Offshore Software Development: What is it and why do it?

The term offshore development in the IT world is predominantly used to describe the business of outsourcing software development and engineering services overseas. The most widespread reasons for for offshore development are cost-efficiency, globalization and lack of domestic resources.

Costs reduction is the most common cause for offshore development. The tasks like coding and software testing services and QA can be carried out in developing countries for one tenth of domestic cost. India has gained revenues from such type of outsourcing from $110 million in 1990 to predicted $6.3 billion in 2000-2001. Inspired by such tremendous success, more and more underdeveloped countries endeavor to become serious rivals for so-called India monopoly.

Software vendors striving to international markets and seeking for localization of their products to specific platforms, languages and cultural standards consider it most efficient to opt for offshore development resources geographically near their target markets. Ireland, Australia and Finland are the most demonstrative examples for this type of outsourcing currently. We still can talk about cost savings when outsourcing to these countries, but they are not so significant as, for example, in India.

The ever-increasing lack of IT professionals, in particular in super powers, is promptly becoming the most often reason for offshore development. For example, the U.S. Department of Commerce indicates that by the year 2003 there will be a gap of approximately 1.4 million computer developers in the US only.

We should note that until recently the phrase “offshore development” has been a kind of misnomer. Though, contracts may be concluded between an onshore customer and an offshore contractor, still the bulk of work has been done at customer’s site by contractors. For example, offshore development contractors from India to U.S. customers used to performed 95 per cent of their tasks on-shore in 1991-1992 and still this rate reached 58 per cent on-shore by 2000. But considering the growing demand for this type of services and visa hindrances generated by the government to preserve domestic jobs made outsourcing extremely difficult.

Such kind onshore-offshore development is often called “body shopping” or “body shipping”. It granted companies the access to comparatively inexpensive, tentative IT resources avoiding the negotiations with individual workers themselves, and with least risk. Agreement is executed with offshore provider, hence most of the employees’ support remains provider’s responsibility. The bulk of such contractors eventually immigrate to the target country to become full time employees.

The largest obstacle to true offshore development is the shortage of trust and evaluation of risks among customers, who are not sure of expertise, competency and credibility of a prospect sub-contractor. To minimize risks, most customers retain as much control as possible over production processes, transferring overseas only un problematic tasks of coding and testing. To allow full-extent offshore work, one must provide really detailed specifications. Yet another means of eliminating risks is to source offshore software development services from well known, established contractors: approximately 10 percent of circa 600 offshore development companies conducting business in India have revenues of at least $10 million per year.

So, we can separate three general offshore software development models:

• Contracting: In this case a company contracts an “offshore” provider to render certain kind of software development services.
• Ownership: An organization sets up a partially or completely owned affiliate in an “overseas” location to directly engage programmers for software development.
• Onshore-Offshore: In this case developers are delegated to the customer’s site temporarily to render programming services.

We’ll scrutinize the first two offshore software development models.

The most popular destinations for offshore development are locations with well developed IT support infrastructures. Such popularity is conditioned by favorable demographics and labor costs, availability of technical education facilities, favorable Government regulatory environment aimed to support offshore development activities.

Ireland perfectly suits this criterion. Almost half of its population is under 25 years of age. Its twenty high schools graduate an adequate number of IT specialists to allow Irish offshore development business thrive. Tight relations between the universities and hardware/software vendors add special knowledge to graduates to begin working when they complete their studies. Irish Government policy soundly support these initiatives. But rather high salaries offset these advantages. This environment and capabilities are translated into 2000 offshore development revenues of over $6 billion. 40 per cent of off-the-shelf software sold throughout Europe derives from Ireland.

India possesses the same benefits, but make emphasis on substantially lower salaries. India authorities at all levels aggressively help to enhance the offshore development sector, which currently comprises more than 10 per cent of overall Indian exports. The Indian National Association of Software and Service Companies is one of the most powerful and influencing industry groups globally. Excellent university support system which closely collaborates with leading hardware and software vendors adds to the above. Within just one year the amount of quality certified software firms in India raised to over 170.

Telecommunications infrastructure in India is being continuously enhanced and the number of wide band leased lines utilized by offshore development companies has increased from 10 in 1992 to over 1200 (64 KBPS, 2 MBPS) today. Over 185 firms from Fortune 500 companies delegated their software activities to India (to more than 1250 Indian companies dedicated to offshore development).

We can draw some parallels between India’s IT infrastructures in 1990 and Russia’s in 2000. Russia’s current offshore development revenue can be compared to India’s ten years ago. Russian IT salaries are roughly the same as India’s today. What is most important is that Russia’s educational infrastructure for yielding new generations of IT professionals is one of the best globally. Soon Russia will find itself among the world’s leading offshore development providers.

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