, greater scalability of operations and process
standardization are the key motivations behind IT and development
outsourcing. Though outsourcing is not for everyone, it can be a
great alternative to the expense of in-house development and/or
domestic staff augmentation.

Effective outsourcing can be achieved through many means,

including; ensuring that the service provider is a very good fit, a
thorough scope definition, the understanding of price versus quality,
that clear expectations have been established, and that all risks have
been identified.

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 6 Essential Factors to Maximize the Value of Outsourcing
Outsourcing to Create Value
Software, Hardware and Product Development Outsourcing is a growing trend each year for companies both
large and small which is showing little evidence of slowing down. Enterprises are very focused on achieving
operational effectiveness when they outsource: cost-reduction, greater scalability of operations and process
standardization are the key motivations behind IT and development outsourcing. Though outsourcing is not for
everyone, it can be a great alternative to the expense of in-house development and or, domestic staff
augmentation.

Effective outsourcing can be achieved through many means, including; ensuring that the service provider is a
very good fit, a thorough scope definition, the understanding of price versus quality, that clear expectations
have been established, and that all risks have been identified.

Outsourcing Options
In-house development represents its own unique challenges, and will not serve all companies in all situations,
which is why many companies tend to outsource work which does not fit within their core competencies. The
three points below describe the different types of outsourcing options that are typically available to companies;
onshore, near shore and offshore.

o Onshore
Onshore (otherwise known as domestic or inshore) outsourcing is the practice of using an external
firm, which is located within the contracting company’s country, to fulfill one or more business
services which the contracting company may not be able to accomplish itself.

The main objective of onshore outsourcing is to reduce the cost of permanently hired staff, reduce
the need to additional infrastructure, or to gain skills not possessed within the company, and is used
by companies who want the reduced costs, but are not comfortable sourcing the material outside of
their home country.

o Near Shore
Near shore outsourcing is the practice when a company outsources to an external firm which is not
located within the same country, but a neighboring country i.e. U.S. companies sending work to
Mexico. Gaining all of the same benefits of onshore outsourcing, plus the added possible value of
reduced labor costs, makes working across minimal time zones a small price to pay.

o Offshore
Offshore outsourcing is the practice of a company outsourcing to a firm who is outside their own
country, which is not close to the home country. There are many reasons to outsource offshore
including reduced labor costs and industry specializations. Thirty-six percent of CFOs surveyed said
their firms currently outsourced through offshore1.

The Value of Outsourcing

Outsourcing is done on varying scales from very small companies outsourcing just a task or two for a short
period of time, to major corporations outsourcing entire departments on a regular basis. Outsourcing can be a
good alternative for companies to employ resources which can prove to be too costly to maintain in-house.

1 1
Sourcing Line Economics. (2014). Job Outsourcing Statistics.
 6 Essential Factors to Maximize the Value of Outsourcing
Outsourcing can also help the
company acquire specialized
skills and technology without
having the added expense of
bringing it in-house by finding a
contracting company who
already maintains those skills
and technologies.

Outsourcing can, and is,

conducted across any
department, depending on the
company contracting the
outsourced company. These
companies find fiscal and
intrinsic value in outsourcing. A
recently completed study by HFS
Research shows Application
Development, Accounting and IT Infrastructure to be the highest outsourced departments2. The other typical
departments are listed in the graph to the right.

Outsourcing can allow a company to employ resources too costly to develop in-house. Hiring the same amount
of full time staff in-house costs the company wages, benefits, bonuses, training, management, and the company
must provide the employee with tasks to do once they have completed the task they were hired for.
Additionally, the company must purchase any needed equipment for the employee to complete the tasks.

On the other hand, outsourcing can permit a company to seek specialized skills or equipment at a fraction of the
cost and effort. Other companies’ employees may possess skills not found within the company looking for the
skill, which can make the companies with this skill a very valuable asset. Similarly, other companies may
possess technology that is needed. Because purchasing the equipment requires funding, and training, it can be
valuable to find a company who currently possess the technology and already understands how to use it. This
can expand a firm’s capabilities which can expand the depth of its customer offerings.

Both outsourcing and in-house

development create their own
advantages in different
situations, which is a reason
some companies choose to use
both methods jointly to manage
their needs. This outsourcing and
in-house development method is
referred to as hybrid outsourcing.
The hybrid outsourcing delivery
model combines outsourcing and
in-house development together
cohesively, by leveraging the
strengths of all assets and
minimizing their downsides. The
hybrid model must be carefully

2 2
HfS Research. (2013). 2013 State of Outsourcing.
 6 Essential Factors to Maximize the Value of Outsourcing
managed to ensure both teams have clearly defined tasks and expectations that the other must abide by. This
hybrid model is used either by utilizing the in-house team and the outsourced team for separate projects, or have
the teams work on the same projects. The latter poses more need to close management to ensure the teams are
on the same page of what needs to be completed. Outsourcing can function successfully within the company
with proper diligence and planning.

