Background
“Offshoring”, or “offshore outsourcing”, generally means moving the physical location of information technology (IT) services delivery from a developed nation with high wage rates to a developing country with lower wage rates.
The offshoring of IT services began in the mid-1990s when companies outsourced their Y2K and euro conversion initiatives. The IT labor market in the developed countries was very tight at that time and offshoring was often their only option. The work performed proved to be very successful. India, in particular, has become well known for its high-quality application development and maintenance work. “Y2K legitimized the offshore marketplace and gave the Indian providers traction,” according to Rita Terdiman, vice president of Industry Services at Gartner. [1]
Since the beginning of the global economic downturn in 2000, offshore outsourcing has become one of the major sources of IT cost savings. Although legacy application development and maintenance projects still represent the majority of work moved offshore, companies are increasingly relying on offshore suppliers for custom application development, call center, and business process outsourcing services as well.
Market Size
In 2000, the annual total global IT services market was estimated to be roughly $400 billion. North American companies spent approximately $114 billion on in-house software development, contracting, and purchases. [2] The global offshore IT services market is valued at between $9 billion and $10 billion annually, and therefore, represents about 2 to 2.5 percent of the global IT services total.
The United States, which accounts for about 45 percent of worldwide IT services spending, is the largest customer of offshore software services. U.S. companies accounted for roughly 60 to 65 percent of the total, European companies account for about 25 percent, and companies in the Asia Pacific region account for 10 to 15 percent. [3]
According to a recent report published by IDC, a Framingham, MA-based market research firm, offshore outsourcing is the dominant trend in the IT services industry. IDC states that 42 percent of the application management contracts have some offshore component and that the main reason for moving offshore has been lower cost. [4] Incoda, believes that the demand for offshore outsourcing of IT and IT-enabled services will continue to increase due to continued cost pressures, the anticipated global economic recovery, and to the trend of globalization of services.
Type of Service Offerings
The offshore outsourcing market has evolved over the last decade. In the mid and late 1990s, it was used almost exclusively for delivering highly commoditized, technical staff augmentation. Today, companies are relying on offshore software developers for a much broader range of IT services. The service offerings of offshore suppliers cover the entire spectrum of IT activity—from support and maintenance of legacy applications to complex custom applications and a variety of other higher value IT and IT-enabled services. Gartner Group places the types of offshore service offerings into three categories, based on the suppliers’ level of experience with those service offerings. [5]
- Most mature: application maintenance and management, application migration, and legacy application development.
- Medium maturity: new custom application development, enterprise application integration, implementation of application packages (e.g., ERP, CRM, SCM), and business integration.
- Least mature: call centers, business process outsourcing (BPO), infrastructure outsourcing, ERP services, remote network management, product engineering, embedded software, and technical services.
The two fastest growing segments of the offshore services market are application management and business process outsourcing (BPO). BPO is capturing the attention of many executives as a way to reduce the costs of business processes such as customer care, billing, collections, claims processing, and various other back office functions. Gartner points out that call center and transaction processing markets are more mature than the outsourcing of more complex, back-office processes.
Offshore providers will strive to create or extend differentiated capabilities and continue to expand their services portfolio offerings to include higher value add project-based services. Given the growing level of competition in the services outsourcing market, companies that don’t have unique capabilities will be subject to downward pressure on billing rates.
Customers
Large multinational enterprises have been the largest users of offshore software services suppliers. In 1999, more than 185 of the Fortune 500 companies outsourced at least part of their software needs to India [6]. Today, the majority of the Fortune 500 use offshore development services through third-party suppliers or have wholly-owned development centers established offshore. Some well-known companies utilizing offshore software development include General Motors, American Express, 3M, Cigna, DuPont, Weyerhaeuser, ING Group, Motorola, Accenture, British Airways, Intel, Deloitte Consulting, British Telecom, Amazon.com, Home Depot, Shell, Sprint, Nortel Networks, EDS, Aetna, and MasterCard. Major hardware and software giants like Microsoft, IBM, Apple, Oracle, Novel, Sun, IBM, Compaq and Texas Instruments all have extensive offshore operations. Not surprisingly, the largest industry sectors using offshore software development are those that are heavily dependent on information technology, including banking, insurance, and other financial services, communications, media, and software.
