Luxoft: A Safe Path to Successful Outsourcing - Dmitry Loschinin

Outsourcing is such a vital part of the business model of so many companies today that many of the hard lessons have been learnt and the market is maturing among buyers and service providers. Yet there remain many ways to get outsourcing wrong. Dmitry Loschinin, president and CEO of Luxoft, tells Jim Banks how to get it right.

Outsourcing has become second nature to many organisations and since the early days, when companies largely turned to external service providers solely to cut costs, many lessons about what makes outsourcing work have been learnt the hard way. Now, as the market matures, there are fewer horror stories, but some large organisations have yet to exploit the full potential of outsourcing, and may lack the first-hand experience of successful service provider relationships.

Furthermore, the outsourcing market is constantly evolving. Service providers are becoming more sophisticated, while their clients are not only seeking more transformational outsourcing relationships, but are also feeling confident enough to hand the more complex and business-critical elements of their organisations over to third parties.

Dmitry Loschinin, president and CEO of Luxoft, believes the outsourcing industry is in the midst of an exciting evolution as more and more large enterprises recognise the broad value that outsourcing providers can deliver for a company's bottom line.

"While many are still cautious following the global economic recession, many other enterprises are looking for a cost-efficient way to accelerate key business activities in 2011," says Loschinin. "As such, software development partners that can meet the growing demand for expertise in such progressive areas as mobile application development and cloud computing, while adhering to strategies that will yield the highest ROI for clients, will be at a significant advantage."

Emerging global leader

A member of the IBS Group, Luxoft is an emerging global leader in application and product engineering outsourcing services for enterprise IT organisations and software vendors. Its clients include Boeing, IBM, Harman, Avaya, Areva and Sabre, and it operates a network of state-of-the-art delivery centres in North America, Central and Eastern Europe, and Asia. The company's market offering is based on a culture of engineering excellence, innovation, and deep domain expertise.

Luxoft's outlook for the outsourcing market in the year ahead is very positive. Loschinin argues that, as companies continue to rebuild and re-invest following the global economic recession, the overall outlook for the outsourcing industry is strong.

"Fueled by technological expertise, regional advantages and business alignment capabilities, Luxoft believes that outsourcing will move from a more fragmented function towards a more integrated approach to helping companies achieve business goals in the year ahead," he says.

The company predicts high demand for global delivery capabilities as a result of an increased push for more comprehensive global IT strategies, and expects that enterprises will look for outsourcing vendors with strong global delivery capabilities in an effort to optimise cost structure, increase scalability, tap into a global labour pool, and foster innovation.

Technology trends

Luxoft also sees mobile software surpassing other traditional application development platforms as companies focus more on software application development for devices such as the iPhone, Android and tablet PCs.

Similarly, companies will increasingly demand access to services and wireless internet connections in cars and airplanes and will push for the development of new solutions to meet this demand.Another strong trend is likely to be the move away from pure cost reduction as a driver for outsourcing, as transformational outsourcing takes over.

"Today, more and more executives are recognising that outsourcing can deliver significant gains by way of efficiency, productivity, quality and cost-savings," says Loschinin.

"Going a step further next year, companies will look for an outsourcer with the capacity to take over the entire product or application development process and, in some cases, manage the entire business function. This will allow the client company to focus internal efforts on advancing the business, while the outsourcer focuses on cost structure, optimisation and other factors that contribute to business growth for that particular segment.

"The Agile delivery model is one of the best choices for outsourcers; it provides fully managed delivery services in a fast and sustainable manner, with high levels of quality. Industrial data and our own experience shows that Agile teams are up to several times more productive than traditional teams that follow the sequential development paradigm. Agile enables companies to change priorities quickly and completely for free and only pay for ‘done' functionality."

Loschinin also sees cloud computing spanning more enterprises, whether it is used in a storage capacity or to decrease carbon footprints. The result is likely to be a sharp increase in demand for the reworking of existing applications and the innovation needed to develop new corporate solutions.

Increasingly, financial services companies are likely to participate more in the outsourcing market, thanks to the growing pressures and tighter regulations the industry faces. The automotive sector, too, is likely to become more engaged with external service providers to develop more sophisticated in-vehicle applications.

Avoid the pitfalls

Taking into account these drivers in the market, and the growing participation of specific industries in outsourcing, Loschinin warns that getting the right relationship with the right provider is more important than ever.

For Loschinin, there are several mistakes that are often made at the beginning of an outsourcing relationship, which can be hard - and very expensive - to fix. Chief among these mistakes is the tendency to mismatch the goals of an organisation with the capabilities of the service provider. Loschinin urges a keen understanding of a third party's attributes and a detailed definition of what the client organisation wants from an outsourcing deal. Equally important is the need to ensure that a company's IT organisation is set up to support the management of outsourcing relationships.

Loschinin notes that an organisation that outsources its weaknesses will be vulnerable to difficulties. One reason for outsourcing is to take a process that is not a core competency and outsource it to an expert, but while Loschinin accepts that external expertise can help to overcome certain problems that arise in-house, managerial weakness is not a sound basis on which to try to establish a long-lasting relationship with a service provider.

The client company remains, after all, responsible for the success of outsourcing deals, so he urges companies to only outsource functions in which the management metrics, processes and measures of success are fully understood.

Another potential pitfall that Luxoft has identified is a lack of focus on lines of communication between client and service provider. That relationship cannot be maintained at arm's length these days, so Loschinin believes that clear roles and responsibilities must be defined to sustain a collaborative mode of engagement.

He advocates that a client insists on regular communication to check in on the status of the deal in place, in the name of transparency. Only by doing so will a client organisation be confident that the intended workflow is being followed and therefore be able to cut down on delays, duplication of work and confusion that might otherwise be missed. Furthermore, this process of checking in can help to identify new opportunities to add value.

Clear goals

A further lesson that has been learnt the hard way by many organisations but still remains a potential trap for companies taking their first steps into outsourcing is that no vendor/client relationship is likely to succeed unless clear and measurable goals have been put in place at the outset, and are understood by both parties. In many instances, defining these goals is a step that should take place before any decision is made about whether to outsource at all.

A clear set of goals defines many parameters of the outsourcing relationship, including the scope of work and the deadlines on which all parties must agree. Without these goals there can be severe delays in vital project components, costs can rise and opportunities to increase efficiency can slip away.

The final piece of advice that Loschinin offers is all about risk management. Failure to identify business risks before embarking on an outsourcing deal can lead to huge problems. Client and service provider can easily be caught by surprise if a thorough risk analysis has not been completed. Concomitant with that analysis is the formulation of a contingency plan that both parties can implement quickly.

Overall, the real lesson is about communication and collaboration. A successful outsourcing relationship is based on a mutual understanding of the benefits that can accrue to both parties in the deal. Without that, the lure of cost savings could well be the siren call that drags a company into costly mistakes.