Offshore IT outsourcing is hot, and for good reason. The Meta Group reports that 80 percent of companies plan to outsource some IT function by 2003, and Dean Davidson, Meta’s Vice President of Service Management Strategies, says, “Outsourcing is a competitive necessity in the era of e-business.”
A recent Aberdeen Group study reports that large consulting and systems integration service suppliers in the United States and Europe are increasingly turning to offshore development and partnerships to lower delivery costs and gain access to diverse IT skill sets. Meanwhile, a growing number of midtier firms and technology and IT service suppliers now partner with offshore developers.
Aberdeen identified the primary benefits as substantial cost savings based on low offshore labor rates, access to specialized technology skills, and a “follow-the-sun” continuous development process.
Lowered labor costs
The most obvious advantage of offshore outsourcing is the reduced cost of IT labor, although estimates of the net savings vary widely. The Aberdeen Group found that average annual IT salaries in 2001 were $4,750 in China, $5,850 in India, and $7,500 in Russia. Aberdeen estimates that offshore contractors can deliver application development, maintenance, legacy migration, systems integration, and related services at an overall cost from 30 percent to 65 percent less than in-house initiatives in developed countries.
Other experts are more conservative. Forrester Research analyst Christine Overby has said that choosing an offshore service provider can save companies 25 percent off the cost of outsourcing to a domestic provider, while a recent Meta Group report indicates that most offshore outsourcing efforts save 15 percent to 20 percent when all costs are considered, with best-practices firms achieving 25 percent to 30 percent savings.
More to come
Future articles will highlight best practices in planning, preparing, and budgeting these offshore initiatives, as well as explore the lifecycle and management of successful outsourced IT projects.
Not surprisingly, though, despite the substantial return-on-investment opportunity and other benefits, the offshore approach is no panacea. Identifying projects, products, and processes that can be successfully outsourced is critical; selecting the right offshore firm for the job can be challenging; legal and security issues can spiral into major headaches; and project and team management challenges can easily lead to cost overruns, project delays, and results that are poor quality and do not match client expectations.
Certain tasks more suited for overseas development
Before plunging into an offshore agreement, it’s essential that you understand which tasks and services are suitable for offshore outsourcing. For firms that have not yet built up significant internal experience in selecting and managing offshore developers, outsourcing is most appropriate for:
Maintenance of mature, stable applications requiring low levels of change.
Application piecework such as printer drivers and other application development not at a business-systems level.
Large development projects with clear and simple design specifications that can be handled by mass production coding. Successful examples include Y2K and euro conversion, and mainframe-to-client/server migration projects.
With increased experience and a mature partnership, enterprises will continue to find additional opportunities for capitalizing on outsourced technical skills and labor cost advantages.
Where are the projects going?
It is important to understand the range of outsourcing options and their particular advantages and challenges. Outsourcing in some countries presents important legal, lingual, and cultural challenges that the uninitiated should approach with caution.
India is by far the largest and most mature environment for offshore software development and services. The National Association of Software and Services Companies in India (NASSCOM) reports that India produces 73,500 software professionals annually. As of December 2000, there were 4.3 million technical workers in India, 250,000 of whom were involved in software service exports. As of March 2001, Carnegie Mellon’s Software Engineering Institute (SEI), which certifies the process maturity and quality of engineering organizations, listed 49 development organizations that had achieved Capability Maturity Model (CMM) Level 5 assessments—the highest level—of which 24 were in India.
English is the national language of India, so the vast majority of professionals are fluent English speakers and writers. India also boasts some of the finest technical education in the world; the six campuses of the India Institute of Technology and several world-class private universities are deservedly renowned centers of technology and business excellence.
The rest of the world
India-based firms dominate the landscape today, with an estimated 85 percent market share, but Russia, the former Soviet-bloc countries, China, and Ireland all have substantial, rapidly growing capabilities. Developing countries around the world either currently host, or are looking to become, locations for offshore development centers.
Ireland is focused primarily on software development; its growth in this area is based on a young, well-educated workforce with strong business and technology skills, activist government policies, private enterprise, a modern telecommunications infrastructure, the lowest tariffs in Europe, and favorable geography. English is Ireland’s primary language, and a large percentage of the country’s graduates are proficient in other European languages.
Russia’s software services firms have developed in areas involving complex problem-solving techniques and focus on projects involving technologies such as speech and character recognition, signal processing, image manipulation, and complex algorithms. China’s huge, well-educated, and technically sophisticated population, its work ethic, and an entrepreneurial younger generation all presage rapid growth, but, as the Aberdeen Group notes, experienced bicultural intermediaries and managers are essential, as is due diligence concerning employment, tax, and intellectual property protection issues.
Outsourcing, by definition, entails the distribution of work across separate, independently managed organizations, and therefore always requires disciplined coordination between customers and suppliers. With due diligence and planned outsourcing development, overseas outsourcing can reduce your company’s costs considerably.