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Offshore Software Development Trends
Smaller software companies are jumping on the offshore bandwagon. A significant 27 percent of software companies with revenues less than $100 million intended to offshore development in 2006, up from 20 percent in 2005.
Price has been the key factor in deciding where to offshore. "Ninety percent of all outsourcing deals in the market today have been structured around cost improvement only," says Linda Cohen, vice president of sourcing research at consulting firm Gartner.
However, certain parts of the world are experiencing significant annual rate increases. For example, in Bangalore, India, salaries of programmers are growing at a rate of 14 percent annually. The escalating costs of labor in India combined with high turnover have prompted many American software companies to look elsewhere for talent. With the growing demand of offshore programmers, finding the right developers among a sea of choices is paramount.
Challenges Finding Developers
The high costs of local programmers, difficulty identifying reputable offshore vendors and problems assessing the quality of those found are major challenges for American software companies.
Local Development Is Costly
Developing software within the United States is a costly endeavor. Recruiting and securing the right individuals can take months and involves recruiting, interviewing and qualifying applicants.
The median salary for beginning programmers in the United States is $51,700.4 For a team of 10 programmers, that is a half-million dollar annual investment. Add overhead, equipment and training, and the price skyrockets. Outsourcing in the United States is even more costly. Rates can range from $40 to $80 per hour, equating to between $83,200 and $166,400 per year for each programmer.
Higher rates are compounded by fewer graduates. Universities are seeing major declines in the number of students majoring in computer science. For example, between the years 2000 and 2004, UCLA computer science enrollment dropped 60 percent.5 In fact, the decline in college graduates in IT-related fields is one of the most worrisome problems faced by CIOs.
Finding Offshore Programmers Is Challenging
Offshoring to India is the number one choice for most American businesses. However, is India always the best source for programmers? Working with developers in Bangalore, India, "The local engineers would start a project, get a few months experience and then bolt for greener pastures," explained Bill Wood of Ping Identity, an American Internet security software company. High attrition, rising salaries and an overburdened infrastructure are causing many American companies to examine other locations, such as China, Russia and Brazil.
When searching for offshore developers, many businesses have no idea where to start. A CIO Insight article explained that small businesses are "using a combination of grass-roots vendor research, word-of-mouth, relationship building and just plain luck," to find offshore developers. Many software executives rely on recommendations from friends and colleagues— a process that is only as good as the reach of the executive's network. Often, executives must travel overseas to assess the quality of development teams. Bruce Lehrman, CIO of a $40 million fundraising software company, explains his experience, "The Ukraine was the most difficult. I had to learn a lot about the culture, and the language was a big barrier. In the hotel, I wasn't sure if I was going into the business office or the ladies' room." Assessing Qualifications Is Challenging
Once a short list of vendors is compiled, the next important step is to assess their qualifications. Issues that should be examined include:
_ Does the vendor have a technology track record that matches your needs?
_ Do the developers employ modern development techniques like Agile or RUP?
_ Is a development manager included?
_ Are costs determined by a fixed rate or by man-hours?
_ Does the vendor have capability maturity model integration (CMMi) and ISO certifications?
_ Who retains the rights to intellectual property and are there possible conflicts of interest?
Brief History of Offshoring
The concept of outsourcing software development overseas grew during the 1990s. The Internet boom resulted in low-cost broadband Internet connections in many nations. This set the stage for American businesses to transfer data and processes offshore.
Stable software platforms such as Oracle and SAP emerged, enabling offshore developers to focus on acquiring very specific skills and technologies.
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