A Third Party Consolidator Approach for Small Project Sourcing

The concept of outsourcing small projects is relatively new.  Following the ignominious collapse of several major outsourcing deals, IT services providers and customers alike have had to revise their approach to the entire outsourcing business.  In the world where outsourcing services are measured in head-count and SLAs, small-project sourcing provides a viable alternative for businesses to take advantage of global sourcing models to reduce their operational and back-office costs. It also changes the dynamics of the supply chain. It provides an opportunity for smaller service providers an opportunity to play in the outsourcing market.

The challenges with small-project sourcing from a SMB perspective are three-fold: 1. Management issues leading to gaps between expectations and delivery.  Businesses are not adept at managing global sourcing for smaller projects. 2. The sheer number of projects with a large pool of smaller outsourcers makes the job of connecting the “right” provider with the projects extremely challenging. 3. Even though the IT projects are small, the procurement logistics are still time-consuming and complex. Having a single consolidator that manages the smaller outsourcers provides an efficient mechanism to implement small project-sourcing.

Good consolidators perform due-diligence on the service provider network, match project needs to providers, and provide a dashboard to review the service levels. The benefits of having a single consolidator include improving the procurement efficiency by providing a set of reliable and pre-credentialed service providers, a one-stop procurement channel, competition between service providers and complete transparency in sourcing. Businesses will benefit by getting Tier-2/Tier-3 pricing together with a single point of control and total visibility on the engagements. While there are challenges, the cost savings can be enormous, in fact substantially higher than traditional IT outsourcing. Just in the U.S., there are over a quarter million companies who have between 100 and 500 employees. A back of the envelope estimate suggests that the savings can be in billions of dollars even if a small percentage of these firms take advantage of project based-outsourcing in their business.

ERP for SMBs

When considering ERP solutions, the key drivers are to spend sufficient time understanding the needs.  In fact, the very first question would be to assess if the business strategies are well established, and equally important, to assess whether the business processes and assumptions that drive the perceived need for a new ERP system are valid.  It is well known that a technology solution cannot fix an ailing business process, in fact, it will only make it worse.  This is important to SMBs considering an upgrade to their ERP system – if the issue is the business process, fix the process before embarking upon a upgrade.  Before embarking on the ERP system upgrade, it is imperative to assess the risks.  Risks are both intrinsic (internal operations, sales, marketing, finance, HR) and extrinsic (how they impact your customers and supply chain).  For SMBs also desiring to upgrade their ERP system, they must assess the existing software and really scrutinize whether the upgrade is going to bring the benefits that are desired. For example, one question to ask is whether a few customizations or enhancements or bolt-ins to the current software satisfy a majority of the requirements.

Assuming that there is a need for an ERP system or an upgrade exists, SMBs need to assess the true life cycle costs, benefits and risks of the upgrade.  It should be pointed out that the life cycle technology costs are but a fraction of the overall costs – the cost of implementing the change across the organization can be daunting.  A healthy bout of skepticism on the true benefits should be entertained.  More than 50% of ERP implementations according to researchers have failed to yield the promised benefits. 

Once the needs and benefits are established, from an IT Governance point of view, the mandate for an ERP system must come from the top and have complete support and cooperation of all key stake-holders.  ERP is not an IT driven, but a business driven project.  Selecting the appropriate vendor is a complex task.  It is best to bring an un-biased consultant to assess the product features against the needs to establish the degree of fit.  Simply attending vendor presentations is not adequate, as vendors attempt to change your business needs to meet their tool features.  

Implementation of ERP, is significantly more complex.  Most recommend an incremental approach as opposed to the big-bang to mitigate risk. Again, the critical aspect is having the business units manage the deployment, with IT just playing the role of a facilitator.

Forgetting small projects?

IT tends to focus on infrastructure and applications that are strategic and mission critical to the enterprise.  Small projects that may be of potential value to business can get lost in the prioritization shuffle. 

There are challenges faced in procuring and managing small projects.  Most Fortune 2000 firms have good governance around procurement, but these processes are ideal for large projects.   The term “small project”s is relative, but for most Fortune 2000 firms, projects under $250,000 can be deemed to be small.  To a large extent, existing procurement practices are quite onerous for a sourcing a small project.  IT management is also challenged and seldom do these projects make it to the CIO’s radar. 

To alleviate these difficulties, it is critical to develop special governance around small project sourcing.  Measures should include developing a short list of providers who are specifically suited for small project sourcing.  Fortunately, the web has led to a whole new generation of providers who have the expertise, the proper methodology in developing and delivering small projects.  Many of them aggregate as a network of providers to give the benefit of one-stop procurement and total visibility into the complete life cycle of the project from sourcing to delivery.

