Hanu whitepaper

Managing the Risks
When Outsourcing Offshore
An Industry Whitepaper
By Anil Singh, Founder & CEO
Hanu Software

Managing the Risks
When Outsourcing Offshore
I. Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

II. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

III. The Most Common Risks Encountered When Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Risk One: Misunderstanding the Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Risk Two: Quality Assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Risk Three: Intellectual Property Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Risk Four: Diﬀering Internal Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Risk Five: Communication Barriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

III. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Disclaimer: All effort has been made to ensure that the information in this white paper is accurate
and reliable at the time of publication. Reference herein to any specific firm or corporation by trade
name or manufacturer, or otherwise, does not constitute or imply endorsement, recommendation or
favoring by Hanu software.

Copyright © 2006 by Hanu Software Solutions, Inc. All rights reserved.

Managing the Risks When Outsourcing Offshore . www.hanusoftware.com . page

I. ExECuTIvE SuMMaRy
In recent years, increasing numbers of businesses have chosen to outsource their
development overseas, for either smaller, defined projects or through a long-term
outsourcing partnership model. The main reasons cited for outsourcing include
a desire to increase company productivity and efficiency, while simultaneously
lowering operating costs in an increasingly competitive economy.
But with outsourcing, whether overseas or locally, comes risks. Five major risks of
outsourcing have been identified in recent years:
» Communication/cultural barriers
» Misunderstanding of requirements
» Quality assurance
» Concerns about intellectual property security
» Differences in company infrastructure and processes
In this white paper, we will discuss each risk in turn, as well as methods of
mitigating the risks when outsourcing overseas.

II. InTROduCTIOn
Offshore outsourcing has grown exponentially in recent years. Gartner, Inc., a
technology services research firm, estimates that global outsourcing will become a
$50 billion industry by the end of 2007. This growth in the sourcing out of either
individual projects, or the development of an extensive partnership relationship
Why do companies
between a domestic firm and one overseas, has been fueled in large part by the
outsource?
significant cost savings (between 20% and 50%) that are enjoyed by firms that
1. To free up of choose to outsource.
company But cost savings are only one reason that companies outsource overseas, and in
resources to recent years has become less important than other benefits. The number one
concentrate on benefit cited in a recent study1 by Diamond Cluster, an IT research firm, was the
core tasks freeing up of internal company resources. By outsourcing, a company was able to
2. Access to quality use their on-site staff more effectively on core business processes. The second most
important factor was the ability to access technological skills of a high quality that
technological
were unavailable or in insufficient supply in-house, with cost running third.
talent
You may have considered outsourcing for any of these reasons. But you may not
3. Reduction in
be able to enjoy these benefits if problems occur in the outsourcing relationship –
operating costs
and they can, if risks are not identified.
4. Reduced time- Basically, risks during outsourced project development are related to three factors:
to-market People, Processes and Policies.
By identifying where these risks can occur, and taking steps early to mitigate
them, your firm can enjoy an outsourcing relationship that is of high value to
all parties involved. In the next section, we will describe what these risks are,
and specific steps you can take to address them.


III. ThE MOST COMMOn RISkS EnCOunTEREd
WhEn OuTSOuRCIng
If you have concerns about outsourcing, you have plenty of company. When the
management of several hundred companies in the U.S. were surveyed recently1,
they noted that their primary concerns included:
» Communication difficulties (consistently ranked as the #1 concern)
» Quality of the development provided
» Lack of physical proximity to the development teams
» Concerns about the protection of intellectual property

Many times, managing the risks involves managing the expectations on both
sides, to paint a realistic picture of what the outsourcing relationship will look
like. From the deliverables that are expected, to the methods used to create source
code, you need to know that the firm you are outsourcing to understands clearly
your expectations. This is why risk number one is critical: poor communication
of project requirements is deadly to any project.

