Indian outsourcing vendors need to aggressively look at pricing their services based on "Service Level Agreements" as a long-term strategy in working with their clients. Though, the standard "Time and Materials (T&M)" models are more comfortable, but they deteriorate the benefits of outsourcing in the long run. This is not only needed to avoid micro-management but also reflects vendors' commitment to share risk, absorb the cost-of mistakes and provide better comfort to their clients. Needless to say, it compels vendors' management to learn better manage their resources and ensure they are always geared to provide quality service to their clients. An absence of such a paradigm leads to just the opposite- a deterioration in the perception of benefits of outsourcing, increased frustration, micro-management and increased substitution.

"Its been more than two years since we started working with you, still why do I get the same low productivity from the offshore team as I did when we started. I expected it to increase significantly, in a year?" quips Tom McWhorter, manager Customer Support with a leading software product company, engaged in offshore outsourcing.

"You know, actually we had the productivity gains, but then, suddenly two of our engineers resigned. When we recouped after six months, we rotated out two others to another important project for your product engineering, which needed experienced people." answers Abhishek, the offshore project manager.

Abhishek is happy to highlight the reason, defending his team's ability to quickly learn and projecting his helplessness over attrition. What he didn't realize is that he has just undermined the very concept of outsourcing by passing his problems to the client. Three days later, he gets an email from Tom, asking him to freeze all resource movements, and also gets to know that for two other opportunities that Tom was trying to outsource, he has just hired a local person.

Not all departments have severe resource crunch. Not when the "total" cost of outsourcing goes out of control and becomes greater than the cost of a local engineer. Not when the client has to train offshore several times (and pay for that) on the same Product!!!

* Rates
* Quality Loss
* Productivity Loss
* Knowledge Loss
* Reputation/Market Loss
* Management Overhead

A more accountable commercial model bases itself on the "total" cost of outsourcing and contains clients' risk, when vendors are not able to manage any aspect of the delivery linked to their commitment. It infuses a culture of "controls", accountability", "fairness" and "performance" as, most of the things are now linked to dollars. Contrast this with Time And Materials model, which leads to "slackness" and "complacency".

Especially, Maintenance Projects should never run on Time and Materials basis. In our recent case, this model had increased the client's tendency to micro manage ("show me the resume", "no resource rotation", "less clarifications should be sought"), since the money they pay is not linked to the output, they try to control the output and ensure its on track.

This is how Tom McWhorter, the manager of customer support, follows his line of thought.

"I pay irrespective of vendor's performance"-Tom

SLA Based Model

A simple solution, which sets things in order on both sides, is an SLA based commercial model (difficult for managers to manage). It gives a feeling to clients that they are paying for what vendors perform. And it gives enormous freedom to Indian vendors. All the same, it is extremely difficult to manage continuously, as now, all risk lies with Indian vendors and they should plan and prepare in advance to contain their risk. Some of things they will have to do now:

1. Ensure they have trained effective shadows, to take care of absenteeism and attrition
2. Ensure they have a fast reliable knowledge creation and perpetuation mechanism
3. Ensure their infrastructure is optimum
4. Ensure they take care of their core resources, or employees will leave, they will not get paid.

All this seems scary. But isn't it better than knowing one day that clients no longer want to have any relationship with them. Is it not what they have always wanted to achieve but could never do?

Here is an illustrative scenario of how this may work. Take a Technical Bug Fixing Project, involving 10 people, as an example. Assuming all engineers are based in India and their rate is USD 20 per hour, the monthly bill to the client may be around $27,000 based on T&M.

When we switch to SLA based model, the vendor will get paid depending upon its performance calculated based on the variance between the target and actual achievement in that month. If the weighted actual achievement of SLAs is over by 10% then the payout will be 110 % of this T&M bill.

There are several other factors one may have to consider, like what should be the SLAs, what should be the measurement period (To take care of the aberrations) etc.