Off-Shoring on the rise for Small to Mid-Sized Enterprises (SMBs)

A survey of more than 200 IT organizations found that among small and midsize organizations that outsource at least part of one IT function, the percentage using offshore service providers rose from 14% in 2008 to 24% this year.  Ref: http://www.computereconomics.com/article.cfm?id=1499

There are many reasons for this:
1. SMBs are seeking to reduce costs.
2. There is a better supply chain of off-shore service providers who cater to SMBs.
3. Traditional offshore providers are doing a better job selling to SMBs.
4. Web-based provider networks are gaining momentum.
5. The recession led to a pent-up demand for IT services.

Web-based brokerage solutions will readily facilitate off-shoring for SMBs. These solutions are built on a solid pre-credentialed Service Provider network to ensure that lower cost is not negated by poor quality.  These web-based solutions benefit both the SMB as well as the Service Provider.  SMBs benefit from low administrative costs and accelerated contracting.  They also benefit from selecting a vendor from a pre-credentialed network.  Service Providers get inexpensive access to the SMB market.

IT Governance for SMBs Desiring to Outsource

IT Governance helps align IT activities to best meet SMB’s business requirements.  Most Governance methodologies start with alignment at the top.  This is a reasonable approach for all organizations where the traditional involvement of board-level executives in IT issues was to defer all key decisions to the company’s IT professionals. IT governance helps facilitate decision making across all stakeholders. This prevents IT from independently making and later being held solely responsible for poor decisions. 

From a IT Governance standpoint, Small to Mid-Sized Businesses (SMBs) differ from the larger firms in two important aspects:  One, they are more nimble and need flexibility, and second, they tend to focus on shorter-term issues.  For SMBs, the guiding principle is to deliver value to the business without injecting onerous controls that stifle productivity.   To achieve it, the IT Governance framework should provide complete transparency on IT activities and make it simple for users to make, monitor and prioritize IT requests.  In order to achieve transparency, SMBs will need to establish controls and processes to deliver quality technology solutions on time and within allocated budgets.  From a management perspective, it is critical to effectively allocate and track resources and costs. 

Outsourcing can actually enable effective IT Governance as it provides a scalable resource base to work in conjunction with internal IT resources.  To make outsourcing successful, the outsourcer’s governance framework must work seamlessly with the SMB’s IT Governance.  Mismatches in the Governance frameworks is one the principal causes of outsourcing failures.  Although mismatches can be best reduced by adopting a common process-centric framework, it is far from easy to implement common processes across two organizations.  A less expensive approach is to identify key risk areas in the process and establish clear mitigation strategies.

Outsourcing 3.0

Outsourcing 3.0 will lead the way for organizations to build and manage technology efficiently.  Traditional outsourcing (Outsourcing 1.0) was initially very successful as outsourcers learned to deliver IT solutions with the appropriate Service Level Agreements (SLAs) using attractive pricing models.  Outsourcing 1.0 was all about negotiating intricate, multi-party agreements which were very time consuming. Following the ignominious collapse of several major outsourcing deals, IT services providers and customers alike have had to revise their approach to the entire outsourcing business.

As organizations desired more niche and project oriented outsourcing, Outsourcing 2.0 came about as a natural step (analogous to Web 2.0).  Outsourcing 2.0 is not about SLAs or multi-party agreements, but collaborative rich mutually benefiting business arrangements, one that often requires taking the initiative (at higher degree), delivering very successful but non-repeatable results.  Smaller engagements were often outsourced through marketplaces such as eLance and Guru.  More sophisticated engagements required skillful brokers who engineered these engagements. The key drawback of Outsourcing 2.0 was the lack of repeatability and metrics.  An evidence of this drawback is the reluctance of Small to Mid-Sized Businesses (SMBs) to outsource their IT functions. 

Outsourcing 3.0 (analogous to Web 3.0) relies on semantic searches to identify niche outsourcers who best fit the objectives of organizations desiring to outsource projects.  It retains the metrics and structured processes of Outsourcing 1.0 combined with the identification of specific outsourcers who can collaborate and provide true value to the outsourcing organization.  The three ingredients required for Outsourcing 3.0 to succeed are: 1) a semantic search engine to link project needs to the appropriate outsourcer; 2) a highly collaborative workflow to ensure that the engagement process provides best value to the parties involved; and; 3) a knowledgeable network of brokers who understand information technology and outsourcing.

The Benefits of Remote Infrastructure Management for SMBs

Frameworks such as ITIL have developed guidelines for strategizing, designing, implementing and managing IT Infrastructure that provides best value to businesses.  While the guidelines were designed for Tier-1 firms, they are also applicable for Small to Mid-Sized Businesses.  Ignoring the Fortune 1000, there are 17000+ companies who have between 500 and 10,000 employees.  Let us call these companies Tier-2 companies.  There are probably 200,000+ companies who have more than 100 employees but less than 500.  Let us call these Tier-3 companies.  A challenge Tier-3 companies, and to some extent the Tier-2 enterprises, face is the lack of economies of scale.  If they do not have a outsourced environment, they require systems administration expertise, network management, helpdesk, maintaining the server farms, and maintaining the user devices (PCs, laptops, PDAs, etc.).   One easy way to gain economies of scale is to outsource, particularly off-shoring to leverage the lower costs. 

