Outsourcing long-term projects can be a tedious process, and companies should be very careful to who and where they outsource. When outsourcing multiple long-term projects, a country’s inflation rate where the outsourcing will take place should be carefully analyzed. Companies that are outsourcing need to keep in mind that it is better to work with one outsourcing company than to constantly be switching partners; if outsourcing to a country with a high inflation rate, small businesses eventually will want to outsource somewhere else, since the original location may turn to be too expensive for a limited budget.

India has traditionally been one of the top destinations for IT outsourcing, due to their reputation and low cost. However, India is no longer as low cost as they have been in the past. Throughout many months during the last several years, India’s inflation rate has been in the double digits, and for 2010 it was at 12%.[1] Other locations, such as Argentina, are also suffering from high inflation rates. For companies with limited budgets that are planning to outsource multiple projects, these countries should be avoided, unless the inflation rate drops. Stability should be important, but it may prove difficult to achieve if outsourcing to a high inflation location.

Inflation rates may not cause problems with short-term projects, but it may cause other types of issues. Searching to whom and where to outsource is a hassle of its own, which may take time and attention away from working on a project, valuable time many businesses may not have. It may be enticing to outsource a small project to a country with a high inflation rate, such as Argentina, as they have very knowledgeable developers, but one should keep in mind that if any further projects will be outsourced in the future to the same company, the prices would probably be higher. This will lead a company back to searching for another location to outsource, spending time and effort searching for and getting to know how the outsourcing company works.

Making a decision to outsource is a difficult one, in which the company outsourcing has to consider the length of the project, if it is a one-time thing, or if they will outsource multiple projects. If it is the latter two, outsourcing to countries with high inflation should be avoided. The focus of a company should be on the projects they plan to work on and productivity, not constantly looking for outsourcing partners due to rising costs due to inflation.

Business | 1 Comment »

India has been one of the top destinations in the world for IT outsourcing, due to their focus on the IT industry, massive labor force, and low wages. This has been a huge enticement for U.S. companies to outsource much of their work to India. Although, the costs of outsourcing to India has been considered to be relatively low, this may no longer be a fact, but a myth based on India’s low costs from years ago. For smaller scale projects, there may remain some cost advantages to outsourcing to India, but at a much smaller scale than years ago. In many circumstances, there is no longer an advantage of outsourcing to India.

During the last several years, the trend of outsourcing to India has been that of rising costs, with no signs of the trend slowing down or reversing. Indian firms themselves have noted the trend, and have begun outsourcing as well, in order to maximize their profit. In 2007, the Associated Free Press (AFP) highlighted how Indian firms were outsourcing from India to other locations, such as Mexico.[1] The rising wages of Indian workers have caused many American and European firms to rethink their strategies. According to the AFP, salaries of software professionals rose 18.7 percent in 2007, while the rupee has gained almost 10 percent [in 2007] to near 10-year highs against the dollar.[2] Since Indian firms have to pay more in wages to their workers, they also have to charge clients more for their services. The cost-benefit advantages of outsourcing to India will continue to decrease, especially taking into account the current economic situation in Europe and the U.S.

For the typical American company planning to outsource to India, the cost-benefit advantage of outsourcing to India may soon disappear. Sramana Mitra, from Forbes Magazine, pointed out that the cost advantage of offshoring to India used to be 1:6, by 2008 it was 1:3. Mitra also expected the cost advantage of outsourcing to India to be completely eroded by 2015.[3] This has set a reality that India is no longer competitive as they once used to be in IT. In fact, outsourcing to India is now more expensive than outsourcing to regions such as Eastern Europe or Latin America, and the costs are comparable to doing a project in-house. The competitiveness of Eastern Europe, coupled with the rising costs in India, has led companies, such as IBM, to open facilities in Romania.[4]

Many larger companies have taken note of the rising costs of outsourcing to India, and have begun requesting for rates to be dropped as much as 15%.[5] American companies that have not noticed the rapid rising expenses of outsourcing to India, soon will. Some Indian firms are attempting to take advantage of their low cost reputation, charging many times more than should be typical for a project, with the hope that the client will not look elsewhere. There are circumstances in which a very large corporation has the need to outsource, and I have noticed how some Indian firms charge as much as eight to ten times more than an American company would charge for the same project. If a company is careless as to why, and to whom they are outsourcing in India, they may end up paying a very steep price in doing so.

