Software development and implementation outsourcing, and business process outsourcing has been big buzzwords for the past five years, and everyone seems to want to get on the outsourcing "bandwagon". Some large vendors have even gone ahead to set up their own development centers in outsourcing countries such as India and Russia. But what about mid-sized vendors that currently develop their enterprise-level software products in US or other high cost countries and want to outsource their product development? They have limited resources and cannot merely create their own outsourcing center. The issues and opportunities for these vendors are discussed here in this paper.
Benefits of Outsourcing
Some of the benefits of outsourcing include
- Reduction in time to go to market.
- Vast pool of talented and trained manpower who can outperform their peers in other countries in terms of knowledge, quality of work, motivation level.
- Availability of quality service providers who already have delivered similar outsourcing work for clients before.
- Cost savings to the tune of more than 70 percent.
- Ease of increasing or decreasing team size, depending on your requirement.
It is not just these factors which can influence your decision. Arguably, in a country like India, where there is a huge population, there is competition for resources, jobs, recognition, and a better life. These and other competition creating factors, coupled with high levels of education and other supporting institutions, result in a large number of professionals, which means a company has a large resource pool to choose from.
After having worked for many years, service providers in outsourcing countries have matured and now can provide services which compared favorably with those provided by any service provider in the world. They have been involved in developing or maintaining enterprise software in areas like finance, accounting, infrastructure services, telecom, embedded systems, driver development, etc. Now they are also coming up in areas like supply chain management (SCM), covering industries like retail, manufacturing, distribution, supplier management, collaborative supply chains, warehouse management etc. The number of professionals for software development, quality assurance, project management, etc. has also grown substantially in recent years.
The History of Outsourcing in India
Currently, India is one of the top destinations for companies seeking outsourcing providers. The number of Indian software professionals have studied and worked in the US IT sector and returned to India to open or work in outsourcing centers has grown. Initially a small number of professionals from India went to the US to study and eventually retained jobs there. However, because of the high demand for IT professionals, US companies began to apply for work visas to allow Indians to come to the US to work on specific projects.
Then came the IT bubble burst of 20002001 and subsequently the 9/11. These two events changed everything. Due to the bubble burst, large investments in software projects slowed in US and 9/11 stopped flow of software professionals from India due to stricter legislation and security. Additionally, a number of these highly skilled professionals touting US corporate experience returned to India. At the same time, Indian companies were maturing and going up the value chain and were able to offer better quality, domain expertise and ability to handle highly specialized work. The bubble burst and 9/11, however, did not stop the need for US companies to develop quality products inexpensively. As a result of the skill base in India, the US and other western countries began to shift more and more new projects to India. Even old projects were being outsourced.
Now India has emerged as a preferred source of IT workers worldwide, given the large base of highly qualified English-speaking IT professionals and their adaptability to various technologies and quality initiatives. In the last decade, the Indian IT services industry has averaged over 50 per cent computed annual growth (CAGR) and shows no sign of deceleration in spite of economic slowdowns elsewhere in the world. Moreover, unlike trends in the West, the number of people of working age in India will continue to be greater than those who have retired and will likely remain so for a number of years to come. This will ensure business continuity, making India and other similar outsourcing countries, an appealing option.
To a great extent, developers of drivers, embedded systems etc. have outsourced, but it is business application developers that have embraced or are embracing outsourcing in a big way. Currently, business application software is the trendsetter creating a market share of more than 90 percent of all outsourced software revenues.
Challenges of Outsourcing
Yet there are challenges. Some software vendors who have been making their own systems may be reluctant to outsource their development work for the fear that their intellectual property may be leaked. Bigger vendors in this category, who want to take advantage of outsourcing, have setup their own development centers in these outsourcing countries.
In terms of product size and complexity; the development of small desktop products, web sites, and custom smaller software products, outsourcing does not impose many challenges, but there are many challenges when large systems that are meant to be deployed at enterprise-level are outsourced. Some of these challenges include
- How to tackle the interests of development teams which were initially developing the application in the home country, but may now lose their jobs to outsourcing.
- The need to have specialized people with appropriate domain, technical, and project management knowledge.
