Sending software development tasks overseas is the latest cost-cutting phenomenon, but is it a case of 'you get what you pay for'? How can you optimise offshore development?

The buy-or-build decision has long been a part of IT management, and despite suggestions from some quarters that the pendulum is beginning to swing back towards build, emerging export-oriented software development sectors in countries such as India and Russia have added a new dimension to the issue by offering high-quality, low-cost services. Some companies are even pursuing an offshore insourcing strategy by establishing their own development centres in such areas, either independently or in collaboration with a local partner.

On the other hand, there is some political sensitivity to sending skilled work overseas at a time of high unemployment among IT professionals. This could be the reason why we were unable to find local companies prepared to discuss their experiences with overseas outsourcing, or that would even admit they were doing it. This suspicion was confirmed by the outsourcers’ claims that their clients were unwilling to act publicly as reference customers.

Fortunately, outsourcers were able to discuss their operations, and several executives from companies involved in overseas insourcing were prepared to share their experiences.

Projects or products
A distinction should be drawn between outsourcing for projects and outsourcing for products, according to Eyal Aronoff, chief technology officer at US-based Quest Software. If the object is to create software that meets your internal needs then outsourcing is easy, but “the art of building products is different: you have to guess what the user wants” and those guesses can be culturally specific.

By developing some of its software in Australia, Quest benefits from “highly educated people [who are] very brilliant [and speak] English, and we get cost savings” thanks to the exchange rate and other factors, he says.

When producing products for particular markets, having native speaking and culturally attached developers is important. Developing in Australia “works fantastically well for us,” he says. Any potential savings made by going further afield (eg, to India) are nullified because the additional iterations required before a satisfactory result is achieved. For this reason, Australian developers can finish a project in half the time taken by their counterparts in Bangalore, he says, but “over time, that will change” as globalisation proceeds and Microsoft’s standards spread.

Quest’s flagship product, Quest Central, has been built in 14 development labs around the world. “The architectures we have enable us to do that,” says Kim Wenn, director of research and development. Principal software architect Guy Harrison explains that creating the large-scale component architecture that enables new functions to be added as plug-ins was a major hurdle, but once overcome it put the company in a good position. It also makes it relatively easy to add the same new function to multiple products simultaneously.

But architecture alone isn’t sufficient to make distributed development work: management and coordination was also essential. “You have to be in touch,” says Aronoff. “There must be a personal connection between the decision makers” so they are comfortable phoning each other outside normal hours if necessary, otherwise differences in time zones can introduce communication latencies that slow down projects. People are aware of this issue, says Wenn, and they modify their work habits accordingly, “You have to be flexible,” she says.

Innovation is another issue that’s important in product development, says Aronoff. Quest’s Australian staff demonstrate a high degree of innovation and will take risks to generate something different. While this is good for product development teams, it’s not appropriate when building software for in-house use.

The balance between process and innovation is an important consideration when creating products. Stability and quality are necessary, but it’s also important to ship new products before competitors deliver their equivalents. You can get bogged down in communications “and innovation is lost,” says Aronoff.

Outsourcing the internal
Outsourcing the development of internal systems can work, according to its proponents, but they agree these concerns must be addressed. Peter Spring, a director of systems integrator Kanbay, says one of the basic rules of IT development is that you need hands-on management. While offshore outsourcing can provide good time to market, access to expertise, quality, and a different type of innovation, the distance between client and outsourcer scales up the risk.

The best results are achieved when projects are split between local and overseas developers, suggests analyst Bruce McCabe of S2 Intelligence, but it isn’t obvious where the line should be drawn. That said, he believes that local development should be preferred when speed is important because it takes longer to find an overseas partner or outsourcer. Once-off projects can be usefully outsourced, but one involving ongoing development or maintenance is better kept in-house.

Organisations that outsource a project need “a focused, driven project head who takes control and maintains control,” says Ted Johnson, Australia and New Zealand advisor to Indian IT consulting and outsourcing company Tata Consultancy Services (TCS).

Good risk management practices should be applied to any project, Spring says, but it is important to have people from the development centre located on the client’s premises, and for managers to visit the development centre regularly.

Bad experiences occur when clients treat outsourcing as a tactical, cost-saving exercise, but “the ones that work treat it as a strategic partnership,” he says. “The ones that do it properly don’t think of it as a cost-saving venture, but saving time to market.”

Ajay Gidh, head of professional services at NCR India, stresses the strategic nature of offshore development. “We are fully equipped along with local software industry to undertake complete responsibility of software development, customisation, maintenance, and support activities,” he says.

