Column: "Avoid expensive and inefficient consulting purchases"

This was posted in CFO World yesterday

Swedish consulting buying companies are stuck in an ineffective purchasing model. To be able to compete globally, the CFOs have to start thinking strategically, says this week's guest columnist. 

Most Swedish companies still choses to have IT-consultants permanently located in their offices. In principle, they are like employees with the largest exception of being more expensive for the company. Also, competence development often gets de-prioritized. Neither the manager at the customer nor the consulting manager takes responsibility for the consultants competence. The prior wants the consulting hours they pay for and the latter as many billable hours as possible.

By migrating from today's fixed consulting team to more flexible alternatives, the buyers would be able to regularly adapt competence according to need in various development projects. Instead of using, for example, a team of 6 consultants on-site, a company could - without increasing its costs - have 2 consultants locally and some ten consultants offshore, e.g. in China.

The consultants onsite will then act as a bridge between customer and the outsourced consultants, securing scaling up and down the team and ensure adequate competence at any given time. Consultants based in Sweden can support several projects and keep up-to-date with the latest technical developments. At the same time, it is crucial to have a project manager locally off-shore - in China as in the example - with responsibility to build and retain the local competence.

With this setup of right-shoring, companies can reduce its costs given lower rates and at the same time keep competence competitive. Additionally, productivity increase by leverage time differences, shorter and more spread out vacations, etc. E.g., a Korean employee works 2 193 hours p.a. in average and the average Swede, 1 644 hours, according to OECD.

In the two examples below, I compare traditional project set-ups with right-shoring models. Example two is from a real customer whereas the first one is based on standard calculations:

1a) A project in Sweden operated during 12 months with three local consultants to deliver a project. Assume the cost is 800 SEK p.h. and they work 1,600 hours each. Total cost equals 3,840,000 SEK.

1b)An alternative solution is to source a part time project manager, working about 2 days a week with project management and delivery: a team of 5 developers and 1 tester in China working about 1,600 hours and a part time project manager in China. Assume hourly rates for the Swedish project manager is 1,200 SEK: for project manager in China 300 SEK, developers 250 SEK and tester 200 SEK. The project can be delivered at least two months earlier; given shorter vacations and less holidays, the Chinese team can be productive even when the Swedes have time off. Most likely, the end result will also enjoy better quality and more thoroughly tested as the larger team can include more specialist functions, such as a dedicated tester. The total estimated cost 3,328,000 SEK.

Alternative 1b provides several benefits: 13% reduced cost, shorter delivery times and a better end-result.

2a) A company wants to hire six people to develop several mobile and embedded applications for different systems and terminals. For sure, it'll take at least four months before all six can start (in best case). The cost in Stockholm would be about 100,000 SEK p.m. p.p.  The total cost ends up at 600,000 SEK p.m. and potentially a half million SEK in recruitment fees.

2b) The alternative could be to have two consultants onsite and four developers and two testers in China. The team is fully operational within two month. The consultants may cost about 120,000 SEK p.m., each developer 40,000 SEK and each tester 30,000 SEK p.m. Thanks to a larger team and shortened start-up, the new products can be delivered and launched at least two months ahead. The total cost is 460,000 SEK p.m.

Alternative 1b provides several benefits: 23% reduced cost, and significant shorter time-to-market.

I hear a lot of people having or knowing about bad experiences in off-shoring. I dare saying that most of these issues relates to experiences from off-shoring childhood some ten years ago. At that time, the conditions for communication were far from what we have today with horrible phone and data communications.

Today, significant improvements are in place and the competencies in countries such as China is nowadays almost as good as in Sweden.

When it comes to develop of physical products, many large companies already have product development distributed all over the world. Corporate managements should also think alike for system and software development, which tends to become core business in many companies. If Swedish companies' system development is more expensive and slower than competitors, we risk to lose our global competitiveness.

It should be in all CFO's and finance managers interest to engage in how its organization uses its resources for system development and purchases of consulting resources. Those leveraging right-shoring's flexible team setup do have the chance to reduce costs, improve its efficiency and shorten time-to-market. Thereby delivering future innovations and shine on the global market.

China Pushes Ahead of Sweden in IT

This article was published in Ny Teknik today under the title "China pushes ahead of Sweden as IT-country" and I have taken the liberty to make a short trans-script.

OPINION. We are about to lose our position as "hotspot" and become a technical developing country. Support the entrepreneurs and increase number of seats at universities otherwise we risk to be stuck with the low-cost jobs in Sweden, warns David Almström, head of Scandinavia, Symbio.

Newly started enterprises decreased in Aug 2012, according to Bolagsverket. Number of AB was reduced by 130, compared to same month 2011. IT companies that might be more willing to take risks is where the reduction is most obvious. According to Assistera less 292 companies was started 3Q 2011 compared to year before.

As I just returned to Sweden after 15 years in the IT industry in China, I'm asking myself what's happening. Stockholm has been perceived to be a hotspot for startups - is Sweden losting out?

Despite hyped Swedish IT companies like Spotify and Klarna the willingness to invest is at record-low levels, according to SvD in Aug. Second quarter this year is the worst since 2007.

Working in the extremely fast-growing market for mobile solutions, I've seen whom we'll be competing with in the future. In countries like China, development have been exploding the last couple of years and it just goes on.

If Sweden are to be competitive, we have to improve the conditions for entrepreneurs. To leverage the entrepreneurial talents, education is required. For IT-entrepreneurs joining universities, excellent knowledge in basic science like mathematics is necessary. 

And how does it look in Sweden?

Well, the number of Swedish students not reaching acceptable levels have double between 1995 and 2008. If we check how engineers graduating, we also see a negative trend. Since the new millenium until last year, the number of registered students at engineering educations have decreased by 22% and number of graduates 15%.

Except lack of competence, lack of capital can be another reason for the ever decreasing new IT companies.

This leads to qualified jobs move outside of Sweden while lower salary jobs remains. When tax revenues decreases, the common welfare is reduced and poverty increase. Time to act to change this trend before to late.

Invest in eduction - both elementary and university. Maybe look at California and Silicon valley where the university have in its roots to collaborate with the private sector and professors are encouraged to engage and support innovations to become growth companies. Thereby also easier to find stakeholders willing to invest.

Politicians should stop plans to reduce 10,000 number of university seats. Improve the safety net for entrepreneurs. In Finland, the government have something referred to as Forced Leave, whereby a company losing revenues and struggles financially can put employees on forced leave. During forced leave, the employee get paid by the government (unemployment funds) and can be re-employed if situation improves.

If politicians do not act drastically with the support of universities, other stakeholders and investors, we may drain Sweden of competence. The result is moving away from a country seen as hotspot for entrepreneurs and early adopters to become a technical developing country. Not a future anyone of us wants.