Painful Lessons From IT Outsourcing Gone Bad

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 U.S.," 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.

Horror No. 4: Service Provider Blacks Out the Client

James Hills, president of marketing firm MarketingHelpNet, probably had one of the most terrifying offshore experiences of all. When a dispute between his new company and the Web site developers grew heated, he came into the office one day -- only to discover the developers had shut his client's site down.

"I came in and checked e-mail. No e-mail, no Web site. They had simply turned it off. It was all gone," Hills recalls. While he was shocked to discover this, in some ways, he was not surprised. After all, the relationship with the offshore provider had been troubled from the start.

It started when Hills took on an assignment from a major client. Rather than trying to develop Web design skills needed to complete the client's project, Hills decided to farm that part of the job out to an offshore provider in the Philippines, at a savings of half of the cost of working with a local Web site designer, says Hills.

As soon as the offshore provider began sending back completed work, Hills knew there was trouble: "Functionality and community features didn't mesh properly and the design wasn't what we were looking for." On top of that, the offshore provider continually missed deadlines.

Becoming increasingly frustrated, Hills didn't make the final payment. The result, of course, was a panicked wake-up call from his client telling him there was no e-mail and no Web site.

Looking back, Hills says that if had he to do it over, he would have been more diligent in checking references. He did only a perfunctory check of references, unfortunately taking it for granted that the offshore design firm actually created the Web sites they claimed.

Time differences also played a key role in the soured relationship. "We weren't able to communicate directly, only through IM," Hills says. And as a small startup at the time, he couldn't support multiple shifts at home to get overlap with India, nor ask his staff to work 20 hours a day to cover both time zones. And sending a manager to the Philippines was out of the question, Hills says.

Hills doubts he'll ever outsource again, but if he did, he would insist that the job be done with a U.S.-based company that puts its offshore staff onto the company's payroll. "No contract workers," Hills says tersely.