The Indian software industry has created “a new breed of IT managers—infrastructure and process managers—with the agility and flexibility to align requirements of people, skills, processes, and tools to those of client environments and consequently the ability to deliver maximum value to partner organisations that outsource software engineering activities to these organisations.”

Robert Beck, general manager of Kanbay, says cultural issues can be a factor, citing the Indian tradition of respect for elders. This can be manifested in tendency to follow the client’s lead during the high-level design phase even if that course of action isn’t in the client’s best interest. This reluctance to suggest better opportunities is in contrast with the Australian culture of “speak your mind”.

Kanbay uses multi-site activity to deliver what the client needs, he says, and uses local senior business analysts and project managers. Spring adds that Indian staff are encouraged to talk to their colleagues at the point of delivery if they have a concern with the direction of the project but do not want to raise it with the client.

When did it start?
According to Beck, the current interest in overseas outsourcing has its roots in the period from 1998 to 2000. While there were some earlier moves in sending IT work overseas, Y2K and the dot-com bubble meant there were plenty of jobs available in the US and Europe at two to five times local salaries, and “all our elite IT professionals went offshore”. At the same time as this “huge drain of good guys and gals” occurred, local demand was high due to the coincidence of Y2K and the introduction of the GST. The “B team” players remaining in Australia were able to demand high rates, and this allowed Indian firms to gain a beachhead through “bodyshopping” (supplying onsite contractors).

Beck used such people when he was with a previous employer. “They were good—there’s no question about the quality,” he says, but it was up to the client to manage them all as individuals, as they were not supplied as a team. This presented some companies with a problem.

Now, Australia is in an IT recession and there are plenty of people ready to work at lower rates, but many companies are still in a situation where their current budgets are still depleted due to pre-spending on the Y2K and GST projects. The result is that they are risk adverse and looking for ways of getting consistent quality and quick development times at low cost.

“We’re not brought up on quality,” says Beck, but Indian companies are “second to none” in delivering quality services in areas such as IT and accounting, just as Japanese companies revolutionised manufacturing quality.

There is a “political cloud” shadowing overseas outsourcing, he suggests, as local IT unemployment means government departments and enterprises are less likely to hire overseas companies. To counter this, such firms are forming alliances with local firms that bid for the work and then subcontract much of the effort to their overseas partner.

However, large organisations are “concerned with pragmatism,” he says, and seek “quality and commercial advantage” even if it means going offshore.

Spring points out that despite local unemployment, a large bank needs around 100 new staff per year just to cover attrition, and if it outsources locally it would simply increase the competition for particular skills. Overseas outsourcing therefore is about addressing strategic issues, he suggests.

Country or company?

Criteria identified by Gartner include geopolitical risk, government support, infrastructure, labour pool characteristics, educational system, English proficiency, cultural compatibility, labour cost advantage, quality initiatives, and country laws (particularly regarding labour, intellectual property, data privacy, and encryption, plus visa regulations, tax incentives, import and export regulations, and the overall enforcement of contract disputes).

McCabe believes the two key considerations for the local industry when considering offshore software development are cost and competency. Organisations should first look for providers or locations that have the necessary skills, and then determine the cost-effectiveness of their services.

When outsourcing, people don’t worry about where the operation is located, just how quickly and cost-effectively it can do the job. “I don’t think they think in terms of ‘where are they located?’” he says.

Johnson says “the single biggest attribute in my mind is quality.” Of TCS’s 18 development centres in India, 16 are CMM 5 certified, and its Melbourne centre is expected to reach that level within a few years. “Quality costs you less, because you get it right the first time,” he says.

In addition to quality, organisations always look for competence and efficiency when outsourcing. Cost-effectiveness is always in the top three criteria in an RFP, he says.

He notes a Forrester report indicating that outsourcing is now seen as a first option by Fortune 500 companies, since it is hard for an internal IT organisation to keep up with the acquisition and disposal of business units in such environments.

However, interest in overseas outsourcing has dropped recently, according to META Group analyst Wissam Raffoul. Around 20 percent of the Global 2000 indicated interest in 2000, and this rose to around 40 percent in 2001. META Group forecasts the level of interest will be between 15 and 20 percent in 2004. Companies have now realised the need for a local presence and are also doing “more and more risk assessment before they award a contract” in this light of political instabilities such as the tension between India and Pakistan. Raffoul says overseas outsourcing is viable providing you can clearly define your requirements.

McCabe says there is “no question” that overseas outsourcing is more cost effective, but warns that the process must be managed: “nothing substitutes for having people on the ground,” so project managers will need to spend a lot of time on planes, shuttling between home base and the development site.