A study by IBM in 2009 found that through outsourcing, the companies studied reduced SG&S (selling, general
and administrative) costs by 42%, increased operating income growth by 48%, and increase EBT (earnings
before taxes) growth by 64%3. Outsourcing increases its value to the company is not using it simply to save
money, but instead uses it stimulate productivity. Outsourcing promotes productivity when used to engage
contracts with companies whose expertise is outside of your business’s core competencies. Understanding your
company’s strengths and weaknesses will prove critical to understanding where outsourcing can be a valuable
asset to your company. This process of assessment and appraisal can be known as “smartsourcing”.

Companies of all sizes have found value through outsourcing in many different ways. Among the most effective
ways they have found value is through reduction of operating costs, supporting more effective operations at a
global level, standardizing processes, meeting regulatory requirements, gaining access to capable talent, forcing
change through the business operations and transforming processes2.

The Drawbacks of Outsourcing

The advantages of outsourcing degenerate when the company places too high a priority on trying to find the
lowest wages to complete the work possibly at the expense of a quality product, instead of taking a full
consideration of the companies’ rates, experience, education, language capabilities and security procedures. By
over focusing on cost, and making too many concessions to conserve it, an outsourcing business can impair
their ability to make a quality product. It is also important to note that outsourcing cannot be properly utilized in
the event that the requirements of the project are not precisely defined, or the deadlines are unrealistic causing
the outsourced company to rush through the work. These can be remedied through in depth discussions with the
contracted company to ensure that they have everything they need to complete the work properly.

Additionally, if the companies do not put the proper contract in place, issues may arise for one or both
companies involved. Security is a critical issue when outsourcing, so it is important to ensure that the company
being contracted has the correct internal procedures in place to secure the information they are provided, so you
can be confident that the information will not be leaked to competitors or public. It is important to outsource to
a reputable company who is careful with the contracting company’s information. They should be able to put in
place the proper non-disclosure agreements, and enforce these throughout their employees.

Many companies who are leery of outsourcing hold on to the theory that in-house development retains direct
control and supervision over a project and ensures quality results. If this were always the case, though,
outsourcing would be irrelevant. However, in-house development does offer some advantages that cannot be
achieved with outsourcing:
 Direct control: The project teams’ supervisors are in-house, so they have direct control over
development, quality assurance and speed.
 Communication: Because communication is conducted more directly, there is less disruption.
 New competencies and innovation: Not outsourcing the work that the company may not currently be
able to conduct will force them to learn to these items which can reduce their reliance on outsourcing.

3
3
IBM Global Services. (2010). Business impact of outsourcing: a fact-based analysis.
 6 Essential Factors to Maximize the Value of Outsourcing
Some companies chose to
mitigate these drawbacks by
inviting the outsourced (either
onshore, near shore or offshore)
resources to work on-site at the
client’s company, again at a cost
savings and without the need for
a permanent hire.

The cost of hiring individuals

which the company may not be
able to keep busy on a regular
basis, as well as the cost of new
technology and training tend to
add up quickly, and are large
factors in the decision to
outsource; otherwise if cost were
not a factor, many companies
may probably prefer to keep work in-house.

Tips for Effectively Outsourcing

As you can see from the graphs, large numbers of companies are looking to start outsourcing for the first time,
and a larger number are looking to increase their current outsourcing strategies2. This tells us that outsourcing is
not only here to stay but growing each and every year.

“Smartsourcing” is the method of assessing the company’s strengths and weaknesses before making a decision
to develop a project either in-house or outsource it. The following questions are guides to help the company
determine its “smartsourcing” strategy.
 Does the project align with our core competencies?
Is this project core to the business’s current competencies? Or is it a project that solves immediate needs,
but may not determine the course of the company? Tactical projects are great candidates for outsourcing
because they will free the company’s resources to work on core competency projects.
 Is it an isolated project or part of a larger operation?
If the project requires resources that may never be needed again, then there may be little to be gained
from an in-house
investment.
 Do we have the
necessary technology
and skilled resources
for the project?
If the company does not
already have the
technology and
employees who can
complete the tasks, this
means they will need to
purchase and hire. As
previously mentioned,
4 these costs can add up
 6 Essential Factors to Maximize the Value of Outsourcing
and hiring a new employee includes the cost of hire, salary, bonus, training, and finding them tasks once
the project is complete. Having to hire a new employee could also increase the time needed before the
project can even be started since they are not yet identified and trained, while outsourcing provides
resources that can reduce the necessary time needed to begin the project. This makes outsourcing a very
viable option.
 What is the team’s current workload?
Does the in-house team have the available time to take on this new project? If not, outsourcing can allow
for the project to be completed without overworking the current staff, or waiting for their time to free up.
Additionally, if the team has many other projects to be working on, it is important to understand if it is a
good use of their time. Are the other projects they are working on more pertinent to the core
competencies of the company? In the timeframe that the project is needed, is the new project relevant
enough to push back the other projects in the teams queue?

