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How Outsourcing Software Development Helps Companies in the US, Canada and Other Developed Countries

Author: Gretel Digo

Posted: June 22, 2015

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The cost benefit of offshore outsourcing software development is obvious, and it is the one of the primary reasons companies in the United States do it.  However, IT service providers have moved up the value chain and expanded their offerings to include high-level and complex development and testing.  These services typically require development skills that are above average, meaning that labor cost is as high as and sometimes even higher than local costs. 

According to an article published by The Economist, extremely competent and good programmers in India and China are hard to find, despite the very large populations of these countries.  These talented programmers command salaries equivalent to or higher than salaries of American or European programmers with the same skill level.  Some companies are willing to pay the higher price for quality, and innovation, thus expanding the benefits of offshore software R&D beyond cost reduction.

Still, the risks of offshore software R&D are real.  It would take significant benefits that outweigh the risks for a company to consider outsourcing software R&D overseas.  According to the Handbook of Business Strategy: Best Practices for Dealing with Offshore Software Development, U.S.  companies that have experience with offshoring reported the following benefits:

Reduced costs. The cost factor remains a main driver for offshoring. CIO magazine said that Otis Elevator, an elevator manufacturing company, spent almost half a million U.S.  dollars in transition costs when it offshored 75 percent of its application development team to India.  Otis recovered the investment after only one year, and it is currently saving $1.4 million in app development and maintenance.

Access to larger talent pool. India, China and Russia have very large populations of software engineers and developers compared to smaller countries.  These engineers are also more willing to work for lower wages than local engineers.  An Intel manager reported that they were able to scale up more easily and increase the size of their development efforts due to access to a large labor pool.  The manager said that outsourcing offers scalability when it is very difficult to find skilled engineers locally.

Government incentives. Many offshore governments are highly invested in their country's IT initiatives and software exporting capabilities.  These governments aim to attract foreign investors by giving incentives to companies that want to outsource or establish offshore operations.  In India, incentives include a 10-year tax holiday for R&D companies in certain industries and 150 percent deduction for scientific R&D spending.

Improved focus. Some companies that were successful with their offshore software R&D projects reported that they were able to focus on core business activities as they transferred responsibility for non-critical software activities to service providers.

Improved time to market. Global connectivity allows software development teams to function round the clock.  As the development team in the U.S.  ends their day, the offshore development team in India or the Philippines can pick up where the internal team left off, ensuring that products are delivered faster.

High-quality, low-cost software. Many companies in North America continue to offshore software R&D because they claim that software produced offshore has better quality but lower costs.  Many U.S.  companies believe that reaching CMM Level 5 (the highest level of software quality) would be too costly if done internally.  The company would have to spend on documentation, sophisticated technology and other costly requirements to maintain high-quality development.

Increased innovation. In a global software development environment, programmers, developers and engineers come from different backgrounds.  This enables companies to leverage shared best practices and innovation.  This is particularly true for companies that establish offshore subsidiaries, allowing direct interaction.

Why Outsourced Software Development is a Business Trend

The goal of offshore software R&D is to develop high-quality software in low-wage countries at reduced cost.  According to a study published in the Journal of Information Technology: Case and Applications, most companies in the U.S., United Kingdom, and Japan have adopted offshore software R&D because of high-quality but low-cost IT services that are available from offshore providers. 

Offshore Software R&D Contracts

Offshore software R&D agreements vary in scale and complexity.  The engagement spectrum ranges from hiring one software engineer on a freelance basis to billion-dollar outsourcing contracts between North American or European companies and offshore service providers.  Outsourcing agreements may be fixed in scope and price, where the client and provider are expected to adhere to predictable processes and consequences.  Other agreements are more flexible in terms of time, materials, and responsiveness to change.  A good outsourcing contract helps both buyer and vendor achieve their goals and allows them to handle issues in a way that proscribes failure of the agreement. 

Large Enterprises

Large enterprises that outsource big development projects often establish their own branch in the offshore location.  For example, a company that wants to hire more than 100 software engineers and developers can save more money through local recruitment.  The rapid growth of emerging markets like India and China mean that talent shortage is always a possibility.  To compete with locally-established companies, the offshore branch may solve this by offering bigger salaries and better compensation packages.

SMBs

Small and medium-sized businesses have limited resources and may not be able to afford to compete in this way with bigger companies.  Instead, successful SMBs outsource software development by building offshore development centers and virtual teams or using build-operate-transfer models.  SMBs work with local service providers that handle infrastructure, legal, IT infrastructure, and HR services instead of direct development.  The offshore centers are often called offshore development centers or virtual workgroups.  The provider offers support and staffing solutions (i.e.  recruitment and training of software developers), while the client is responsible for management and output monitoring.  In this type of delivery model, the client and provider share responsibility for project delivery. 

