If you pay peanuts you get monkeys!

Though this post was meant to address a different flavor of tactical software outsourcing a recent encounter with a peer convinced me to address the issue of peanuts and monkeys… it baffles me how many entrepreneurs are blind to a simple fact… if you pay peanuts you get monkeys!

At the end of one quarter (many years ago), while one of my project managers was presenting performance metrics for one of the supplier he manages I queried a blip..it was déjà vu! Dan explained some of the developers had been reported to be under performing or so the supplier had explained to Dan and that corrective action had been taken. Two words came to mind.. bull s&%t…

I asked Dan to pull out the performance metrics for the last two quarters (we had been managing this supplier for the last ten months) and overlay them, A few minutes later with a somewhat embarrassed look Dan said ‘boss there is a pattern here..’, the next step was to break up the metrics by each project being managed by us with the supplier and and soon it was clear that the dedicated team supposed to be tied down to one of their long running projects was not very dedicated at all and the supplier was clearly poaching resources off the dedicated pool to fulfill other smaller projects laid on them by the same client whilst charging them for additional resources that were clearly not part of the picture.  This supplier was pulling wool over our eyes!

The upside was this supplier had not been selected by ourselves instead our clients had engaged us to manage their selected suppliers on their behalf. When I had pitched to the client; a new media agency based in Soho, London to shift their off shored software services to one of our vetted suppliers, not only was the suggestion met with stiff resistance but I was asked if we had a ‘deal’ with our vetted suppliers to bring them new business! Offended I was but I knew time would prove me right… and ten months into the contract I had the evidence to reassert why we ask clients to work with offshore suppliers we have painstakingly vetted!

Having identified the pattern I went back to the client and submitted my project manager’s findings to them,Mark the CEO  was up in arms but could not believe it could be true, He had been assured by their supplier that they had a dedicated team of 8 technical staff for which they were paying a little short of £7,500- per month. For me the numbers simply did not add up… they never had! This supplier was based in the Middle East and South Asia, the team my client was paying for was allegedly sitting in the Middle Eastern office (in Dubai). Knowing the rates in the UAE in those days it was simply not possible to offer those day rates out of UAE let alone anywhere in South Asia for the caliber of resources we knew were working at this suppliers end.

It was not that the resources were inefficient, they were competent technical staff and that was it… you do not expect competent technical staff to turn incompetent every few months for a number of weeks and then get back to their usual competent self!… unless they are distracted. And we knew that caliber of staff simply did not come at those rates.

I suspected that there were probably 8 technical staff as a minimum who were not very dedicated to my client alone, neither were they dedicated to a single project for my client (as they were contractually bound to be), in fact the same team was being used to service all the projects from this particular client whilst being double billed and very likely being utilised and billed elsewhere too. Given the rates my client had negotiated it was logically not possible for the supplier to provide a dedicated team at that price unless the supplier was a registered charity!

My client who had been using this particular supplier for over two years was in denial, there was also the issue of I told you to use a vetted supplier! Mark suggested that there must be another explanation… and concocted a number of possible explanations for the blips… ego is a strange thing! Here I was trying to explain to this guy that his supplier was shafting him and he was suggesting I had it wrong!

I pulled out some unrelated stats.. namely the rental rates for offices at the DIC (Dubai Internet City), average wage rates for IT staff in Dubai for the past two years and made my case that the rates he was receiving for resources sitting in Dubai was simply not possible unless they were slaves or were paid in kind by their company! or more realistically he was paying for 8 but getting far less, or paying a dedicated rate but getting a not so dedicated resource pool. The conversation was going only one way… down hill!

Mark did not want to accept that he had been wrong all along and worse that he had been wrong over the past 24 months. We agreed to disagree and I was politely told that our services were no longer required and that they would be managing the supplier internally. Though miffed at loosing a client who was blind to being screwed and was unwilling to let us help him not get screwed I too politely agreed it was for the best and probably better for our brand that we were no longer involved and parted ways… somewhat acrimoniously.

