SMBs Need Small Vendors

The most important single factor in choosing the right offshore vendor may be finding one of appropriate size. The obvious fear is that a small firm's project will not represent a sufficient portion of a large offshore vendor's revenues to make them stand up and take notice. In that small-fish/big-pond scenario, the small firm often ends up with the offshorer's less experienced team members assigned to their account, and gets very little access to the vendor's senior-level executives. The OOBP's Goland has a hard and fast rule for small firms evaluating offshore vendors: If your project constitutes less than 5 percent of a vendor's total revenue, walk away.

By the same token, however, signing up a small vendor has its own set of perils. The smaller the vendor, the less stable it is. Giving up control over major IT projects is hard enough without worrying if the vendor can survive downturns in the market. For that, Goland has another rule: The offshore vendor must have been in business for at least five years and have more than 100 employees.

"You must find a vendor that is small enough that the project you give him is of significant importance," Goland says. "If that's not the case, you will never get the right people to work on it. And if you cannot staff the project with the best people, it will fail. At the same time, the vendor should be strong enough to weather changes."

That all sounds good. Trouble is, offshore vendors that fit those criteria are hard to come by—a lesson Al Garcia learned the hard way. Garcia is the vice president at Comac Inc., a $30 million fulfillment house for presales marketing materials, based in Milpitas, Calif. Two and a half years ago he started looking for an outside vendor to help develop a more sophisticated warehouse-management and online-order system. "We were looking to outsource," Garcia says. "Onshore, offshore, it didn't make a difference."

Garcia researched three different options: large offshore vendors; small offshore vendors; and small onshore vendors. His research was extensive. He even attended a seminar given by the CEO of Tata, and later met him personally. But when Tata realized how small a job Comac had to offer, "they lost interest," Garcia says.

With Tata off the table, Garcia focused his search on vendors that would be a "good cultural fit." But he found that no two offshore vendors had the same approach to managing the relationship. Some would assign a project manager to the account but would not guarantee that this person would reside in the U.S. Others would promise a local representative that would take up residence at the client site. Garcia ultimately decided that he "wanted someone we could grab around the neck and choke, if necessary."

A company called Miracle Software Systems Inc. seemed to fit the bill. But Garcia had grave doubts that the company would be able to handle Comac's need for what he calls "agile programming." "We don't worry about specs," Garcia says. "We worry about concepts, and use programmers working together and delivering quickly, then tweaking later. We want to move fast, and we found the whole concept of agile programming was difficult to offshore."

He also had reservations about the claims that Indian companies were making in their zeal to win new business. "I couldn't do a Dun & Bradstreet or Hoover's on these companies," Garcia says. "I got some references, and of course everybody said they were wonderful, but it gave me no confidence. And when you talk to the vendors themselves, and ask them if they do this or that, they all say, 'Yeah, we do everything.' So there were some serious credibility issues with the Indian companies."

Finally, Garcia decided the risks of going offshore were just too great. He went with a company called The Refactory Inc., based in Champaign, Ill. Comac is Refactory's only client. "We're not a small fish, we're their only fish, so I know I'm getting the A-Team." He also says that when he looks at all the costs associated with managing an offshore vendor, he believes he's actually paying less to stay in the U.S.

Even if a company is lucky enough to find an offshore vendor of suitable size, things very rarely stay that way. In the worst-case scenario, a vendor struggles to survive, closes its doors, and seriously endangers the client's survival. But the opposite can also be true. Railinc Corp., based in Cary, N.C., is a provider of data-exchange services for the freight-railroad industry with about $50 million in annual revenue. Back in 1998, the company thought it had found the perfect offshore vendor.

Over the next four years, however, the vendor, Business Management Data, was acquired three different times: first by PSINet Consulting; then by SignalTree Solutions; and finally by Keane Inc., the $956 million, Boston-based global outsourcing giant. "They were small at the time," says Paul Neville, vice president of IT at Railinc. As one would expect, the team that Railinc had come to rely on dispersed when Keane bought SignalTree. "When Keane stepped in, things changed," Neville says. "Initially, we didn't see any worsening of service. But then the higher-ups moved on, and they brought in a new team." Though the transition was bumpy, Railinc worked hard to keep Keane's attention, and today is satisfied with their level of service. "There may be cheaper alternatives, but considering we're a small fish in a big pond, Keane's been quite responsive," says Neville.

This article was originally published on 03-06-2006
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