- The need to have people with appropriate language training (English, Japanese, French, German etc.).
- The need for a service provider that has done similar outsourcing work for clients before. This ensures, the service provider understands client's requirements, understands his job and has the capability to deliver.
Outsourcing for Mid-sized Companies
If you are a mid-market enterprise software product company and you cannot afford to setup your own development center in an outsourcing country like India or Russia, consider partnering with an outsourcing service provider. These outsourcing service providers can provide the facilities of world class development centers, impeccable service, knowledgeable, skilled and experienced man power matching or more than your expectations.
Outsourcing of your product development can happen at any stage of the product development life cycle. At the very start when you are in the "concept-to-market" stage or when you already have some parts of your product developed, you can still outsource your product development activity entirely or in part. If you outsource all of your development activity or part of it, make sure the goals of your outsourcing are clear. If you choose to outsource your marketing activity, you may like to keep business requirement gathering with you. Either way, be sure to identify an outsourcing partner who does the same type of outsourcing work for clients that have similar products as yours, or who are in the same business as you. Also make sure you checked the credentials of your prospective partner and check with his previous and existing clients about his work.
Ultimately, the outsourcing company should demonstrate its ability by showing your work in its previous and current partnerships. It should exhibit its domain expertise and the results it has delivered for the past several years in the specific domain. The outsourcing company should also provide the rsums of the domain experts, project managers, senior developers that work for the company. Most importantly, the outsourcer should show the return on investment (ROI) and the time to market benefits that its clients have consistently gained.
Despite AMR research which shows that US software companies are focusing today on automating repetitive tasks that may make software outsourcing obsolete by 2010, my belief is that it will not happen. It will take at least ten more years for this to happen. Many vendors including Sun Micro Systems have been working for years on software products which will automate entire software development. But even today, these systems are in their infancy and cannot be used commercially. Businesses are getting bigger and very complex and all this complexity cannot be created automatically from such software systems. For very small and simple businesses, automation is possible but not for big ones. In fact, the development of such systems will be outsourced to India and low cost countries in near future.
Whereas earlier, the benchmark for any outsourcing partner for its potential for quality of work was capability maturity model (CMM) level and people capability maturity model (P-CMM) level, today these is not enough. The problem is that these models indicate the maturity of an outsourcing partner and its people for delivery of quality bug-free with product and good project management, but they do not offer any indication about the company's product management capabilities and today's outsourcing deals involve high expertise work components. In today's world, software development is more to do with understanding user requirements, understanding the work done by users and most important; understanding the industry in which the user operates. To ensure your outsource partner has this capability, you must determine that your partner and his domain experts understand your product well.
Since software from enterprise resource planning (ERP), finance, accounting, and other related areas have been developed for many years, finding domain experts in these areas has been easy in outsourcing countries. However, development in SCM, customer relationship management (CRM) software etc. has been a relatively new area. Only now, outsourcing of these products is coming to these countries, so finding domain experts in these areas in countries like India is difficult. So if you have a product like this and considering outsourcing, make sure your outsourcing partner has experience in outsourcing similar product development.
India offers a compelling value proposition in terms of skilled manpower, cost of delivery, domain expertise, and time-to-market. Considering this: companies look to offshore work to India to reduce their cost of delivery, time-to-market, and to effectively deal with the shortage of qualified manpower in their home markets. The offshore model provides the much-needed scalability for growth. Further, US companies with a significant Indian offshore component enjoy higher operating margins and return on investment (ROI) than those without. The earning per share (EPS) growth of overseas companies, which have an offshore portfolio have been significantly ahead of their counterparts. This trend is expected to continue in the future.
About the author
Ashfaque Ahmed is a seasoned consultant and business analyst in the areas of advance planning and scheduling in SCM. He has worked with many big to medium clients in retail, distribution, and manufacturing industries. Some of these industries include automotive, consumer packaged goods, pharmaceutical, food, textile, steel, packaging materials etc. He holds a bachelor's degree in engineering and an MBA in Information Systems. He can be reached at firstname.lastname@example.org or visit his web site at www.geocities.com/ahmedashfaque2002
Copyright @ 2004-2005 Ashfaque Ahmed