According to Stephanie Overby (CIO Magazine: Outsourcing: The Pros and Cons of Offshore Remote Infrastructure Management dated: March 18, 2008), the services that can be off-shored are:

Service                % that can be off-shored

Network Services                80%

Internal Help Desk              75%

Servers                              70%

Maintenance                       60%

Administration                    35%

End-user Devices               15%

While the degree of off-shoring can vary for each enterprise, Stephanie’s insightful article points out the need for a blended model – a combination of on-site expertise backed by Remote Infrastructure Management (RIM) services.  Cost savings are a result of three factors:  1)  labor arbitrage, 2) shared services including SaaS, cloud computing, and, 3) shared expertise.  The best example of labor arbitrage is off-shoring.  Large outsourcers such as IBM, Infosys, and Wipro have provided these cost benefits to Tier-1 companies.  In the past five years, many Tier-2 and Tier-3 outsourcers have provided niche RIM services.   Cloud computing has helped reduce infrastructure costs.  SaaS (Software as a Service) has gained momentum helping companies pay for services actually consumed.  Shared expertise is another strong benefit as outsourcers provide a multitude of expertise that would be very costly to in-source.

Savings can be significant.  Typical savings for e-mail hosting and support can amount to over 100% , over 200% for remote server monitoring, and over 50% for applications monitoring and support. 

In addition to cost savings, RIM offers a much higher level of service.  For example, outsourcers can provide 24-7 support far more economically than in-sourcing.  Another significant benefit of using outsourcers is the ability to provide higher availability of services on demand.  RIM is a proven model for managing IT Infrastructure.  In the past these benefits were limited to Tier-1 firms managing large data centers.  Recently, the growth of highly qualified and credentialed Tier-2 RIM providers makes it easy for Tier-3 enterprises to take advantage of off-shore partners.

Outsourcing Small Projects

One challenge confronting CIOs is tracking and managing small projects.  Most CIOs have a very sound governance process for managing mission critical applications, IT infrastructure projects, and other large strategic IT initiatives.  All of their attention inevitably gets focused on these strategic and mission critical projects.  Small projects that are “quick-wins” for the business can get lost in the prioritization shuffle, and some of these projects may suddenly turn into unanticipated crises. 

The challenge with small projects, from a CIO perspective, is threefold:

• Bandwidth issues – IT is busy putting out fires, focused on big, mission critical and/or strategic applications.
• Even though the projects are small, procurement logistics are still time-consuming and complex.
• Lack of visibility of the status of small projects – they can easily “slip off the radar”.

Procurement also faces challenges since their preferred Tier-1 vendors cannot deliver small projects efficiently, and their needs to be complete transparency in the vendor selection process. 

Having a single consolidator that manages the numerous vendors provides an efficient mechanism to implement small projects. Good consolidators perform due-diligence on the service provider network, match project needs to providers, and provide a dashboard to review the status of the small project portfolio.  The benefits of having a single consolidator include improving the procurement efficiency by providing a set of reliable, credentialed service providers, a one-stop procurement channel, competition between service providers and complete transparency in sourcing.  CIOs benefit by getting Tier-2 pricing together with a single point of control and total visibility on the projects.

Is a CIO or CTO required? Does On-Demand services make sense?

The question may sound almost blasphemous, particularly in light of numerous CIOs and CTOs I know who are all looking for a job – nevertheless it is a topic of great interest.  Just to ensure we all have the same understanding, let us define a CIO to be the “architect” who aligns IT to the business ensuring “best value” for the business.  CTO can be defined as the individual who delivers the IT in the most efficient manner possible.  To address the issue of whether a CIO or CTO is required, let us first classify companies based on size.

Ignoring the Fortune 1000, there are 17000+ companies who have between 500 and 10,000 employees.  Let us call these companies Tier-2 companies.  There are probably 200,000+ companies who have more than 100 employees but less than 500.  Let us call these Tier-3 companies.  There are millions of companies smaller, and for the sake of this discussion, let us ignore them (even though they may have IT needs).

The role of both a CIO and CTO is critical in Tier-2 companies, and I am going to assert that these roles should not report to a CFO, but should report directly to the CEO or COO.  It is possible, and likely, that the CTO reports to the CIO and may not even be called a CTO, but that is less important for this discussion.

