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IT Outsourcing in the Small and Medium Businesses

Like the country and western song, the offerings of Indian and American outsourcing firms are "meeting in the middle." This marks a fundamental shift in the offshore outsourcing frontier, according to Dean Davison, vice president of the Meta Group, a technology advisory firm in Stanford, Connecticut.

In the past, Indian software development companies set up American offices to win outsourcing contracts. Working with their buyers, they designed projects locally. Then Indian programmers wrote the software applications in India because of the cost savings. Davison says Indian companies can hire local programmers "who are extremely talented" whose pay scales are significantly less due to the difference in the cost of living between Bombay and Boston.

Indian outsourcing firms were able to showcase their talents with Y2K assignments. Davison says this was an easy task to outsource offshore because the job was clear cut; programmers simply had to change the date codes in the applications. There was no requirement for constant interaction with the corporate office.

"Successful offshore outsourcing projects were those with steady requirements like Y2K and quality testing/assurance rather than fast changing requirements," says Davison. They were easily defined projects that the American-based office handed over to their code factories in India for mass production development.

Indians Lead Push For Quality

On the other hand, many development assignments needed too much face time for an offshore supplier. Five years ago companies did not design software with rigorous parameters, remembers Davison. They had a good idea of what they wanted, but there was a lot of give and take between buyer and supplier until the developers completed an application that met the buyer's needs. This method of development made it difficult to work with an offshore vendor. So most of this work went to stateside suppliers.

As Indian software companies matured, they began paying increasing attention to quality development. Indian developers rigidly apply the Capability Maturity Model (CMM), a Software Engineering Institute model that measures quality in software development. The top score is a 5. Davison says top tier American outsourcing vendors like EDS, IBM and CSC currently provide Level 2 development, with pockets of Levels 3, 4 and 5. But at least 10 Indian firms offer Level 5 support.

Davison says this prompted U.S. firms to improve the quality of their work. "Local firms said, 'We can do this, too,'" he adds. Attention to quality has been a major Indian contribution to the industry.

This led large American outsourcing firms to develop partnerships with Indian vendors. This union allowed the suppliers to capitalize on each partner's talents. The U.S. firm retains primary project responsibility and the Indian programmers develop the code, reducing the average cost of development.

At the same time, Indian companies are developing large North American operations in order to capture more of the specialized development market. They began to look more and more like EDS.

Boundaries Are Blurring

"The boundaries between North American/European and offshore vendors is blurring," says Davison. "By 2005, local providers with offshore components and offshore vendors with strong local project definition skills will be largely indistinguishable." He finds this interesting because both sides started "at the opposite end of the spectrum."

Within the next five years having offshore capabilities will no longer be a major distinction, he predicts. Instead, Davison says firms will have to distinguish themselves by their industry knowledge. Cost considerations, while important, will become secondary.

The Meta Group believes these hybrid global/national vendors will develop 20 percent of code offshore by 2002 and 45 percent two years later. By contrast, EDS developed less than five percent offshore last year.

Davison predicts buyers will increasingly outsource e-commerce projects to offshore providers because the software is becoming standardized. Currently, most e-commerce projects are customized for buyers which is why local outsourcers are capturing most of this business currently. But that will change as patterns emerge for application profiles and commerce chain links.

In addition, buyers are moving away from outsourcing projects to outsourcing ongoing operations. An American company that implements an SAP project hires an outsourcing firm to keep it running. Until recently, U.S. firms were hiring U.S. suppliers to manage their SAP programs. Today, Davison says offshore firms are now tackling SAP maintenance even though the computer running the application is in the U.S. Improved global telecommunications have made this possible.

Assess Your Corporate Culture Before Sending Work Offshore

Davison says that buyers considering offshore outsourcing must assess their internal application development and maintenance requirements. He estimates offshore outsourcing can reduce development costs by as much as 25 percent.

However, the vendor can generate these savings only if buyers are willing to operate with "significantly more rigid methodologies" than they are used to. Davison says sometimes this rigidity can become "a roadblock" for the buyer's IT personnel who must work with the offshore vendors whose success is dependent upon these new procedures. Davison suggests executives who are considering offshore outsourcing to honestly assess their corporate culture to determine how willing the staff is to adopt CMM models.

Lessons from the Outsourcing Primer:

• Indian and American firms are looking more like each other.
• Indian firms led the movement to quality application development using the CMM model.
• Before outsourcing development to an offshore firm, make sure your corporate cultures mesh so the two companies can work together harmoniously.
• Offshore firms are moving toward on-going relationships as opposed to clearly defined, finite projects.

Publish Date: August 2000

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