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Painful lessons from IT outsourcing gone bad

Ephraim Schwartz | Aug. 26, 2008
Outsourcing has worked well for many companies, but it can also lead to business-damaging nightmares, says Larry Harding, founder and president of High Street Partners

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.


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