Doing Business Internationally Through the Internet

Berglund Authority Level 4

speaker Mark Lipson

For this issue of Interface our feature is the first event within the new Berglund Roundtable series, a presentation given at Pacific University on September 22, 2005, at Pacific University by Mark Lipson, CEO of Lunar Logic in Eugene, Oregon. Mark's topic is issues which arise in cross-cultural communication between firms and outsourced operations abroad. If you prefer to view the video rather than reading the transcript, please go to: http://bcis.pacificu.edu/roundtables/schedule/092005/video.php

Jeffrey Barlow
Hello, I’m Jeffrey Barlow, director of the Berglund Center at Pacific University.  Welcome to the first of six Berglund Roundtables.  The mission of the Berglund Center is to illuminate the impact of the Internet on the way that we live, work, and learn.  We’re very pleased to have the series begin with Mark Lipson from Lunar Logic.  Let me first introduce the Vice President for University Relations at Pacific University.  Tim O’Malley who will introduce the speaker in more detail.

Tim O’Malley
Thank you, Jeffrey.  On behalf of all of us at Pacific University, it’s my pleasure to welcome all of you to the first of the Roundtable series sponsored by the Berglund Center for Internet Studies here at Pacific University. The topic this afternoon, “Doing Business Internationally Through the Internet,” is particularly important not only to the mission of the Berglund Center, but in the interest of all of us here in the room and in our audience.  We’re especially pleased today to welcome Mark Lipson, the CEO, founder, and President of Lunar Logic in Eugene.  Mark comes to us with more than 20 years’ experience in programming and moving gradually through the profession to be an entrepreneur and executive of a startup company that has quickly grown from a handful of employees to more than 175 employees in an international marketplace.  Mark is described as an old-fashioned tech-CEO who is just as comfortable with computer programming as he is in the executive’s chair at his company as a lead developer and programmer.  He’ll speak to us this afternoon about the challenges of doing business in an international marketplace.  So with that, please welcome Mark Lipson.

Mark Lipson
Thank you. Briefly, Lunar Logic is a software company providing software services for hire primarily with a couple of products. Our specialty is web applications, and particularly educational web for Thomson and particularly with Thomson Higher Education.  We’ve developed to maintain to the support of their product I’ve learned since its inception.  I was the original programmer and it’s taken over Thomson Higher Education.

Lunar Logic was started in the summer between ’96 and ‘98. Rather, 1998. It started off with just me and two or three others and then we started doubling every year for quite some years.  By this point we had, including the temps on staff, around 200 people. That kept us busy.

Early on, (2001, early working with Thomson) I started working with a company in Moscow called Oak Teach, and I’ve been working with them ever since.  I’ve learned a lot about working with people in different time zones; communication issues, costs, budgeting, cultural issues, all that. And in 2003 I sent my then Senior Vice President of Project Management over to Poland to set up an office.  The inspiration was while we were returning from a flight to Seattle, flying back to Eugene.  We knew that Thomson was going to mandate a certain percent of outsource work, we thought we’d take matters into our own hands.  And we set up our own. So Lunar Logic Polska is my satellite office in Europe.  And there are a number of advantages to doing business there.  It’s a significant different experience working with a company that I own in eastern Europe compared to the one that the partners owned.

There are some significant differences.  Back to a footnote about my PowerPoint here, I didn’t have a chance to edit, so I’m going to talk about some of the points I missed.  Now it’s written that it is harder than you’d think to get the cost savings.  You can’t just look at the dollars per hour of the developers.  In most places, the communication costs are very high.  And that said, I had two very different experiences in that segment; I could contrast those. In general, there are some cultural differences that are interesting challenges. For instance, all the developers I’ve worked with in Europe are much more process-oriented and they’ve studied all the project management styles and they expect there to be a very orderly manner to things.  And I suppose Thomson is on one extreme, but this happens a lot in the world of business, where the market shifts immediately and responsiveness is demanded.  And I found myself in a position where they required me to be highly agile and to turn on a dime and to change midstream and to still produce quality software, which is a challenge.  I cannot apply the waterfall model to very many projects at all in my experience.  I know that there are projects out there, but not in my world.  The closer you get to the web, it seems, the more rapidly the requirements change.  And the requirements change faster than you can write software, so that’s been an interesting challenge; getting the processing to rise.  And there’s an assumption that there’ll be a clear process.

