Five tips for successful offshoring

Offshoring has experienced some major changes over the past year. A few months ago, Forrester clients were worrying about offshore outsourcing rate inflation and whether or not certain tier-one Indian providers would accept their business.

Today, as the economic environment worsens and Indian providers scramble to maintain their high growth rates, sourcing and vendor management professionals are in a much better position to negotiate reasonable rates and to get improved quality or service in exchange for those rates.

With the dramatic change in circumstances, many companies want to take a hard line approach to negotiating. But the key thing to remember is that the deal has to be fair to both parties. If the provider is not making enough money on your deal, your experience will ultimately become negative.

With that in mind, buyers should consider the following:

Avoid inflation costs if the deal is fair. You should be able to avoid any rate escalation clauses in contracts of three years’ duration or less. If you are paying very low introductory rates, you may be required to accept inflation clauses, which sometimes yield low-quality or inexperienced staff in the initial year. Therefore, you are better off paying reasonable market rates for reasonable staff during year one and avoiding inflation clauses in years two and three.

Do not overpay for multinational IT services companies. Multinational players sometimes charge more for India-based resources than pure-play offshore providers – even though the resources may have the exact same qualifications and are sitting in the exact same city in India. Sourcing and vendor management executives should examine these relationships to ensure that there’s a reason if they are paying extra or above market rates.

Evaluate travel-related expenses. During the past three years, providers have started to charge more – and more often – for travel. Do not pay for unnecessary travel or for resources permanently stationed with you. Also, if you negotiated hourly rates with travel costs included, make sure to pay attention if the provider is suddenly travelling less, since you have technically already paid for that travel in the hourly rate.

Ask for more experienced resources. Since many companies today are cancelling complex discretionary development projects with their outsourcing providers, those providers now have excellent high-value resources sitting on the bench. Now is an excellent time to negotiate for that staff in order to get better value rather than looking for a pure rate reduction.

Reassess all your provider relationships. Take this opportunity to make sure you have competitive rates with all of your providers and not just the pure-play Indian providers. Also, keep in mind that many providers are offering clients a short-term discount now in return for the promise of increased work as the market gets better. This can be another way to avoid getting duped with lower-quality resources within the context of a lowered rate.

Christine Ferrusi Ross is a vice president at Forrester Research

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