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Prospecting for Offshore Value
By M.R. Rangaswami, Managing Director, The Sand Hill Group
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.
Sure, saving $1 million on a project sounds compelling enough. But that savings will not provide a long-term competitive advantage to the client. To have a consistent, bottom-line impact, offshoring must become a strategic element of a software company's operating model.
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:
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.