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Offshore Outsourcing: The Big Five

Offshore outsourcing of software development, support and maintenance is gradually emerging as a source for competitive advantages--and a source for headaches, too--for a number of companies


Recent study by Gartner attributed the first year-over-year revenue drop suffered by the IT services industry in 2002 to growth in offshore outsourcing services, which is pushing down the prices. Forrester Research says that the offshore outsourcing is going to rise from 12 percent of corporate IT budgets in 2000 to more than 28 percent in 2003. Meta Group predicts that as much as 50 percent of U.S. IT workers will shift to contract labor by 2007.

A CEO of a young IT products company recently said on the panel of a popular Washington, D.C. event that by offshore outsourcing its R&D center to Bangalore, India, his company was able to develop products very efficiently, effectively and with a minimal amount of cash. With only a $15,000 to $20,000 monthly cash burn rate, his company was able to compete against 4- or 5-year-old VC-backed companies that had raised multi-millions.


But is that all there is to offshore outsourcing--reduced cost? What are the various things that one should consider while employing offshore outsourcing? Industry experts say that there is a lot that stays hidden but has an enormous impact on the decision to offshore outsource. Let's examine the experiences of these people to understand what it takes to successfully offshore outsource a project.


Outsourcing Is More Than Labor ArbitrageLabor arbitrage--the ability to pay one labor pool less than the other--has definitely modified the fundamentals of offshore outsourcing. Also, the availability of a greater number of equally qualified people--India produces 75,000 IT graduates every year as compared to 26,000 in the United States--has played a big part in the growth and efficacy of offshore outsourcing.


However, there is more to offshore outsourcing then just lower HR expenses. There are many areas including vendor selection, communications, technical oversight, security/privacy and specialization, which all need to be considered while offshore outsourcing work offshore. Studying best practices in these areas is a must if you want to be successful. Five things will help you achieve that.

Select the Right Vendor

As an industry, offshore outsourcing has matured. There are many documented benefits and pitfalls of offshore outsourcing. The general awareness has reached such a level that the case for offshore outsourcing has been pretty much made. Now the prevalent question has changed from "Why offshore outsource?" to " Offshore outsource to whom?"


How you select your vendor will have a significant impact on your success. There are a host of questions that you need to get answers to. You need to establish selection criteria to evaluate vendors. You need to understand your core competencies, your business needs and how they relate to the core competencies of the vendor. You need to evaluate the industry knowledge of each vendor and their processes and methodologies, including CMM, ISO9000 or TQM certifications. You need to understand the cultural diversity and the impact that it may have on communications and development efforts.


One startup company that tied up with an offshore outsourcing company in India had to constantly answer this question while seeking outside investment: "How are you going to assure that you have this effective development organization in India with all of the negative things going on around the world?" It was able to address this concern easily because it wasn't the only company using Indian development centers. Its vendor was also supporting a number of other U.S. companies that were much larger and prominent than the startup. The vendor had enough redundancy and resources for backup and recovery to ensure continuous operations in emergency situations.


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