When the Buyer Goes the Extra Mile, Outsourcing Relationships Flourish | Article

identity theftThe media continually broadcasts scary stories about the importance of computer security. Identity, data, and medical information theft! Oh my!

Ping Identity, a Denver, Colorado, software company, develops products that reside on servers that allow for a secure sign-on. The company wanted to strike while the iron was hot; “we needed to facilitate rapid, high-end development to accelerate our time-to-market for our security product,” says Bill Wood, vice president, Development.

These days offshoring is the natural answer to that business challenge. Ping is a late-stage start-up; typically, venture capital firms expect expeditious success to cut the money burn. “It’s all about speed when you’re a start-up,” says Wood. For these reasons, Wood said outsourcing and offshoring were “a foregone conclusion.”

Attempt No. 1: India

So Ping outsourced its development to an Indian supplier in Bangalore. Unfortunately, its first overseas venture had unhappy results. “We suffered a 130 percent run rate. The quality of work was poor. And their high attrition rate made delivery poor, too,” reports Wood.

He believes the problem was Ping’s insistence on using Agile methodology, where every developer on the team becomes an equal participant. “The Indian employees could not work with Agile because of their hierarchical structure. They couldn’t work in a flat organization,” he says.

In all fairness, he says Agile development “is difficult.” He estimates only the top 20 percent of developers “are suited to it.”

Supplier selection for attempt No. 2

The second time it searched for an offshore supplier, Ping had a sharper image of the kind of supplier it needed. According to Wood, it sought a partner that:

  • Had highly skilled engineers with deep Agile expertise.
  • Was committed to working with a small company
  • Had a work environment that motivated employees to think on their feet and that emphasized individual interactions instead of processes and tools
  • Provided cost-competitive rates

Specifically, Ping utilized 17 different criteria, ranging from depth of experience to the type of engineers. “Ping was very scientific about selection since they got burned the first time,” says Alex Motrenko, Ping’s account manager at Luxoft. “This time the approach was not about just finding some programmers. It was partnering with a company that shared their commitment to engineering excellence.”

Engineering excellence was critical this time around because Ping had to ship software that worked 100 percent, continues Montrenko. “If you are an enterprise IT organization, and, say, your payroll software goes down for an hour, it will come back. If Ping ships defective security software to its customers, they are in serious trouble. Ping couldn’t bet the farm.”

“Our board wanted to use another Indian company, which was in vogue at the time (December 2004.) But Ping looked at 15 different companies in eight countries. It short-listed seven. Ping executives then spent three days on site at each supplier. They interviewed the management and the prospective engineers who would be joining the Ping team.

Wood says Luxoft, based in Moscow, won for three reasons. It had:

  • “Extremely low” attrition rates
  • A high level of expertise for the dollar spent
  • A geographical edge since Moscow is closer to Denver than Bangalore

“The difference in educational focus between India and Russia was clear,” says Wood. “The Russian engineers were equipped with a broad math, sciences, and engineering base. The Indians had a much narrower, IT-focused background.”

Peter Vaihansky, vice president of marketing for Luxoft, says “the DNA of Russian software developers is research and development and the sciences; so they think like engineers.” He says Russians typically don’t just code to specifications. “They think up front about enabling expansion or maintenance. They are problem solvers,” he says.

Transition to Russia

Wood says Luxoft was able to staff a team quickly. He reports Luxoft delivered useful software in two months.

At the outset, Ping assigned only technical programming tasks to the Luxoft team which its product managers supervised out of Denver. “In short order, the Moscow team built expertise in our business domain and moved up the value chain of services offered,” says Wood. Today, Luxoft’s team handles the day-to-day task management. “Their level of expertise is so high they provide technical support to our end-users,” the Ping executive reports.

Wood says Ping executives faced the uncertainty of “how to address time zone issues, geographic barriers, and different cycles of daily work.” Times zones turned out to be a non-issue. Wood says it’s standard for Russian engineers to go to work at 11:00 am and work until 9:00 pm. That jibed well with Ping’s work zone because its engineers typically turn on their computers at the office at 6:30 am. “That gives us a three-hour overlap,” he points out. Overall, the company “can operate as a global organization because together we have a 17-hour work day,” Wood explains.

He adds culture and language issues were also a concern. “As it turned out, there were no language barriers, since most Russian engineers speak English,” he reports. And as the Ping team learns more about Russian culture, “We’re finding there is a shared set of values,” he adds.

