Offshore Outsourcing: It's Not Just About Cost Cutting

Software development outsourcing - and offshore outsourcing in particular - is becoming increasingly popular as companies look for ways to cut application development costs, reduce in-house development teams, and utilize highly skilled knowledge workers without paying exorbitant fees to United States-based consultants. When considering any business outsourcing decision, companies must look beyond up-front cost savings, however. In order to evaluate the true cost of an outsourcing decision and to achieve the maximum ROI on outsourced development projects, companies must delve into a number of complex issues.

Overall Cost

Clearly the main driver for businesses to outsource software development overseas is the significant up-front cost savings, but companies need to consider other factors that will contribute to overall project costs.

Training

How long will it take and how many of your employees will be needed to educate an outsourcer about your business processes and existing software environment? Although some offshore vendors, such as India's Wipro, are beginning to build business process reengineering (BPR) capabilities in an attempt to match U.S. consultancies, training quickly becomes a major cost concern with more complex projects, potentially enough so to sway a decision toward using existing consulting relationships. Companies looking at offshore outsourcers will need to evaluate whether the cost of training the vendor's consultants outweighs the overall cost savings of going overseas.

Quality Issues

In addition to checking with reference customers about their post-delivery satisfaction, Nucleus recommends verifying vendor quality certifications, especially the vendor's Capability Maturity Model (CMM) level. CMM is an excellent way to gauge quality management methodologies.

Many Indian firms are at the coveted CMM Level 5, while several Chinese vendors are at CMM Level 2 and a handful are at Level 3. Choosing a vendor with the proper quality level requires a careful balancing act. Level 5 vendors will necessarily be more expensive, so for some companies, it may make sense to choose Level 2 or 3 vendors for less complex projects, provided that reference customers were pleased with the quality of the vendor's final product.

Complexity and Project Risk

>In addition to cost, the single biggest factor you need to consider when deciding whether or not to outsource a development project is the impact the project's success or failure will have on your organization. This was a moot point until recently because most offshore development companies possessed neither the domain expertise nor the highly skilled programmers necessary to develop complex, customized applications. (Typically, offshore development firms have been utilized for smaller projects to develop applications with already solidified - and unchanging - design requirements.)

Today, however, developers - especially in India and, to a lesser extent, China - have both the skills and the experience to tackle large development projects. Companies looking to farm out projects of increased importance and/or high risk need to be extremely careful before handing the keys over to an overseas outsourcer. But as the practice increases in popularity, companies can feel more confident that the risk of using a developer in India versus a United States-based consultant is lessening.

Evaluating Vendors

Once the decision to outsource has been made, it can be exceedingly difficult to differentiate among the multitude of overseas vendors. The best place to begin is by using the same criteria you would use during any vendor selection process.

Vendor Capabilities

It should be a relatively straightforward process to determine a particular vendor's technical skills. This is most easily accomplished with Indian vendors that place far more value on technical certifications than their East Asian counterparts. Be sure to check reference customers, verify that the vendor's programmers are certified in the languages and applications relevant to your project, and then conduct a vendor-versus-vendor comparison on an appropriate technical issue during the selection process.

Potential Time Frame

Can a vendor meet your deadlines? It seems like a simple question, but it is important to verify promises versus reality by asking reference customers about their experiences with the vendor's meeting their deadlines. Indeed, the 12-hour time difference between India and the United States may seem daunting, but it can work to your advantage, especially if you are simultaneously employing programmers to test and/or verify code worked on overnight halfway across the world. With such an arrangement, it is possible to work on a development project 24 hours a day, greatly increasing time to market and thus ROI.

Project Complexity and Business Processes

Applications that require business process change, such as sales force automation and knowledge management, involve far more time defining requirements and thus require vendors to closely examine the way you do business. This can be challenging when you are working with overseas outsourcers because of distance, language, and cultural barriers. Nucleus recommends carefully evaluating an offshore vendor's BPR consulting capabilities before engaging one for these types of projects. Also, it is critical to clearly map out relevant processes and rules and then reconcile differences between the vendor's procedures and yours before beginning any project.

Ongoing Maintenance

Is your company seeking a long-term relationship or a simple development project? As outsourcing projects grow more complex, vendors' application management capabilities become far more important. Some companies, such as E5 Systems of Waltham, Massachusetts, have developed a hybrid approach to this issue, with management and consulting services in the United States and development and maintenance centers in India and China. Companies will want to carefully evaluate a vendor's application management capabilities, especially because ongoing maintenance costs can be several times the cost of the initial development stage.

Conclusion

Although it is clearly evident that outsourcing offshore can produce major up-front cost savings, most vendors have yet to prove that they can provide a positive ROI on more complex software development projects. Despite the growing trend of relying on overseas outsourcers for strategically important applications, it is up to the companies using these services to carefully evaluate the true cost of an offshore outsourcing relationship. Though the up-front cost savings of outsourcing seem clear, companies must delve deeper into the full range of evaluation factors before making any outsourcing decision.

Copyright © 2003 IDG Communications, Inc.

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