5 Top Trends in Offshore Outsourcing

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Analysts and offshore outsourcing experts gathered at the recent U.S.-Russia Technology Roundtable in San Jose, Calif., identified five major trends in offshore development.

Here’s a summary of those trends, as well as some of the factors driving them:

1. More and more IT jobs will move overseas in the coming years
Forrester Research estimates that the demand for offshore outsourcing will account for 28% of IT budgets in Europe and the U.S. within two years. Further, the number of offshore IT workers worldwide (software developers working overseas on projects for Western firms) will go from 360,000 today to more than 1 million by 2005.

“Clients are now banging on our doors demanding data on where they should go for offshore development,” said Rita Terdiman, an analyst with Gartner Group. “We tell them to go where they can find the best resources and the highest quality for the lowest price.”

2. More corporate giants opening dedicated software development centers in places like India and Russia
While most companies tend to test the offshore waters with a small project or two, the big names tend to cement these relationships by setting up huge dedicated development centers in their countries of choice.

Microsoft and GE, for example, built campuses in India several years back. Over the past couple of years, though, Intel, Boeing and Motorola have preferred Russia as the best place for dedicated centers. Intel has 400 workers at one Russian center working on wireless LAN and modem projects. It plans to ramp this up to more than 1,000 staff over the next couple of years.

Dell, too, just established a dedicated software engineering center in Moscow. Unlike Intel’s, this one is managed and staffed by Russian outsourcing vendor Luxoft. It is a scalable-upon-request team of software developers, with every member being selected by Dell based on relevant experience, domain knowledge and educational background. Dell views this center as a way to focus internal IT resources on specific core areas while scaling up the pace of IT deliverables, and at the same time reduce costs.

“Having delegated some projects to the Moscow Center, we intend to free up the time and energy of our IT departments to enable them to focus on value-added technology tasks, while keeping the scale of IT deliverables at the current and even higher pace,” said J.R. Carter of Dell Computers.

Tom Sundsboe, a director of Luxoft, explained that such centers tend to evolve once companies gain confidence in the ability of their offshore partner.

“After you demonstrate first class ROI and rapid time to market with a Fortune 50 company during your early projects, they tend to want to consolidate the relationship by utilizing your skills and resources in the establishment of a dedicated center,” he said. “That has been our experience with Boeing and Dell.”

3. The gradual acceptance of Western intellectual property (IP) standards
Some companies are understandably hesitant to develop software in countries where software piracy is rife and where IP legislation is in its infancy.

“Russia today is like the U.S. in the early ’80s in terms of intellectual property rules,” said Russian academician Eugeny Velikhov. “We have a lot of catching up to do but we are working hard to do so rapidly.”

But with leading global corporations now heavily involved in Russia and India, the legislative picture is changing. Intel’s Richard Wirt believes that while it is essential to take effective IP protection actions in these countries, he has found governments receptive to changes that will encourage greater business cooperation. As a result, he feels that great strides have already been made in Russia and other countries.

“Russian law is starting to resemble American law in the IP field,” said Wirt.

4. Offshore sourcing moves up the value chain
Not so long ago offshore software development dealt with mainframe maintenance, Y2K fixes and general IT grunt work.

“Originally, the offshore industry inherited labor intensive body shop type IT tasks such as printer drivers and Y2K,” said Stephan Lane of Aberdeen Group.

These days, he says, the picture has changed. Java, XML, Oracle and higher-end work has now become the order of the day — at least in those countries where the resource base possesses the requisite skills.

“Offshore resources in places like Russia are accomplished in high-end and complex algorithm-intensive projects,” said Terdiman.

5. Stratification of offshore countries based on cost and skill sets
India and Ireland were once the rising stars of offshore outsourcing. Both offered very low rates and an available resource pool. More recently, though, these advantages have diminished, largely as a result of their rise in popularity. Ireland, for example, can no longer compete on price with most countries. And India now finds itself sub-contracting work to China and Malaysia in an effort to stay competitive, added Lane.

To survive, these countries must move up the value chain while others take their place as the place to go to find an abundance of highly skilled programmers at low rates. China and Russia are the two he taps to replace Ireland and India as the darlings of the offshore world.

Venture capitalist Esther Dyson agreed, though her money is on Russia.

“Within 10 years, Russia will be well known as the leading source of top-notch offshore development talent,” she predicted.

Dyson caution, though, that U.S. companies should not approach the offshore market as a brief fling for the sake of short-term cost advantage.

“If you go in for the long-haul and establish meaningful partnerships with Russian firms you will realize the greatest benefits,” she said.