Insights into how technology and the outsourcing of R&D are changing the software industry

Tying the costs of outsourcing to the achievement of outcomes that support real business objectives sounds like nirvana.  You can assign a value to a given activity and it can help you better evaluate the ROI that you’re getting too.

Not surprisingly in this economy, outsourcers are trying every angle they can to get business and many are tired of just reducing rates.  So dont’ be surprised if they start making promises about delivering against outcomes and outputs.  But don’t just believe the hype.

The real question that you have to get to is how committed are they to really delivering on outcomes and how much are they just trying to suck you into a sales conversation, only and perhaps purposefully, to shift the conversation back to traditional outsourcing engagement models.

Do your own due diligence and understand how committed they truly are to this kind of engagement.  Here are a few questions to ask

• What they’ve changed organizationally to enable them to deliver against outcomes instead of providing bodies?
• What % of their business is coming from outcome or other performance-based arrangements
• Especially for vendors that have a heavy offshore component, how are they dealing with the philisophical and cultural shifts required to really deliver.

What you may find is that their’s not much beneath the veneer.  In the meetings that our CEO Gordon Brooks and I have had with journalists and analysts, we’ve of course gotten very good feedback on our approach to outcome certainty (especially in BusinessWeek’s NEXT blog).

But what’s really struck people, like AMR’s Dana Stiffler, is the extent that we’ve embraced this approach.  Today about 20% of Symphony’s engagements are outcome or output-based with another 40% of so utilizing other performance-based mechanisms like revenue sharing, fixed margin and SLA’s.  According to Stiffler, she hasn’t heard of anyone else in the software product development outsourcing space really embrace outcome-orientation at all and even in the big Indian IT shops its a tiny percentage of their business.

Now why don’t other firms adopt performance-based contracts as aggressively — because it’s hard.  It’s hard to track the metrics that matter.  It’s hard to change the way that your employees think about thier work to align with delivering outcomes.  And most of all it’s hard to change the risk profile that your company is used to when taking on these committments.