When Supplier’s poach internal resources for double sometimes triple billing

A month later I got a call from Mark who wanted to meet up for a coffee and a catch up! and we met up the same afternoon, Mark was accompanied by one of his project manager, Linda; who had reached a similar conclusion as ourselves, though Linda did have the benefit of all the performance data we had compiled while we managed the supplier and had handed over whilst parting ways. It was an awkward meeting for Mark wanted to say ‘you were right all along’ but could not quite bring him self to do so, this was why Linda was there who eloquently worded the conversation so as to not make out that Mark was wrong or I right.

I inquired if they wanted us involved in any capacity and the answer was a yes, ‘..we want you guys to manage the knowledge transfer from these guys to a new supplier..’, and I was asked to present the suppliers on our list that would be a good fit for the agency to work with.

Any how a few months later with water under the bridge, a new supplier in place (with a smaller dedicated team and a slightly higher monthly retainer), all things running smoothly and our relationship at a different level, I asked Mark how he had arrived at the same conclusion as me? Mark went about telling me one of the funniest stories I have heard of how he turned up unannounced at his supplier’s offices in Dubai only to find a handful of people working of whom only a third were working on his projects and how a very annoyed account manager had him escorted off his premises for coming over unannounced!

I could relate to that for I too had once pulled a similar stunt with a supplier I had suspected of being a lying cowboy! and had been dished similar hospitality in a strange city in Eastern Europe.

Unfortunately this practice is pretty prevalent and we as buyers are partly to blame for its existence. Let me explain:

Though vast majority of SME’s desire tier 1 quality but they can not afford tier 1 prices (some tier 2 suppliers price the S&M segment of the SME sector out too), what most SME’s like to pay is tier 3 prices and many work hard to drive their supplier even lower… they end up paying peanuts and they get monkeys and deservedly so.

There is a misconception that sending software development services offshore has to be cheap! the word is not ‘cheap’ it is ‘comparatively good value’ that is if you want quality outputs. There is another misconception that in developing economies people can survive on little to nothing! we keep hearing in the press how the average salary of an average person/household in South Asia/Eastern Europe/China/Africa is less than XXX dollars per year and we categorize every kind of labor in the same segment without any thought to to how skewed income distribution is in any part of the world!

Software developers or knowledge economy workers do not fall into this ‘average household’ category. To my clients I say… do your own research got to Yahoo (back in the days) and/or Google, find a local job portal for your target off-shoring country and run a search for the job roles you are looking for in a team offshore and see what turns up! in the least it gives you an informed position to negotiate from.

SME’s confuse good value with dirt cheap and in the majority of cases end up paying in quality which ends up them paying three times the number of peanuts they budgeted for and it becomes an expensive exercise in evolution where you start with a monkey and end up with something close to what you required many iterations later! one which with hindsight they realize would not have been so painful had they gone with a more quality conscious albeit slightly more expensive supplier. The message is paying peanuts guarantees monkeys.

Lets face it there is a dearth of good reliable offshore software service providers and an abundance of what I call cowboy organizations touting cheaper and cheaper day rates and promising the heavens to the small to medium sized enterprises in developed economies. And sadly there is also a dearth of common sense on the buying side where many organizations believe they can pay peanuts but do not expect to get monkeys! it is this sort of irresponsible behavior on the buying side that keeps the cowboy operators in business who keep moving from one SME to the other in a continuous cycle of building and dashing expectations. These short term contracts/projects do keep the cowboys in business but do considerable damage to the overall reputation of the offshore software outsourcing industry.

