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Painful lessons from IT outsourcing gone bad

Painful lessons from IT outsourcing gone bad

In tough times, companies look to shift tech work to outsiders, whether offshore or down the street. Be careful: This "cure" could be deadly.

Horror No. 2: Manufacturing efficiency doesn't extend to marketing

Executives in charge of a small consumer product group at Hewlett-Packard were under the gun. They were told in no uncertain terms to cut all costs related to getting the product into the big-box stores like Best Buy and Circuit City, recalls Margaret McDonald, then marketing manager for the HP department and now president of her own company, McDonald Wordsmith Communications. (McDonald would not name the product and would only say that it is sold today at places like Best Buy.)

"We were trying to get as much work as possible over to the Taiwan manufacturer with the goal to get the cost for these products down as low as possible," McDonald recalls. The Taiwanese outsourcer had a great deal of experience in getting the bill-of-materials costs lower, and HP was seeing that benefit. So managers started pushing for more savings elsewhere, insisting that the entire project be handed over to Taiwan -- everything from manufacture to writing the instruction manuals to all the marketing materials.

"These execs were being evaluated on cost, not on the quality of the brand," says McDonald. When she tried to tell her managers that what they wanted was unreasonable for an outsourced manufacturer to deliver, they accused her of just trying to hold on to her job.

As she predicted, the project turned out to be a disaster. Take this example of the Taiwan-produced marketing materials: "This glamour of new product will perfectly fit to your daily life from any of locations!" Of course, non-native English prose like that never saw the light of day, but it wasted six months until the higher-ups finally realized what was happening.

McDonald isn't sure her managers learned a lesson. She sees the failure not due to the offshore firm hired or even the miscommunication between the US and Taiwan firms. Instead, she sees the problems as a failure within HP, between its own internal organizations. "The main [HP] branding people had no idea was going on." And the local managers reacted to the extreme cost pressures in a vacuum, with no concern for protecting the brand, McDonald says. The fact that the job was outsourced simply created the right circumstances for these internal flaws to finally become evident.

Horror No. 3: Giant telecom stumbles in transition to offshore

Steve Martin, a consultant and partner at Pace Harmon, a company that is often called in to help fix outsourcing deals gone bad, recalls the giant telecommunications company headed for disaster: It never considered the fact that although its new offshore provider, though good at coding, did not understand the business side of telecommunications.

The outsourcing project was divided into two phases. In phase one, all the internally managed operations were moved to an outsourced service provider (in this case, based in the United States). The idea was to test and stabilize the outsourcing approach with a local provider first, before taking the riskier step of moving the application development offshore.

The first phase went fairly well, so the telecom initiated phase two, shifting the effort to India. That didn't proceed so smoothly. The Indian provider simply didn't understand the telecom business, so lost in the transition halfway across the globe was all the telecom's inherent knowledge of the business applications -- what it is supposed to do and why. "All of that knowledge got left in the US," Martin recalls.

Because the Indian firm didn't understand what it was coding, it took much longer to develop the applications. And they didn't work well, resulting in even more time and effort to figure out where they went wrong and fix them. It got so bad that the telecom canceled the offshoring midway and brought the effort back home.

Of course, there were lingering problems to resolve, such as how to handle the disputes over tens of millions of dollars in service credits the telecom believed it was due from the Indian outsourcer, which argued that it delivered what it had been asked to do. "An amazingly large amount of costs had to be reconciled," Martin notes. The two companies eschewed a legal battle to avoid the bad publicity, ultimately settling the dispute privately.

What the telecom company learned the hard way was that there is more to a deal than signing the contract. In the original deal, pricing took precedence over every other consideration because the executives wanted to show that they saved millions of dollars. Shortchanged in the process were the details of the transition, the development processes, and the governance. Adequate thought was not given to the obligations of the people who were responsible for executing the transition.

"The contract was executed from a business perspective, where it looked great, but not enough thought was given to how to programmatically move to the new environment," Martin says.

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