The time zone really is part of that.  If you’re not speaking directly to someone, there has to be some objective, set of standards, to apply.   So we found that particularly in sending word to Russia, we’d give them projects that are more clearly defined, sometimes more peripheral, and it cuts down on what we can send there, but certain types of projects certainly worked better than others; needs to be in their area of competency, needs to be discrete, separate, with a timeline that’s relatively far away, where the requirements are less volatile.  Then there’s the time zone issue.  And also an interesting thing: particularly in Europe and India, Indonesia, and other places in the world I work with indirectly, people rely a lot more on public transportation, which means at 5:03, or whenever the bus comes by, everyone’s out of the office.  Otherwise they’re an hour late to get home for dinner.  Then the workweek is a little bit shorter.  People tend to expect to have more predictable working hours.  So I’ve found it’s a lot harder to find people in other countries to work odd shifts to communicate with my people.  Generally, I provide the people who work late at night.

And tying back to process, there have been some interesting communication issues.  For instance, recently there was a project that we were attempting to hand off in its entirety to Russia, but the customer hadn’t written any specifications, and it had gone from one prototype level to another prototype to another iteration, and at no point was there a clear set of specifications or test plans.  And I don’t want to say it blew their circuits, but they felt like it had not been handed over.  We couldn’t convey to them that we were handing it over without those components. So we had to go back and write specifications 3 months after they had supposedly started it.  They refused to do Q&A on the product because they didn’t know what to test against.  Whereas our instinct would have been “Well, we’ll make it up as we go along. We can figure this out.  We’ll reverse engineer, we’ll call the customer.“  And of course there’s the ability to call the customer in our time zone.  They certainly don’t feel that they have that right.  Then there’s the base level of cultural assumptions.  All the different things “yes” might mean.  “Yes” as a conflict avoidance mechanism.  “Yes, I understand what you’re saying” is an equivalent to “Let’s do lunch.”

So in general, the silver bullet, if you can call it that, is communication.  Investment in communication, it seems.  In my experience, the best solution is to have someone whose full time job is to keep the offshore team successful; to keep them contributing, helpful, preferably working in their time zone.  If I can convince someone offshore to work in my time zone, then I’ll try that, too.  But I’ve had on the Russian team someone who grew up in Russia, who’s fluent in Russian, and who’s lived there until she was 17.  And she’s culturally fluent, which has been very important because with our partner in Russia they don’t work for us.  Which is another interesting issue where they’re very conscious of what level of hierarchy the person is when they’re giving them decrees, particularly changing something at the last minute, which they don’t expect anyway.  They want to follow the protocol, and I suppose there just isn’t as much discipline in terms of protocol coming from this side.  The customer changes his mind, the department changes its mind, so she was able to earn their respect and crack down on them in the right way and express urgency, whereas I or any number of other executives in the company might say for instance “We really need such-and-such to happen,” or “Could you please do such-and-such, we really need this by tomorrow,” they don’t know how important it is.  That doesn’t speak to their sense of priorities.  That’s just not clear to them and it’s been pretty important to have someone in the time zone who’s technical enough, or at least understands the projects deeply enough, that they can re-explain the specifications if they exist to the development team. We find that amazingly small things need to be re-explained.  Or the hardest thing to communicate seems to be the business case behind a given project.  Sure it may look like this, there may be a list over here, a team back in service, such-and-such, but why?  And the questions we might ask in terms of how you would verify that the customer is going to like it, answering questions on your own about specifications, that sort of thing.  We really need someone who understands that as well as the technical things.  And the other thing I’ve done that works pretty well is having one of my people in the time zone.  When I sent my Senior Vice President project manager over, he was my best project manager so he was the perfect person, so it was certainly his setup for success.  Of course, I lost my best project manager.  But it worked pretty well in terms of setting up the new business.  And you have to invest in plane tickets, too. You just count that as a communication cost.

One of the biggest challenges, really, has been that there’s a distrust curve.  (I can only draw that with my hands because I didn’t put it in the slideshow.) But distrust just builds up and builds up, then you have a visit and it drops down.  And everyone’s happy, they’re all friends, and everyone trusts the technologic expertise of the other team, and then it starts building up again.  You need to keep pushing it down.  And I find that without supervision, the leads on my projects delegate increasingly peripheral parts of projects to the offshore teams.  They don’t trust their architectural judgment.  They hold out more and more of the work, but when they work with them they realize that they’re better trained than they are and they have a very deep understanding when you explain the business case of the overall picture of the project, so it works to set whole projects.  But I think the ideal solution is the huge investment in communication and big pieces so that you’re not required to communicate back and forth, but you have a big investment in understanding the project up front.

