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New Strategies Reflect Outsourcing Maturity


By Frederic Boulanger
September 1, 2006 — 
Under increasing market pressures, organizations continue to focus on fostering core competencies while offloading non-core activities. Discussions about which software development activities fit into “core” and “non-core” buckets are commonplace today, and nearly every company with a software R&D function has an outsourcing strategy.

In 2003, according to a study published in Software Development magazine, 23 percent of software companies in North America said they were outsourcing some portion of research and development. By 2005, that had grown to 29 percent—it is estimated that the trend is growing at an annual rate of 30 percent. In industries like automotive, pharmaceutical and electronics, 90 percent of firms outsource some portion of R&D.

The conversation today has shifted from a question of outsourcing to how it can be made to work. The most sophisticated organizations use a variety of software talent in their outsourcing mixes. While the optimal outsourcing composition will vary between organizations, managers of successful R&D outsourcing models respect four important truths.

FOUR TRUTHS OF OUTSOURCING
First, they know that outsourcing does not equal offshoring. They recognize a range of third parties that may fit into the overall outsourcing mix. Sophisticated outsourcing models typically include at least four different types of labor options: in-house teams, sub-contractors within the same city (or even the same office), specialized firms on the same continent, and development houses overseas. Today’s R&D managers are experts at evaluating a particular project’s unique profile and matching the right mix of outsourcing vendors to the project.

Second, organizations with optimized outsourcing strategies know that outsourcing does not mean “over the wall.” They respect that an outsourced project requires at least as much management as an internally hosted project, and they evaluate what management style will be required. This can range from fully hands-on oversight to nearly total automation—and a range of scenarios in between.

Third, they know that sending work offshore is not necessarily cheaper. In fact, many may have been burned by projects that were blindly offshored during the tech downturn—not because the offshore vendor was incompetent, but because the project was unsuitable for a foreign vendor. Today’s more experienced R&D managers look at more than hourly labor costs—they also evaluate a project’s overall profile and map that to an appropriate outsourcing mix.

Finally, successful outsourcing models recognize the difference between IT software projects and product development projects, and they outsource accordingly. Whereas IT developers never have to look at the codebase, product development requires expertise to make a platform do what it wasn’t supposed to, with the ultimate goal of getting first-to-market. This focuses on innovation, on reading between the lines to turn a never-been-tried idea into a winning product.

READING BETWEEN THE LINES
Not every software development project requires a high degree of innovation. Many projects—such as those with highly detailed requirements specifications, or those surrounding maintenance of mature products—can largely be controlled by automated processes and tools. In these situations, minimizing costs and maintaining product margins are of paramount concern, and due to the controls in place, these are low-risk projects to outsource. Offshore firms, particularly in India, have proven their value in these projects.

But, while talk about outsourcing software R&D tends to raise thoughts of India almost immediately, India is not the whole story. In fact, as a legion of failed offshore software projects attest, a more sophisticated approach to outsourcing needs to be considered, in particular for projects that are time-sensitive, or that require a high degree of innovation.

Products like those in the early stages of development, “one-off” projects for a specific customer, urgent projects with short timelines, or highly experimental projects that require a specific skill set are ideal candidates for outsourcing to near-shore partners. Software development firms that are “near” to you in time zone, culture or location offer the advantages of outsourcing without the linguistic, cultural and time zone distractions that offshoring entails.

In Canada, where I live, such firms are carving out a niche in the successful delivery of highly innovative or time-sensitive projects. They are adding significant value to in-house North American teams that may be unable to tackle those projects due to availability, skills gaps or cost considerations.

Perhaps more importantly, outsourcing partners within North America share your culture and ideally have a wide range of relevant product and industry experience. So, a great deal can go unsaid or undefined. In a good near-shore relationship, the partner will intuit your needs to a degree that is not achievable when working with offshore vendors. A near-shore partner who understands the product development environment will be able to read between the lines.

For example, a near-shore partner can fill in the gaps between a high-level need (e.g., “We would like to build a softphone for WiFi-enabled devices”), and all the details of execution that need entails, without needing the details on paper. In fact, the partner’s capability should include a strong user interface design practice, and the ability to flesh out and define a project based on a high-level expression of need.

THE RATE GAP
You may be thinking, “But North American wages are four times higher than what I’d pay for offshore development. At that price, I can afford some screw-ups and delays.” But low labor rates are no guarantee that a project will save a software firm money. Hard experience has taught many firms that, when the wrong type of project is outsourced offshore, the cost of misunderstandings and delays quickly outstrips the cost of having a better-suited near-shore vendor perform the work. This is especially true of time-sensitive projects, where the cost of ramping up an offshore team can quickly eat up any rate-based cost savings.

It’s also worth noting that, just as the approach to outsourcing has evolved and matured to embrace a variety of vendors—including local, near-shore and offshore—so, too, has the near-shore business model. Sophisticated near-shore vendors have global teams, giving them the advantage of global costs in addition to innovation, experience, speed, response time and the agility of a core innovation team.

When combined with the right set of development processes, close—and closely managed—relationships with firms overseas help near-shore vendors to deliver products at lower cost, with no sacrifice in time-to-market or quality. By extension, the organizations that partner with these near-shore vendors are able to deliver effectively on their product commitments—faster, more efficiently, and with high quality.

Frederic Boulanger is president and CEO of Macadamian, a Canada-based software company.


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