Domestic software outsourcing

Most of the Software outsourcing companies in India are concentrating on US and European market for offshore software outsourcing. But now trend is turning towards small to medium companies of domestic market. Nasscom estimates that domestic software and services market is of above 15,000 crore and growing. Trend suggests that, major Indian software outsourcing companies were till now looking at big companies only but now, they have started to look at small to medium scale businesses also. India has above 3.5 million small and mid scale companies which are increasing IT deployment in their organizations. Competition in their respective business and cost puts pressure on small to mid companies to focus on their core business and take help of software outsourcing company to do non critical IT application development work. Biggest outsourcer is financial industry which is spending thousands of crores on IT requirements. IT Outsourcing companies manage IT requirements for these companies and also give strategic suggestions about how to use IT for the benefits of the business. This includes services from hardware maintenance to software installation and purchasing of new packages as well as doing software outsourcing development. But yet industry is not reacting to domestic market fast because, profit from domestic market is much lesser then profit from offshore software development business.

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Software outsourcing and product development

India's software outsourcing sector is booming and increasing very fast. Banglore is now world famous as a offshore software hub. Same way, Indian BPO market is also booming. Many other IT enable outsourcing services like account outsourcing and payroll outsourcing, But now, according to latest trend, product development outsourcing is increasing in India. There are many small to medium size companies who are outsourcing parts or full product development to Indian counterparts.

So far, this trend was not much encouragable in software outsourcing. Only big companies like Adobe, Microsoft and Cisco were doing product development in India and that too inside their development center. But now many Indian companies have started product development and started entering into software outsourcing product development. It is considered that, increase in business will be around 100% in offshore outsourcing product development.

Product development requires specialised skills which not every software outsourcing company has. Product selling firms in US and Europe can reduce their software development cost by doing offshore outsourcing. On the other hand, they can concentrate on marketing and new ideas. Also, they may have to maintain people with specialised skills if they want to do on their own. If they want to open their own small development center in India, it can not be very useful. By aligning with Indian software outsourcing company, they can get access to wider skill area.

For Indian software outsourcing companies, product development is very lucriative market. Because, comapnies can charge much higer billing rate compare to software outsourcing services. On the other hand, it is also costlier to find and maintain quality software engineers.

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Software outsourcing

At present software outsourcing to India is booming and all companies are having enough orders. But future may not be as rosy as it looks to be. In US and Europe so many companies are looking to start offshore outsourcing. But this booming industry is not free from dissatisfied customers. According to Gartner, one out of every four outsourcing deal is failing and ending with termination of order.

According to diamondcluster's 2005 global IT Outsourcing report, number of customers terminating software outsourcing deal prematurely has doubled to 51% - a drastic increase. While, number of customers satisfied with their offshore outsourcing has decreased to 62% from 79%. According to Tom Weakland, blame is not totally on the shoulders of software outsourcing service providers. But it also lies on the customers. Many companies are using offshore outsourcing since last few years. But yet they don't have effective measure to gauge success of offshore outsourcing deal. This outsourcing study included 210 customers and 242 software outsourcing service providers. All participants where from global 1000 companies and were of senior executive level. Research was conducted in the end of 2004 and in the beginning of 2005. IT budget of the companies which were involved ranged from less then 5 million dollars to more then 500 million dollars. The survey also points in the direction that, around three fourth of software outsourcing companies are expecting growth in offshore IT outsourcing.

However, survey reflected on few core issues also. Like, 7% of the customers mentioned that, they will decrease onshore outsourcing. While 5% customers mentioned that they will decrease offshore outsourcing. Other key factors found in the survey are, employee backlash has continued to be a major concern for customers along with worries over US anti-outsourcing legislation and political pressure.

For Indian software outsourcing companies, bad news in report was alarming interest in China. 40% of the customers mentioned that, they are expecting to outsource some part of their IT business to China in next three to five years. This was just 8% a year ago. For software outsourcing, reallocation of internal resources to more critical functions was considered biggest benefit of offshore outsourcing. While cost saving was next to it. This shows that, companies are finding very high cost-savings as very difficult to achieve. And they are understanding more about loss of good people and value of their institutional knowledge.

Report also mentions the rise of china in offshore software outsourcing market. It mentions that, china is looking like India was looking 10 years back. When software outsourcing capabilities of china will take off, it will put very high pressure on the traditional providers of offshore outsourcing services and it will set a new competitive price. Some CEOs and senior management people of software outsourcing companies were not agreeing with the report mentioning that, buyer dissatisfaction and premature cancellation are away from reality. Now a days, buyer confidence in software outsourcing and offshore software development is increasing and so is the repeat orders from customers. However, they also mention that, threat from China can not be overlooked, but it is not going to be there in nearby future.

