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Tips for managing offshore vendors

The global outsourcing scene has changed, and CIOs need to rewrite the rules when it comes to choosing and managing vendors.

John Meersman is director of technology for National Frozen Foods Corp. in Seattle, one of the country's top producers...

of private label frozen corn, peas, carrots and green beans.

Founded 93 years ago and still family-owned, the company has deep roots in the Pacific Northwest, processing 300 million pounds of vegetables a year at its three highly automated plants in Washington and Oregon. But these days Meersman has China on the brain. People are looking for less expensive food. With Chinese labor as cheap as 60 cents per hour, his company is quietly exploring offshoring some of its manufacturing operations.

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Outsourcing: Where to start

"My question is, 'When will the pendulum swing?'" Meersman said. "Is there going to be an uprising, where laborers demand more money as they become more educated?" According to global offshoring expert Atul Vashistha, salaries in Asia are rising about 12% to 15% per year. "Does that mean, they will catch up with the U.S. in five to 10 years? Absolutely not," Vashistha said.

For offshore executives, though, the view is a different one. Program managers are starting to earn U.S.-like salaries, and six-figure packages for the CEOs of offshore companies are not unusual. "But the moment you start dropping below that level, the gap is very high," said Vashistha, noting that Asian engineers earn between $6,000 and $10,000 per year. "The real question is, can you afford to serve your customer base without going overseas?"

The exchange was part of a lively discussion on vendor management and outsourcing at July's CIO Decisions conference in Pebble Beach, Calif. Led by Vashistha and Janet Parkhurst, an attorney at Millbank, Tweed, Hadley and McCloy LLC, and moderated by retail consultant Cathy Hotka, the discussion included a panel of conference attendees offering "war stories" and advice for successful vendor management.

Frank Enfanto, vice president of health care services systems delivery at Blue Cross Blue Shield (BCBS) of Massachusetts, said the key for his company has been to treat vendor relationships as strategic partnerships. "A lot of companies say they want a partnership, but they don't act like it's a partnership. They say, 'You're the vendor and you do what I say,'" Enfanto said. Vendors are fully integrated into the BCBS, he said, not just in execution and implementation but in the planning stage. Outsourcing is all about relationships, Vashistha agreed. One reason it has proved difficult is that IT people are typically promoted on the basis of their project management smarts, not their people skills. "One of things you need to start thinking about is acquiring the skill set to manage those relationships," he said.

Les Johnson, CIO of North Coast Electric, a wholesale provider of electrical goods and services, said it's important to try to find vendors whose work styles match that of the company. Moderator Hotka asked the panel how much respect midmarket companies can expect to get from vendors, given they are competing against the "500-pound canaries." "Do you ever feel you're at a disadvantage because you're not a $50 billion company?"

"I was at a $50 billion company and I still didn't think we always got respect," said Kathy Brittain White, a former CIO at $65 billion Cardinal Health Inc. "There are vendors that are not very respectful, period; they just have products that you need," she said. White recently founded Rural Sourcing Inc., an "insourcing" company that offers high-tech expertise in low-cost, rural locations. She suggested that, when they can, midmarket companies look for vendors that have something to gain by having their business.

One point that came up repeatedly was that vendors hold the cards when it comes to writing contracts. Attorney Parkhurst suggested companies ask their peer companies, consultants and in-house legal counsel to recommend experienced lawyers for help. BCBS' Enfanto said his company uses in-house counsel, but also turns to outside lawyers who have just negotiated with a particular vendor for extra help. Said Vashistha: "In any outsourcing deal, the key thing to remember is that vendors do this every day. This is their business. You should have the same skill set on your side."

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