CNews - April 12, 2011
What is the most effective strategy for a company looking to outsource software development? Some believe that the path to success lies in outsourcing certain short term projects across multiple service providers on a fixed cost basis, and burdening them with all of the structural and technical risks. By contrast, Vladimir Stasevich, Head of Vendor Projects at Citi, thinks the focus should be put on developing long term outsourcing partnerships with shared risk management. This more strategic approach can empower a constructive dialog between customer and provider and create a win-win situation that delivers measurably better results.
In this interview with CNews, Vladimir Stasevich shares his success in putting this strategy into practice.
CNews: Why did you turn to outsourcing?
Vladimir Stasevich: Citi has been working in Russia since 1993. We are a full subsidiary of the well known global financial services company, and most of our business processes are supported by existing corporate information systems. Initially, our IT department was focused on updating legacy solutions, and supporting financial products and services that were offered to our customers in Russia. Our staff was quite limited. As business grew, we needed to launch new services and products to support the expanding requirements of this market, placing greater demands on our internal staff. Compounding the challenge, we also needed them to fill gaps in some of the processes in our corporate systems that were not able to fully cover certain Russian specific niches. While we knew we could rely on our in-house forces (we have software developers for certain tasks), we decided to opt for another strategy to deal with our growth - outsourcing.
We know how to spend money wisely. We are aware of the costs associated with in-house IT resources and the money that the Bank spends on its own IT staff. The problem we face is that our overhead charges are pretty high (we rent expensive offices, maintain well-developed corporate infrastructure, etc). For us to conduct large-scale software development internally, we would first need to invest in building out the required support infrastructure and updating our internal processes, and then be constantly occupied with HR and the activities around on-boarding staff.
Having weighed all pros and cons, we turned to outsourcing, which is more cost-efficient for us at that point.
CNews: What outsourcing model did you choose and why?
Vladimir Stasevich: There is a continuous flow of tasks within financial services companies around both supporting legacy systems and developing new solutions. These activities require having IT professionals available with specific technical and functional skills. This is an area where having long term partnerships with outsourcing vendors can be really beneficial. In this model, we observe fewer risks and more opportunities for driving IT costs down. It gives us a mature and highly experienced outsourced software development team, which is engaged in our projects solely and ready to take on nearly full-cycle software development projects. Long term cooperation allows us to set up flawless communications and work effectively as a team. We can accumulate expertise, become more familiar with each other, and avoid past mistakes in future projects.
But in 2004 we couldn’t find the required competencies, maturity and experience offered by any of the Russian service providers. We saw no examples of practicing long term IT outsourcing among our partner banks. As a result, we decided to move ahead with an outsourcing model that is common for our country: fixed cost projects without long term planning beyond the project scope.
CNews: What major criteria did you follow while choosing an IT outsourcing services provider?
Vladimir Stasevich: For us, the most crucial competencies expected of any IT outsourcing services provider include high-end software development, skills in software implementation, and the ability to offer high-level support. We took note of the sufficiency of each provider’s IT resources and their technical infrastructure (workstations, testing environment, etc), as well as the skills and knowledge in IT process management they could bring to an engagement. In addition, a critical review was given to those people we were supposed to work with directly – their proficiency, experience, and ability to listen to our needs as a customer. In order to evaluate each provider’s competency from a practical perspective, we started our collaboration with them on small pilot projects. That helped us get a clear view of the potential we had for further cooperation. One of the companies, among several, which bid for the Bank’s tenders, was EPAM Systems. Their experience and expertise in those technologies that are most relevant to us led to EPAM gradually becoming one of our main IT outsourcing partners.
CNews: How did you build up your cooperation?
Vladimir Stasevich: I would describe this experience as a trial-and-error method towards long term fruitful cooperation. From the start, both sides needed to get used to each other. The range of actual IT tasks was split up into separate minor projects and then outsourced to EPAM on a fixed cost basis. At this stage, we tried mostly not to interfere in the software development process. The best situation seemed to us as follows: we set the challenge, earmark money and, in a well-defined time, get a completed, high-quality delivery of the agreed to functionality.
In reality, things didn't work out that way. We were on budget, but due to lack of proper contacts between us and the provider we encountered some problems during the business analysis phase. As a consequence, we fell short of our expectations regarding the quality of the delivered solutions. The provider, in turn, graded the projects as economically irrational and even loss-making. So the initial engagement didn’t wholly meet the expectations of either side.
But despite losses, EPAM was still willing to invest in our relationship - namely, to train their IT software engineers in the technologies that were relevant to us, and build up their technical infrastructure in compliance with our standards and requirements. We were impressed by their spirit and readiness to take a step towards finding a mutually advantageous cooperation model.
CNews: Was it a bilateral intention to develop this type of relationship?
Vladimir Stasevich: It was. As for our side, we became more engaged in project activities in terms of management and supervision functions. Together with EPAM, we defined cases when it made sense to take baby steps where we could plan and fund each consecutive milestone based on the results of the previous one. We partially gave up the fixed cost model in favor of the time and material one. That led to outsourcing actually becoming became cheaper, as EPAM lowered their rates in response to this model shift. The change went well, and some of the previous issues were resolved.
By fostering our relationship gradually and step-by-step, we actually arrived at the above-mentioned long term partnership model. At present, we jointly plan projects and budgets and are co-responsible for the results delivered to our business customers. There is a solid team combining outsourced and in-house IT forces. We know all the people who work for us and who play a significant role in successful project implementation or take part in crucial managerial decisions. The provider’s IT professionals, in their turn, now have insight into the specifics of our business and are more aware of the needs and expectations of certain business customers and users.