The 6 Essential Factors for Maximizing Outsourcing Value

If it is determined the project should be outsourced, below are 6 essential factors that are required to outsource
effectively. Each of these elements will play a key role in the success of your outsourced project and all of them
need to be taken into serious consideration prior to engaging in any outsourced development project.

1. Interview Prospective Partners

Look at the prospective companies that you are thinking of employing as you would a new employee to
your own company - 'interview' them and learn how their company works and how they can fulfill your
needs. It is ideal to be ready to discuss your project needs at that time so you can determine if their
capabilities match your needs. This discussion should include information about your project scope as
well as, your budget and schedule needs. Ensure the contractor can live up to the expectations you have
for the finished deliverables.

It is important to research the company you are thinking of employing to understand their competencies,
business models, time zone coverage, language and education level of the employees, and the strengths
of the country their resources are in. In addition, ensure that the company possess the exact skills
expertise and experience that your type of project requires and that they are compatible with your
company’s culture and objectives.

2. Clearly Define the Scope of Work

Discussing your project scope with the potential partner will help you understand if they do have the
expertise needed to fulfill your needs. Keep an open mind that your intended ideas may not be the only
way to complete your wanted end result, so listen to options that are available. Even if you have a
requirements document to provide to the contractors, it is still important to discuss your vision, goals
and objectives, as you may not realize that something was left out of the requirements documentation
that could prove to be an important detail.

Being open and honest about the scope even before you hire the company will allow them to provide
you with a more accurate estimate of the charges. Any left out information, or poor descriptions can lead
to inaccurate estimates, which will lead to additional money being requested later down the line when
the left out information is discovered. In the end, it will be most important to have a very clear definition
of the project requirements up front that is as detailed and precise as possible and making sure that both
parties understand and agree upon not only the project specifications, but also upon the comprehensive
definition of the final deliverables.

5
 6 Essential Factors to Maximize the Value of Outsourcing

3. Compare Price vs. Quality

As previously mentioned, companies tend to lose value of their projects when solely price shopping to
find the company which they intend to outsource to. In determining who you should contract, it is
important not to compare solely on price, but rather which contractor can provide the services and
quality you are in need of. It is important to have a proper all-around fit with your contractor, which can
reduce surprises later.

4. Establish Clear Expectations

After hiring your contractor, it is important to establish clear expectations with them. This discussion
should review communication expectations, timing expectations, quality expectations, task ownership
expectations, process expectations, support expectations and payment term expectations.

5. Evaluate All Risks

It is important to clearly understand all of the potential risks which could arise with outsourcing to any
company. Have an open discussion with the companies you are talking to about the concerns you have
and the risks you see with outsourcing the project. They should be able to work with you to answer your
questions and come up with risk mitigation plans.

Some of the top identified risks of outsourcing are: data security, process discipline (not adhering to the
contracting companies needed processes), failure to deliver, scope creep, government regulations,
culture, turnover and knowledge transfer.

6. Establish Clear Communications

The most value with outsourcing can be achieved through open communication of needs, wants and
expectations. Without open communication, a project can fail regardless if the project is outsourced or
completed in-house. Work to keep communications fluid, including regular status calls and reporting of
progress, management of changes in scope or direction and visibility of quality and progress.

Conclusion
Outsourcing has proved to decrease expenses and increase productivity for many companies over the years,
which is probably a major reason that the majority of companies who currently outsource intend to either
maintain or increase their outsourcing efforts in the coming years.

Outsourcing of development work can present many challenges. Adopting these recommended best practices
can help to alleviate the risks and selecting the right partner can provide valuable assistance toward achieving
these best practices. These elements include: providing a clear definition of the scope of work and project
requirements up front; communication between client and provider to ensure understanding and agreement on
the requirements prior to development; ongoing status review meetings and discussion of requirements during
development and highlighting and defining each stage of development in order to assist project management in
monitoring accuracy, progress, quality, and correctness of work. If these outlined objectives are implemented
and followed consistently, outsourcing can prove to be a very valuable asset to your organization assisting in
many areas including cost savings and increases in overall efficiency and productivity.

Contact PSA
About Professional Software Associates, Inc.
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