Market Analysis: NWC Inc. Ventures Offshore

Guinea Pigs in Transit

We geared up our NWC Inc. business applications lab in Green Bay, Wis., to determine what's involved in offshore application development outsourcing. We examined the drivers, the pitfalls and the silver linings.

NWC Inc. is familiar with multinational projects, having participated in a development venture for one of the world's largest software companies that involved teams in San Francisco; St. Petersburg, Russia; and Pretoria, South Africa. Even so, we wanted to document a project in real time. We investigated how well an overseas outsourcer could integrate into our production environment and ended up with a worthy piece of software. Read about our experiences in "Imported Java,".We want to stress that much of what is called offshore outsourcing is mislabeled. For instance, if your company is a huge multinational, the term offshore is rather vague. If IBM places a development office in China, and employees in that office do development work, some people call that offshore outsourcing. But it's not outsourcing, and it's not offshore for IBM.

Then there are the "outsourcing" centers that other multinationals, including GE, maintain. These centers, sometimes jointly owned, are in countries where the multinational does regular business. This is indeed outsourcing, because the employees are not workers of the multinational company. But what if GE chooses to contract with organizations that have application-development facilities in India? GE sells in India, so is that really offshore? We argue no, and further contend that it's unseemly for a country that champions capitalism to claim that jobs are being "stolen." It's competition within the company for where to put the jobs.

What about work contracted to an outsourcer in, say, Russia by an organization with no presence in that country? Our reader poll indicates that some of this work would not be undertaken if it had to be done in-house: When asked what the main benefit of outsourcing is, the second most common answer (after cost reductions) was "delivers IT value that otherwise would not be affordable." In these cases, employees of client companies accrue a net benefit from managing contracts and performing technical contact duties--work they wouldn't otherwise have--and developers in India, Russia, Ireland or China have work that they wouldn't normally have.

Of course, this is a small slice of the outsourcing pie; the remainder is software development that would have been done in-house but is being outsourced to a company in another country. This includes work contracted to offshore firms and work contracted to large U.S. outsourcers, like Keane, that is performed offshore. This is the category that riles many IT pros--they think that work should be done in the United States.In the spirit of staying in the real world, we tried to ignore the glut of sensationalized studies on offshore outsourcing that clogged our inbox while we were working on this package. For example, Gartner's and Meta's predictions of 100 percent market growth over the next four or five years can be misleading--our reader survey numbers show that just over 4 percent of all application development is now outsourced, meaning that "100 percent growth" will put us at just over 8 percent if projections hold true. Not exactly a landslide. Instead, we analyzed the results of our reader poll and talked to managers from Fortune 1000 companies who come down on both sides of offshoring.The primary drivers are not as clear cut as you'd think. For example, cost reductions are not just the result of less-expensive labor and benefits. They also include not having to buy and/or build more space in the United States; and savings on taxes employers must pay on their buildings, parking spaces and corporate and employee incomes, plus employees' social security. But it's not just the near-term bottom line, according to one CEO we spoke with.

"Our decision to globalize is based on the rationale that to make the company prosper, we needed to take advantage of the benefits a global operation offers," says David Sikora, CEO of Pervasive Software, which maintains a number of outsourcing relationships. "Companies that figure out how to integrate their business processes globally will be the most successful. Once the industry has reached a steady state, prices will be significantly impacted and will put huge competitive pressure on those who are not globalized. For us, it was a long-term strategic decision."

Those soured on outsourcing say they were dissatisfied with the quality of work delivered, failed projects and the high cost of managing projects remotely. Indeed, AMR Research says that less than one-third of the 220 companies it surveyed that outsource some IT work are satisfied with the cost savings. Concern for protecting American jobs and skills also was a consideration. Of course, some work--mainly U.S. government work--cannot go outside the country, and some projects involve intellectual property that companies are not willing to send to an outsourcing firm. Giving your IP to another company is risky; sending IP to a different country, with different IP laws, is more so.

