Outsourcing Made Right – Think Big, but Buy Small by Ivar Jacobson

Let’s be realistic.  In a column like this I can only give you a hint of what you as a buyer need to do.  However, it is amazing how many outsourcing agreements would benefit from this basic advice.  But note that basic means that there may be exceptions.

1.       Split the work into smaller, separately defined pieces that potentially can be given to different vendors.

2.       Separate work that is exploratory in nature from work that is mere production.  Production can be calculated at a fixed price, whereas exploratory work can’t reasonably be calculated in advance.  For instance don’t ask for a fixed price until you know the key requirements (say 60-80% of all requirements), and until you know how you want it to be built (you must have an architecture that is implementable). 

3.       It is beyond human ability to specify all requirements for software upfront.  Don’t accept a contractual model where all requirements have to be specified and agreed upon early.  Even worse is to agree on requirements upfront and then pay an unspecified amount for each change.  This is nothing less than horse dealer contracts. 

4.       Outsourcing software development without an architecture is like asking someone to build a house without an architecture.  You would never do that. However, for software, drawings are not enough.  You need to make sure that the architecture can be realized.  All important risks (performance, etc.) must have been eliminated.  That requires you need some executable code – usually 5-10% of the final code must be in place before someone can calculate a fixed price.

5.       As for a house, you need to inspect at certain points to make sure that the work is on track.  Inspection in our case must include executable code to be meaningful.

Now, this is not easy to do.  Still, this is just the basics.  For large outsourcing projects such as building an enterprise wide SOA system, the required competencies are much higher. 

6.       You need to be able to split the work among several subcontractors.  Thus, you need to set a building standard.  Otherwise different vendors will deliver non-compatible software.  It is not enough to specify what platform to use, but you need to specify how to make drawings (UML for example), what design practices to use (use cases for example), when inspection needs to happen and more.

The general advice is to split the work in smaller manageable pieces with fast deliveries.  Think big, but buy small!  Western companies outsourced big M$ projects to India.  Japanese companies are not giving up control that easily.  Their outsourcing contracts to China are in the order of $100k.  Many western companies are now taking back (insourcing) their software to maintain and develop it at home.  The new strategy is to insource the business critical applications, but outsource less critical software.  Reflecting on this, it seems we are going back to where we were before the outsourcing frenzy started.

Again, if you don’t have this competence or you cannot get it, don’t even bother to outsource your software development.  And, competency is not enough.  You need to be smart!

Outsourcing made right is very hard by Ivar Jacobson

Outsourcing is not new, we have done outsourcing for decades.  The only thing that is new is that we are now buying software from companies located in different parts of the world.  These companies have different business culture and their employees speak other languages. 

Let’s not make any mistake: outsourcing done well is very hard.  It is much harder to be successful with outsourcing than to develop the software ourselves.   So why do we then do it?  Because we don’t have the needed competencies or resources ourselves or because we believe we will get the job done for much less money. Unfortunately, many companies discover far too late that they have made themselves fools and don’t get what they had hoped to get.  Since they have given up their own resources they have no easy way forward. And of course they cannot admit it. There is a new trend arising.  Outsourcing companies take back its software development.  We have got insourcing.

However, some companies are successful with outsourcing.  Thus outsourcing will continue to be important, but it won’t be the silver bullet it has been for the past couple of years.  There is no magic. 

Actually outsourcing software is quite similar to building your own home with subcontractors.  The most obvious thing to do is to create a competitive environment.  You want to have alternatives and not be stuck with one vendor – a vendor that may want to give you a low price for the first order and then lock you in for the future.  Competition as we all know is not just about money, but also about quality (in a wide sense) and schedule.  In summary what you want is good software, quickly and at low cost.

In my next column/blog I will give concrete advices on how to succeed with outsourcing.  Until then a few words about project managers.

You will need a strong and competent project manager to succeed with outsourcing.  This person needs a very solid and modern background from the entire lifecycle of software development including maintenance.  If you don’t have such a project manager, don’t even bother to outsource complete software products.  Many vendors will happily tell you that you don’t need to worry, since they have it.  That is a dream scenario for those vendors.   If you don’t have that strong project manager you need to get someone from outside.  Hire someone from a company that won’t be involved in the bidding and that won’t get a kick-back from any of the candidate vendors.  That someone should also understand the basics in negotiations.  You can be sure that the bigger software vendors have experts in negotiations, and, they will know when they are dealing with pigeons.

 The only way to succeed in outsourcing is that you will have to be smart.  Very smart!

Outsourcing made wrong – a real case by Ivar Jacobson

A few days ago I wrote about how outsourcing goes wrong.  Now I will explain more in detail a real case.

A couple of weeks ago I was in the US and visited a state government.  They had outsourced the development of their new Enterprise Software to a US based international software house here called Smarty for the nice sum of several hundred million dollars.