The varying economic situations around the world have led to many countries being competitive in IT, including the United States. Due to stagnant wages and job competitiveness, outsourcing to American companies is not as expensive as many think. Combine American companies’ modern day lower cost of outsourcing, with the lack of having to deal with a drastically different culture, the advantages of outsourcing within the country become apparent. There no longer remains an outsourcing destination that stands out when compared to other regions in the world. India has been dethroned as the top country to outsource IT to; many regions in the world are now competitive, and those thinking of outsourcing should plan very carefully of how, and to whom, they will outsource.

[1]http://afp.google.com/article/ALeqM5hhMB4FZqzg6WngihhgmGEZ_E-eRQ

[2] http://afp.google.com/article/ALeqM5hhMB4FZqzg6WngihhgmGEZ_E-eRQ

[3] http://www.forbes.com/2008/02/29/mitra-india-outsourcing-tech-enter-cx_sm_0229outsource.html

[4] http://www.itresources-romania.ro/*newsID_44-article_newsDetails

[5] http://www.sourcingbrazil.com/big-u-s-outsourcing-clients-to-big-indian-it-providers-lower-your-rates/

Business | 1 Comment »

I just finished Robert Kennedy’s ”The Services Shift”, a book on the globalization of services, with an emphasis on Information Technology.

Kennedy is a Professor at Michigan’s Ross School of Business. He also runs the William Davidson Institute — a fairly prominent think-tank that focuses on business and policy issues in developing countries.

This book is a goldmine:

• IT managers will find very detailed and clear information on what, when, where and how to offshore
• Outsourcing vendors will find relevant and not-so-well-known information on industry trends.

But hold on, there is more. Because the book goes far beyond the technicalities of services offshoring, literally everybody would benefit tremendously from reading its sections 1, 2, 6, and 7.

In fact, if you think the book is of no concern to you, consider one mind-blowing statistics shown in it: in the USA, services represent a staggering 83% of the country’s GDP.

The author managed to stay away from politics and partisanship. The book carries nothing like Lou Dobbs’ low-level propaganda or Thomas Friedman’s provocative views.

Kennedy sticks to the facts, and demonstrates brilliantly why the globalization of services is an unstoppable trend, at least for any foreseeable future.

Consider “The Services Shift” a wake up call. A new economy has emerged, and it is a global one. Liking or disliking this global order we have created is everyone’s prerogative, ignoring it is just not possible anymore, whatever our role in our society is.

The price to pay for the US to retain global leadership is to acknowledge this situation, accelerate innovation, create disruptive business models, and more importantly prepare our children to live in a world that will be changing at an always faster pace.

I will definitely elaborate on some parts of this book in future posts. In the meantime, do yourself a favor: read it!

Purchase the book on Amazon.com

Remi
www.vsisoft.com

Business | No Comments »

Many in the software industry are reluctant to outsource the design of their applications, and by design I mean the overall usability (look-and-feel, navigation, user experience, etc.).

I do not have a definite answer, but I have learned one thing: BEWARE! While it makes total sense to have the back-end of the application developed offshore (whether outsourced or not), it is critical to carefully double check, when not triple check what the real design capabilities of your potential offshore provider are, if you do not want to end up with applications that are just unusable !

SMBs usually call existing references before selecting an outsourcing provider. Make sure design capability is one of your “must ask” questions. The reference certainly knows whether your provider has decent design capabilities or not.

You do not necessarily have to write off a potential provider that does not have such experience, but if you choose to keep the design inshore and develop the back-end offshore, do not take for granted that the communication between the teams will go smoothly. In fact, it is unlikely to be the case, unless you spend a fair amount of time making sure communication flows.

According to the Korean Institute of Design Promotion, China has globally better design capabilities than other popular offshore destinations, like India or Brazil. That is another hint for picking a Chinese offshore partner.

The study is not specifically about software design, but I see no reason why their findings would not apply to software too.

Their latest report is available for download here.

Remi
www.vsisoft.com

Business, China | No Comments »

Fortune corporations have been using outsourcing companies for a long time. GE, American Express and the likes have enabled the creation of a giant industry, led today by India followed by China.

Outsourcing agreements between American industry leaders and their suppliers, often Indian companies, generally span over several years and are worth dozens when not hundreds of millions of dollars.

Over the years, tier-1 Indian suppliers have mastered the art of maximizing their profit on these agreements, thus enabling their rapid expansion and wealth.

It was not too much of a problem as long as they were dealing with industry giants, which have the capability to closely oversee their offshore contracts and operations. The situation is totally different with SMBs, which cannot afford to see their monthly bills go through the roof, or witness considerable decrease in the quality of the deliverables.

