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Excerpt from An Overview of Offshore Software Development, by Dr. Bernard L. Palowitch, Jr., President & CEO of Incoda Corporation.
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“Competitors in India, China, Israel, Ireland, Canada, Mexico, Russia, Argentina, the Philippines, and other countries have become well aware of the American appetite for IT solutions. The ones that have been successful among these new global competitors have built a tech-savvy base of workers. They have invested in infrastructure. They have made a commitment to quality. And they have paid their dues by performing well on low-level tasks for clients in the US, Japan, Western Europe, Australia, and other highly industrialized economies.
Now they want to share in the dream.”
Harris N. Miller
President, Information Technology Association of America [1]
While there are more than 20 countries that have some level of offshore IT industry, not all countries are ready to share in the dream. The market is quite fragmented and there is great disparity in provider maturity. In all, there are several thousand offshore suppliers of IT and IT-enabled services scattered around the globe.
The process of selecting an offshore supplier consists of two phases: the first phase is selecting the destination country or countries; the second phase is selecting one or more optimal suppliers in the target countries. Selecting the offshore country is a key first step in supplier selection because there are a number of important country-level criteria that should be considered along with company-level criteria. Some of the important country-level considerations are: general fluency in the customer’s language, cultural similarity, similarity in business practices, quality of the educational system, quality and up-time of the telecommunications and other physical infrastructure (e.g., utilities, airports, hotels), government support for the IT services industry, a mature legal system, political stability, lack of religious strife, and security. No single country offers the highest ratings on all of these dimensions.
Three important country-level selection criteria are the differential of average IT wage rates between the customer's country and the offshore country; language proficiency in the customer’s native language, and the size and maturity of the IT services industry in the offshore country. Table 1 (see below) illustrates the data for more than 20 countries from the perspective of a U.S.-based client.
As discussed, one of the primary criteria for the move offshore is the cost savings achieved from differences in the wage rates for technical labor. Business cases built on cost savings are largely driven by the differential between the customer’s local wage rate and the wage rate in the target offshore country.
A second country-level criterion for selecting an offshore supplier is the supplier’s command of the customer’s language. For example, customers in the US and UK risk serious communication challenges (e.g., misunderstandings in the requirements; technical documentation that is viewed as unacceptable) when they are dealing with an offshore supplier whose native language is not English. This risk is mitigated by selecting suppliers in countries that demonstrate strong proficiency in English. English is an official language in India, Ireland, and several other prominent offshore countries.
A third important criterion is the maturity of the IT services industry in the offshore country. Surrogate metrics for industry maturity include IT service industry revenues (especially export IT service revenues), number of IT services companies, and number of IT professionals. Other maturity metrics could include the number of Fortune 500 offshore development centers that are located in the country and how well the IT services industry is supported by tax programs and other governmental incentives.
Table 1
Comparison of Leading OSD Countries
Source: A Buyer’s Guide to Offshore Outsourcing (http://www.cio.com/offshoremap), November 15, 2002; Offshore Outsourcing Part I: State of the Industry, Sourcing Interests Group, 2003, pp. 2-6 to 2-13; Market Shape Ltd. analysis; Incoda Corporation analysis. See additional notes below for salary information for IT professionals.
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The most popular offshore location is currently India, which combines very attractive wage rate differentials, a good country-level proficiency of the English language, and a relatively mature IT services industry. Various estimates give India between 80 percent and 90 percent of the total offshore outsourcing software services market. A recent survey by NASSCOM, India’s leading software and services industry association, found that almost two out of five Fortune 500 companies currently outsource some of their software requirements to India.
Ireland and Israel offer strong infrastructures and multilingual workforces, but at higher prices than India. Canada offers a less attractive labor rate spread with the U.S. but it provides comfort with its near-shore location and its longstanding trade history with the U.S. Pakistan and Bulgaria offer the most attractive wage spread and good English proficiency but they lack the experience in offshoring as compared to the other countries in the top tier.
There are several ways to mitigate geopolitical risks. One way is to develop a sourcing strategy that uses onshore, nearshore (e.g., Canada, Mexico for U.S. companies), and offshore locations. A second option is to insist that your supplier use multiple offshore development center sites, either within the same country or in different countries, if possible. In parallel, involve business users and offshore suppliers in business continuity planning to develop appropriate contingencies to address the most important risks. Companies also need to keep abreast of the shifting offshore landscape.
Endnotes
[1] Testimony of Harris N. Miller, President, Information Technology Association of America, before the U.S. House of Representatives Committee on Small Business, October 20, 2003.
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To learn more about Incoda's perspectives on offshore software development, please see:
To download the entire Incoda white paper, An Overview of Offshore Software Development, please visit the Resources Section of this website. Registration is required.
Some Additional Notes on the Salary Information Presented in Exhibit 1
Salary information was compiled by Market Shape Ltd. (http://www.marketshape.co.uk), a UK-based market research and business development consultancy, for Incoda Corporation in early 2004. Data for Exhibit 1 was collected from numerous sources, including:
application business center companies computer consultants custom design development directory India information offshore offshoring outsourcing programming resource software technology web
internet global it pages extranet vendors suppliers intranet sourcing address knowledge numbers website developers integration overseas services top km database articles outsourced journals consulting data free magazines yellow best programmers firms solutions tools management outsource enterprise guide contact phone download online projects
| Ukraine | Thailand | South Korea | South Africa | Singapore | Russia | Romania | Poland | Philippines | Pakistan | Mexico | Malaysia | Israel | Ireland | Indonesia | India | Hungary | Czech Republic | China | Canada | Bulgaria | Brazil | Argentina |
information business application development computer technology offshoring design programming directory consultants companies offshore outsourcing custom software center resource India web
phone numbers articles magazines guide database consulting overseas outsource global best journals top knowledge website suppliers data address it management enterprise sourcing firms intranet solutions projects integration free vendors services yellow pages outsourced developers contact download internet km tools programmers extranet online
| Argentina | Brazil | Bulgaria | Canada | China | Czech Republic | Hungary | India | Indonesia | Ireland | Israel | Malaysia | Mexico | Pakistan | Philippines | Poland | Romania | Russia | Singapore | South Africa | South Korea | Thailand | Ukraine |
companies application technology development business directory programming information offshoring design consultants outsourcing custom center resource offshore computer india web software
address articles best consulting contact data database developers download enterprise extranet firms free global guide integration internet intranet it journals km knowledge magazines management online outsource outsourced overseas phone numbers programmers projects services solutions sourcing suppliers tools top vendors website yellow pages
| Czech Republic | South Korea | India | South Africa | Bulgaria | Poland | Indonesia | Philippines | Israel | Romania | Brazil | Ukraine | Mexico | Malaysia | Hungary | Thailand | Pakistan | Singapore | China | Argentina | Russia | Canada | Ireland |
This page describes several important evaluation criteria and ranks the top countries for custom application and web software development offshore outsourcing.