When the buyer goes the extra mile for the supplier

Ping executives believe that happy engineers are productive engineers. Executives noticed that some Luxoft engineers were commuting more than two hours every day into Moscow. “We are considering a work-at-home opportunity for engineers to reduce their long commute times,” says Wood. He says U.S. studies show that people convert some of that commute time back into on-task time; employers actually get more productivity from these employees each day when they get to work at home. “You also get more loyalty,” he reports.

Then there was the money issue. Wood says a lot has changed in Moscow in the four years since it signed its outsourcing contract. The Russian economy is running at a faster clip, so inflation has become a concern. That means the cost has gone up for Ping. Wood says the inflation of engineer salaries now exceeds the 10-12 percent inflation rate of the country.

“We’ve worked closely with Luxoft to understand what’s happening and to manage and share the cost,” says Wood. He says Ping expects Luxoft to deliver services below a certain cost threshold. “I assume they enjoy a good margin. As long as we are within our guidelines, we are a happy customer,” he says.

Wood personally insisted on adding an amendment to the contract: a new rate scale that includes incremental rates between the existing major jumps. “That allows talented individuals to receive micro-promotions. We didn’t want them to have to wait for an increase in compensation until they received a major promotion.

Ping is looking at virtualizing its team. Wood got the idea when two valued members of the Moscow team moved out of Moscow — one to a small town in the Russian federation, the other to Ireland. They continue to work at home and contribute to the cause. “I predict we’ll see more of that this year,” says Wood.

He says they will “swarm,” an Agile way of doing things that encourages people to work in place, then come together every once in a while to synchronize, like bees. “This allows people to work at home and balance their lives better,” he observes.

Ping has also introduced new technologies popular in the United States, including voice over Internet protocol (VoIP), instant messaging, and WebEx. For example, the two use Skype with video since it’s free.

Why this relationship works

From the beginning, Ping fully integrated Luxoft engineers into its own development team. “We treat them as if they are Ping employees,” he says. This method works, as evidenced by the retention rate. Wood says last year the development team’s retention rate was 100 percent. “That is rare in outsourcing engagements,” he says.

Offshoring has uncovered complimentary technical strengths that buoy the development process. For example, .NET skills are difficult to find in Denver but are readily available within Luxoft, according to Wood.

The Ping executive says the software company learned in its first offshore attempt they had to be “very, very clear in communications.” And Ping conducts semi-annual employee and customer satisfaction surveys to monitor the health of this outsourcing engagement.

Business benefits

The expected savings are helping the bottom line. Wood says savings total more than 30 percent compared to the cost of an engineer in Denver. This figure includes the travel burden; Wood has 18 trips to Moscow in his budget. He personally goes to Russia every three weeks.

He is a big believer in cross-pollination; he feels that cultural diversity breeds innovation. “Working with Luxoft has fulfilled our dream of having a global team. We have been able to leverage smart people with diverse backgrounds and different opinions. The bottom line: we have been able to monetize software,” says Wood.

Offshoring allowed Ping to produce product offerings “at a faster clip than we could have done if the work were solely done in Denver,” says Wood. In addition, the quality of work has allowed the company to “bypass all our competition. We are now leaders in our space because of our speed of delivery. We now have more solutions to offer to our customers than our competitors. I believe that’s because we could draw on the capacity of the engineers in Moscow.”

Ping had an unusual situation: its research company made a discovery that had high business worth but was tangential to its security market. Ping spun off the research company. Since the company already had a relationship with Luxoft, “we short-circuited the search process and immediately engaged Luxoft to staff a team in Ukraine,” reports Wood. He says this was “like throwing a switch to draw on a pool of engineers.”

Ping is planning to sell its products in the European market and may add support capabilities for its customers in eastern Europe. “We see some future benefits. Moscow is a three-hour plane ride from central Europe; that’s a plus,” he says.

Both groups appreciate the expertise of the other. Wood points out Moscow serves as a “fully independent test group for validating work done in Denver. Ditto for the work done in Moscow.”

The bottom line: Wood says the late-stage start-up’s success is beginning to attract interest from some large companies. If someone buys Ping, the Luxoft team made a large contribution.

Lessons from the Outsourcing Journal:

  • In a true outsourcing partnership, each player contributes to the well-being of the relationship. But sometimes the buyer goes the extra mile to take care of supplier. In this case, the buyer amended the contract to take care of the supplier’s workers.
  • If you are going to use the Agile development method, find a supplier with the culture to make this work.
  • Clear communication and frequent travel to the offshore country contribute to offshoring success.
  • Cross-pollination between cultures often provides benefits to the buyer by providing different viewpoints.

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