Below are some suggestions that SMBs should follow when selecting their supplier:

• US agreement: Make sure the agreement is between two US companies. If anything goes wrong with a foreign entity, it will be much harder to take any legal action: your Bangalore or Dalian based provider might not care much having an agreement governed by US laws, since losing there would not really impact their global business. They would care much more with a contract governed by their local laws; however in this case, do you have the financial breadth to go defend your case in India or China?

• US management: The same goes with the management. Make sure your provider’s senior executives live in the USA. If there is a major crisis, there is no time to travel to Mumbai, Omsk or Beijing, hire a translator and have to deal with different business practices. Ideally all business and technical decisions should be made in the USA, without requiring any green light coming from the offshore base

• Work methodology: Do not let your supplier embark you in complex processes, like CMM for instance. Like most SMBs, you are certainly under intense market pressure, and unlikely to dedicate the amount of time and resources required by these heavy approaches. It is critical that your provider master Agile methodologies. Agile provides with the highest level of flexibility, and allows for a truly incremental approach. In addition, progress can be better monitored, and problems detected as soon as possible

• Moving resources around: it is unfortunate, but many outsourcing companies would rapidly replace the senior resources originally assigned to their client by very junior ones. This is how they maximize their profit. The good news for SMBs is that the average development / support team is small enough that you can make sure resources are not reallocated without your permission

• Fixed price: If possible, go for fixed price contracts. Your provider might be reluctant to commit, especially when the specifications and workload are unclear, but it is usually possible to segment the work in such a way that fixed-price contracts become possible

• Experience: Work with people who have a proven experience in your field of expertise; I am talking about technical expertise and domain expertise. When signing a contract, offshore companies will assign in priority their “on-the-bench” resources, even if they are not totally qualified for the job. Make sure your provider will assign the right resources, and if not available hire them

• Attrition rate (employee turnover) is a major problem for many offshore companies, especially in cities like Bangalore. Ask your provider about their employee retention program, or even better about the preventive steps they take to avoid any loss of productivity / knowledge when employees resign

• IP protection: if you have an extremely sensitive IP, think twice before sending the work abroad. And if you need or want to go offshore anyway, split the knowledge between several providers, or ask your provider to assign the work to different teams located in different regions or countries

• Do not be greedy: You can be sure of one thing: you will get what you are paying for. Know the limits of your supplier. If you go over the limit, they might still take the contract, but will assign less resources, or less qualified resources, and pay less attention to your account overall.

I hope it will help prevent some deadly mistakes. Do not hesitate to contact me if you have any question or comment.

Remi
www.vsisoft.com

Business, China | 4 Comments »

I usually use this blog to promote IT outsourcing to SMBs.

While outsourcing makes total sense indeed, the decision to outsource should never be made lightly, as it can yield to a very unpleasant experience. My observation though is that the various failures result from the same few causes, which I listed below as the 10 reasons not to outsource:

1. You never outsourced before and are considering outsourcing a strategic project. If that is the case, start first with a 3 to 4 month long pilot project; it will enable you to learn a lot

2. You believe that when it comes to outsourcing, “the bigger the supplier, the better”. In fact, too big a discrepancy between suppliers and their clients is one of the major reasons why outsourcing projects fail

3. You believe that offshore resources are not as capable as US ones. If you feel like that, your supplier will certainly sense it, and it is bad enough to likely to result in failure

4. Your in-house team has poor project supervision capabilities. Without strict project supervision, chances are that the development team will run loose, and the distance is not going to help. What you should do in this case is first hire a project manager (or subcontract one in your area)

5. Your decision to outsource is only dictated by cost-cutting reasons. I view this one as possibly the most likely cause for failure. Companies in this situation tend to choose the contender who provided with the lowest price offer. If you have got a low price, be sure you will get what you are paying for

6. Sending a problem away does not make it disappear, especially in today’s flat world. I love this comment I read a while ago in CIO magazine. “If you are outsourcing a problem, it will still be a problem”

7. There is no clear consensus in-house on the features to implement. If you are in this case, I suggest the following approach:

   • Write down the 5 major benefits you want to get from your application. They will be the ultimate measure of each deliverable

   • Take your original estimate and multiply it by 2

   • Choose a supplier who has a proven capability to use highly iterative (Agile like) development techniques

   • Make sure you have an interface to the offshore team located in the USA and fluent in English

