Who Can Do IT?

• By 2005, spending on IT outsourcing services worldwide will increase at a five-year compound growth rate (CAGR) of 12%, exceeding $100 billion USD

• By 2005, 30% of the Global 2000 companies will have an offshore outsourcing strategy in place (1)

There is a significant growth trend regarding the general idea of outsourcing the later stages of software development and maintenance. Much of this growth in outsourcing is expected to be offshore. More specifically, many companies are finding out that offshore firms can do IT at a much lower cost than it can be done in the U.S (2).

India: A Global Hotspot

For firms doing software development wholly in the United States, labor can account for 75% of the costs. So companies are looking to firms that have a better quality to cost ratio. Firms in India have proven to be head and shoulders above the rest. For example, companies such as GE, Bank of America, Target, and American Express have partnerships with Indian firms (2). Furthermore:

• Over 40% of Fortune 500 companies outsource IT to India (1)

• By 2008, IT & IT enabled services outsourced to India will grow from $8.5 billion USD (2001-02) to at least $50 billion USD (1)

The Software Engineering Institute’s capability maturity model (CMM) is a framework that is often used to evaluate the qualifications of offshore software firms. India has about 32 firms that have reached their prestigious level 5 certification (3). By comparison, China, which is another major player in the software development market, currently has one firm at this level.

On an absolute basis, India has twice as many technical graduates as the U.S. They offer lower wages and benefits, which can be 40 to 60 percent below those in the U.S. Because Indian firms couple those lower rates with a high degree of quality, their IT services are highly valued. As a result, U.S. companies are pairing up with their partners in India to do nondiscretionary programming. This frees up capital for other proprietary development efforts that give them a strategic advantage and allows them to stay ahead of the competition (2).

Deploying an Offshore Outsourcing Strategy

First, the company should decide if they are suited to offshore outsourcing. Because a great deal of time and resources will be required to oversee the work and integration of a development team, only companies with fairly large in-house IT staffs (over 50 employees focused on software development or maintenance) should consider offshore partnerships (2).Next, the company needs to evaluate the project and decide which phases are the best candidates for outsourcing. There are typically 6 steps through which a software development project progresses: project initiation, analysis, logic design, physical design, implementation and maintenance. The good candidates for offshore outsourcing tend to be the later phases (2).

Finally, the company should use its formal process for making its make-or-buy decisions. The final decision should serve the needs of the company as a whole. If a deal is made, a senior IT leader should head up the process and involve any senior business leaders who will be affected (2).

Offshore outsourcing is a proven cost-saving technique. Selecting the right location is an important part of an offshore outsourcing strategy. For many firms, India’s experience, friendly laws and high degree of English proficiency is tough to beat (4).

References:

(1) White Paper. (2002). The Benefits of Outsourcing Information Technology Offshore. Arackal Digital Solutions, Inc.

(2) Amoribieta, I., Bhaumik, K., Kanakamedala, K., and Parkhe, A. (2001). Programmers Abroad: A Primer On Offshore Software Development. McKinseyQuarterly.com

(3) The Hindu. (2002). Process Maturity: India Way Ahead of China. IndiaSoftware.com.

(4) Guerra, A. (2002). In Search of Savings. WallStreetandTech.com