Advantages & Disadvantages Software Development Outsourcing
Posted by Kevin Brady on Mon 26th January 2009 at 12:19 AM, Filed in Outsourcing
Last week I was asked to do some telephone consultancy for a US research agency and the subject was “The Risks of Indian Software Development Outsourcing”. Their client was a venture capitalist very keen to understand whether this kind of outsourcing so popular in recent years is still in the ascendancy or likely to decline in the future.
My current view is that the market is on the turn and this started before the “Credit Crunch”. I have heard that a couple of the major Indian Outsourcers are now securing fewer and fewer large scale software development contracts.
Whether you believe these rumors or not the following list of Pros and Cons of Offshore Software Development should help you consolidate your opinion one way or the other.
- Cheaper Labour
Probably the most well known reason to consider outsourcing is to access cheaper labour. Workers in developing countries are paid far less than workers in the developed countries due to their lower costs of living. The current cost advantage in terms of the ratio of the cost of employing one British work compared to say Indian based resource is still 1:3 and is a key driver behind the market.
- Lower Operating Costs
Cheaper labour is only part of the equation and if you look deeper you can see extra cost advantages of using offshore development resource. For example, each employee you don’t have working on site means one less computer you need to purchase and maintain and one less person needing expensive office space. The operational expense savings can be enormous and can really help small to medium sized companies to punch above their weight when competing against larger competitors.
- Lower Labour Training Costs
Training new employees is expensive. This is especially the case in high turnover jobs such as customer service call centres. Each new employee may need one to three weeks (or more) of training before being able to start working. In addition, there are materials to create and trainers to hire.
Access to Better Technology
If you have a small to medium size business, you probably can’t justify having all the latest technology for every employee. It just costs too much. An outsourcing firm is likely to be able to afford the latest technology since that is part of their core business. As mentioned earlier this can really help small to medium sized companies punch above their weight when competing against larger competitors through access to this flexible /cheap external resource pool of development capability.
- Less Production Down- Time
You can have employees working on site 24 hours a day. However, it is harder to attract talented employees to work less desirable shifts. This is no longer a problem with outsourcing. Your company can develop a system 24 hours a day, with workers around the globe operating covering all the shifts you require.
Disadvantages of Offshore Software Development
The comments I hear more and more these days is Offshore Software Development is just “To Much Pain for Too Little Gain”.
- Long Term Cost Advantage under Threat
The 1:3 cost advantage of Indian Offshore Development is starting to erode and is moving increasingly towards a 1:1.5 advantage. Many are questioning if the increased management overheads, aggravation and the risks detailed below are just to great relative to the potential cost saving. Furthermore, onsite development resource rates have been falling in the UK and US as IT professionals adapt and respond to this offshore threat to their livelihoods. Some of my colleagues are saying “Why not Poland or Latvia?” For many Eastern Europe have already become more compelling than India as the Indian cost advantage erodes.
For example in the US ADP, the largest U.S. payroll services provider has 45,000 employees worldwide, of which only 2,500 are in India. It has around 1,000 workers in El Paso, Texas, it’s expanding a location in Augusta, Ga., and it’s opening a facility in Jackson, Mississippi. It’s also growing a location in Halifax, Canada. ADP isn’t moving its workforce to India—it’s hedging its bets geographically. On a recent earnings call, ADP’s chief executive used terms such as “smartshoring,” and “nearshoring” to describe the strategy.
The pure labour arbitrage equation seems no longer to balance.
One of the most important things to do when considering offshore development is to ask yourself why the country you are using to offshore your development work is so economically poor and the wage costs of workers so low?
If you can answer this question you may well discover that if you’re not careful you might be importing some these countries Micro Economic ills directly into your business. Your IT Project could end-up costing you more in management overhead and associated costs than you might have thought.
In the case of India one of these key micro economic constraints is Indian Culture. India has the reputation of having some of the hardest parents in the world, and people are taught obedience and respect for ones betters from an early age (we could do with some of this in the west in my view). The downside of this is that this obedience expresses itself in the workplace as a total commitment to never offend or displease people. This is all well and good in terms making India a very safe place to live and work, but in terms of running successful IT projects, people often need to be upfront about their true feelings concerning the risks and issues threatening your projects success. On one offshore project I managed some years back, I remember my boss telling me that Indian management “Never say’s NO, and Never say’s Yes to Death”. This kind of culture threatens effective risk and issue management and can really increase your projects likelihood of failure.
It is also important to remember that the motivational hierarchy in Indian offshore development centres is built around the numbers of people you manage rather than what you do or achieve. This is a cultural thing which drives a strong desire among technical people to want to move up the chain rather than become long term technical specialists. You will often find many young faces in offshore development centres (fresh out of university) calling themselves architects and business analysts because of this constant desire for managerial responsibility.
All of this has a big impact on software quality, timely delivery and cost. There is very little you can do to mitigate this situation except as they do in Accenture and Avanade http://www.claretyconsulting.com/it/comments/the-avanade-success-story/2007-06-04/ by having western project managers working offshore or through the employment of anglicised Indian Management.
- Lower Quality
This was alluded to in the previous section. In business, you often get what you pay for. While workers across the world can be very competent, the fact is sometimes they lack skills and education. If you need the finest employees, be prepared to pay for them, whether they are in your office or in another country. Furthermore, the demand for staff in India is so great that staff turnover is upwards of 30% per year. This can mean serious knowledge transfer issues leading to reduced software quality. The bigger the project the more serious this risk becomes.
- Low Management Maturity
Management maturity among offshore Indian development centres is often low. Very few people have any form of Project or Programme Management Qualifications and the main project management method used is good old fashioned JFDI (Just F?????g Do It). This is fine as long your offshore development is small. The larger the project the less likely this approach will deliver you a project success at a price you expected.
- Skills Availability
Obviously India has lots of technical resource but a shortage of experienced seasoned professionals for reasons mentioned earlier. Be very careful when beating down Indian outsourcers on price. They won’t be beaten down, you will instead! These guys just increase the numbers of low grade inexperienced staff on your project in order to decrease cost until you virtually have a group monkeys developing your software
I promise you that I have seen my fair share of ugly systems delivered because of this fact alone. For Indian Outsourcers it’s about getting the deal done with quality, reputation etc coming a poor second.
They are the best in the world at playing the price /quality contract game !
The only way to mitigate this risk is to make sure that you meet and interview the project team, and know at all times who is assigned to your delivery team. Offshore does not mean zero onshore management overhead. If you’re onshore management team is not working 65 hours per week then something is wrong. You have to keep your fingers on the pulse at all times.
- Staff Turnover
The demand for staff in India between offshore centres is so great that staff turnover is upwards of 30% per year for many firms. This means knowledge transfer issues leading to reduced software quality. The bigger the project the more important this risk becomes.
These are just some of the pros and cons of outsourcing. Carefully consider them before you start outsourcing.
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