Risk One: Misunderstanding the Requirements
You may have heard managers at other firms complain about the “poor quality
code” that they received when outsourcing overseas, or statements that the
developers “didn’t get it”. But in most cases, firms that are outsourced fail to
meet expectations not because of inferior ability, but because they misunderstood
the project requirements.
The number one risk when outsourcing overseas is poorly defined project
requirements. Your company project manager may be tempted to pull together
a “quick project overview” or ask that an overseas development team develop a
project “on the fly”, especially if the deadline for completion is tight. But
skimping on documenting the project requirements is a recipe for potential
problems further down the line – and numerous, often costly, change controls.
A development team is often only as good as the project requirements they are
given and with good reason. There are many, many different ways to approach
developing an application, for many different purposes. Any may be valid, but if
you leave this up to chance, the developers may choose a path that you didn’t
want, causing the project to go “back to the drawing board”.
There’s a line between creating a massive, overly detailed project specification that
takes months to complete, versus a one-page, completely inadequate “project
concept”. But in general, the more clearly defined your project specifications are
from the beginning, the better the vendor project managers will be able to under-
stand what you want done, how you want it done, and be able to implement it.
How important is this stage? A study conducted by the Software Engineering
Institute discovered that poorly defined or unclear project requirements are the
number one reason why software development projects fail, or are delayed.


Reducing the Risk
Never force a software vendor to “guess” at what you want built. While engineers
are often talented individuals, they are not mind readers, and as mentioned
before, there are many different paths to building a product, but not all may be
acceptable to you. To avoid disappointment, clearly define your requirements.
To reduce the risk related to misunderstanding of the project requirements, it
is important to approach the requirements development phase of a project as the
most critical to complete, prior to starting development. After development
begins is too late, since that “wrong path” may be taken. When you are
#1 one reason that considering a firm to outsource to, evaluate what processes they have in place
outsourced software for gathering project requirements, and for translating these requirements into
system specifications that the developers can use.
projects fail: unclear
requirements The better vendors will make this as easy as possible on you (or your company’s
designated contact). They will have a project manager, fluent in English, who will
1. Spending extra
spend time in interviews learning about your requirements, and documenting
time on the
this for the overseas development team. They will know what questions to ask,
requirements and based on their experience, can capture project details and requirements
gathering phase relatively quickly. It will often take several discussion, either on-site (for larger
always pays oﬀ projects) or by phone/teleconference. But it is well worth the time spent.
2. Both companies The vendor project manager will be collecting information to be used during
should have the three steps in creating project requirements:
designated
company contacts 1) Gathering the Initial User Requirements: prior to creating the system use
throughout the cases, the vendor project manager will spend time interviewing potential users
about the desired features and functionality for the system being built. This
project, for
includes learning about the business requirements for the completed system, and
communication
gathering from your firm the high-level system requirements and user interfaces
3. Provide vendors the system will include.
with speciﬁcs
Many times, the vendor engineers will use these initial requirements to create an
about the users, initial “mock-up”, that will be built upon later, to ensure that the requirements
load, business are accurately understood.
requirements and
technologies During this initial phase, the vendor project manager will document the system
involved requirements and specifications, including any significant project milestones and
parameters for performance. It is vital that the vendor captures and documents
information about the number of users the software is to support, how quickly
operations are to be performed, and how users will actually be using the software.

2) Analyzing the System Requirements: This involves determining the
acceptability, ability to implement, and testability of the proposed system.

3) Inspecting Requirements: This involves a comprehensive review of the
proposed requirements, with the goal of identifying any issues or errors related
to ambiguities or discrepancies discovered in the requirements. Part of this


documentation will include a plan for issues tracking, and how issues that occur
during project development will be handled.

While the above stages require some time and effort, their importance to a
successful outcome when outsourcing cannot be over-emphasized. A strong
initial analysis will significantly reduce unexpected project costs. Once this phase
is completed, you will have a detailed requirements document, which you and
the outsourcing firm will jointly review and sign off on. This becomes the
guideline for development, and will provide clearly defined parameters for project
development. At Hanu software, we consider this phase of primary importance,
and a project manager dedicated to your project will work closely with you to
capture all project requirements.