Tier-3 companies who tend to emulate a Tier-2, generally have a CIO.  I take the position that in such firms, the role of a CIO is greatly exaggerated.  After all, once the IT vision is articulated, the role becomes more of a lower level delivery manager.  My view is that for such firms, an on-demand CIO service is valuable.  Organizations like Office of the CIO, USourceIT all foster on-demand services.  The advantages of the on-demand service are:

• There are no excessive fixed costs (a small retainer plus on-demand service provides continuity).
• Different skills are brought to the table based on demand – for example, if the focus is applications, then an applications architect may be better suited for the business.
• Experience in different verticals and horizontals can help “reuse” the knowledge base – for example, if a firm needed CPG and manufacturing experience, then a CIO who has worked in such environments can offer rapid solutions to align the IT to the business needs.

The key to success for a CIO on-demand service is to provide a trusted value driven turn-key IT capability to Tier-3 companies that enables them to compete, grow and operate effectively.

Estimating the Cost of a IT Project

There has been extensive research and development in estimation techniques for software development projects, resulting in a number of formal methods and toolsets.  These models suffer from a variety of weaknesses:

• The most objective methods, such as Lines of Code, Function Points and Feature Points have the inherent disadvantage that a great deal of design effort is required to get to a point where the estimate can be made, raising the question of “How much is it going to cost to give me an estimate of how much it is going to cost?”
• In trying to solve this problem by moving the estimate earlier in the project life-cycle, the solution becomes “less known”, and therefore the estimation error rises.  However, the better the estimators understand the business domain, the more reliable the estimate.  If the estimators don’t have a good understanding, the risk is sometimes not in the breadth of the scope, but in the intractability of one or two component – “Nobody told me that this project required curing world hunger!”
• Team productivity can be highly variable.  If the estimators know who will do the work, they can produce better estimates.  But often the estimators have been given that job because they are very good developers, and they then estimate how long it would take them to do it, and not the mere mortals who will be actually be assigned to the project.
• Simple estimator bias: optimistic estimators vs. pessimistic estimators.
• Unstated assumptions, misunderstanding etc.

For the SMB, the relative cost of an IT project can be very significant, and so the necessity to get a good estimate as early as possible is essential, as is the need for a reliable estimate.  There are several things that can be done to achieve both of these, using a set of formal techniques, and taking advantage of the typical limited complexity of SMB projects.

The estimation activity is split into three distinct phases.  These phases should be ideally kept sequential, though some backtracking frequently occurs.  The phases are:

• Assessment: understanding and sizing.
• Estimation: turning the size into an estimate of effort
• Adjustment: reviewing and adjusting the estimate and the risks

In the Assessment Phase estimators analyze the software solution to be estimated. Time pressure typically constrains the estimators’ ability to understand the scope of the task, so a focus on ramping up the estimators’ knowledge of the business problem is essential.  The general approach is to model the solution, to identify the components, and then estimate their size and complexity.  Finally, tasks that are not strictly mapped to components are added.  The essential point is that effort is not estimated at this point – just size and complexity.  Here we introduce the first bias reduction mechanism: the “sizing” should be performed independently by more than one person.  If the SMB has never developed a system like this before, analogical estimation will be a problem.  Looking at similar implemented solutions implemented by competitors can help with understanding the complexity (for example, there are many details in the shopping cart checkout process: change quantities, cancel item, shipping options, calculating shipping costs etc. etc.)

The Estimation Phase consists of turning the output from the assessment phase into effort.  Doing so requires analogical estimation.  For example, “How much time will it take to develop the detailed requirements for, and to design, construct and unit test this shopping checkout module?”  This is both a function of the size and complexity of each task, but also of the developers’ knowledge and experience.  For example, if it developed in house, the in-house team may have a better understanding of the business, but less experience of the technology.

The Adjustment Phase focuses on two aspects of the estimate.  First is the difference between the estimates of individual estimators; second is assessment of risks.  In comparing the estimates of individual estimators it is frequently found that estimates of experienced estimators for the same task can vary widely for any number of reasons, but chief among them are general optimistic/pessimistic bias, and differing assumptions.  So this part of the adjustment activity is a dialog, which is better if mediated by an independent third party to reduce the risk of one estimator dominating the result.  Finally, the “riskiest” activities should be identified, and potentially adjustments made to the estimates.  You can think about this as identifying the unknowns.  For example, does the solution require the purchase and integration of a software component that we have no experience of?  This activity can often uncover risks that need to be mitigated as early as possible in the project, and perhaps before the project is committed.  This could be done earlier in the estimation process, but these risks frequently only get uncovered when estimation differences are discussed and an unstated assumption is unearthed.

Pricing and laying out a timeline are typically the final activities.  At this stage, staffing options sometimes have to be evaluated.  For example, can this project be outsourced, and if it is, what are the assumed offshore rates and the additional project management oversight required.