Now of course my head of marketing did this and he has just a couple of vested interests, but I just wanted to say that you can’t just look at the dollars per hour and assume that’s your cost savings.  You have to add back in the cost of communication, the plane tickets, of much clearer specifications, of investment and process, and management and putting someone on the right shift.  So having 24-hour coverage is a very good thing.  I found that historically with my Russian partner, they’re great in emergencies.  If you communicate clearly that that it’s really an emergency, at the end of your day, theirs is just starting and they can pick up where you left off when your people are completely exhausted.  Particularly on web sites with live traffic, you deal with a lot of emergencies.  I feel like the super hero has to save the universe again and again and again.

We use JIRA as one method of communication, just to track things at the task level for a little bit of help with workflows and guarantee that handoffs happen.  And for the micro-level specification, there’s the specification but there’s a much smaller level of specificity that evolves over time with a product, particularly with an agile project where you just found out yesterday what the customer really meant on page three.  And we use Wikis to capture status, just have an area for people to collaborate, have immediate feedback on what’s being built.  We use e-mail, and e-mail’s not the most effective form of communication overseas, but I think of it in terms of layers.  There are specifications in the longest time scale written documents, and e-mails form a nice thread--almost a blog form of information--you can rely on it and it give general commands.  Then, instant messaging is what those responsible for managing the offshore partners [use as] their main tool.  And an interesting note to that is that they don’t usually use a video because they’re usually working from home in their pajamas, so an interesting reason not to use the video.  But just the real-time nature seems to be the most important thing.  And we use VOMD, of course, we have weekly calls.  We have in our Polish offices VPN, so around the same network, we can just dial an extension and talk to the people in Poland, which is strange but it’s very handy.  Of course it’s hard to get people to make those phone calls, because with the time zones, it’s confusing; there’s a nine-hour time difference to Poland and an eleven-hour time difference to Russia.

So another note on communication: you get a lot of smiling and nodding and saying “Yes, that’s a great idea.”  But they’re going to ignore what you said and do what your boss said.  At least for the people in Russia, they’re very conscious that you have to get the person in charge to authorize things

Now, a time zone makes a big difference.  You really have to solve things here, explain it to them, and then they can do it.  Or fly them out and get them to work with the customer, but that real-time communication is very important, especially with an agile process, which is what we have with Thomson.  The specifications are not entirely clear, they change, so there’s a general concept that if you have a clear idea of what you want, there are certain areas that are very efficient to plug offshore vendors in and they each have their own areas of specialization.  I mean, if there are pretty clear designs for 50 JSP pages, send it off to the JSP team in Poland and they can work wonders with it.  If there’s a specific applet that needs to be coded and there’s a reasonably clear idea of what that is, send it off to Russia.

So there’s the concept of the never-ending day and “the sun never sets on the software empire” and there’s a slight psychological benefit of having an extra group that you hadn’t thought of before.  So it’s near the end of the day, it’s not quite done, and “Oh right, there’s Poland.”  And once you get it working and you get to know the skills of the various teams, you can actually lower cost.  One nice little thing for those worried about losing their jobs in this country is that there’s pretty clear role differentiation; there’s a lot of management and leadership and understanding of the business case and architecture and engineering that has to happen here, and then there’s a lot of work that it makes sense to send somewhere else.  And for us, owning one of our offshore vendors, we have a foothold in the European market, which doesn’t hurt.

Jeffrey Barlow
Thank you very much, Mark.  I would like to understand why it is that Thomson was going to mandate a percentage of overseas work.  What was their perspective?

Mark Lipson
You know, I’m not sure if they had any other motivation other than cost savings.  That really seems to be the main component.  They have vendors in India in particular that they were successful with.  They’ve tried it, it’s worked for them, they strongly encourage others through their organization to do that.  And it’s a mandate that they apply with gradually increasing force.  Every quarter they step up the level of pressure to do this, and largely its just budget pressure.

Jeffrey Barlow
So that means that you are sharing your savings with Thomson? Their point is to get their contract with you down and you then are cutting down your costs, and that is passed through to Thomson and that’s making you more competitive.

Mark Lipson
Right.  [As an analogy], centralizing is a concentrated cleaning agent and it needs to be mixed in with a certain amount of water; it doesn’t need to be that concentrated, and the customer demands a certain cost per gallon.  And I don’t want to say we’re watering down our services, that’s not the analogy we’re shooting for, but it still gets things adequately clean with a little bit of water.  It’s designed that way.

Tim O’Malley
Mark, I had a question.  You had mentioned earlier I think that you’ve been in this venture in Poland for about two years.  And there are clear pros and cons with doing business overseas in this regard.  How long before your company can fully appreciate a margin or a return on your investment?