Consequently, an Australian organisation might only use a company in Eastern Europe if its specific competencies outweighed the disadvantage of the extra travelling time, says McCabe.

Joanne Collins-Smee, vice-president, Application Management Services, IBM Global Services Australia and New Zealand, agreed that any outsourcer should be happy for you to send staff to check on the progress of a project, but suggested the onus should be put on the outsourcer to send the project manager to visit the client with sufficient artefacts to allow the customer’s team to check the progress and quality of the work.

Contracts with TCS typically give the customer the right to request the replacement of specific members of the project team after a honeymoon period of 30, 60, or 90 days. If they exercise that right, “that’s fine by us,” says Johnson, even though it happens in between 20 and 25 percent of jobs.

“It’s very important that [we] think like the customer,” he says. This provides a way of dealing with unexpected events through a “get it back on track, get it done” mentality. TCS has an “Indian can-do nature—we’ll fix it,” he says.

But the relationship should be a two-way street. Johnson says services companies must be able to approach clients with concerns such as “we don’t think you are applying adequate skills in this particular area” when a key client employee is working on the project part time instead of full time, is on holiday, or is transferred, or promoted.

A longer-term partnership is better than using contract terms as weapons for bashing each other, he suggests, but clients should retain control and be a part of the process rather than being passive consumers of the services. “A successful partnership is a win-win,” says Johnson.

Not just India
While Indian companies such as Tata and Infosys “are a very big catalyst . . . they are gaining some ground,” McCabe says organisations should also look at countries in South East Asia such as Thailand and the Philippines. Thailand offers software development skills and “content factories” for data cleansing, translation and similar projects, while the Philippines is relatively close to Australia and has English-speaking workers with good IT skills.

“From a user perspective, [overseas outsourcing] is a very good thing,” says McCabe. He believes there is no danger of the local development community falling below critical mass, but predicts the biggest effect will be on the margins traditionally enjoyed by the largest professional services companies. Such companies will still be able to compete, thanks to good management and by being close to their market, McCabe says.

While he expects today’s leading edge skills will be more widely available in the future, there is always a time lag before large numbers of people acquire new skills. “Large developers don’t take risks in . . . skilling up,” he says, so small local developers that pick the right emerging technologies will always be in demand.

Collins-Smee claims there is relatively little interest in overseas outsourcing, even though Indian companies “are definitely visiting our customers.”

The success of traditional overseas outsourcers relies on “code factories”, Raffoul says, and “this model is less and less attractive” if applications are not well defined, in which case outsourcers must be able to provide a local, onsite presence, which drives up their costs. Since the primary motivation for overseas outsourcing is cost reduction, this is a significant issue.

“Customers in Australia are quite sophisticated and doing their analysis,” Collins-Smee says, and some are asking for a blended solution where portions of a project are allocated to local and overseas centres to best meet their criteria regarding risk, development time, and the need for specialised skills. In her experience, at least 20-25 percent of the project staff should be in Australia to take care of communications and project management issues. “Incredibly good project management is incredibly important,” she says.

Consequently, overseas companies are trying to position themselves as full-service companies, but that only increases the need for onsite presence, says Raffoul. At the same time, they are trying to widen their target market by appealing to a greater range of markets, despite their claims of focusing on key industries. Potential customers should therefore check whether an outsourcer is doing specialist work in their industry, or simply providing general-purpose applications in that sector, he warns.

Kanbay’s Spring points out that the same happens with the big consulting companies: a senior partner might be involved in selling you the service, but you will get relatively inexperienced people working on your project.

Beck agrees, saying that the cost structures of big consultancies force their staff to learn on the job.

Size matters
The size of these companies can be a concern, he suggests. Indian outsourcers’ revenues range from US$75 million to US$700 million, and according to Raffoul they shouldn’t be offered contracts worth more than 25 percent of their annual revenue.

Johnson says TCS’s size gives it an advantage. With around 21,000 IT professionals worldwide, it has a large inventory of skills and experience, and therefore can bring the right people to bear on a customer’s projects though the “sourced globally, delivered locally” model.

There is also a need to assess the skill levels of overseas outsourcers. “They all claim they are [at] level 5” of the Capability Maturity Model (CMM), says Raffoul, but the majority of their workforce is junior staff. “You need the skills behind the methodology,” he says.

But it’s not only foreign centres that are taking the CMM route. Level 5 certification for IBM’s Australian operation is pending, according to Collins-Smee.