Risk TWO: Quality assurance
Even the best development teams create code that has “bugs”, which is why
quality assurance, whether development is completed onshore or offshore, is
important. A major risk when outsourcing to an unknown vendor is whether
they have adequate quality assurance/testing processes in place. Waiting for
Quality assurance product release to find out what bugs are present is not the best scenario, and
is Critical taking time to check on the QA processes a vendor uses can reduce this risk. The
1. Check that the main reasons that quality assurance is not done, or is done inadequately, are:
vendor has its » The company outsourced to does not have its own QA/testing team, and
own QA/testing assumed that the client would complete this in-house.
team » The project had a very tight deadline, and so QA testing was done rapidly,
or set aside to give development a priority.
2. Carefully evaluate
the vendor’s » The vendor did not understand fully the system requirements, and so testing
QA processes, did not cover them.
including tracking
and documenta- Reducing the Risk
tion One of the first things you will want to evaluate in a possible software vendor
is what quality assurance processes they have in place. The better vendors have
3. Are their their own quality assurance team in place that works in conjunction with the
standards developers to implement a test plan for your software.
compatible with
your company’s? Things to check include:
» Is there a system for tracking issues/bugs or system changes in place?
4. Test carefully
prior to beta » What processes are in place for fixing bugs?
release, no matter » What standards for monitoring and quality compliance are in place?
how “rushed” » Do the developers use industry-standard unit tests and regression tests to test
a project is each build?
» Is the software being tested for load, performance, integration and the real
world end-user experience? (This last is key).


It is important that test cases, created based upon the carefully documented
system requirements mentioned in the previous section, are developed for any
software system developed. This can mean the difference between a “great beta”
version, or one that is bug-filled.

Once development is completed, the quality assurance team will step in, checking
that all functionality, scalability and security issues have been addressed based
upon the initial test plan developed from the system requirements gathered. The
test plan covers all system regression, load and volume testing, and conduct user
acceptance testing, with specific performance criteria for each.

Another way to improve the quality of the completed deliverable is to conduct
inspections of the work products. Inspections are detailed technical peer reviews
of software designs or implementations. It has been estimated that each hour
spent on quality assurance activities, such as design reviews, can save a firm from
three to ten hours in downstream costs. You should ask your offshore vendor to
conduct inspections at each stage of the development or the maintenance process.

By conducting regular peer review inspections, the vendor will be able to detect
and correct defects rapidly in upstream work products. This allows them to better
control the costs and prevent schedule delays during the project. For instance, a
requirement defect that is left undetected until construction or maintenance will
cost fifty to 200 times as much to fix as it would have cost to fix when the system
requirements were originally being developed.

Risk ThRee: Intellectual Property Protection
Your intellectual property is one of your company’s greatest assets, and when
outsourcing, it is critical to take steps to protect it. Stories abound of unethical
companies that have stolen technologies or data, and marketed them, but in most
cases, these problems could have been avoided with careful vendor evaluation,
and implementing measures to protect your company’s intellectual property.
This starts with only providing any vendor with only the minimum proprietary
technology or data needed to complete the project, and carefully evaluating the
confidentiality measures the vendor you have selected has in place.

Be sure to evaluate these policies carefully for both your firm, and the vendor firm.
For instance, you’ll want to make sure that your own employees understand what
corporate information is acceptable to share – and what is not – with an outside
vendor. This includes the internal rules for authorizing access to company data.

Make sure that the vendor you are outsourcing to has in place clear, enforceable
policies for protecting the data you share with them. At the minimum, this
includes signing a nondisclosure agreement, a non-compete agreement, and a
nonsolicitation agreement, as well as policies that prevent the vendor from creating
unauthorized copies of your software or technology. While this may seem straight-
forward, it can become a bit more complex at times, such as when an outsourced


firm uses their proprietary technology, or an Open Source technology, to develop
a new product that will be used by your new application. In this situation, it is
important to predefine what source code belongs to the vendor, and what belongs
to you, the client, and to clarify any licensing issues.