The successes of large multinational companies have generated strong interest in offshoring by small and medium sized companies, including an increasing number of technology start-ups. More than eighty percent of the software companies surveyed are shipping work offshore today or will do so in the next year, according to the Sand Hill Group, an investment and research firm based in San Francisco, California, who published the findings of survey of 51 software companies in July 2003. The study found that 63 percent of the responding companies are currently involved in offshore initiatives and an additional 21 percent are in the process of sending work offshore and will have such processes in place within a year. [7]
Drivers
Three primary drivers have produced the rapid growth in offshore outsourcing. They are:
1. Difficult economic conditions around the globe. Companies are being forced to investigate any and all opportunities to reduce their cost structures.
2. The large, wage-rate differences for similar skills that exist around the globe. The larger the differential between domestic wage rates and offshore rates translates directly into larger cost savings in both direct and indirect labor costs.
3. Demonstrated outsourcing successes by well-regarded companies. Numerous articles and case studies have been published that document the benefits achieved from offshoring by respected global corporations.
Incoda believes that businesses will continue to focus their attention on core business priorities and will increase their offshore outsourcing of non-core IT systems and processes. Potential customers for offshore services will continue to look for cost savings and are gaining a level of confidence with the delivery capabilities of offshore suppliers. Many of the today’s offshore projects will expand from discrete assignments to multi-year outsourcing engagements.
Enablers
Three enablers support the move to offshore outsourcing.
1. The increasing capabilities and falling costs of telecommunications worldwide, including high-speed Internet, instant messaging, web conferencing, and VoIP. These telecommunications advances, along with numerous productivity tools, such as collaborative project management software and knowledge management applications, enable businesses to leverage highly qualified workforces anywhere in the world.
2. Tax and other financial incentives offered by governments to nurture the growth of the IT services sector. For example, in India, the government plays an active role in promoting the software export industry, with initiatives such as the Software Technology Parks of India (STPI) and the Special Economic Zones (SEZ), which offer income tax exemptions until 2010. Other developing countries are also supporting their domestic software export industry through specific policies and tax incentives.
3. Availability of educated, technically skilled, and motivated workers in countries around the world. Long-term trends predict a shortage of IT talent in the world’s developed economies. In many countries, open technical positions remain unfilled because of a lack of applicants with the requisite technical and non-technical skills. On the supply side, India alone graduates roughly 110,000 computer professionals annually from its more than 1,800 educational institutions.
By Dr. Bernard L. Palowitch, Jr., President & CEO of Incoda Corporation.
Tuesday, May 25, 2010
Key differences between local and offshore software development
While many of the processes and practices for managing offshore outsourcing are similar to outsourcing to local suppliers, we have found that there are four major differences that are unique to offshore software projects.
1. Vendor selection and contract negotiation are more complex.
Today, more than twenty countries are considered to be offshore outsourcing locations. And within many of the most attractive countries there are at least several hundred potential suppliers. The processses of identifying an appropriate set of potential companies, conducting meaningful RFI and RFP activities, and negotiating project arrangements are much more difficult and time consuming than evaluating outsourcing vendors within one’s own country. The diverse cultures, foreign language barriers, differing time zones, difficulty in understanding and interpreting the information received, and unfamiliar legal systems and contract provisions are just a few of the factors than complicate using offshore suppliers.
2. Software requirements specifications need to be more clearly defined.
Customer requirements and design documents need to be developed with much greater accuracy and detail because the geographical separation between the onsite business users and the offshore team makes real-time communication much more difficult. Because of the physical separation and, in many cases, time-zone differences, the individual team members don’t have the luxury of getting answers and clarifications as quickly and easily as if their colleagues were sitting just a few seats away.
3. Roles and responsibilities of the project team need to be explicit.
Moving work offshore also focuses attention on clearly defining the roles and responsibilities for each step in the software development process. While most of the common software development methodologies can be followed to guide offshore work, the activities and tasks need to explicitly assigned and modified, as appropriate, to take into account that the people and groups responsible for the various work steps are geographically separate. On most projects, team members will never meet face-to-face over the duration of the project.
4. Successful completion requires better project management, including team communications, progress monitoring and reporting, and formal review of intermediate and final project deliverables.
