The word “outsourcing” comes with a lot of baggage.

Rightly so, outsourcing is often associated with low-cost labor and taking jobs offshore. Large outsourcers are known for playing the cost arbitrage game. In many situations, results are compromised and quality is risked to reduce costs. Many managers have pulled out their hair trying to manage an outsourcing relationship that was deemed necessary by a senior executive who seems to have little understanding of basic math: If the cost of effort is one-third of the price, but a project takes 4x the effort to complete, the savings simply don’t add up. It’s no wonder that outsourcing is almost always synonymous with “cheap.”

A small segment of outsourcers have always tried to instill a value proposition within the outsourcing business model. Some have been successful. Others have not. Historically, outsourcers have tried to be a more attractive option by committing to fixed-price engagements and guaranteeing results. This aligns the outsourcer to outcomes rather than to effort.

Unfortunately, the pace of technological advancement taking place today is forcing businesses to react to the market in a much more rapid fashion. It’s becoming almost impossible to ask a vendor to commit to a firm, fixed-price, fixed-scope engagement. If you do, you will get what you ask for, but it’s very likely that this won’t be what you need. Business changes too quickly. No matter what you think you know today, tomorrow you will discover something new.

Companies are therefore faced with a dilemma. The onslaught of technology and heightened consumer expectations require businesses to embrace third-party outsourcers to help navigate and take advantage of these advancements. But outsourcers and vendors find themselves beholden to a business model that is fundamentally broken. On one hand it provides for low-value cost arbitrage services. On the other, it produces results that can often best be classified as the wrong results. This is a lose-lose proposition. There has to be a better way. 

Across the software development landscape, a select few companies are working to develop engagement models that change the way software products are built and measured. In these new models, which I see as the next step in the evolution of agile, product development efforts will be measured against business outcomes like revenue, market share, and consumer engagement. The benefit in such a model is that product teams—all the way down to the most junior engineers—understand these outcomes, as well as the market and consumer context around which the product is being built. 
Without this understanding, true innovation is impossible. You can’t create a new, innovative solution to a problem that you didn’t know existed, or without knowing what it will take for the product to become self-funding and sustainable. The old way of measuring inputs and outputs is a race to the bottom. In fact, there can be an inverse relationship between time and value. Compensating vendors by the hour, day or month creates an inherent misalignment of motivations. In the wrong hands, it could encourage outsourced teams to become rather inefficient.

So how can outsourcers and vendors accurately measure those business outcomes and the value of a team’s contributions to the larger development objectives? The short answer is by changing the incentives. Mature agile product teams define metrics like velocity and bill for quantifiable results, rather than for time and materials. Used properly, velocity is a good measurement, not just of the number of features delivered, but of the amount of business value delivered within a given timeframe.

It is also important to note that, with an outsourced team, the focus should notnecessarily be on maximizing velocity (although speed to market is imperative). It is much more important for teams to be consistently efficient. Predictability is an essential component of hitting targets and getting products to market in a profitable fashion.

The product development services sector is slowly but surely changing the outsourcing game. By building strategic products that require ongoing innovation, outsourcers are being forced to deliver a value proposition previously unparalleled in the IT outsourcing world. Companies that can deliver are much more than outsourcers; they are true business partners. In that case, outsourcing goes from being a dirty word to being one of the best-kept secrets in town.

David DeWolf is CEO of 3Pillar Global, a software product life-cycle and development company.

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