Protect your IP Always insist on clear documentation of all source code created during your
project for your software. This becomes your company’s property, and is legally
1. Check that the protected.
vendor has a
documented, You will want to check with any vendors being considered to see what processes
enforceable they have inplace to protect your confidential data, such as customer and
employee information, financial data, or proprietary market research data. If a
Information
vendor does not have a documented Information Security Management (ISM)
Security Manage-
policy in place, you should search elsewhere for a vendor that does.
ment policy in
place The better vendors, such as Hanu Software, will offer to provide development
on a dedicated project and data server, with audit control access for each of the
2. Share only neces- project servers. Some things to check on include:
sary information
» How physically secure is the vendor’s facility? Is it secured with smart cards to
during projects
control physical access?
3. Clarify licensing » Have all members of the development team signed a confidentiality agreement
and source code with your firm?
ownership
By finding answers to the above, and implementing them, you will take large
steps towards protecting your firm’s intellectual property.

Risk fOuR: diﬀering Internal Processes
Each vendor will have somewhat unique processes and methodologies that they
follow when developing a project. It is important to evaluate how this differs
from your in-house processes, and how the two differing approaches can best be
“meshed” together during a development project.
It is best if a development project is guided by a well-defined, common software
development and project management methodology. The best vendors follow
industry standards, such as CMMI and ISO 9001 QMS (as Hanu Software does).
This common methodology should cover libraries, tools used, version control and
quality assurance processes, as well as security metrics for each project.

Once the process is agreed upon and established, it is equally important that
monitoring is in place, to ensure that these processes are being properly followed.
Clients should have each project milestone clearly defined, including what
deliverables are planned during each phase, with specific deadlines for the
completion of each. The client should also have a clear understanding of what
their obligations are in regards to reviewing and approving each delivered
product, including the requirements documentation, the system design, test
cases, and any test issues that arise.


In general, the more involved your company is with the project, the more
smoothly the project will go. This is why it is important to have a designated
contact within your firm, whose role is to communicate with the vendor project
Painless Merging of manager and/or development teams. This person, as well as key stakeholders
Methodologies in the project, should be available to review progress reports, review finished
deliverables, and be available for telephone conference. If the vendor has
1. Agree upon a questions related to your firm’s products and applications, which require answers
consistent in order to continue development, your designated company contact is
methodology responsible for arranging for the proper technical resources to provide answers.
based upon
industry “best Your company’s project manager or designated contact will need to review the
practices” that status of any deliverables as well as any testing done, and be available to
communicate frequently with the vendor project manager. Most project
your ﬁrm and the
problems occur to infrequent or poor communication between the firm
vendor will follow
outsourcing, and the vendor. But the “no news is good news” approach is rarely
prior to starting
true; in fact, the opposite will often occur. One of the easiest ways to reduce
the project this risk, and to catch problems early on, is to initiate frequent communication,
2. Monitor compli- with regular times specified for project reviews.
ance with the Differences in development methodology can occur, if one firm prefers an
agreed-upon RUP approach with exacting specifications, while another firm prefers agile
standard methodologies. One firm may have a preferred tool in place for source code
3. Set up speciﬁc control, or for coding standards, or for testing builds.
times to clarify These issues can often be worked out by communicating the reason for each
and answer approach, and then choosing a consistent methodology. Most frequently, you
questions, will ask the offshore team to adopt your in-house methodologies, but you may
especially at the be surprised to discover that they have methodologies or tools that equal yours,
outset of any especially if they have significant experience in a technology. This is where
project or out- teamwork, and communication between the project and development team
sourcing managers is critical.
relationship Related to methodologies are evaluating how the firm being outsourced to
handles sudden requests for large volumes or rapid delivery. Check on how
flexible and scalable your vendor is, and whether they have processes in place
for hiring additional staff as required for larger projects. This includes having
sufficient project management staff in place to ensure adequate monitoring and
communication with your firm. Ask them: “What is the smallest project you
have worked on? The largest project?” to help determine whether they can scale
to meet your needs. You will also want to check references for projects that are
similar to yours.

