A friend of mine has recently been considering off-shoring a portion of his development
organization, this post is a synopsis of my thoughts and experience....
Off-shore development has been going of for more than a couple decades. When I started with
Accenture (then Andersen Consulting) in 1994, engineers in the
Philippines were being employed to do off-shore development - simply missing the
ubiquitous moniker. Only with India's tremendous growth in this area and the exposure of outsourcing in
Friedland's book "The World Is Flat", has off-shore development truly started to be universally discussed.
Despite all the hype, observations by media pundits and the reality of off-shore development don't really jive. India will not take all US IT jobs, China will not replace India as the preferred destination (in the Short Term) and the cost savings won't last all that much longer. Having managed a 40 person on-shore / off-shore product development and marketing organization (based in Bangalore, India) for the last three years, I have come to understand some of the capabilities and drawbacks of this development model along with some ability to cut through the hype.
Off-shore Model - Various EditionsA brief synopsis of 3 different models that can be used to analyze the various
development structures.
- Wholly Owned Subsidiary- The off-shore development organization is owned by the parent company and all 'workers' are employees. This structure is typically used by Multi-nationals that have the ability to staff a large organization, deploy the required processes, invest in the necessary tools and have a low enough overhead:delivery ratio to make it cost effective. Microsoft, Google, SAIC, IBM, EDS, etc. have successfully deployed this model.
- 3rd Party Development Organization - The off-shore development organization is owned by a third-party organization and all the 'workers' are employees of the third-party organization. Typically the 3rd party will be responsible for the processes, tools, staffing and delivery. Tata, Infosys and Wipro are the pioneers of this model and are constantly evolving to be more like traditional consulting organizations rather than just low cost development organizations.
- Body Shop - At the most basic form, Body Shop organizations provide workers and space without the management and oversite. Process development, tools, etc are left up to the customer. Body Shopping will not be addressed in this posting since I don't believe it is a particularly effective method of off-shoring compared to the other two models.
Model Analysis
Analyzing business models is always subjective and difficult to structure without some form of a framework. While not ideal, I am "shoe-horning" a SWOT Analysis since it is close enough and better than any alternatives that I considered.
Model 1 : Wholly Owned Subsidiary
Strengths
- Direct control over all aspects of development and delivery
- Your costs do not include their Margin
- As employees, you are able to provide unique incentives (e.g. options) and perks (e.g. rotation programs)
- Overhead costs associated with managing their manages do not exist
Weaknesses
- Your costs include your overhead expenses - unless you are a multi-national you will never have the same overhead:delivery ratio that a large outsource company will have
- All HR initiatives are yours and your HR department must be prepared to support the local initiatives and regulations.
- Engineers want career paths (especially in India) with specific milestones. Your organization must be large enough to support growth and their career paths.
- It is easier for "Name Brand" companies to hire top talent - if you don't have the brand, the Tata's, IBM's and Accenture's of the world will have a foot-up in recruiting.
- You are responsible for developing your processes and making sure that they work.
Opportunities
- Your off-shore management team must be integrated into your local management team. I have been fortunate to work with an exceptional country manager. It makes all the difference.
- While cost savings are going away, there is still a pretty significant value proposition. As of April 2007, the loaded cost per employee, per year is approximately $17,000. This is for a 100 person development organization and includes HR, Operations, Finance, Management and IT resources in the total number. Additional costs such as
Threats
- Costs are rising rapidly - this is especially true in Bangalore and other Tier 1 cities. When compared to the US: Salaries are lower, Telecommunications is higher, HW is equivalent or higher, SW is equivalent, Power is higher, Space is equivalent in Tier 1 cities though lower elsewhere, Admin Overhead is lower.
- Attrition is a significant factor when working in India.
Model 2 : 3rd Party Development Organization
Strengths
- You do not need to "deal" with all the legal, HR and regulatory issues of managing an off-shore subsidiary.
- They can bring the processes, tools and best practices from day 1. This should not be overlooked.
- If you go with a large organization, they can provide the career paths and incentives that staff in India require. However, you have less control over the types of incentives that you can provide to their employees.
Weaknesses
- Your costs include their Margin.
- Their processes are fairly rigid.
- You have limited control over the resources that get added to your project.
Opportunities
- If you don't have world-class development processes in place, working with a CMMI-5 company is a good way to develop them.
- The Golden Rule applies. If you are a SME, you will always be a second tier customer - focus and priority goes to the customers that generate millions of $ in biling revenues.
Threats
- If product development / IT delivery is a core compency to your company, by off-shoring you lost control.
Critical Success Factors
- Your processes (or partner's processes) and associated tools must be rock solid.
- Metrics for tracking project success must be in-place.
- Your team must clearly segment activities and responsibilities between locations.
- HR needs to be a tremendous focus - hiring, growing and retaining talent can make or break an off-shoring initiative.
- Communication is critical
Communication is critical
One more time - communication is critical. Daily conference calls, online chat sessions, midnight Skype sessions and regular trips for in-person meetings are all absolutely critical to success.
Summary
- Difficult for SMEs to do it themselves
- Risk is compounded due to distance and time
- Cost justification for India is going away
- If your development processes are not solid you will have major issues.
- There are some great resources in India - skills extension for your team can be a great reason in itself.
Library
http://www.solovatsoft.com/softwaremethodology.html : some good white papers though tilted towards their approach.
http://blogs.msdn.com/architectinsight/archive/2007/03/12/globalisation-clinic.aspx : a Microsoft blog that addresses a number of valid points.
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