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Senior executives dream of creating agile networks of global information technology service providers to lower costs, increase quality, implement seamless sunrise-to-sunrise production, reduce response time and disperse risks. Such agility allows organizations to enable flexible IT staffing while protecting business innovation.1 And indeed our research on 21 large U.S. offshore clients found that global outsourcing enables agile responses to business needs. (See “About the Research.”) For example, one U.S. financial services company has various joint ventures and fee-for-service relationships with 14 Indian suppliers. This network of suppliers enabled the company to adapt quickly to the immense surge in mortgage applications during the refinancing boom. As the refinancing boom subsided, the company was able to scale back resources immediately — all without affecting its domestic IT head count.
But agile IT networks require an immense amount of hands-on management. Our research found that U.S. clients micromanage their offshore suppliers to a much greater degree than they manage their domestic suppliers. The increased oversight is needed to mitigate higher risks, to build trust with new suppliers gradually and to coordinate delivery teams that are more remote and culturally diverse. Our research shows that, whereas U.S. clients require domestic-suppliers to submit status reports on one- to two-week cycles, many U.S. clients require offshore-suppliers to submit daily ones. While U.S. clients review résumés of domestic-supplier employees before they are assigned to teams, many U.S. clients personally interview every potential offshore-supplier team member to ensure that they have sufficient communication skills. And while U.S. clients trust domestic-supplier staff to ask for clarification when needed, they spend additional time questioning offshore-supplier staff to ensure understanding.
Micromanagement significantly increases transaction costs and can erode overall savings.
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1. For more information on creating agile global networks, see K. Cattani, E. Dahan and G. Schmidt, “Offshoring Versus Spackling,” MIT Sloan Management Review 46, no. 3 (spring 2005): 6–7 and V. Venkatraman, “Offshoring Without Guilt,” MIT Sloan Management Review 45, no. 3 (spring 2004): 14–16.
2. The notion of escalating outcomes from tactical to strategic has been found in other work, including: K. Kaiser and S. Hawk, “Evolution of Offshore Software Development: From Outsourcing to Co-Sourcing,” MIS Quarterly Executive 3, no. 2 (June 2004): 69–81 and E. Carmel and R. Agarwal, “The Maturation of Offshore Sourcing of Information Technology Work,” MIS Quarterly Executive 1, no. 2 (June 2002): 65–77.
3. For more information on mitigating risks by selecting multiple countries, see T. Vestring, T. Rouse and U. Reinert, “Hedge Your Offshoring Bets,” MIT Sloan Management Review 46, no. 3 (spring 2005): 27–29.
4. D. Feeny, M. Lacity, and L. Willcocks, “Taking the Measure of Outsourcing Providers,” MIT Sloan Management Review 46, no. 3 (spring 2005): 41–48.
5. M. Lacity and L. Willcocks, “Global Information Technology Out-sourcing: In Search of Business Advantage” (Chichester, U.K.: John Wiley & Sons, 2001).
6. Although this arrangement met Biotech’s security needs, the supplier’s IT staff did not like commuting across town to Biotech’s facility. Apparently, it’s like asking a Manhattan resident to commute to Queens.
7. CMM defines five levels of software development maturity and specifies what processes must be in place to achieve those levels. At the highest level (Level 5), organizations have implemented at least 18 key processes, such as pro-actively preventing software defects and managing change.
8. For detailed cases on implementing CMM within an organization, see P. Jalote, “CMM in Practice: Processes for Executing Software Projects at Infosys” (Boston: Addison Wesley, 2000) and P.S. Adler, F.S. McGarry, W.B. Irion Talbot and D.J. Binney, “Enabling Process Discipline: Lessons from the Journey to CMM Level 5,” MIS Quarterly Executive 4, no. 1 (2005): 215–227.