Risk fiVe: Communication Barriers
Almost every significant study of outsourcing risks in the past decade has brought
up the issue of communication, and the risks associated. Communication when
outsourcing can be a concern because of:


» English fluency: Not all overseas vendors have staff who are native speakers of
English.
» Time zone differences: When its 11:00 am in New York City, it’s 7 pm in India.
This can make it difficult to communicate with overseas vendors, due to time
zone differences, unless they have a project manager onshore. Of course, this
can also become an advantage: while your company sleeps, an overseas developer
can be creating code for your project, enabling “around the clock” coding when
coordinated with in-house staff.
» Cultural differences: In the United States, we tend to be an “ethnocentric”
culture, believing that our management and work styles are adopted around
the world. In reality, overseas vendors may operate in a very different cultural
context, which can lead to misunderstandings.

Reducing the Risk
When selecting a vendor for outsourcing, it is important to evaluate whether the
vendor has in place sufficient onshore staff to facilitate project and relationship
management. This includes English fluency, and a strong company commitment
to bridge cultural differences.
The better overseas vendors provide services through a best shore methodology,
or one that combines a local presence with access to overseas talent. This offers the
best of both worlds: clear communication locally from an individual dedicated to
understanding your requirements and the ability to discuss these with the “back
and forth” that is only possible through face-to-face communication, with the cost
savings possible through using offshore talent.
This model is the best for overcoming many of the problems often associated with
outsourcing. This domestic office provides a local point of contact for more rapid
communication of and resolution of issues that might arise, and demonstrates a
higher level of commitment to a personalized relationship when working with
clients.
Communication with an overseas development team by phone or teleconference
is much easier nowadays, with technologies such as VoIP or online conferencing,
that allow you to call overseas at no or minimal cost. Again, your company’s
designated contacts will want to hold regular review sessions with not only the
company project managers, but key members of the development team. This can
help establish common ground, and improved understanding of what you hope
to accomplish through project development. It also provides the developers with
an opportunity to ask question and clarify important points.
The minutes of any teleconference meeting should be recorded, and distributed to
all team members after the meeting.
The vendor you select to outsource to should have an established communication
plan as part of each project. This will include the following:


» Regular (minimum, bi-weekly) staff meetings with key project managers and
project stakeholders.

» A weekly project status report (by phone, supplemented by email documentation
of the project status). This report should clearly identify any issues or roadblocks
encountered, as well as the measures taken. Any questions or points that require
clarification by the development team should also be raised in the report.

» Ad hoc communications by email, chat or phone with your company’s
designated contact for the project, to ask questions, clarify points, or to notify
the contact of any important milestones or issues that have developed.

Open, frequent communication to discover and discuss the risks related to the
project and jointly come up with a plan for addressing and constantly monitoring
these risks is something that goes a long towards establishing a long-term successful
outsourcing partnership.

III. SuMMaRy
Offshore outsourcing provides numerous benefits to firms that choose this
option, from improved productivity, to reduced costs. But any outsourcing
relationship will have some risks. The major risks identified are related to people,
process and communication, as defined within this paper.

The best approach is to acknowledge the risks, and to communicate openly about
them in order to create a plan to mitigate potential risks. With careful planning,
and evaluation of vendors, you can enjoy an outsourcing experience that is
superior, maximizing the benefits and return for your company.

Reference

1. Weakland, Tom, “2005 Global IT Outsourcing Study,” © 2005 DiamondCluster
International, Inc.


about hanu Software
Leveraging best in class people, processes, and technologies, Hanu provides
high-quality, high-value software development and business process outsourcing
services to independent software vendors (ISVs) and enterprises.

Founded in 2002, Hanu is dedicated to developing effective outsourcing
partnerships with clients in order to accelerate time to market, reduce operational
cost and empowering them to devote more time to their core business.

headquarters Onshore Technology Center
5 Independence Way, Suite 300
Princeton, NJ 08540
P: (800) 520-1816
F: (609) 945-2390

Oﬀshore solution Delivery Center (OsDC)
657,Udyog Vihar, Phase V.
Gurgaon 122016
P: 91.124.4139102
VoIP: 1.732.658.5205

For more information, please visit www.hanuSoftware.com.


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