Offshore Outsourcing: 
‘Nirvana’ for Application Development?
by Raj Phalpher, P.Eng., CMC

The outsourcing phenomenon shows no signs of losing momentum.
According to Dun and Bradstreet, the global outsourcing market approached a trillion dollars (US) in year 2000.  Almost unanimously, attendees polled at the GigaWorld US IT Forum in May 2000 believe that, “outsourcing would play a significant role in the rise of e-business, so we may see an acceleration rather than drop in outsourcing growth rates in some areas as organizations struggle with skills shortage and speed-to-market challenges that e-business presents”.  Outsourcing and especially, IT outsourcing, is not a fad; it is here to stay.

IT outsourcing has grown by more than 25% year-on-year in the 1990’s.
Information Technology (IT) represents 26 percent of this global outsourcing.   IT outsourcing expenditures in year 2000 represent a 25% growth over 1999 levels.  This trend has continued since the early 1990’s.

The ‘Guru’ of IT outsourcing: India

India has approximately 80% of the US IT offshore outsourcing market.
Over the last decade, India has become the largest offshore supplier of software to US organizations. It has 80% of the US market and Israel, Eastern Europe and Russia collectively account for the remaining 20%.  (Giga Information Group’s Research Digest, August 2000:  ‘Offshore Outsourcing: India an Oasis During Application Development Drought’ by Stephanie Moore.)  

Software development in India has grown from US$350 million in 1993 to US$ 6 billion in 1999.  This is expected to grow to US$9.5 billion in 2001.  India has more than 550 companies engaged in export of software related services and products.  Some of the large India-based software houses trade on the New York Stock Exchange: Wipro, InfoSys, Satyam. (Investing in their stock has been quite profitable, but that is a separate topic!)

President Clinton’s visit to India boosts offshore software development.
Forty CEO's from the Silicon Valley accompanied President Clinton during his visit to India in March 2000.  They signed $4 billion worth of software development and maintenance contracts.  Some of the largest US based organizations have established software development labs in India: Microsoft, Motorola, Texas Instruments, Bell South and Citibank.  Even system integrator, PricewaterhouseCoopers, has a 450 person development center just outside Calcutta.

Offshore Development Centres – A growing trend.
An Offshore Development Centre (ODC) is akin to having a remote software development or maintenance team that is fully dedicated to providing customer software support that complements the customer’s internal standards and procedures.   These are usually established only after the software vendor in India and the IT organization in North America have already had experience in working together on offshore projects and both sides are confident that the relationship will continue to prosper.  Mutual trust and professional project management are the key.  Tata Consulting Services (TCS) is a pioneer in this arena and has set up ODC’s in India for about 20 customers including Nortel Networks.

Acceptance of Outsourcing in Canada.
Canada often lags behind the US in adoption of new technology, business trends and even trends in fashion.  This lag ranges from a few weeks to a few months depending upon the nature of the product or service and its influence on our lifestyle, etc.  IT Outsourcing is no exception.   Canada has been slow to take advantage of the competent and skilled resources available in India.   Indian software development organizations are also partly responsible for this.  Only recently have some of the large software development houses opened representative offices in Toronto. 

Large Canadian banks have outsourced some of their development  - Indian firms contributed significantly to the Y2K effort on both on-site and off-site basis.  Nortel Networks is at it since early 1990’s.   It has its own development lab located in India plus has outsourcing agreements with several India-based development organizations. 

India has the right ‘Masala’ for e-business 
(Masala: Indian term for spices used to make curries)

Large pool of highly trained and motivated English speaking professionals.
This phenomenal growth can be attributed to the availability of a large pool of highly trained and motivated English speaking professionals.  Most of them have degrees in Computer Sciences and experienced with current development environments: Windows, Unix, Linux, HTML, Java, C, C++, VisualBasic, PowerBuilder, OO application development methodology, on line transactions processing, etc.    There are 400,000 IT professionals employed in software export endeavours, with 60,000 to 70,000 new IT professionals entering the workforce each year.  Most of them are graduates of India’s world-class six Indian Institutes of Technology plus other leading engineering schools. (Graduates of Indian Institutes of Technology (including the author of this article) usually receive accreditation from Professional Engineers of Ontario without taking any additional courses in Canada.)

India has more organizations at SEI CMM Levels 4 & 5 than the US.
As of March 2000, there were 28 organizations in the US and 29 organizations in India at SEI CMM  Levels 4 & 5.  (CMM = Capability Maturity Model; established in 1984 by Software Engineering Institute (SEI) to provide leadership in advance state of practice of Software Engineering to improve quality of systems that depend on software. In Canada, Citibank Canada was the first organization to achieve Level 4 (November 2000) and there is none at level 5.  Citibank Canada sought assistance from their development lab in India, COSL, which is at Level 5.)  In addition, around 150 software development organizations in India are registered to ISO 9000.  These certifications demonstrate Indian organizations’ commitment to quality and software process discipline. Data published by SEI indicates that organizations that pursue and achieve higher levels of CMM enjoy productivity gains of up to 60%, average year-over-year defect reduction of approximately 40%, and annual reduction in time to market of 20%.

Prime Minister Indira Gandhi’s ‘karma’ pays off.
Like in Canada or anywhere else in the world, government’s policies seldom have the intended effect.  During the 1970’s, in order to encourage domestic computer industry, Indira Gandhi’s nationalistic policies alienated international suppliers.  IBM and other suppliers left India in 1977 limiting the developers’ access to mainframes.  A blessing in disguise, this has helped spur their experience with Unix, open systems and client / server architecture.   It is harder to get adequate resources for legacy systems, but support for client/server is much more readily available

Benefits: Speed of Delivery….Quality…..Costs.
Nortel Networks and other organizations embarked upon offshore outsourcing in the early 1990’s because of cost advantage and even today cost savings in the 30 to 70% range are possible.  However, today the raison d'être for offshore outsourcing is not cost but speed of delivery and high quality of work products.  The large Canadian banks outsourced Y2K work to India because it just had to be done before December 1999 and the quality of output could not be compromised – there was no time for rework!