Companies considering offshore development must recognize that offshore outsourcing presents a major management challenge and that the level of project planning, coordination, technical integration, and remote support for offshore projects is more complicated than performing software development solely in-house or with a local supplier. A huge hurdle is overcoming language and cultural barriers. For example, even in cases where the offshore supplier had an excellent command of the English language, we found that small nuances and slang terms in the requirements and in our online discussions introduced huge misunderstandings in the project outputs. More intermediate progress reviews should be conducted to make sure that the timetable is being met and test results should be constantly monitored.
By Dr. Bernard L. Palowitch, Jr., President & CEO of Incoda Corporation.
1. Vendor selection and contract negotiation are more complex.
Today, more than twenty countries are considered to be offshore outsourcing locations. And within many of the most attractive countries there are at least several hundred potential suppliers. The processses of identifying an appropriate set of potential companies, conducting meaningful RFI and RFP activities, and negotiating project arrangements are much more difficult and time consuming than evaluating outsourcing vendors within one’s own country. The diverse cultures, foreign language barriers, differing time zones, difficulty in understanding and interpreting the information received, and unfamiliar legal systems and contract provisions are just a few of the factors than complicate using offshore suppliers.
2. Software requirements specifications need to be more clearly defined.
Customer requirements and design documents need to be developed with much greater accuracy and detail because the geographical separation between the onsite business users and the offshore team makes real-time communication much more difficult. Because of the physical separation and, in many cases, time-zone differences, the individual team members don’t have the luxury of getting answers and clarifications as quickly and easily as if their colleagues were sitting just a few seats away.
3. Roles and responsibilities of the project team need to be explicit.
Moving work offshore also focuses attention on clearly defining the roles and responsibilities for each step in the software development process. While most of the common software development methodologies can be followed to guide offshore work, the activities and tasks need to explicitly assigned and modified, as appropriate, to take into account that the people and groups responsible for the various work steps are geographically separate. On most projects, team members will never meet face-to-face over the duration of the project.
4. Successful completion requires better project management, including team communications, progress monitoring and reporting, and formal review of intermediate and final project deliverables.
Companies considering offshore development must recognize that offshore outsourcing presents a major management challenge and that the level of project planning, coordination, technical integration, and remote support for offshore projects is more complicated than performing software development solely in-house or with a local supplier. A huge hurdle is overcoming language and cultural barriers. For example, even in cases where the offshore supplier had an excellent command of the English language, we found that small nuances and slang terms in the requirements and in our online discussions introduced huge misunderstandings in the project outputs. More intermediate progress reviews should be conducted to make sure that the timetable is being met and test results should be constantly monitored.
By Dr. Bernard L. Palowitch, Jr., President & CEO of Incoda Corporation.
How to Achieve Successful Offshore Outsourcing
How is successful Offshore outsourcing carried out? Top-tier vendors in India and elsewhere handle businesses that successfully accommodate high-quality service levels to overseas clients at rock-bottom fees, a pool of expert English-speaking resources and best IT professionals in the world, and more!
Steps:
1. It is a good idea to have a separate department or a few employees dedicated to identifying and vetting potential clients.
2. Include informal networking. “Informal networking is going to be one of the biggest drivers of offshoring in the small-business community”, says Gartner analyst Frances Karamouzis
3. Broaden your information sources. Trade associations can prove to be a great source of information.
4. Investigate brokerage web sites. Brokerage Web sites have emerged to link sellers of offshore services with prospective buyers.
5. Decide on your two-way business transaction. Next, once an outsourcing project has been acquired, a smooth two-way business transaction needs to be ensured, which will bring profits to both partied involved.
6. Keep in touch. The Offshore Outsourcing vendor must regularly consult the outsourcer regarding issues related to the project.
7. Select a liaison. A representative or on site co-coordinator may be appointed to handle, resolve and maintain client-relationships.
8. Create procedures. Procedures must be invented to help the Offshore Outsourcing service provider and the outsourcer to define the increase in payment without long and weary negotiations.
9. Choose the best way to monitor work. A correspondence clause must be included in the contract, making for the outsourcer to visit the Offshore Outsourcing vendors place every now and then, to monitor the progress of work.