  1.  Smarty would develop the enterprise software in three years, then install it, and maintain it for 18 months.  Smarty is responsible for process, architecture, language, tools, and whatever they do will be taken over by the State.
  2. Fixed price from the beginning, but changes after signed off specification would be extra.
  3. Smarty would deliver a specification during the project and agree with the State on this before moving on.
  4. Deliveries were phase based: requirement specification, higher level design, lower level design, code and unit test.
  5.  All difficult tests (integration test, performance test, stress test, system test) would be done by the State.

This is a dream contract for Smarty.  It just cannot go wrong.  The State is locked in early to a fixed price. 

The State has agreed to review and subsequently sign off the requirements once they are thrown over the wall from Smarty.  This sounds OK, but it is horribly wrong.  It is beyond human ability to sign off the requirements for a single product even, yet alone totally impossible for an enterprise system.  No one knows the detailed requirements or can fully understand just papers.  The business people, the users and all other stakeholders have some more or less clear ideas of what they want to get done, but we all know that their detailed requirements always change as soon as they get something to use.  Moreover, one of the most important requirements for the client is to get a system that can be maintained and extended for as long as the business will stay…and that must be thought of as forever.  However, Smarty is protected.

To deliver a specification to be signed off, to deliver drawings, and code is the simple part of the project, since you just deliver paper-ware.  You really don’t need to be delayed in delivering paper-ware, you just write a little less <grin>.  And, being a bit ironic, the good thing from Smarty’s point of view is that paper-ware cannot be validated or tested, so nothing can go wrong.  Thus everything will go very well until integration test and acceptance test.  However, in our case this was moved to the State.  Here hell will break loose.

First, of course, it will be very hard to get the software to work as specified and this is where projects are delayed.  However, most important, it will be extremely hard if not impossible to validate that the software does what the business and its users want it to do. With this approach, the State won’t know what s/he will get until after the whole huge project is at its expected end.  However, Smarty is protected: “we did what we said we would do”.  Moreover, the requirements on maintainability and extensibility will not be tested, because they can’t be tested.  The State won’t know until the software is taken over and it needs to be improved, but then Smarty is long since gone.

The case I have just described is not unique.  Many companies which have moved into outsourcing feel cheated.  They have trusted that the vendor knows how to make its customers successful, and the vendor believes they can achieve that. Once the deal is underway, there is not much more to do.  The client has restructured the company to have hundreds or more people working for her/him in the way the vendor has specified.  The client has made a bad deal and doesn’t want to make this public.  And, since everyone is doing the same thing, the client is in good company and can say:  We just need to make it better next time.

However, this would never have had to happen if the deal had been structured smart.

Outsourcing made wrong by Ivar Jacobson

Outsourcing is hot!  Every major corporation around the globe is outsourcing all or part of their software development.  Examples come from all industries: banking, insurance, utilities and government.  They outsource to the large software houses in for instance India or in the US and UK which of course have offshore development in India. And unfortunately the result is lots of unsuccessful projects.  However, the failures are often never talked about because the vendor has got a fantastic contract and the customer won’t speak up about poor contracts that they reviewed and approved.  This is wonderful business for the software houses.  This reminds me of the saying: “My grandfather was a horse trader, my father was a used car salesman, I am myself in the software business.”

Why do these types of projects fail? There are many reasons, but they can all be summarized by saying that they were not smart.  The buyer doesn’t know what he is buying and the vendor doesn’t know how to make it work.  If you were as cautious when buying an enterprise system as you were when buying your own house, you would be much better off.  Would you buy a house from someone by just saying “give me what I need”, and then pay them a fixed price?  No, of course not, but this or similar is what many outsourcing deals are about.  After the agreement the buyer just waits to see what he will get say three years down the road. On that path he will have to sign off on requirements that look good and complete, but which due to the ever-changing nature of software requirements are only correct to say 60%.  Following that path you will get drawings that you don’t know if they ever can be built.  At the end of that path you will have to take over the software without knowing for sure that it works for the people who are supposed to live with it.  This is what people do.  The vendors are protected because you agreed originally to sign off after each phase and you did so because you believed it would work.  It doesn’t work for software.  For enterprise systems it is a proven path to failure. 

The vendor wants happy customers, but s/he just don’t know how to do these kinds of huge projects successfully.  Or maybe the deal on the table is irresistible, and since, most often the vendor is more competent than the buyer and they won’t put themselves in a position to lose anything.

What I say here is controversial. However, someone has to say it.  Now, it should also be noted that there are companies that are very successful in outsourcing.  Their approach to outsourcing is very different based on an understanding on the nature of software, on the importance of starting small but scaling up as quickly as possible (but not quicker <grin>).  I will in another column talk about succeeding with outsourcing.  Some of the things I will talk about are:

  1.  Quickly build an architectural roadmap.
  2.  Separate work that can be given a fixed price from work that cannot reasonable be calculated upfront.
  3.  Split the big contract into many smaller contracts.
  4.  Make room for competition by specifying standards and tools.
  5. Deliver early, get feedback early.

Simply you will have to be very smart.