I have four words for you: common sense & due diligence!  (ok.. that’s technically five!)
There are many ways of conducting due diligence without having to fly out to the suppliers offices, and these are pretty much common sense approaches… Google your supplier and see what the web throws out at you on them, ask for and contact multiple references, ask for previous and current clients, ask for sample contracts that would be in place between you and them should you select them (the quality of a contract speaks a lot for a company’s processes). If any of the references turn out to be in the same time zone as you, meet up with them. Look up the CEO and any team leads pitched to you on Linkedin and other social networking sites, you may be surprised by what turns up or equally so by what does not. And lastly check to see if your supplier has a blog… you can learn a lot about a company’s culture and attitude from their blog… unless it happens to be technical gibberish which unfortunately is the norm for some offshore software service providers… which too tells you a lot about the company and it’s leadership.

There are also common sense approaches to ensuring you do not get screwed like Mark did from the Agency in Soho! demand transparency and visibility of the team that is going to be dedicated to your project/product and get to know them over Skype or ooVoo or whatever you use (and use the video mode it makes the interaction more personal), develop a relationship with your dedicated team as you would with one sitting in your offices or a local supplier… remember it is about relationships… it is all about people and people are more likely to be honest and open with those with whom they have a relationship than complete strangers. Just as any quality and relationship conscious offshore software service provider would try and embed themselves in your organization, you ought to reciprocate and do the same. Over time you will find that not only will this breed a true partnership approach it will lead to many intangible benefits too.

Another lesson common sense teaches us is that it is easier for a product based company (say a widget manufacturer) to maintain lower rates over time than for a service based company. A service provider can not horde its labor or go against market determined rates for too long. So if you see rates that make the market look silly… its not the market being fooled it is you. And face it there will be tier 2, tier 3 offshore software service providers who do command a premium rate and with good reason, so if you feel the rate is high inquire about their processes and the value they are going to add to your project and your business; because they will bring more to the table than just a bunch of technicians.

And lastly if the rates seem too good to be true… they probably are. Discuss it with the supplier… ask them how can they afford to provide such rates? what are their margins? and don’t be shy to ask if they are making any money on the project? show some concern and do not try and fleece the supplier! for if it is not a win-win situation no one will win… specially you…guaranteed.

Now my two pence worth of what you can take away from the above if you are an offshore software service provider:

If you are indulging in any cowboy practices some of which I have touched upon above… stop it. Not only are you giving the industry a bad name you are slowly chopping your own limbs off!
Some suppliers quote peanuts to capture a prospective client, then they bleed them dry! if you are one of them… shame on you! start with a true overall cost and negotiate a payment plan with your prospective client if they are bootstrapping their venture – remember your growth and prosperity as a supplier is linked to the growth and prosperity of your clients.

Be transparent with your clients and when they drive your costs down to a point where it isn’t worth it anymore; let them know and walk away from it instead of delivering a half baked cake! you will be respected for it. Take pride in your output and your brand. There are many many SME’s out there who will give you business… you gotta keep knocking on them doors and maintaining your quality and building on your reputation which will help open many more.

I have come across some suppliers who would take on any work for any amount of money to keep their cash flow going and revenues from shrinking… in my opinion this is a fools paradise; take time out to win projects that add value to your bottom line and give you the opportunity to add value to the client’s business. This fools paradise will neither add value or margins to your business. Do not hesitate to scale your resource pool down if times are lean, you can always build back your team but building back damaged reputation is much harder.

Do not hesitate to be transparent with your clients specially those who are looking to develop a long term relationship with you, if your client requires you to be transparent on costs then ask them for the aims and objectives of requiring such detailed transparency and if their objectives align with yours then do not hesitate in being open. But remember openness can be a double edged sword be wary of ‘cowboy clients’ who will lead you up the garden path (yes cowboy clients exist just as cowboy suppliers do!) and do your own due diligence on the prospective client just as they would on you.

And lastly don’t accept peanuts and never deliver monkeys!

Do not forget about the fact that chronic hepatitis c need to recognize as soon as possible and then maybe it will be possible to quickly cure is hepatitis c contagious remember this and beware.

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