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Offshore outsourcing has sound place at SMB IT table

Sending IT projects overseas is on the rise among smaller shops, especially through third-party deals.

Offshore IT outsourcing isn't just for big companies anymore. The practice is gaining traction among small and midsized businesses (SMBs), which can realize many of the same long-term benefits as their larger brethren, according to analysts, vendors and chief information officers (CIOs). But there are special concerns to look out for.

"Offshoring has been a big-company phenomenon," said William Martorelli, an analyst at Forrester Research Inc. in Cambridge, Mass., "but there's no question that [now] this is an area of growth for SMBs."

An SMB, like any organization working with an overseas partner, must have strong communication skills. But it has the added challenge of finding a partner that is committed to devoting strong resources to a smaller deal. SMB partners must also be able to scale up as the SMB does.

Alignment of these priorities can help SMBs launch new initiatives quickly and cost effectively, save their own staff for the most critical projects and even deliver on the promises of innovation and job creation in the U.S. (See "SMB offshore outsourcing creating new job.")

In the trenches

Mapics Inc., a $173 million maker of enterprise resource planning and customer relationship management products for manufacturers in Alpharetta, Ga., needed to reduce costs and be responsive to market changes, said CIO Sandy Hofmann. So the company offshored programming work to HCL Technologies Ltd. in India, which sent over project managers to act as the liaison between the two countries. The partnership has delivered the desired results for the 650-employee firm.

"I can have many more programmers without spending more and can get more work done faster at a lower cost," Hofmann said.

Dave Rudzinsky wasn't hunting for offshore workers to help his company with a software implementation project. It just sort of happened that way.

"I didn't have a huge project where I said 'Let's go to India!' I found software I liked, and the company that had it [Fremont, Calif.-based Sierra Atlantic Inc. had a huge offshore arm]," said Rudzinsky, CIO of Hologic Inc., a 750-employee medical imaging company based in Bedford, Mass. "They didn't ask us about offshore outsourcing -- they just did it."

Rudzinsky bought a cost management analytical tool from Sierra Atlantic, as well as a data transfer tool that integrates Agile with Oracle. Developers and consultants from Sierra's offshore arm met with Hologic, handled the development in India and flew back to the U.S. for the final implementation.

"It worked out great," Rudzinsky said.

However, Rudzinsky's previous offshore outsourcing experience with another company is another story.

A major vendor he enlisted for some database work initially had said it would use its own offshore team, but then chose a third-party vendor because it could get an even better rate. But it turned out that the third party didn't have the experience or the skills. Hologic then had a problem.

"It almost compromised our implementation project schedule," Rudzinsky said. "We had to really scramble to recover and would have been over budget, but [their primary vendor] picked up the tab to get us back on track with a team of U.S. consultants thrown at the problems."

The difference between the good deal and the sour deal? Better communication and the right size.

"We don't do business with big companies -- they've got so many resources, how do you know you're getting the best [ones]?" he said. "Smaller firms give us more attention. We're a better opportunity for them."

Scale matters

An executive with one of those big companies -- India's sixth-largest IT services firm -- agreed that a small company going with another small one is often a better match. At bigger firms, smaller projects can be smaller priorities, which means SMBs can receive fewer or less prominent resources.

Tony Viola, vice president of marketing in North America for Mumbai, India-based Patni Computer Systems Ltd., said larger offshore providers, when they can't reach critical mass with an SMB, may end up taking good people off a project without the SMB's knowledge -- if they accept the project at all.

"If there's a screaming need for resources where there is a need for scale, SMBs may get new engineers who aren't steeped in tech and don't know how it's being used," Viola said. "You want to know who's on the project, and make sure they stay on it."

Viola said it's important for SMB CIOs to do their homework and look for companies that are small and hungry enough to accept an SMB as a client and then flexible enough to scale as the SMB's needs change. Patni, for one, only considers working with SMBs that eventually will scale up.

"Bigger guys want to play with bigger guys," concurred Amit Maheshwari, CEO of Watertown, Mass.-based outsourcing firm i-Vantage Inc., which helps companies establish their own offshore subsidiaries. "I can't see a larger outsourcer being really able to go after the bedroom community market -- the overhead is too much."

Failure is an option -- to avoid

Because SMBs find themselves being courted by smaller providers, it's important that they make sure they're not in bed with a fly-by-night operation.

"SMB clients need to do due diligence investigating the financial stability of providers and where they fit into the industry," advised Dane Anderson, an analyst at Meta Group Inc. "It's also essential they do their homework for the relationship as a whole rather than just what's necessary to meet the contract."

And as with any IT project conducted in or out of the company, SMB CIOs can't consider offshoring until there are processes in place by which to execute, test and complete the work.

"When they don't have processes in place, they can't pass them along to the outsourcer," Maheshwari said. "That forces the outsourcer to play a guessing game, and the expectations can differ. Both sides need to know what the expectations are and what the processes would be if the work were done in-house."

Mapics' Hofmann said she has seen projects fail because people did not implement the project controls they needed to and didn't establish milestones so they could measure progress and take corrective action. "It sounds so basic," she said.

When the offshore sirens seduce SMB CIOs with their sweet song of cost savings, the deal could be headed for the rocks.

Meta Group's Anderson said financial pressures and the urge to "do something" can cause senior executives, including CIOs, to rush into an offshoring project. Outsourcers too will try to get the deal done as quickly as possible in order to launch into the work or maximize their chances for potential upscale or extra services.

"Anytime the decision is rushed, there's a better than 50% chance of failure," Anderson said. He encourages CIOs to look at offshore deals as just a component of a broader business plan, which usually assures greater acceptance of the deal, less rush and more focus on making it work, he said.

But the biggest mistake an SMB today can make could be ignoring the offshore alternative altogether.

"We don't see [doing nothing] as an option," Anderson said. "Even in the SMB space, organizations need to formulate a plan of action. They need to take a look at all those options and articulate what's most appropriate for the business as a whole."

"It doesn't even have to be offshore," agreed Mapics' Hofmann. "The idea is to find people who can help you deliver your core competency most effectively."

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