Survey Says ...Of the nearly 700 respondents to our reader poll, only 19 percent are placing application-development projects offshore. Which types of projects? Nearly half are outsourcing client-server applications, while only 11 percent will outsource architecture and systems planning. Some 70 percent are outsourcing less than a quarter of total IT application development. Significantly, less than 5 percent of all application development is being done offshore.

As for motivation, no surprise there: Nearly half of respondents cited IT cost reductions as the driving force, with an additional 12 percent saying they couldn't afford to do projects in-house. It stands to reason then that price was the most popular criterion when choosing an offshore vendor, followed by specific skills and reputation.

When asked how satisfied they are with their offshore outsourcing, our readers rated the ingenuity of offshore teams and contract relations highest, while code quality and thoroughness of analysis and design scored lower. The greatest challenges in offshore outsourcing? Remote team management, poor quality of final product and inability to work directly with developers.

One thing that surprised us was how little concern readers, and organizations going offshore in general, seem to have about security. But after analyzing the results of our poll, and one recently conducted by Enterprise Strategy Group, we realized that most companies outsourcing work to offshore vendors are the same organizations that have been outsourcing for years. They know the security problems and give outsourcers enough rights to get the job done, but not enough to jeopardize critical corporate data. As offshoring begins to spread to organizations with less outsourcing experience, we expect more horror stories.

There is a place for offshore outsourcing. Your job is to use some of that left-brain analytical ability and remove the emotional component from your evaluations. Look at outsourcing as another tool to meet the business goals of your organization. If you still feel that your job is at risk, see "Worried?" at left. When corporate boards and shareholders are clamoring to keep costs down, and a building, an employee and benefits all cost significantly more in North America and Europe, hosting that work in countries like India, Russia and China is something a responsible CIO must consider.Our project, research, interviews and reader survey led us to a few conclusions. First, don't assume outsourcing--offshore or on--will save you money unless you're a large organization with a steady volume of projects to farm out. There is considerable overhead associated with doing business in a country several time zones away, but it can be lessened with economies of scale.

Second, the more layers of red tape between conception and deployment of a system, the more appealing and cost-effective outsourcing is likely to be. This excess bureaucracy is usually found in large enterprises--if you've worked in a place where meetings stack up like firewood and most employees spend less than half their time doing their actual jobs, you understand. For these organizations, outsourcing is like buying a commercial product, with the added benefit that you get to specify the requirements. This is true of all outsourcing, with offshore outsourcing being "different" only because it is perceived to be less expensive and the jobs are located elsewhere. Developers are not available for endless meetings, and project managers are less available than if they were in-house ... this isn't always a bad thing.

If you've decided to test the waters, select the right project. Our interviews and surveys tell us that two popular uses for offshore outsourcing are in upgrading legacy applications and in client-server development. Web application development comes in third. We agree: If you need an application rewritten to support new technologies or have old client-server systems you want to maintain while upgrading your staff's skills, explore offshore and onshore outsourcing solutions. Although the cost of working with a company that's based in a major U.S. metro area is unlikely to be much different than the costs to develop in-house, you won't have to contend with time zone and language problems. It may be worth the extra money.

Finally, check out our monthly newsletter for global sourcing. "Managing Offshore" explores the sourcing of services for application development, application maintenance, infrastructure, business process outsourcing, and call/contact centers. Download a sample issue or a free report.Don MacVittie is a technology editor at Network Computing. He previously worked at WPS Resources as an application engineer. Write to him at [email protected].

The furor over offshore outsourcing is being fanned by groups whose agendas generally serve their own best interests--that's human nature, after all. We set out to present readers with practical advice based on our real-world experiences. For "NWC Inc. Ventures Offshore," we drew on our background participating in multinational projects, interviewed managers from Fortune 1000 companies, analyzed an extensive reader poll and waded through dozens of analyst reports. We concluded that offshore outsourcing will grow, though not at the wildfire rates suggested by some pundits. As to whether it's as bad for the U.S. IT job market, as some believe, we point to the recently released "Job Outlook 2005" survey by the National Association of Colleges and Employers. In this list of the Top 10 degrees in demand by employers, computer science, computer engineering and information sciences placed sixth, seventh and tenth, respectively. IT skills are clearly still in demand. The trick as a potential employee is knowing which companies are most likely to outsource.

