Offshore software research and development (R&D) is the process of subcontracting a company's software development needs to a third party or information technology (IT) service provider located overseas. Software R & D or software development in a corporate context typically refers to applied research, from conception and design to prototyping and testing of new products and systems.
Software R & D covers a set of tasks that include conception, design, specification, code development, testing, and documentation. According to the paper The Globalization of Software R&D: The Search for Talent published by Stanford.edu, the majority of software R&D projects features well-defined specifications that a service provider can easily work with. However, some outsourced software R&D projects evolve during the course of the project and require intensive participation from both the buyer and the service provider in all stages the process, from design to completion.
The software development team starts by understanding the specifications or requirements and translating them into instructions for the computer that will perform a certain task. Testing is then done to check the accuracy of the specifications and translation, followed by documentation and maintenance of the program as end users request modifications. Unlike other IT R&D processes, software R & D does not involve manufacturing of the product. When the R&D process is completed, the program is ready to distribute, ship and use.
According to the Stanford paper, more software is written for a company's internal operations (in-house software segment), such as administration and finance and accounting, than is produced for products and services sold to end users (software products/services segment). Corporate software development was originally performed to improve efficiencies in finance and admin data processing. Today, software products and systems are essential in both backend and front-facing processes in all business areas and across industries.
Evolution of Offshore Software R & D
Most companies offshore software development to reduce costs. Advances in technology have made it possible for the global distribution of IT services, including software development. Highly-skilled software developers and R&D talents are increasingly in demand in a technology-driven market. Lower wages in offshore locations like India and the Philippines have also stimulated companies of all sizes to hire foreign software development professionals
The evolution of offshore software R & D can be traced back to different paths. Influences such as downsizing, rapid advances in technology, global markets and customers, mergers and acquisitions, labor arbitrage or wage differentials, foreign government actions, and skills shortages have continued to push offshore software R&D forward.
In-house IT departments are the major consumers of software products produced offshore. In the mid-80s to early 90s, many companies downsized their information systems (IS) departments due to political reasons and a general misunderstanding of the importance of IT. Outsourced software development providers appeared during this period, and companies began to outsource big software development contracts, replacing in-house software employees.
Rapid Advances in Technology
During the same period, corporations began shifting towards client/server architectures to reduce hardware expenses and later on to manage the changes that came with distributed computing. This conversion to new systems required skills that were not available in the downsized IS departments. New skills are always required as technology keeps changing. In the early 2000s, programmers and webmasters were in demand, and companies were forced to look to third parties and locations such as staff leasing Philippines for outsourcing software R & D.
The growing demand for software worldwide may exhaust local labor resources, in which case the company will look to foreign locations for talent. The search for specific skills drives corporations and software publishers to offshore outsource software development. While there may be a surplus of IT professionals or technicians in a particular country, good programmers and software developers are hard to find. Some studies show that good programmers are 20 times better than average programmers, indicating that a high level of talent is important for companies who want the best people on board.
Mergers and Acquisitions
As a result of acquisitions or mergers with a foreign software firm, companies may gain an offshore development team. For example, a Japanese software publisher partners with a company in the U.S. to distribute their products in North America. In turn, the American software publisher gains local distribution channels and technologies because of the partnership.
Global Markets and Consumers
Offshore software R&D in the software publishing segment is one of the best ways to reduce development costs and additional spending. "Localization" or customizing the software to accommodate local language and standards was often outsourced to a provider in the end-user's destination. For example, a company that produced German personal finance software outsourced some or all software development to a German subcontractor.
Because software publishers must also offer support for their products (sometimes requiring local service technicians), companies often employ offshore workers. Offshore technicians handle inquiries from local customers, and install, customize and maintain software for local companies. These local services allowed the parent company to understand the systems environment and keep up with changing demands.
Low-Cost Software Development
Emerging markets like India offer skilled software developers at much lower rates, driving most companies to outsource. However, cost reduction is merely one factor. Some software publishers are willing to pay higher prices for offshore software R&D if the provider improves speed to market, reliability, and quality.
Foreign Government Incentives
Many foreign governments are helping locators (businesses that want to establish software development operations overseas) by giving them incentives to invest. Incentives may be in the form of changes in import restrictions, training and education, and tax breaks.
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