7 / 24 concept extended to software development.
India is 10 hours ahead of the Eastern Time zone.  This time difference has been leveraged by many organizations to achieve 24 hours development operation.  One of the major considerations in Nortel Networks’ decision to initiate offshore outsourcing was the 7 / 24 utilization of the development labs in Ottawa, the cost of which runs into several tens of millions.  When the programmers in Ottawa finish their day at 11 PM, they can transfer control of the development beds to their counterparts in Bombay.  It is 9 AM in Bombay and their workday has just begun.  They have almost exclusive use of the equipment till 6 PM  (some geeks in Ottawa do work past the midnight too!)  At 6 PM (8 AM Ottawa time), they are ready to discuss the project status and major issues with their counterparts in Ottawa. 

7 / 24 operation does require more stringent application of project management discipline.  However, the benefits of compressed schedule outweigh the additional project management overhead.   A number of project managers like the idea of ‘bugs being fixed while they are asleep!’

You do not pay for bench time….minimum upfront commitment.
Paying for bench time between projects is a major source of frustration for a number of organizations. A number of such organizations have invested in offshore outsourcing in India to take care of their peak demand.  This facilitates better utilization of in-house personnel.  They avoid hiring / de-hiring for specific projects.  Usually, there is no commitment or contractual obligation to pay for the bench time to the offshore organization.   This ability to turn projects ‘on’ or ‘off’ has led some organizations to use offshore outsourcing successfully for ‘skunk work’ and prototyping.

Exhibit 1: Cost Advantage of Outsourcing


The ‘Mantra’ for IT offshore outsourcing

Exhibit 1 illustrates that the cost advantage increases with the percentage of development effort outsourced and the percentage of work performed offshore.  They are maximized when the entire development team is outsourced and all the work is performed offshore.  Obviously, that may not a savvy business decision because over time the outsource organization controls the product and you are reduced to nothing more than being a marketing arm of an offshore organization. 

How to jump on the offshore outsourcing bandwagon?
There are several ways of jumping on the offshore outsourcing bandwagon, including:

  • Bring offshore resources for work on site
  • Combination of offshore / on site with high level project managers on site and detailed work done offshore
  • Outsourcing offshore a portion of the development effort

Tips for Canadian IT Organizations
It is very difficult to develop a generalized model for outsourcing that suits several organizations.  It depends on such factors as organization’s strategies, business priorities, product lines, competitive pressures, management style and skills available.  Here are some tips and considerations:

1. Survey what is available 
There is ample choice of organizations ranging from the medium size ones (provide more cost savings and more control) to the very large ones (have diverse skills availability) mentioned earlier.

2. Select the vendor with a proven track record
Client references for both the offshore developing organizations and their local representative in Canada are easily available and should be checked for their ability to meet your specific needs in terms of ability to communicate, turn around time, meeting project schedule, etc.

3. Appoint an executive for all aspects of outsourcing
Offshore outsourcing requires relationship with the vendor – the level of trust increasers if there is a single point of contact within the IT organization.

4. Test waters - ramp up slowly
Start with a small project or a thin slice of a large project.  Ramp-up outsourcing only after being satisfied with the vendor’s performance and the ‘shaking down’ of the process.

5. Start with web services instead of legacy systems 
Skilled support for client/server environment, net-centric systems is much more readily available than COBOL programmers for legacy systems.

6. On-site resources or local representative a must 
Research by Giga indicates that use of some senior resources on-site or an intermediary is a must for the success of a project.

One model that works.
Exhibit 2 illustrates an outsourcing model that has been used successfully by a Markham firm.  It has outsourced enhancements for a specific customer or market to a software developer in India.  It may or may not work for your organization. 

Exhibit 2: Outsourcing Model


Summary

Critical success factors for any application development project (based on survey of 8380 projects conducted in the US by the Standing Group) are :

  • Clear statement of requirements
  • Availability of competent resources 
  • User involvement
  • Executive Support
  • Proper planning

These factors become even more important for projects outsourced offshore.  Canadian IT organizations that are pursuing offshore outsourcing of Applications Development and Maintenance are cognizant of these factors.  Offshore outsourcing has led them to become more organized internally to deal effectively with the developing organizations in India, which have a lot more process discipline and are usually at a higher level of CMM model.  These Canadian IT organizations are enjoying shorter time to market, have steady workforce levels and are delivering quality software products to their customers.   This is accompanied by cost savings in the 30 to 70% range!


About the Author
Raj Phalpher is a Certified Management Consultant (CMC).  At present, as Chief Results Officer, Resultel Technologies Inc, he is responsible for marketing and delivering, business performance improvement and change management related consulting services.  He has provided training, counseling, and support to some of the world's largest and most prestigious organizations in both the public and private sectors.

He is a member of the Management Board of QUASAR, an ISO Registrar.  He is founder and chair-Emeritus of Toronto SPIN (Software Process Improvement Network) Steering Committee, and an active member of ASQ (American Society for Quality).

Mr. Phalpher has helped IT organizations in Canada and the US pursue and manage offshore software development.  He can be reached at phalpher@resultel.com .

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Copyright 2001 by Raj Phalpher. All rights reserved.

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