In the past, we confronted challenges due to some difficulties our business units had in projecting future requests for new functionality or system versions. Because of this EPAM couldn’t temporarily switch “our” IT staff to another project, as they could be assigned a new tasked any time. This resulted in idle periods for the team. Some software engineers needed left for other outsourcing projects, and we had to get along with new people over and over again.
The situation is now much better in the sense that both we and the provider share a common overview of our short- and mid-term projects. This helps EPAM to more accurately plan the workload of resources dedicated to us. If, for example, a part of the team has down time or, vice versa, is overloaded, the provider turns to us for a joint discussion on how to work with this going forward.
CNews: How do you share areas of responsibility within a single IT team?
Vladimir Stasevich: Organizational management principles are different for information system development, implementation and support. Each side is focused on its own specific functions. The total number of external outsourced team experts typically exceeds 100 people.
The development process is arranged as follows: Citi defines the task and draws its requirements specification. From here, the provider gets analysts, software engineers and testers involved, who are fully responsible for all development phases. The required work is performed by the team offsite, as we stand on principle not to use the onsite software development model.
Vladimir Stasevich: The quality of the provider’s services is of vital importance to us
Solution implementation is performed by our in-house IT department. We may also engage external analysts to participate in specific implementation projects. But as opposed to a process driven by development milestones, here we set a compulsory condition that onsite work is managed by the Citi PM.
Production support is handed over to respective software development companies. It all comes back to where it started - software engineers write the code which is maintained later on by their colleagues. This psychological point positively influences the quality of the solutions developed by the provider and then implemented for us. The provider’s team delivers Level 2 support and higher. The range of tasks includes application bug investigation and workaround provisioning, if necessary – creating new tasks regarding system patching, etc. At the same time, management and supervision functions are carried out by the Citi experts - our own in-house support service. As a rule, we tend to offsite support, at the provider’s premises. But, for instance, in Ryazan, where the Bank owns a large transaction center (2000+ employees), we share the same building with the EPAM support team. So, even though the provider’s professionals technically work outside of Citi, they are actually within our reach. As for other outsourcing vendors, support is provided offsite. As our experience shows, it doesn’t affect the quality of service.
As a consequence, we can effectively build up the whole IT solution lifecycle support: from task setting to implementation and maintenance. That’s good from a business point of view, as it means that there is no idleness and a set task will get completed both on time and with the proper quality.
CNews: Talking about the advantages of long-term cooperation with the IT outsourcing services provider you mentioned expertise accumulation: the provider gets insight into its Customer’s business and is able to perform works in its business areas. Does this factor work for you?
Vladimir Stasevich: I would say it does. We do not assign any concrete business specializations to IT providers. For example, EPAM implements projects in different business areas for us. Examples of this are the Bank’s co-branding system development, cards reporting solutions development, securities system support, and contact center maintenance. One of the more challenging projects we have worked on was for e-delivery platform development. Its application enables information integration from several systems (customers’ accounts data, information messages, etc) and provides aggregated delivery to the customer through e-channels. A more recent project is the SMS distribution platform development. Its usage ensures higher performance during marketing campaign arrangements, supports distribution of corporate and information messages to our customers, receives and analyzes feedback, etc. Additionally, there is an opportunity to cooperate with several mobile service providers and keep our outgoing traffic automatically balanced for those channels.
CNews: You have outsourced a major part of your IT processes. Do you still have an opportunity to control and influence the quality and effectiveness of your provider’s work?
Vladimir Stasevich: The quality of the provider’s services is of primary importance for us. Solutions that we get from external providers influence our customers’ attitude towards the Bank and their loyalty to Citi products and services. If, due to some software bugs, our customer cannot get a reply from a contact center operator, we risk losing him or her, which is unacceptable. Our partners share our views on this issue and create facilities that allow us to control the quality of IT team performance on an aggregate level as well as down to its discrete elements.
With this in mind, together with EPAM, we have developed and implemented a metrics system. It provides continuous monitoring of various software defects and IT experts’ performance quality (faults at business analysis, development and testing phases, etc.). This lets us take prompt steps to remedy any problematic situation. In addition, these indicators let us follow the tasks that analysts, developers and testers are occupied with throughout their working day, and show the distribution of costs over different time periods within certain projects, and along general business lines. Our metrics are closely tied to our employee motivation and bonus payment system. This provides us with an effective mechanism to increase the quality and efficiency of information systems development and support.
CNews: On the whole, how far did outsourcing prove its financial advantage in reality compared to expanding one’s own in-house IT department? Which factors were crucial at that point?
Vladimir Stasevich: Now we are able to estimate accurately what resources are required to implement each project we outsource. When compared to its possible in-house implementation the costs are lower - outsourcing is cheaper. Besides the factors initially taken into account during the estimation, we can also enjoy the benefits of scale that we get from working with a partner. For example, EPAM has 6,000+ employees, leveraging a well-developed infrastructure and well-built IT processes. That allows their IT costs to be lower than Citi’s ones. Consequently, this can impact the costs of every project. The outsourcing model we have finally reached has helped us achieve the best possible quality to price ratio for the business. Mutual understanding and joint team work for the benefit of our business customers, shared responsibility for results, planning and cost control, quality and efficiency control metrics – all these factors contributed to a mutually advantageous balance both for us and our IT outsourcing services provider.
Original publication is here.