Outsourcing - Some Lessons Learned

Monday, September 10, 2007

David Feldmeier, http://www.gazelletech.com

I have done outsourcing for semiconductors, but I think that some of the lessons that I learned can be applied. There are a couple of issues with pure time & materials (T&M) contracts:
a. Difficult to keep costs down because there is no incentive to contractor to minimize cost
b. Difficult to keep costs down because of feature creep on the client side However, having been on the contractor side, a fixed-cost contract has issues as well:
a. Clients often expect additional work for no additional cost
b. Since the project may not be clearly defined, I must add additional cost to cover this uncertainty The solution that I have used on both the consulting and client side is a combination approach. What I do is a T&M contract to a detailed product specification and a detailed project Gantt chart with both timing and resourcing. Once the project is well-defined, then I put a fixed-price contract in place. This solves a bunch of problems, because the project is T&M while it is loosely defined and becomes fixed-price when it becomes well defined. Both sides are protected in this case.

I would estimate that the T&M phase will account for something like 10-15% of the total project cost. Because this first phase is relatively inexpensive, I sometimes have had two companies running in parallel and then I choose one of the two companies for the fixed-price phase.

As far as the payments go, expect to pay some money up-front to get things going. Set a series of major and minor milestones. I'd set the minor milestones to be about every 10 working days. Do payments on the major milestones. Make sure that the major milestones can be (and are) verified. The payments should be enough to cover all of the work that they have done until that milestone (approximately), but not more, so that they have incentive to get to the next milestone. Even after the project is over, I would hold back 10% or so for 90 days so that the contractor has incentive to continue to be helpful if issues occur after you have accepted the final product.

Hold project reviews at the milestones. I often have pulled in an external consultant for reviews, as they can be very helpful and see things that you may miss, and generally their cost is relatively minor compared with the project cost.

Generally I have found it useful to have one or two really technical people to oversee the project and act as a source of expertise and continuity once the consulting company has moved on to other projects.

I generally split the product design from the testing and I assign these tasks to different companies. Anything that one company doesn't want you to know usually leaks back through the other company. This works very well.

Another issue to be aware of is the ownership of intellectual property. This always is the most difficult part of a project to negotiate. You will want to keep any intellectual property developed by the contractor, and they will want to reuse the intellectual property in future projects. I have solved this in the past by dividing the intellectual property by whether it provides a distinct market advantage. For any general technology that doesn't make much difference in the final product, I'm happy to have both sides share ownership, such that you can reuse it in future software if done by another contractor and the contractor can reuse it in future with other customers.

Getting the contract right is vitally important. It needs to cover things in a very clear and complete way. I used three different contracts: an NDA, a per company agreement and a per project agreement. This is a very clean way to separate things.

As you probably can tell, I have done a number of projects in the past. I also have some pretty reasonable contracts that I have developed over the last couple of years.

David Feldmeier, President
Gazelle Technologies, Inc.
705 San Conrado Terrace, Suite 8
Sunnyvale, CA, 94085
408-404-4884
408-481-9872 fax
dfeldmeier@gazelletech.com
www.gazelletech.com

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