But as a CIO, how do you know whether going offshore is a smart move for your organization? We answer that question in "Imported Java,", where we spec out a piece of software for our NWC Inc. business applications lab and contract with Patni, a well-known Indian development house, then document the process of building our app. You can find our requirements document, Patni's responses and the actual application Patni produced for us here.

In the end, offshore outsourcing is all about producing a comparable-quality product for less money. It would be fiscally irresponsible not to at least explore the possibilities.The corporate benefits of sending jobs to cheaper climes are clear. But what if you're a highly paid U.S. software engineer or Web developer?

Simply put, the higher cost of American workers must be offset by higher productivity. Hand-in-hand with this concept is reduced overhead: If you spend more than half your time in meetings--typical for some IT staffers--who, exactly, is doing the work? There's also a movement in American organizations to make IT staff more business-oriented. If you're worrying about business problems, you don't have as much time to address technical concerns.

If tweaking your schedule doesn't solve the problem, and you're concerned about job security, consider getting training in project management. Nearly 40 percent of readers we surveyed said their companies' offshore outsourcing relationships are managed by an IT staffer dedicated to that task. For every offshore project, there must be an onshore coordinator; make it a point to be qualified for the position. Learn all you can about how to work with people in different time zones, countries and cultures. Figure out how to grant outsiders access to development and test machines, and bone up on milestone plotting and tracking--for both internal and external staff.

Another, more big-picture strategy is to encourage your government representatives to reduce the burdens corporations face when hiring American workers. Cost reductions, be they from lower prescription drug prices, tax relief or an easier time hiring and firing, will help organizations justify keeping positions in the United States that otherwise might go overseas.Finally, remember we've seen more intense outsourcing situations--in the textile industry, for example--and our economy has adjusted. The fear that outsourcing is sucking away "the best jobs" is a visceral reaction that demands more research.

Our outsourcing project with Indian vendor Patni was an experiment in the overall offshoring experience. Our goals were to evaluate the value, quality, and issues surrounding an offshore implementation.

One of the things we did in our project that is a little out of the ordinary for any outsourced project is to give Patni free reign in what types of documentation and coding standards were included in the deliverables. Our goal with this bit of freedom was to gauge the maturity level of their process. We were pleasantly surprised by what we found.

Here are the documents that Patni submitted. The only modifications we have made is to eliminate references to costs and manhour estimates. We removed these numbers in an attempt to keep from harming Patni competitively for participating in our tests. We are of the opinion that the vendors who refused to participate should not have a window into the pricing structure of the vendor who was willing to work this project with us.

Our initial requirements document was purposely short of information. Our approach was that some projects would come to them fully defined, but many projects are only defined once the project managers start asking questions. We chose the second route to see how Patni handled it. Here is our requirements document.The first document we received was their response to our RFQ. The notice at the top that this information is confidential is left in for your reference. Patni has given us permission to publish this document in support of this project.

Next we sent the database schemas to Patni. These documents are excluded here because we wish to focus on the documents that Patni provided us, not the ones we provided them. As you know, in order for any vendor to develop an application with a database interface we must provide them with the schemas, so we mention it here.

The final document we offer you at this time is the Functional Specification created by Patni. Notice that there is enough overlap with the original response that the two tie together, but not so much that it bores you senseless. This document does an excellent job of showing their understanding of the project with our skimpy initial documentation and some well-placed questions on their part.

(Be sure to listen in to our exclusive interviews with Don MacVittie for a behind-the-scenes look at his analysis of Patni and his take on the future of application development.)

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