   • Establish a daily communication line (should be part of Agile), and make sure your supplier has enough command of the English language to make the daily standup meetings profitable

8. There is no shortage of talents in your area. Why go offshore? Hire or subcontract locally

9. You are not willing to do your homework on the potential supplier and their country of origin. Take India for instance: the country has poor infrastructure, and their industry is plagued by an insane attrition rate. If these factors are critical for your success, then avoid Indian suppliers; if there are of little relevance in your case, then you can safely consider Indian suppliers as potential providers

10. You cannot communicate your company’s uniqueness. Your organization is unique, and you want the solutions developed for you to be unique too. The problem is that in order to reduce their risks and optimize their profit, some suppliers, especially large ones, will push for reusing existing building blocks, templates or look-and-feel, resulting in an application with little “personality”. One person in your organization should be in charge of making sure your corporate personality (uniqueness) is built in the solution, in other word “what you want is what you get”.

There is no project too big or too small to be outsourced, and no organization too small to successfully outsource some IT developments.

Contrary to a common opinion, outsourcing does not require a lot of extra efforts.

A successful outsourcing operation requires common sense, very good project management and excellent communication skills. With hundreds of thousands of skilled engineers available around the planet, technical resources are NOT an issue.

Remi
www.outsourcing-vsc.com

Business | 10 Comments »

A vast majority of SMBs are either contemplating offshoring part of their IT, or have already done so, often to India or China.

An outsourcing provider focusing on SMBs, I am always trying to refine our market segmentation.

I would classify SMBs looking to outsourcing their development / maintenance into 3 different categories, each of them yielding to very different results:

1. Companies in the first category (the largest one by far) are obsessed by paying the lowest price. I call them the Wal-Mart buyers: they want more for less. When a prospect belongs to the first category, I walk away from the deal, as a deal purely based on cost savings is set for failure. Interestingly enough, the bulk of outsourcing companies are fighting for these customers.

2. SMBs who fall in the second category are often first timers, therefore with a very limited experience of outsourcing. There are so afraid of potential failure that most of the time, they choose a supplier based on its apparent stability: the larger the better. The worst part of this choice is that a SMB is too small to be strategic for a large provider; [I elaborated on this risk last year].

   Being obsessed by the potential downside, they do not pay enough attention to the upside, an attitude yielding to mixed results at best.

3. Companies in the third category usually already have a solid experience of outsourcing, and make their decision based on a series of benefits they want to get from the operation. Unlike the companies of the second category, they want the highest upside possible, and will only work with suppliers that can guarantee their expectations will be met.

This last category is the one on which I focus my efforts; the risk of failure is extremely low, since expectations have been clearly stated at the beginning. In addition, and that is the icing on the cake, there is little competition on these accounts since a very few outsourcing companies are in fact able to demonstrate their ability to deliver.

These customers are fun to work with; the employees assigned to these projects are very loyal and will do whatever it takes to make these projects a success, no need to ask and/or push.

Remi
www.outsourcing-vsc.com

Business | 7 Comments »

SMBs do not necessarily have trivial software needs; some have even very sophisticated and/or diverse ones. It is not uncommon for SMBs to have needs that encompass JAVA and .NET developments, together with technical support for enterprise applications like SAP or NAV, and requests on advanced technologies like Flex or Ruby on Rails.

In fact, chances are the talents are available somewhere someplace. It might be in Bangalore, Shanghai, Sao Paulo or Cape Town.

The difficulty is to get them together. While industry leaders like IBM, TCS or Infosys have access to a wide pool of talents, they are just not interested in SMBs, leaving most of them with little alternative other than looking for the partners themselves, a time-consuming task that generally yields to mixed results at best.

The truth is that the vast majority of SMBs are not equipped to spend time and energy selecting their offshore outsourcing vendors. In addition offshore companies have different business practices, which in most cases are not really up to par with our business standards here in the USA.

My observation is that SMBs should not be the ones looking around for the various outsourcing providers. It should be the task of US outsourcing companies to establish a network of qualified and reliable offshore partners.

A few (not enough!) US outsourcing companies have already engaged into this avenue. SMBs should absolutely work with them; a US-based outsourcing company that provides with:

• Services agreements, ruled by US laws, which cover their various needs

• A local presence, at both business and technical levels, which enables to deal locally, removing cultural differences, language barriers and significant time difference.

And last, all the relations between the US outsourcing vendor and its offshore partners should be totally transparent to the customer.

Remi
www.outsourcing-vsc.com

Business | 4 Comments »