A related issue is that most local organisations are around level 2 of this model, so there is a risk of communications problems. “They might be too smart,” says Raffoul, so you may need to upskill your own staff so they speak the same technical language as the outsourcers.

TCS’s Johnson disagrees. “That’s not our experience,” he says. Even if a customer does not have high methodological standards, it will generally aspire to them and will be able to work well with a CMM 5 certified supplier. “Part of the benefit of cosourcing is that you enhance the client,” he says.

Raffoul says “They [India] play well the methodology game” and position themselves on the basis of quality, but their weakness is distance from the customer—an onsite presence is necessary to deliver value—so companies such as Wipro are setting up branches in Europe, the US, and Japan. “They can’t stay 100 percent offshore,” says Raffoul. In general, Australian organisations like to choose an outsourcer among global vendors that have a local presence, he says.

Offshore outsourcers claim to deliver infrastructure services in competition with the likes of IBM Global Services or EDS, but are not succeeding because a local presence is essential. “You can’t rely on international reputations,” says Raffoul.

Moving offshore

-EDS Best Shore offers our global clients exactly what they have asked us forâ€"consistently superior service around the world at competitive prices," says Paulett Eberhart, president of EDS's Solutions Consulting line of business. -Whether clients need applications development or delivery, or information technology outsourcing or business process outsourcing, EDS can provide a consistent, seamless environment regardless of global location," he adds.

-Global sourcing and delivery of application services provides low-risk, consistent, and reliable development expertise in multiple global locations," says Dan Zadorozny, president of Applications Services for EDS Solutions Consulting. -As a result, over the next year, EDS will increase personnel and resources by some 40 percent to support client demand for global sourcing." The company estimates 20,000 employees will be delivering Best Shore services by the end of 2004, but currently there are 4500 employees at 13 facilities, including locations in India, Brazil, and New Zealand.

IBM has recognised the question of geographical and political instability identified by Raffoul, as well as related issues including foreign currency risks, resource availability, and infrastructure capabilities of different countries. Its equivalent of Best Shore is Transparent Geography, -the industry's most comprehensive and diverse pool of resources for managing geopolitical risks while providing cost-effective delivery of application management services," according to a company statement, with operations in a variety of locations including low-cost nations such as India, Mexico, Argentina, Brazil, and China.

IBM has been developing software in India for years, with outputs including parts of AIX and VisualAge, but the use of Central and South American locations is especially relevant to projects for customers in the US market, since these countries are in similar time zones and are relatively close to the continental USâ€"the distance from New York to Rio de Janeiro is roughly half that from Los Angeles to Shanghai. However, Collins-Smee says -I think the idea of geographical proximity is waning."

And she isn't convinced that other countries (including India, where IBM has a development centre in Bangalore) offer a real cost advantage. Australia is -very cost competitive with other countries," she says.

IBM is building a development centre in the Victorian regional city of Ballarat, which will enjoy lower infrastructure costs than capital city locations, she says. Over the next few years, inflation is expected to be much higher in India than Australia and this will further improve Australia's relative position. Local customers are taking a longer-term view which includes this consideration. -If you shift a job to India, it'll be there for several years."

There is much greater interest in offshore development among IBM's US customers, she said, because of the bigger difference in costs.

Last December, Hewlett-Packard followed the lead of IBM and EDS, announcing that it would transfer a substantial portion of its IT services business to India, citing cost pressures in the consulting and integration markets.

Service level agreements
Another issue involves service level agreements, where there is a big gap between traditional vendors and overseas outsourcers. According to Raffoul, those offered by the latter tend to be -very primitive" and -do not reflect the business operation" being based on IT-centric measures.

As for moving in-house development overseas, -it's not an agenda item" for most companies. Some banks have successful joint ventures in India, but these are -special cases," says Raffoul. -I don't see it as a trend." Moving a code factory overseas could give a 30 percent cost reduction -if you get it right," he says. That would only apply to a situation with very well-defined requirements and little need for local interaction, otherwise the savings would be less.

Collins-Smee agrees: setting up the communications and security infrastructure and so on is -a daunting task," she says.

Raffoul also warns that organisations should expect to spend 5-7 percent of the contract price on the costs of managing an overseas relationship. -If you have vague requirements, maybe it's not a very good option," he says.

He expects software development and maintenance outsourcing to increase, -but it's yet to be seen [how much of] it will go offshore."

Although Quest's Aronoff suggests offshore development could slow down a project, there are situations where it can speed things up. If an organisation can arrange a follow-the-sun model where developers in two or three well-spaced time zones hand over the project at the end of each business day, more work can theoretically be completed in a given period.

