Success factors in outsourcing to other countries
What are the main risks and how to succeed with outsourcing to other countries? Offshoring expert, professor Darja Šmite, provides her best advice based on her research.
As the availability of local talents are limited, many Norwegian companies are engaging IT-specialists or team up with IT-providers in other countries to continue to innovate and deliver new products. Many companies have managed to establish working collaborations with offshore or nearshore partners, but there are also many challenges. In this article, professor Darja Šmite summarizes some of the success factors based on her research.
Based on experience from more than ten years of research into offshoring collaborations, professor Darja Šmite’s demonstrates that offshoring of complex software development is an especially challenging endeavor and many companies do not achieve the expected benefits of cheaper and faster development. Offshoring challenges are primarly caused by temporal, geographical and cultural distances.
In reaction, many companies turned to “nearshoring”, i.e. chosing relatively close locations with overlapping time zones, similar culture and even language, and often close economic, political, and historical linkages.
In response to the question of how to succeed, Šmite lists 45 different factors accumulated over the years. These are related to the customer company itself and their readiness to offshore, the selected vendor and the mutual relationship with the customer, maturity and motivational potential, the task in question and it’s complexity, and various aspects of the vendor integration. Many of these aspects are said to significantly endanger or alleviate the offshoring experiences. Yet, Šmite states that one factor sticks out as the number one success factor helping overcome even the most challenging circumstances. It’s the vendors ability to keep talents and develop their competence.
Find a vendor who is able to employ and keep talented engineers: Šmite emphasizes that to succeed with offshoring, companies shall not only look at the ability to employ engineers at a lower cost, but find a vendor who offers talented engineers with technical and domain competence and experience, who can work fast, climb the learning curve, and teach others. The latters is important in case of changes in the team. The next prerequisite for success, according to the expert, is the vendors ability to retain talents. Her research shows that high turnover of the employees can be compared to a hole in one’s pocket – companies continuously have to invest in retraining and mentoring new hires and suffer from gaps in productivity. Therefore, the expert suggests to search for vendors with low employee turnover. To check the turnover, her advice is to ask the vendors about their annual attrition, i.e. the amount of people leaving the company, as well as internal staff mobility, i.e. the amount of people who is transferred to other roles (including promotions) and between projects. Customer involvement in the hiring process may help proactively screening out ‘job hoppers’.
The customer can also address employee turnover by ensuring career potential, learning and growth opportunities, sourcing work that both provides intellectual challenge but avoids intellectual frustrations (high thresholds for becoming a valuable contributor), and foster a sense of belonging and relatedness by treating the offshoring counterparts as allies and partners rather than contractors or resources.
A good fit is important: The shift from the initial “win-lose” power relationships to “win-win” long-term alliances and partnerships is an step in maturation and evolution of offshoring practices. Therefore, the focus on a good fit with the vendor is obviously of great importance. In her research, Šmite found factors beneficial for cooperation to include cultural fit and process fit. Cooperation is also said to benefit from prior familiarity and experience of working together. Further Šmite’s research sheds light on a less known factor – size. She studied four disproportional collaborations between Scandinavian SMEs that chose to work with large well-established vendors. Having no prior experience with offshoring, companies relied on the reputable service providers to help them overcome the widely discussed challenges. Yet, all four contracts were terminated. Šmite explains that the small customers were never prioritized by the large vendors, and were sometimes even used as a platform to train engineers for larger vendors. Therefore, when choosing a partner, the customer should not search for the best service provider on the market, but for the best-suited service provider for them.