Offshore Suppliers & Employee Churn

Q: What will be the impact of rising wages & attrition on Indian IT/ITES Outsourcing?

A: Clients are very wary of being in continuous start-up mode with a churning account team: its slow, resource intensive, and errodes service quality. Clients who are in their second round of outsourcing recognize this and tend to emphasize SLAs or Key Measurables measureing attrition and turnover rates.

On the other hand, Service Providers say "as long as we meet our SLAs, it shouldn't matter what our attrition rates are." While there's some merit in that, performance SLAs can be lagging indicators - they let you know how things went in the past. Lagging indicators are good measures, but leading indicators are useful too. For example, if we know that high turnover will eventually impact service, than it makes sense to measure turnover rates as a precursor to measuring SLAs. Attrition Rate SLAs are a leading indicator.

Of course, this approach only solves the problem for the single client, and condenses the problem for other, less savvy customers of the Service Provider. Much in the way IT wages in the US hit a saturation point in the late 1990's/early 2000's, market forces should stabilize wages in Inda --- eventually. In the meantime, look for Service Providers with ingenious retention programs. Even with rigorous due diligence, it can be very difficult to determine accurate attrition rates.

Keeping Supplier employees committed

It's a typical worry: how does an organization maintain it's responsiveness when they outsource? Can malaise and apathy be prevented? It's a valid concern, especially for high touch elements like help desk support, or call centers. While it can be challenging, there are ways to maintain (or even improve) service delivery and personal commitment to the end user.

While it always best to negotiate SLAs in a competitive environment, it's often possible to negotiate them mid-contract. Here's a good starting point for quality-of-service metrics:

1. Specific competency requirements. Could be language skills (Indian call center providers administer language fluency tests), or skills competency tests, with minimum requirements or tenure. Microsoft certifications are an excellent example.

2. Customer satisfaction surveys. Make sure they are generally trending in the right direction

3. Employee retention/turnover objectives; at least for key personnel

4. SLAs for response time, first-call resolution percentage, etc

5. Escalation procedures, perhaps with second-tier responses going to your in-sourced personnel.

6. Reference checks. Prior to signing the agreement, rigorous reference checks with similar clients and due diligence (including 'secret' calls as a customer) should be conducted.

US: Offshore provider for Europe?

As globalization matures, the face of who offshores to whom is shifting: increasingly the US's labor pool is viewed as low cost compared to other parts of the world, mostly due to the decline in value of the US dollar. For example, both Honda and BMW are opening manufacturing facilities in the US to leverage relatively inexpensive skilled labor rates, not simply to ease shipping and tariff costs (the traditional reasons). This is the same reason Ford gave for opening plants in Mexico years ago.

But U.S. labor arbitrage opportunities extend into white collar jobs to. The same US-based $300USD/hour consultant hired in 2000 for €250 is now €200 - a 20% cost reduction for arguably the best thought leadership in the world. Historically expensive places like Dubai have offshored their labor (blue and white collar) to the US and other willing work forces for years.

Outsourcing - or more specifically, offshoring - has led to some unscrupulous practices that smack of slavery (Nike got nailed a few years ago for sweatshop practices) so offshoring is ‘guilty by association.’ But in common practice, market forces balance wages with a willing workforce, at least over a long term. Chances are, American families drawing a Honda paycheck in Indiana have a similar perspective as Mexican families working for Ford in Jaurez.

SLA tips - Disaster Recovery

“I’m renegotiating a 3-year service contract for data center Disaster Recovery (DR) services. My current Service Provider offers the ability to exit the agreement if they fail to perform. What other SLAs should be in place?”

ANSWER: On the surface, this seems like the ultimate supplier promise: “If we don’t deliver, you can leave – no questions asked.” That’s perfect for major issues, but outsourcing relationships are more typically plagued by chronic small problems than catastrophic delivery failures. You will need some tactical tools in addition to the nuclear option of terminating the agreement.

Defined Service Level Agreements (SLAs) should encourage favorable behavior and align work priorities to business needs. SLAs should be meaningful, measurable, and evocable. In your example, even if the Service Provider’s SLAs are measuring the right metrics (RTO and RPO are among typical DR SLAs), there is no appropriate management mechanism to improve the environment. Your only redress is termination which can be difficult and expensive, a cure that’s worse than the disease…and the service provider knows it. And transitions are fraught with risk: imagine migrating to a new environment from a cranky service provider, especially if you decide to use a competitor.

Service providers have largely accepted defined SLAs, and in some instances even become vocal advocates. SLAs help their delivery teams manage customer expectations and prioritize resources. In some emerging fields like Business Process Outsourcing, providers occasionally use defined SLAs as a competitive differentiator to unseat incumbent suppliers, actively challenging prospective clients to measure and monitor service delivery.

While there are many standard candidates for SLA metrics like uptime, availability, and response time, it’s important to correlate them to meaningful business related metrics. And leading indicators are better than lagging indicators. For example, a traditional DR SLA would grant a financial credit if, pursuant to a declared disaster, the supplier fails to restore the client environment within an agreed upon period – a lagging indicator. A leading indicator would be SLAs for tests, DR plan updates, training, etc; all critical success factors to a successful restoration during an actual disaster. Where ever possible, find a predictor of success.

SLA remedies don’t have to be financial. If your supplier fails to restore your environment during a DR test, a re-test makes more sense than a bucket of cash. Or negotiate the right to exit the agreement if the supplier repeatedly fails the DR tests.

SLAs are an important monitor of your outsource relationship. They enable you to manage key service delivery elements because everyone has a vested interest in success. They can be difficult to negotiate but an extremely effective tool when applied creatively.