IBM has used this model, and a large internal Siebel implementation is currently shuttling between Australia and Europe in this manner. However, the company's Australian operation is not currently involved in follow-the-sun projects for external customers. The model is especially applicable to production support and customer support activities, according to Collins-Smee.

One problem is that throwing more people at a development project does not necessarily mean it will be completed more quickly. Although Fredrick Brooks' classic book The Mythical Man-Month explained over 20 years ago that the management problems caused by increasing the size of a team can more than offset the extra work that theoretically can be done, this issue is not always recognised.

But follow-the-sun is not quite the same as using more people. Time savings can be made if one group's output is another's input and the units of work can be completed in a day. For example, as far back as 1997, IBM used a system where programmers and analysts in the US would review work just completed in Europe and Asia, and provide specifications for the next day's work. This iterative arrangement shaved one-third from development cycles. But as Aronoff points out, the closer relationship between people at the same location can reduce the number of iterations needed to complete the project.

Kanbay uses a similar model, says Spring. The company's main points of delivery are Australia, Hong Kong, Singapore, the UK, and the US, so its staff can work face to face with clients during local business hours, then hand over tasks to the development centre in India and receive the response for the start of the next working day.

Beck observes that Kanbay's approach is -particularly advantageous when you get to the end of a project and you're into user education and acceptance testing." Test users try to break the system and log any faults they uncover. With an offshore development team, these problems can be fixed overnight, whereas onshore development means the test and development teams can only work on alternate days, he explained.

IP all over the place
Speaking as a private individual, Legato System's vice president and chief solutions officer Bobby Young warns of the risk of intellectual property leakage when using developers in other countries. -If you want to keep your intellectual property protected, keep it somewhere they have laws to protect it," he says. -Before I take something [offshore] again, I'll ensure I have legal protection."

Young's comments refer to allegations by Legato that eight engineers from its operation in India left to join another firm, taking with them certain pieces of Legato's intellectual property. The matter is still the subject of litigation. As a result of this alleged incident, Young thinks it is better to take skilled individuals from overseas to the US rather than have them work in their home countries.

A company needs to have a presence where the work is being performed in order to protect its interests, Young believes. -[International] collaboration just does not work when you've got cultural differences," he says.

Beck, whose industry experience prior to joining Kanbay included the use of overseas outsourcers, agrees about the importance of cultural issues, but says -culturally, I think India has been a good fit," adding that -cricket has been a big bonding thing".

Before putting its staff on a particular job, TCS ensures they are trained in the local culture, the client's industry and the client itself, as well as in relevant technical skills. -We look for a very successful outcome so we have a happy reference site," says Johnson.

Oracle's development centres around the world are all subsidiary companies, staffed by Oracle employees. They are -an extension of the development community based at Redwood Shores [California]," says Richard Rendell, senior director of the Australian product development centres.

These centres provide software for the global market as well as for local needs, he says. The key advantage is that -we get the best ideas from the best people around the world." Work on any particular module is the responsibility of a specific centre, he explains. This permits flexibility of working hours (as it avoids the need to handover the project at a set time each day), but -it's a round the clock development model," he says, because there's always someone working on each product.

Communication between different sites is important, says Rendell, but it becomes a routine part of the operation. -A lot of it is about process, and whether you're engaging people in those processes."

The responsibilities of development centres are -not just writing the code," he says. They may also employ curriculum development staff working alongside the developers to ensure that training materials are ready at the same time as the software, legislative analysts to help ensure products meet local requirements, global or regional product managers, and so on.

Look out for . . .
While Beck's perspective is probably coloured by his current role at Kanbay, he is (to mangle a metaphor) a gamekeeper turned poacher.

He suggests four things to look for when choosing an overseas outsourcer:

• a blended, multi-site service, not a pure offshore play;
• experience in jobs like yours (-otherwise they are learning on the job, and there is risk.");
• proof that the onshore/offshore blend has worked successfully (eg, if local and overseas companies are partnering to bid, has that relationship been tested?); and
• the peopleâ€"check the resumes and credentials of the lead staff that will be assigned to your project.

Johnson endorses that last point, noting that TCS routinely includes the resumes of senior project staff when bidding for a contract.

Collins-Smee's tips for successful outsourcing are:

• consider your business strategy (are your customers ready for the effects it will have?);
• model the financial implications carefully, including inflation projections (and presumably currency fluctuations), any transition costs and the overall risk profile; and
• check whether local outsourcers can provide competitive quotations (remember: the project will probably be less complex and less risky if kept onshore).

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