10. Have ‘outs’. Exclusions must be included to accommodate changes beyond the control of either party (act of God).
Source Wikihow.com
Steps:
1. It is a good idea to have a separate department or a few employees dedicated to identifying and vetting potential clients.
2. Include informal networking. “Informal networking is going to be one of the biggest drivers of offshoring in the small-business community”, says Gartner analyst Frances Karamouzis
3. Broaden your information sources. Trade associations can prove to be a great source of information.
4. Investigate brokerage web sites. Brokerage Web sites have emerged to link sellers of offshore services with prospective buyers.
5. Decide on your two-way business transaction. Next, once an outsourcing project has been acquired, a smooth two-way business transaction needs to be ensured, which will bring profits to both partied involved.
6. Keep in touch. The Offshore Outsourcing vendor must regularly consult the outsourcer regarding issues related to the project.
7. Select a liaison. A representative or on site co-coordinator may be appointed to handle, resolve and maintain client-relationships.
8. Create procedures. Procedures must be invented to help the Offshore Outsourcing service provider and the outsourcer to define the increase in payment without long and weary negotiations.
9. Choose the best way to monitor work. A correspondence clause must be included in the contract, making for the outsourcer to visit the Offshore Outsourcing vendors place every now and then, to monitor the progress of work.
10. Have ‘outs’. Exclusions must be included to accommodate changes beyond the control of either party (act of God).
Source Wikihow.com
Friday, May 21, 2010
Benefits and Challenges of Offshoring
While there are benefits and risks in incorporating offshore suppliers in a sourcing strategy, in most cases, companies find that the advantages outweigh the risks.
Benefits
The primary business rationale for offshoring has been to reduce IT operating and infrastructure costs. The cost savings from offshore outsourcing increase with the percentage of total development effort outsourced and the percentage of work performed offshore. They are maximized when the entire development is outsourced and all the work is performed overseas.
Since the predominant component of IT costs is direct and indirect labor, sizable cost reductions can be achieved by moving these functions to lower wage rate locations. Based on recent average wage rates for IT professionals, net savings from offshore outsourcing generally range between 25 to 40 percent for U.S. and European companies. Cost savings has been the primary business rationale for offshoring across all industry sectors. The Sand Hill Group Study found that even technology companies were moving work offshore, driven, in part, by lower labor costs.
After wage rate differentials, the level of cost savings also depends on the amount of work that is moved offshore. While an analysis of offshore projects shows that the optimal ratio of offshore to onshore work ranges between 70:30 to 80:20, some companies only reach a 50:50 split because they desire to have a greater number of people onsite, which reduces the overall savings.
Offshore outsourcing has been used to achieve a variety of other financial and non-financial benefits, including:
- Faster time-to-market for new products and services
- Increased focus on core competencies
- Staff augmentation for work load balancing and/or access to skilled IT labor on an as-needed basis
- Access to skilled IT labor to augment existing (internal) skill sets
- Access to leading technologies
- Ability to have work performed nearly 24/7 by augmenting local activities with development centers on other continents.
Other reasons for offshore outsourcing include a scaleable business model that can be ramped up or down very quickly without incurring long-term costs such as unemployment insurance and employee benefits, and implementing the software development and quality assurance processes and practices of the offshore suppliers as a way to quickly improve the customer’s own internal processes.
While labor cost savings have been the primary rationale, additional value can be achieved over time from enhanced and streamlined business processes. For example, creating a single shared services environment can generate sizable efficiencies if the current processes are done in different locations or done by different business units. Business process reengineering, i.e., removing inefficiencies and bottlenecks and enhancing workflow using automation and other information technologies, can add additional cost savings as well as faster cycle times and other business benefits.
Challenges
Before launching an offshore development initiative, senior management needs to thoroughly understand the challenges to successful offshoring. Major risks and issues include differences in language, culture, politics, regulations, and work practices—all of which can disrupt a collaborative customer-supplier relationship. Specifically, some of the key challenges include:
Internal Organizational Issues
- “Loss of control” of projects and processes
- Increased management attention
- Concerns over retaining intellectual property and other proprietary information
- Concerns over potential legal issues with foreign companies
- Uncertainty about achieving the financial and nonfinancial objectives
- Sensitivity around moving certain types of applications overseas
- Security risks
- Customer preference for suppliers in close physical proximity
- Internal IT departments may not welcome outsourcing due to concerns about job security.
