Sending it offshore

We live in a Global Village, exactly as Marshall McLuhan predicted. And down at the village soukh you can buy goods cheap from all over the world — skills too. What you want today, mister? Nice system analyst maybe? Project manager? We got special today on Java code monkey.

Outsourcing software

development to Third World countries like India, the Philippines, China and Russia is of course nothing like haggling in a village market — as savvy CIOs clearly realize. They’re outsourcing more and more software development and other IT functions offshore, lured by low labour costs, the availability of hard-to-find skills — and in some cases, perhaps surprisingly, higher-than-North-American quality standards.

When Forrester Research surveyed Fortune 1000 CIOs 14 months ago, two-thirds said they would be outsourcing offshore by 2003 if they weren’t already — and 44 per cent already were. That was before the 9-11-triggered recession tightened the screws on corporate IT departments. Giga Information Group Inc., a Cambridge Mass.-based research firm, recently predicted offshore outsourcing would increase by at least 25 per cent in 2003.

Canadian data is harder to find, and there is reason to think the trend might be less pronounced here given the different economic conditions. But Steve Convey, a partner with Accenture in Toronto says, “”My sense, anecdotally, from dealing with my clients, is that most big Canadian firms are thinking about this or pursuing it in one shape or form.””

The main reason: substantial cost savings. Convey estimates outsourcing to European countries can save Canadian firms up to 30 per cent on development costs. By going a little further afield, to Asian countries such as India and the Philippines, savings can climb to 50 or even 70 per cent over what onshore outsourcers would charge.

Accenture, an outsourcer itself as well as a consulting firm, long ago saw the writing on the wall and began setting up outsourcing operations in places like Mumbai (Bombay), India, Manilla in the Philippines and, most recently, China, the hottest entrant in the offshore outsourcing racket. The company has said it will increase its offshore resource pool from about 4,000 people in 2002 to 12,000 by the end of 2003.

Other big outsourcers and systems integrators such as EDS and IBM Global Services are going the same route. So are big software developers such as Oracle and Microsoft. Bill Gates recently committed to investing US$400 million in boosting education, business partnerships and software development in India. This clearly wasn’t just philanthropy.

Outsourcing isn’t only for the big and powerful, though. Satty Verma is president and CEO of Softwaretron, a Toronto-based start-up developing a DVD/CD authoring package. Softwaretron ended up outsourcing much of the development of the product to X Group, a firm in Kiev in the Ukraine.

“”We did get quotes from local firms that could have taken the project right from initial design to fully written,”” Verma says. “”But by using X Group, we estimate we’re saving, overall, somewhere between 20 and 50 per cent.””

Verma used Elance Online, a Web-based matchmaking service from Sunnyvale, Calf.-based Elance Inc. It helps small and medium-size businesses find short-term employees and outsourcers both in North America and overseas. Posting his job on Elance elicited several bids, Verma says. X Group’s was one of the lowest.

Offshore outsourcing may sound scary to IT managers and CIOs accustomed to having programmers and analysts just around the corner or down the hall. Certainly there are risks — and lack of proximity can be one. Workers in countries like Russia and India are working when their North American clients are home and vice versa.

Verma insists this is not a problem in his experience — he has also outsourced to Indian firms in the past. Elance provides a private bulletin board system that allows him to communicate in writing with X Group, albeit often with a small time delay. They can also prearrange virtual meetings at the Elance site and use the bulletin board as an ICQ-style chat room.

Poor supervision of offshore outsourcers can be a problem, says New York-based IT consultant Ed Yourdon — but it’s not necessarily directly related to lack of proximity.

“”You find a lot of organizations that have had no previous experience outsourcing to anybody often assume mistakenly they can delegate everything,”” Yourdon says. “”They basically abdicate responsibility for supervision. With a lot of projects that go sour, it’s because of neglect from the customer side.””

In fact, quality standards at Indian software firms are often higher than in North America, Yourdon contends. “”Because Indian firms have better software processes, including risk management processes,”” Yourdon says, “”if things start going wrong, they’re more likely to catch them early — moreso than with onshore outsourcers and especially internal shops which never like to admit anything is wrong.””

Yourdon may have some biases in this regard. He sits on the board of an Indian outsourcing firm. He would not, however, deny there are potential pitfalls to going offshore.

Language, for example — though this is less a problem in India, where English is universally spoken by educated people. In other countries, language problems can impede communication or mean additional costs for interpreters.

Verma says language is not a problem on his project. Enough of the X Group programmers speak English — or at least write English computerese — to ensure good understanding. Softwaretron also avoided many potential pitfalls by developing a very clear and complete blueprint of what it wanted, he adds.

There are other potential problems. Political instability can disrupt communications or the work itself.

And there can be hidden costs — for translation and interpretation, for travel and visas if overseas workers need to be onsite for some of the project. But all of these problems can be overcome, Convey and Yourdon say. Three key pieces of advice:

  • Establish a risk management process, understand the risks going in and know how to mitigate or eliminate them if they threaten a project.
  • Treat offshore outsourcing as a long-term strategy not a quick fix, Yourdon says. Start with a small project to get to know how your partner works.
  • Pick a partner with compatible software methods and a verifiable track record, a firm you can reasonably expect to have worked through the most basic potential problems.

Convey makes the case that his own company offers the best of both worlds — North American presence and software and project methodologies, low-paid, high-skilled overseas workers. Furthermore, Accenture has a network of shops, he points out. If one location runs out of resources — or into political trouble — work can move elsewhere. It’s a pitch, but persuasive.

One final twist. Offshore outsourcing might sound like a win-win, but don’t expect domestic outsourcers to see it that way. Canadian and U.S. firms are almost certainly being hurt, Convey and Yourdon say. Forrester estimates that 3.3 million U.S. jobs and $136 billion in wages — much of it IT-related — will move offshore in the next 15 years.

There could be a silver lining for Canadian software companies, though. With the Canuck buck so low, developers here look attractive to U.S. firms that balk at Third World outsourcing. Four of 13 projects at Accenture’s Toronto development shop are for U.S. clients, Convey notes.

“”We’re perceived as low risk,”” he says. “”They look at Canada as a safe haven.””

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Jim Love, Chief Content Officer, IT World Canada

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