| Ever since Fredrick Taylor introduced scientific management
almost a century ago, business managers have been attempting
to reduce manufacturing costs in a systematic manner. Operations
research in 1930’s and 40’s re-engineering
in the eighties and more recently six-sigma (Total Quality
Management) are all manifestations of the same pursuit.
How to make the product faster, cheaper and better? Software
development is no exception. In spite of all the automated
tools available for requirements management, code generation,
testing, configuration management, etc., software development
is very labour intensive. And, very well paid labour at
that. Business managers are looking for ways to reduce
the cost of running their software development factory.
A number of Canadian organizations are contemplating offshore
outsourcing to reduce software development costs.
Offshore Outsourcing
This appears to be a ‘band-aid’ solution. As
the wages rise in off-shore centres, their cost-advantage
will disappear.
Before we discuss the pros and cons of outsourcing in
more detail, here is a quick snapshot of the outsourcing
scene. According to Dun and Bradstreet, the global outsourcing
market approached a trillion dollars (US) in year 2000. “By
2004, more than 80 per cent of U.S. executive boardrooms
will have discussed offshore sourcing, and more than 40
per cent of U.S. enterprises will have completed some type
of pilot or will be sourcing information technology services,” according
to Gartner, a technology consulting firm. Outsourcing software
development by US Corporations to offshore suppliers has
grown sixteen fold over the last decade, from US $400 million
in 1993 to almost $15 billion expected in 2003.
There are several ways of jumping on the offshore outsourcing
bandwagon, including:
- Bring offshore resources for work on site.
- Combination
of offshore/on site with high level project managers
on site and detailed work done offshore.
- Outsourcing offshore
a portion of the development effort.
The cost advantage increases with the percentage of development
effort outsourced and the percentage of work performed
offshore. It is maximized when the entire development team
is outsourced and all the work is performed offshore. Cost
advantages stem mostly from lower wages and not necessarily
from higher productivity of offshore developers.
Canada often lags behind the US in adoption of new technology
and business strategies. This delay can be anywhere from
a few weeks to a few months depending upon the nature of
the product or service. IT Outsourcing is no exception.
Canada has been slow to take advantage of the competent
and skilled offshore resources. However, this is not because
of the traditional lag in adoption of new business strategies.
It is because it makes less business sense to outsource
from Canada.
A number of organisations that provide the outsource service
have failed to recognize Canada as a distinct market from
the US and develop a unique pricing structure for Canada.
This has resulted in offering outsourced services that
present marginal cost advantage over the local rates – see
the highlighted text box for sample calculations.
Once one factors in the SR & ED tax credits, which
mandates that Canadians do the work in Canada, it does
not make much business sense to outsource from Canada.
In fact, it makes more sense for Canadian companies to
compete in the US market place with these offshore companies
by offering a near shore alternative to US-based organizations.
Canada has far fewer cultural differences and language
barriers with the US (we do have some!). Such large corporations
as EDS and CGI are taking advantage of the lower Canadian
dollar and aggressively marketing their services south
of the border.
| Sample
calculations for oustourcing cost advantages. |
| Labour costs in offshore countries are about one-tenth
of those in the US. An experienced programmer in Bangalore,
India, the hub of outsourcing, earns US$6,000 a year
vs. US$60,000 paid to his/her counterpart in AnyCIty,
USA. The bulk of this cost advantage is retained by
the marketing organization and the programmer’s
services are billed at about $36,000, 40% lower than
the prevailing rate in AnyCity, US$36,000 becomes C$48,000
when converted to Canadian dollars at C$ = 75 US cents.
Although still lower than the wages of a comparable
programmer in Canada, it is far less appealing than
it is for the US-based organizations. |
In part two of this article,
I will discuss several alternatives to offshore outsourcing
currently being pursued by a number of organizations.
Raj Phalpher, CMC, CIPS Toronto member,
is currently a Senior consultant with Resultel Technologies
Inc. www.resultel.com.
He specializes in process discipline, claiming SR & ED
tax credits and management of offshore software development.
phalpher@resultel.com
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