Offshore Market and Supplier Issues
- Formative offshore market
- Dependence on supplier-provided information
- Limited understanding of suppliers’ true reputation and track record
- Socio-cultural barriers and business compatibility
- Infrastructure issues
- Supplier may have little or no experience in the industry or business function/process
- Uncertain political climate.
Project and Process Management Issues
- Communication, language, and cultural issues
- Time zone and holiday schedule issues
- Increased travel costs.
The importance of the risks listed above varies widely from company to company. Some of the risks presented could be quite costly and damaging to the business, and therefore, mitigation strategies should be developed before getting underway.
By Dr. Bernard L. Palowitch, Jr., President & CEO of Incoda Corporation.
Benefits
The primary business rationale for offshoring has been to reduce IT operating and infrastructure costs. The cost savings from offshore outsourcing increase with the percentage of total development effort outsourced and the percentage of work performed offshore. They are maximized when the entire development is outsourced and all the work is performed overseas.
Since the predominant component of IT costs is direct and indirect labor, sizable cost reductions can be achieved by moving these functions to lower wage rate locations. Based on recent average wage rates for IT professionals, net savings from offshore outsourcing generally range between 25 to 40 percent for U.S. and European companies. Cost savings has been the primary business rationale for offshoring across all industry sectors. The Sand Hill Group Study found that even technology companies were moving work offshore, driven, in part, by lower labor costs.
After wage rate differentials, the level of cost savings also depends on the amount of work that is moved offshore. While an analysis of offshore projects shows that the optimal ratio of offshore to onshore work ranges between 70:30 to 80:20, some companies only reach a 50:50 split because they desire to have a greater number of people onsite, which reduces the overall savings.
Offshore outsourcing has been used to achieve a variety of other financial and non-financial benefits, including:
- Faster time-to-market for new products and services
- Increased focus on core competencies
- Staff augmentation for work load balancing and/or access to skilled IT labor on an as-needed basis
- Access to skilled IT labor to augment existing (internal) skill sets
- Access to leading technologies
- Ability to have work performed nearly 24/7 by augmenting local activities with development centers on other continents.
Other reasons for offshore outsourcing include a scaleable business model that can be ramped up or down very quickly without incurring long-term costs such as unemployment insurance and employee benefits, and implementing the software development and quality assurance processes and practices of the offshore suppliers as a way to quickly improve the customer’s own internal processes.
While labor cost savings have been the primary rationale, additional value can be achieved over time from enhanced and streamlined business processes. For example, creating a single shared services environment can generate sizable efficiencies if the current processes are done in different locations or done by different business units. Business process reengineering, i.e., removing inefficiencies and bottlenecks and enhancing workflow using automation and other information technologies, can add additional cost savings as well as faster cycle times and other business benefits.
Challenges
Before launching an offshore development initiative, senior management needs to thoroughly understand the challenges to successful offshoring. Major risks and issues include differences in language, culture, politics, regulations, and work practices—all of which can disrupt a collaborative customer-supplier relationship. Specifically, some of the key challenges include:
Internal Organizational Issues
- “Loss of control” of projects and processes
- Increased management attention
- Concerns over retaining intellectual property and other proprietary information
- Concerns over potential legal issues with foreign companies
- Uncertainty about achieving the financial and nonfinancial objectives
- Sensitivity around moving certain types of applications overseas
- Security risks
- Customer preference for suppliers in close physical proximity
- Internal IT departments may not welcome outsourcing due to concerns about job security.
Offshore Market and Supplier Issues
- Formative offshore market
- Dependence on supplier-provided information
- Limited understanding of suppliers’ true reputation and track record
- Socio-cultural barriers and business compatibility
- Infrastructure issues
- Supplier may have little or no experience in the industry or business function/process
- Uncertain political climate.
Project and Process Management Issues
- Communication, language, and cultural issues
- Time zone and holiday schedule issues
- Increased travel costs.
The importance of the risks listed above varies widely from company to company. Some of the risks presented could be quite costly and damaging to the business, and therefore, mitigation strategies should be developed before getting underway.
By Dr. Bernard L. Palowitch, Jr., President & CEO of Incoda Corporation.
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