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An analysis of opportunities and risks finds most software companies can do more to leverage offshore services.
Most software companies say they are offshoring at least some of their development or support services. The reality is that most haven't scratched the surface. For software companies with significant offshore experience, its benefits are clear: Cost savings of 15 to 40 percent, ample supply of skilled workers, quicker time-to-market for new initiatives, and product quality comparable to or higher than that of internal developers. When most software companies began leveraging offshore services during the technology boom of the late 1990s, the main incentive was to find skilled programmers and other staff - a scarce commodity domestically. Today's sagging economy means smart enterprises are still looking overseas but for different reasons. Wall Street has demanded lower operating costs and offshore services firms have helped deliver. But this motivation may be short sighted. "If you're only doing it for the cost differential, then you're absolutely doing it for the wrong reasons and you're guaranteed to fail," says Romesh Wadhwani, chairman of Symphony Services, a provider of high-end core product development services from India. |
Evolving from a project-by-project mentality to a strategic partnership involves a thorough assessment of offshore opportunities. Software makers can now send virtually any portion of their operation offshore - from maintenance of prior releases to bug testing to help desk support to new application development (see box above). Improved technology and business processes make it possible to offshore some not-so-obvious initiatives as well, including the following:
- Product analytics.
Software makers spend a lot of effort getting their products to market but very little effort figuring out how the product is used. "This is the last piece of the puzzle and many never get to it," says Suresh Katta, founder, president and CEO of Saama Technologies, an applications development and technology consulting firm. Product analytics modules can analyze what users are doing and then provide reports on that activity. Saama specializes in helping its software clients develop this type of non-core, software engineering functionality.
- Sales prototype development.
Selling enterprise software is more competitive than ever. That means powerful sales tools are critical. Xoriant, a Silicon Valley-based company which provides software development services, helps bring in business for its clients by building sales prototypes. The client sends Xoriant a sample data set from one of its prospective customers. Xoriant loads the data into the application and massages it properly so that it can be demonstrated on key sales calls. "A sample data set does not give the customer a perspective of what his data would look like," says Girish Gaitonde, founder of Xoriant. "He wants to see his own data."
- Startup product development.
Venture capitalists today are insisting that new software startups have some type of offshore development strategy. This is prompting some entrepreneurs to offshore the entire lifecycle of their products. Wadhwani founded Aspect Development in 1991 and with it, helped pioneer the concept of offshore product development. "We launched the Indian operation on the same day that we started the company so that from 'Day Zero,' we leveraged India as a strategic resource." The offshore strategy allowed the startup to minimize the capital it needed to raise and thereby minimized the valuation it needed to give up.
But as software makers investigate opportunities to take additional initiatives overseas, many are again wrestling with internal objections. Overcoming these basic fears is vital to a productive offshore strategy:
- What if it fails?
As with domestically outsourced initiatives, plenty of offshore efforts do fail. But work sent overseas always seems to be held to a higher standard. Studying and adhering to a set of best practices (see story below) will help minimize the risk associated with contracting overseas. But all experts agree that ensuring thorough project termination terms in the contract is critical, as is the construction of a contingency plan.
- What if my code is stolen?
Many of the regions reknown for offshore development are also known as hotbeds of software piracy. This makes fear of intellectual property theft a legitimate concern for many software makers. However, incidence of intellectual property theft is quite low. Anti-theft laws in India and other popular offshore nations are similar to that of the U.S. "Contractually, the intellectual property rests with the customer," says B. Ramaswamy, president and managing director at Sonata Software, an IT consulting and software services company. When selecting a vendor, Sonata recommends a dedicated team for the project, disclosure of other clients who would be potential competitors and adequate security and access control for its client systems.