According to Microsoft Developer Network, a team of software engineers must be assigned to one client and the team must have good retention rates to ensure the success of the partnership.  There must also be transparent communications at all levels, from buyer-to-provider and developer-to-developer.  Best practices and tools should be in place, like common coding standards, continuous integration, unit testing, bug tracking, one click build and deploy scripts, etc.  For example, continuous integration leads to seamless communication and productivity even when issues arise.  Communication between software engineers is of utmost importance in a distributed environment.  Companies often deal with this dislocation by enforcing daily/weekly reports and meetings and through team-building events and other activities that strengthen employee relationships.

Why Companies Outsource Software Development & Research

The transformation of software development engagements from direct hiring to project-based work to complete outsourcing or offshoring is driven mainly by a company's cost reduction initiatives, but it is not the only factor that comes into play.  According to a report published by InformationWeek, enterprises are outsourcing software development to access hard-to-find technical skills, leverage the service provider's expertise and mature processes, improve service levels, improve scalability, and focus on their core business.

However, offshoring software development introduces a certain level of risk, from security vulnerabilities to poor quality products and systems.  For a company to outsource software R&D, the benefits must outweigh the risks.  Enterprises use different methodologies to control risks throughout the software supply chain.  This includes risk assessment, setting security metrics and clear service-level agreements (SLAs), independent application security testing, establishing acceptance thresholds, and outsourcing to providers with security certifications.

Other Benefits of Outsourcing Software Development and Research

The potential to reduce development costs is the most obvious reason for software research outsourcing in the Philippines and other established offshore destinations.  By hiring low-wage software engineers and developers, the company can produce or publish software at a fraction of the cost of local markets.  According to Real World Offshore Development Practices by Bryan Campbell, offshore development can help an organization save 15 to 25 percent of its overall development costs.  The 100 to 200 percent returns that many providers promise is possible to achieve but only with well-defined, well-designed, and straightforward projects.  Cost reduction in a global software development setting can be complicated by issues arising from coordination complexities, however.  Still, many companies offshore development because of other benefits:

Time Zone Benefits

When developers are scattered all over the globe, development work can go on 24/7 or at least allow organizations to increase daily working hours.  Functionality gets written faster with round-the-clock hands-on coding.  Some companies like Global Investments and International Semiconductor found that it was possible to do this during the testing phase and for support tasks and defect resolution.  Not all stages of development are suitable for the "follow-the-sun" approach, however.

Rapid Development

Cloud-based offshore development can further speed up development.  As soon as offshore developers are granted access to the cloud and remote infrastructure, coding can begin immediately.  Developers do not need to replicate the technical environment.  Due to the central nature of development, continuous integration happens more easily as remote developers deliver codes to the main bank.  Code sharing among teams is also faster through the cloud.

Better Developers

Shortage of developers is usually not the reason companies outsource, but shortage of good developers.  For example, there may be a surplus of developers in the U.S.  and U.K., but only a few have the talent or skill level required to produce quality work.  For companies willing to pay for talent at any price, outsourcing development work to Ireland, Canada and other near-shore locations is a viable solution. 

Modularized Development

Offshore software R&D allows processes to be divided into modules and developed simultaneously across several sites to reduce cycle time.  Companies have different ways of "packaging" work into bundles.  Some treat offshore team members as members of one large team, while others treat them as a separate team per location that are coordinated to achieve the project goal.  Managers may assign development work that does not require a lot of shuttling back and forth to Indian developers to foster independence and a sense of goodwill.

Proximity to Markets and Consumers

With offshore software R&D centers, companies are closer to their target market and to consumers.  For example, software publishers catering to the Chinese market benefit from hiring local developers who are culturally closer to their customers, share their language, and better understand local markets. 

Improved Flexibility

In a climate where technologies evolve at breakneck speed, organizations must be vigilant, responsive and flexible.  Instead of building internal development teams and adding full-time staff, many companies choose to offshore outsource software development to reduce the cost drain and become more flexible to market conditions and customer needs.  Offshoring also prevents high emotional costs associated with downsizing and lay-offs. 

Better Testing

In many cases, it is more affordable and efficient to obtain expertise and tools from third party than sourcing or building them.  Because buyers demand it, providers now offer technical expertise as well as practices that assure high quality at every stage of software development.  Service providers offer new development methodologies (such as Agile), tools, frameworks and techniques that can speed up deployment of products and systems and increase process transparency to customers. 

Staff Leasing in the Philippines for Outsourced Software Development & Research

Get more info about business process outsourcing and the Philippines as an outsourcing destination.  You can also learn more about software development outsourcing by visiting our Software Development page. 

Previous Software Development Offshore Outsourcing: Main Growth Drivers 
Next Offshoring Software Development & Research: Industry Trends 


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