How to Choose An Offshore Software Vendor

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For most American IT executives, offshore outsourcing presents an opportunity to cut costs. But there are many other considerations, so before you rush to outsource beyond U.S. borders, it’s imperative that you do your homework.

That was the consensus at a U.S.-Russia Technology Roundtable held last month in San Jose, Calif. Experts at the event discussed ways American corporations could make a success of planned or ongoing offshore outsourcing ventures.

Speakers from Boeing, Intel, CSC and Phillips Semiconductors, the Russian government, analyst groups, Russoft (the national software association of Russia) and Russian vendors addressed an audience of around 100 during the one-day event. Most focused on the criteria to use when selecting a potential overseas supplier.

“It is vital to study the resource base of the countries concerned, their education levels, degree of technology expertise and also cultural factors,” said Tom Sundsboe, a director of Moscow-based Luxoft, one of the largest offshore outsourcing vendors in Russia and a founding member of Russoft. “At the same time, you have to look at the merits of individual companies in terms of viability, quality standards, communication infrastructure and project management excellence.”

Eugeny Velikhov, an academician and official representative of the Russian government, informed the audience that more than half the Fortune 1000 utilizes offshore software development resources. Boeing, Dell, Intel and IBM, he said, had been in Russia for many years. He believed that the remainder of the Fortune 1000, as well as many mid-sized concerns were now casting their eyes in the direction of places like Indian and Russia as a possible source of development talent.

“Offshore software development is entering the mainstream,” said Aberdeen Group’s Stephan Lane. “Mid-market companies are now eager to join large global concerns in outsourcing application development overseas.”

According to International Data Corporation (IDC), spending on offshore development by US companies will soar from $5.5 billion in 2000 to $17.6 billion within two years. During the time, the number of offshore IT workers will grow from 360,000 currently to over 1 million.

With so much time, money and resources now being invested in offshore development, let’s take a look at some of the important factors that guarantee best results and the highest ROI.

Cost

It goes without saying that cost is an important reason to go offshore. CSC Denmark (part of U.S.-based IT outsourcing giant CSC) achieved 60% cost reductions by using Star Software (based in St. Petersburg, Russia) to create software for clients like the Danish Parliament.

“While the skill sets available abroad are wonderful, the biggest reason to go overseas remains cost,” said CSC’s Niels Erik Clausen.

Time to Market

Cost, though isn’t everything. While most of the big U.S. corporations present were more than happy to utilize highly skilled programmers at a fraction of the U.S. rates, several brought up time to market as an equally important factor.

Phillips Semiconductor, for instance, worked with St. Petersburg-based eVelopers to develop nine major e-business applications, one of which saved the company 24,000 hours per year in manual data entry. During these development projects, Phillips capitalized on the time zone difference to achieve virtual round the clock development.

“Though we are a very small company, we worked hard on programming while our client was asleep,” said Regina Velton of eVelopers.

When Phillips programmers arrived at the start of the business day, they reviewed the latest code, provided feedback and then received all the fixes by the next morning.

“This arrangement eliminated one-third of the normal time to market period for our last several applications,” said Bill Roeder of Phillips Semiconductor.

Choose a company, not a country

At first glance, it would appear that U.S. corporations should weigh the strengths and weaknesses of the various countries in the offshore development game and decide from there. Lane of Aberdeen Group disagrees.

“Choose a company for offshore development, not a country,” he said. “An offshore partner should exist as a virtual extension of the internal IT department and the only way that this can be achieved is if both parties establish a collaborative relationship. This is something that can only be evaluated at a company, not a country level.”

Boeing’s Sergey Kravchenko supported these views by telling of Boeing’s experience with offshore development. His company screened 20 companies before choosing the one that had the resources and talent to pull off the complex projects they had in mind.

“When you want help building a major Web site and Web-based catalog like MyBoeingFleet.com, as well as a massive authoring/publishing system known as eMod, you want to make very sure that you pick the right company,” said Kravchenko. “The success of those initial projects — 5 million hits within a few months — has led to about 50 joint software development projects using resources from Luxoft.”

Abundance of educated resources

Several speakers, however, made the point that with so many businesses heading overseas, Fortune 1000 companies should focus on countries where the educational resources exist in enough quantity to cope with the demands of large-scale projects.

“Only India, China and Russia are capable of scaling up enough to meet demand,” said Rita Terdiman, an analyst with Gartner Group. Like others, she commented on the superior level of education in Russia and the fact that the country possesses a huge technical workforce capable of solving complex programming tasks.

Intel’s Richard Wirt supplied the facts to backup Terdiman’s conclusions. He spent 11 years building up Intel’s interests in Russia, including the massive Intel Center in Nizhny Novgorod. He cited Microsoft Research figures that Russia graduated 180,000 people a year with the necessary skills to make it in IT. Indian came next with 60,000 then China with 50,000. No other country in the developing world came close.

Adjust the outsourcing vendor to your processes

CSC uses offshore talent to supplement the efforts of its own staff in Europe and the USA. One key lesson learned is that you can’t carry out your own IT operations using one set of rules and processes while using a vendor with a completely different mode of operation. Instead, one set of coordinated plans and procedures must exist between the offshore developer and their client.

“You must adjust the offshore company to your own processes,” said CSC’s Clausen.

Project Management excellence

Offshore outsourcing of software development can mean having your software being developed thousands of miles away by complete strangers from a foreign culture. So project management excellence really comes into its own under such conditions.

“You have to operate with project team members on both sides who are culturally compatible,” said Luxoft’s Sundsboe. “Project management skills must be stressed to smooth out the bumps and make offshore software development into a truly collaborative endeavor.”

Intel, for example, advocates the “two-in-a-box” approach, such as having a project manager from the client company and one from the offshore vendor constantly involved in face-to-face discussions and eventually thinking as one with regard to development projects.

“Using this method, our overall results have far exceeded our expectations,” said Intel’s Wirt. “It instills the necessary communication and cooperation to bridge any cultural divides.”

Established Standards

In order to separate out fly-by-night vendors from those in it for the long haul, utilize established western business metrics and standards. Those offering the most value to organizations seeking overseas development assistance are probably ISO 9001 and the Software Engineering Institute’s Capability Maturity Model (CMM), an industry-standard benchmark to assess an organization’s software development process and methodologies.

Boeing, for instance, was instrumental in Luxoft becoming the first Russian company to achieve Level 4 CMM. After adopting this methodology internally many years ago to minimize the error rate per million lines of code among its own developers, Boeing insisted that its suppliers follow similarly rigorous standards. Such attention to quality assurance, said Boeing’s Kravchenko, plays a major role in developing trust among between large corporations and potential offshore vendors.

“I recommend to clients that they only deal with companies who are CMM Level 3 at least,” said Terdiman. “CMM is the ticket to enter the dance.”

ISO 9001, too, helped to convince Boeing to do business with its Russian partner. As a result of being certified by Lloyd’s Register Quality Assurance, surveillance audits are conducted at Luxoft every six months to ensure that quality assurance procedures are maintained.

Kravchenko related a story of it taking less than a year to rewrite the code used by Boeing on a Crane supercomputer onto an SGI workstation for use in computational fluid dynamics.

“We were able to stop using the Crane and realized fantastic cost savings,” said Kravchenko. “Instead of scientists lining up to get on one Crane machine, we were able to operate 20 workstations using the new code.”