Mark Lipson
We are actively paying back the investment cost at a rate that I am satisfied with, and it only took six months to reach that point where it was in the black and fairly quickly some of the benefits were visible quickly: having people in the other time zone and just having the experience of the more devoted dedicated team with a group that has quite a bit of allegiance to my company as opposed to a partner that has other customers and doesn’t really want to be managed by one of their partners.  So I could sense what the benefits were going to be.  There were some interesting catches in that it seemed to take about three months to be able to hire someone; we got to learn a lot about Polish labor laws, and HR practices.  Comp time is cumulative and mandatory and carries from job to job, so anyone who’s a hard worker, never uses their comp time and they always have two months saved up, you hire them, and then they can take a two-month vacation.  Or they can give notice and then take a two-month vacation and that’s generally what people do, and the previous employer will handle that cost and you just have to pay out the back end for that.  So hiring is a little bit slow over there, you have to think carefully.  Another small detail is that once you reach a certain point, six months or something like that, the cost of laying someone off is something like 25% of their annual salary of the employers share of unemployment, so there’s a pretty substantial cost to downsize.

Joe Howell
I’m Joe Howell and I’m the funding advisor of the Berglund Institute, and my question is with respect to your choice in Europe.  So many of the European countries need to fund some of these social programs that it does become quite expensive.  Did you have an opportunity to compare and contrast the cost you might have incurred were you to have gone else where in the world, particularly to India or to China, and how that might have affected both your cost and your relationship with your significant customer?

Mark Lipson
Well, I wanted to try something a little different, and from the initial calculations it seemed that our cost would be fairly competitive or at least low enough that for our purposes that worked.  I only wanted to take so large of a cultural step.  I wanted to go for something that was at least somewhat familiar, like I’d worked with my Russian partner for so many years, and I’ve been over there, Europe’s a nice place, so I’m sure that in the long run we could have realized larger cost savings, but it would have taken a little longer and I wasn’t quite ready for such a long term investment; for me it would have been a long term investment.

Joe Howell
Here’s my follow-up question on that: so far much of the conversations have been related to the cost benefits of going abroad and we’ve talked about some of the other intangible benefits of going elsewhere in the world.  Would you see yourself--based upon what you’ve learned--now seeking to expand further outside of the United States and to other places in addition to eastern Europe, and for what reasons would you choose to or not to establish another location in the future given the workload there?

Mark Lipson
There’s a per-facility cost of management, keeping track of each group, adjusting to the time zones, adjusting to the individuals, adjusting to the management, and the processes for these groups, but certainly in the long term I’d be very interested.  I could see that as reasonably inevitable to reach out to other locations internationally; it’s just a matter of time.  And I need to try very hard to have it not be based on how much I want to visit the place.  (“Fiji, right, I hear there are a lot of programmers in Fiji who need jobs.”)  Each culture has its strengths, there’s a lot out there in terms of skills and training and opportunities.  Certainly I could make an analogy to digging for gold or something.  Where there are pockets it’s a good idea to dig for them.  And there’s potential out there in terms of partnership opportunities.  I like being part of making the world more global.

Mark Bailey
I’m Mark Bailey from the College of Education.  I have a slightly tangent question.  I’m interested in what your experience has been regarding different cross-cultural perspectives on the educational software that you’ve been developing.  Have you found that to be beneficial, a hindrance? What has been your experience?

Mark Lipson
Russian textbooks have no pictures.  And the attitude is very different.  I’m not sure if even after several years of working with us, if our Russian colleagues understand why we need so many illustrations and so many sidebar comments and so much color and how can we afford to put that much color ink into a textbook, and why we need to explain huge complicated graphs and figures, or why we need so many figures to begin with when we can just describe it verbally or in mathematical terms.  So there’s a very different outlook, style, which has taken some adjustment, but they’re adaptable and they comprehend the concept of a game, for instance, so applying their understanding of games or entertainment or something along those lines, for instance a physics modeling exercise with a little bit of artistic direction and you get a good interesting result. I haven’t quite determined what the Polish teaching style is yet, I assume its somewhere in between

Jeffrey Barlow
If I might ask another question from the teacher’s perspective, we have several students in the room, who most of them are, I believe, in Computer Science or Media Arts.  How would one of our graduates find an opportunity in your field or with your firm?  What sort of preparation would you look for?