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Dedicated offshore software development center

Many companies have opened dedicated offshore software development center - ODC in India. Instead of sending work on project basis, having a dedicated offshore development center is more preferred for many companies. While sending work on project basis to India, your offshore software development company creates a team to work on your project. But when project gets over, that team gets disassembled and team members start working as a part of few different teams taking knowledge along with them. When Software application requires some changes, again offshore software Development Company has to assemble team which work on project and again they get disassembled. And this continues. Because of change in programmers, software application also suffers and every time new team has to acquire knowledge of the existing system which is time consuming and costly. Instead of this, when software application is going to require some changes in future or requires continuous maintenance work, it is always preferable that, you make a deal with offshore software development partner to create an ODC - offshore development center where programmers work dedicatedly for your application development only. There are many benefits of ODC over traditional project based software outsourcing. It gives advantage of sustaining knowledge base which gets created while working on project and after completion also, it is retained. That indirectly benefits in increased productivity. Also, offshore software development center programmers can be treated as part of your own organization, they should be given email IDs of your company and their development place should be separate with your company name and logo. That makes them feeling part of your organization and remains more connected.

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Outsourcing deal breakup

Sears, Roebuck and Co. has terminated its 10-year, $1.6 billion IT outsourcing deal with Computer Sciences Corp. Deal was terminated in less than a year into the agreement. In a Securities and Exchange Commission filing, Sears said it had cause to pull out of the contract, citing CSC's "failure to perform certain of its obligations." But company is now facing arbitration on the displute over the grounds of cancellation and what fee sears has to pay to CSC for the termination. The amount at stake is 96 million dollars termination fees. According to CSC, Sears has to pay that fee to terminate the contract.

Sears' filing in SEC on 13th May also revealed that CSC sought a federal court injunction that would have prevented Sears from ending the contract but court has denied the request. According to CSC in its motion filed with court, sears terminated contract "for convenience due to change of control". This was because of the sear's merger with Kmart Holding Corp. The merger has created new parent holding company Sears Holding Corp. in November. Sears and CSC made an agreement in June 2004 according to which CSC was to provide Sears with a range of IT services, including support for desktops, servers, and telecommunications systems.

Hidden cost in offshore outsourcing

Shifting work to offshore software development center can be much more expensive then one can even think of and in his article, Stephanie overby explains many reasons for why offshore outsourcing has many hidden cost. Shifting work from $100 per hour person to $20 per hour person looks very attractive and many companies are shifting their work but it has some hidden cost like

• The Cost of Selecting a Vendor - expect 1 to 10% cost on vendor selection and travelling
• The Cost of Transition - expect 2- 3% on transition cost.
• The Cost of Layoffs - Expect to pay an extra 3 percent to 5 percent on layoffs and related costs.
• The Cultural Cost - Expect to spend an extra 3 percent to 27 percent on productivity lags.
• The Cost of Ramping Up - Expect to spend an extra 1 percent to 10 percent on improving software development processes.
• The Cost of Managing an Offshore Contract - Expect to pay an additional 6 percent to 10 percent on managing your offshore contract.

Read full article at http://www.cio.com/archive/090103/money.html

80% CIOs are considering Offshore outsourcing and Offshore outsourcing is irreversible megatrend according to gartner and by 2004, eight out of 10 CIOs will get direct marching orders to move offshore atleast part of their technology services. Cost saving of outsourcing can go as high as 40% but also, it is not just the only reason for outsourcing as it is now considered a tool to achieve longer term strategic goals to increase IT staff flexibility and gain access to bas of world class IT skills, so they can quickly respond to business opportunities. "I can't think of a single meeting I've had with a client in the last year without offshore being a topic," says Bob Pryor, who heads the global outsourcing practice at Cap Gemini Ernst & Young. Read full article at http://www.computerworld.com/managementtopics/outsourcing/story/0,10801,84861,00.html

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IT Outsourcing labor shortage

Leaders from India's growing software outsourcing and IT enabled outsourcing services mentioned on thursday that, Indian university graduates lack the skills needed for estimated around 1 million jobs in next 4 year. According to Mr. Rajeeva Ratna Shah, an official of the federal planning commission, this problem is not with the quantity. But it is with the quality of talent. Federal planning comission directs India's economic strategy. Above was mentioned at outsourcing conference in Banglore, famous for India's hightech IT outsourcing services. He also mentioned only a fraction of 3 million graduate produced each year are ready to be employed in IT outsourcing industry. Others require several months training.

Mr. Kiran Karnik mentioned, most people who apply for back-office job lack communication skill, knowledge of international practice and advanced computing skill. He said, in interviews companies are able to select only 8 or 9 out of 100 who apply for the job. He added, the issues are so crucial that the industry will develop its own systems to test the skill of the country's university graduate.

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