The Bottom Line of Offshore Development

The trend toward farming out development work to overseas firms has yielded bottom-line profits to most of the firms that have taken the leap of faith, according to an industry survey.

The Software & Information Industry Association (SIIA) surveyed 114 software companies on the subject of offshoring their development efforts. It found 68 of the firms have offshore operations while 46 have quit or have not done it yet.

For those companies offshoring their work, it’s been a boon, with 75 percent of companies reporting a positive impact on revenues and 88 percent reporting a positive impact on profits.

Companies move projects offshore, largely to India and China, for cost savings, but also for time to market, according to David Thomas, executive director of the SIIA. It simply takes too long to hire and build a team in the U.S., especially when a team of 50 or 100 is assembled and ready to go in Bangalore or Shanghai.

“They know if they built a whole new team it would take too long. [Offshore], there was a team at an outsourcer ready to go and they could increase their speed to market. If you can get a product to market one-and-a-half to two years earlier, that’s a significant improvement in revenues,” he told

The lack of talent is also a factor. The U.S. can’t produce enough talent, Congress keeps dragging its feet on H1-B visas and with Google on a vertical growth ramp, it’s literally grabbing every Java programmer in the Silicon Valley it can get.

“Offshoring is not costing people jobs,” said Thomas. “In the Silicon Valley, the unemployment rate among engineers is about zero. There was a lot of concern it would be the other way around but we’re just not seeing that.”

Companies that quit often did so because they didn’t get the immediate cost savings they assumed would come from moving from a large U.S. city to India or China. “Many entered into it thinking they would get a five-times cost savings. Very rarely do you save money — especially the first few years — because there’s a lot of investment in money and bringing people up to speed,” said Thomas.

Other issues included language, cultural barriers, the time difference, and, in some cases, the quality of the product wasn’t very good. And while India and China have come a long way, they’ve still got a long way to go, too.

“A lot of infrastructure has to be built; that’s why a lot of companies gave up,” said Thomas. They thought they could wave a magic wand and have a bunch of engineers working for them. Then they found out they had to get a place, invest in computers, infrastructure, and so on.”

The companies that refused to go mostly cited fear of a loss of control of their software or outright theft of their intellectual property. “There really haven’t been any instances of that. That fear really didn’t materialize, particularly since it was such a big concern,” he said.

But Jim Duggan, research director at Gartner who follows development issues, said it has been a problem. “They’re [SIIA] not looking very hard as far as I can tell. The typical stories you get back from India from packaged software vendors is they had to use pretty heavy encryption keys and copy protection to avoid employees taking copies outside the company,” he said.

Usually the businesses are mindful of intellectual property; it’s the individuals with the sticky fingers, he said.

Duggan said that outsourcing has been great for small and medium-sized companies that needed the extra set of hands, as Thomas described it. “The top-tier guys are every bit as good as anyone you’d find in the world,” he said. “They have great education, great facilities and good business practices.”

Still, while he’s mostly positive on outsourcing, he also thinks the well may run dry for the U.S.

“Long-term, one of the things we expect is both Indian and Chinese capacity will get sopped up writing software for India and China,” he said. “We’re already hearing from Indian clients that they are reaching capacity, and internal projects are competing for staff.”

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