Mark Lipson
I appreciate when Computer Science programs teach people the basics.  And every couple of years, Microsoft comes out with a new operating system and it’s just as much slower as the machines are faster.  People keep writing in higher and higher level languages, [so] it’s really nice when people know how the computer actually runs, what assembly language is like to code in, and not that people should particularly have to use card punches for the first year of their experience, but to have some comprehension of what those languages are based on to get a snapshot of the history; that seems to make people more versatile, to really have a solid grasp on procedural programming before you go to object-oriented programming, just to get an appreciation of the history there.  So that’s one, and understanding process as well as just programming methodology, getting some exposure to how businesses run software projects.  Some Computer Science programs teach that more than others and I’m sure they all do it to some extent, but keeping on top of project management strategies is also a good one.  It’s also a pretty likely career shift for people in that field to eventually be a lead programmer, and I’m shocked at how few people understand that it’s important to look in the budget. You get programmers who get promoted to lead developers and their focus is completely on doing it right and the cost and that sort of thing.  And I suppose there’s the social level, knowing to be a little bit more attuned to the customer perspective and knowing what a business case might be and being able to accept that the market needs may change and that means the work changes and that’s okay.  And a little bit of understanding of customer empathy, I suppose.  It is a bit of a culture I see in programmers coming out of school, and in general I see the US job opportunities drifting a bit toward the higher act, rather than if your skills limit you to give you a specification and you can fill in the box, starting from stuffed out code and filling it in.  That’s not where the job security is.  Its architective now and communication skills are very important, to be able to work with the customer, design a system for them, and provide a solution.  That level of thinking, that level of interaction, and you need deep technical skills and appreciation for that, and you need estimating skills and social skills, technical skills, and a level of adaptability.

Shereen Khoja
I’m Shereen Khoja; I’m an Assistant Professor of Computer Science here.  One of the questions that I get asked often by prospective students and their parents is what about outsourcing?  Are there going to be jobs for my son or my daughter once they graduate?  What would you answer to that question?

Mark Lipson
Definitely.  You can just look at an annotated history of outsourcing failures to see why. “Bitter Outsourcing” would be the name of the book.  And the solutions are run to approach at the very least in managing those projects and architecting them and keeping them on track.  Those are pretty secure jobs.  And also anything that needs to be highly reactive that needs to be done the same day, you don’t have time to write a specification and collect input, get those in authority in your offshore location to sign off on it, approve it, and allocate staff, so forth and so on, and convince them that it’s really an emergency and it needs to be done in the next couple of days.  There’s a need for that agile knowing exactly what the solution is and on a really small project it doesn’t make sense to send it overseas.  And if your prototyping is done, I think there just needs to be an acceptance that there’s a division of labor that makes sense.  Culturally, we’re finding where to draw that line in terms of clearly specifying longer term is on one side reactive imaginative working directly with the customer, and I imagine it would go the other way around, if it was a European customer or an Asian customer we would get the part that’s more clearly defined.  Just culturally there’s that immediate aspect of working directly with the customer and the stake holders that it creates a natural division line, so just targeting toward that division of labor.

Tom Young
My name is Tom Young, I’m an exchange scholar.  Just now I heard that you just started from scratch.  Now for you to start from scratch based on the Internet, how can you find—I know you expand quickly, right? —how can you find more partners that you think you can work with, is the first one.  Number two is on the other hand you want to expand your business, how can you win the trust of your customers? Because it’s impossible to get help from your friends, because you’ve got work through Internet.

Mark Lipson
As far as finding other customers, I have to admit that my company’s strength isn’t really the marketing side; we write software.  But we manage to grow despite that because it’s extremely service-oriented and we’ve formed a symbiotic relationship with our customers.  We just have these natural market verticals into Thomson and all the various companies any existing customer, when you do one project and they like it, if they have more work they send it your way.  You just gradually develop that trust relationship.  And at a certain point that needs to leap to the next pond as it were and that happens, from my experience, through personal connections, through recommendations, and just by doing a good job and by paying attention to the level of customer satisfaction and by being very service-oriented on the customer side.  As far as partners go, there’s a natural excitement to working with new people and you just start small. And when there’s sufficient excitement, that’s enough to get something small started.  There’s a strong correlation between finding a new developing partner and finding a new customer where it’s in everyone’s best interest to start small to pick something that’s clearly in your area of work competency and to go from there.

Jeffrey Barlow
Thank you very much for participating in this first of the Berglund Roundtables, and thank you especially Mark Lipson from Lunar Logic in Eugene, Oregon.  Our next Roundtable will be October 18th and the topic will be “Appropriate Legislation to Prevent and Prosecute Identity Theft to State Level.”  We hope that you will participate at that time.  Thank you.