- What will my employees think? As soon as one project is sent overseas, many workers feel their jobs will be next. This paranoia can cripple a development team if not addressed correctly. Mike Paschal has experienced this firsthand. As VP of engineering at Navis and a veteran offshore user, Paschal says open communication with his team has helped ease concerns and facilitated project success. Paschal involves his team in vendor and project team selection. He also makes employees aware of the economic impact and time savings involved in the decision to go offshore. "It is not a matter of your job going away but a matter of augmenting the workforce in a cost effective way. We are saving operating costs so that we can save your job."
Seven Best Practices for Realizing Offshore SuccessExperts share their tips for turning offshore development into a strategic asset.
A software maker's decision to go offshore opens a Pandora's Box of decision making: Which vendor is right for me? How do I negotiate this contract? What pieces of my business make sense to offshore? What is the appropriate communication strategy? How can I turn this project into a long-term strategic partnership - or should I?
Correctly answering these questions will mean the difference between success and failure offshore.
Find domain experts.
When choosing an offshore service provider, it is critical to partner with one who has experience with software companies as clients, as well as with the specific type of application in question. "If you don't understand the specific domain, you tend to ignore important features and functionality because you don't know how they are used," says Symphony Services' Wadhwani. "For example, the screens may look nice individually but not flow well." Symphony has developed talent pools in specialized areas to help clients staff key projects.
- Name the team.
Many services vendors will sell based on their experience with major clients and the top-notch staff they used to serve them. To achieve project success, it pays to get a prospective offshore contractor to identify the project management team. "Smaller clients may not get the same level of attention [that marquis clients get]," says Saama Technologies' Katta. "It is important to ask, 'Who is really going to do my work?'"
- Minimize the culture gap.
When someone speaks English, it can be easy to forget that they live across the globe in a very different environment. "Cultural misunderstandings are still a big issue but the reality is that we are paying less attention to them than we used to," says Atul Vashishta, CEO and chairman of NeoIT, a global sourcing and solutions provider. "In India, for example, 'Yes' doesn't mean 'Yes', it means 'I understand.' Or does a Friday deadline mean 5 p.m. Friday or 8 a.m. Monday?" A very tight contract and set of specifications will control for these areas of potential misunderstanding. In addition to language issues, clients must be aware of regional holidays and work customs that may interfere with progress.
- Rethink the design team.
Most support staff is not involved at the product design level. This prevents usage information from being incorporated into the development process. "Quality assurance (QA) is a journey - not a destination," says Xoriant's Gaitonde. "If you don't do a good QA job then you pay more for support." Rather than bringing QA in at the testing stage, involving QA staff from both the offshore services provider and the client at the marketing-requirements-document (MRD) level will identify usage problems before they happen and lower support costs.
- Enlist the support of top brass.
Contracting offshore services always holds the potential to dampen employee and public relations. One way to minimize the impact is to be sure management is on board. "The executive team must be behind [the offshore project]," says Navis' Paschal. "They must understand why it is being sent offshore and be ready to reassure employees [about the decision.]"
- Consider an advisor.
When embarking on an offshore strategy, it may make sense to bring in the experts. Strategic sourcing consultants work with clients to identify opportunities, strategies, regions and vendors. "We've seen every trick in the book," says Vinnie Mirchandani, founder of the Jetstream Group, a strategic advisory services firm. "Most software vendors' history has been in developing software so they don't know how to procure, measure and manage third-party development of software." A consultant's expertise during the planning and sourcing process can result in costs 15 to 30 percent lower than if the company had done it on its own.
- Think partnership, not project.
Most software companies don't maximize their offshore potential. Taking full advantage of the opportunity means keeping an eye on the horizon and working with offshore services firms to identify next steps. Sonata has a consulting group which works with clients to evaluate possibilities and develop a sourcing roadmap. Says Sonata's Ramaswamy, "Embarking on a long-term relationship pays off handsomely as a strategic asset."
M.R. Rangaswami is a Managing Director of The Sand Hill Group, a a technology investment and consulting firm based in the San Francisco Bay Area. To send M.R. feedback, email: mr@sandhillgroup.com