| A number of Canadian organizations are contemplating
offshore outsourcing to reduce software development costs.
This article reviews the current outsourcing scene and
presents strategies for reducing in-house development costs
as an alternative to offshore outsourcing. These strategies
would help stem the flow of much needed high tech jobs
from Canada to other countries.
Two alternatives to offshore outsourcing pursued by a
number of organizations are:
Process Discipline / Organizational
Effectiveness
- Revenue and profit projections fail
to materialize.
- Mega investment in IT infrastructure
does not result in the purported benefits.
- “State
of the art” call centre does not reduce
the customer attrition rate of a service provider.
- Quality
initiatives: CMM, ITIL, 6 sigma make a small dent in
shortening the development cycle.
Sound familiar. Why
are such failures so common? What do these failures have
in common? A plausible cause for
these
is disconnects…disconnect between vision and business
processes…disconnect between business processes
and technology infrastructure…disconnect between
technology deployment and employee competencies...disconnect
between
strategies and tactical actions.
The Dependencies Model
These disconnects are the root cause of many challenges facing an organization,
successful ones simply connect them:
- by linking strategies and goals to the vision.
- by designing business processes that help realize the
vision and achieve the goals.
- by devising an organization structure that is in synch
with the business processes, key strategies and vision.
- by defining employee competencies based on business
processes and organization structure.
- by developing tactical actions only after business processes,
organizational structure, competencies of its employees and the technology
infrastructure, are well defined.
It is important to follow this sequence of dependencies, as organizations
that fail to follow are likely to be operating at sub-optimal
levels. Sub-optimal decisions may result from such actions as:
- Investing
in information technology infrastructure that
is not aligned with organization’s strategy, business processes
or employee competencies.
- Designing business processes
without considering organization’s
strategies and goals.
- Jumping from the vision and mission
statement straight directly to tactical actions.
Reducing these disconnects, or eliminating them altogether, is the first
step towards organizing for success and implementing process
discipline.
Organizations that do this benefit from reducing software development
costs as well as dramatically increase the project success rate.
SR & ED Tax Credits
The second strategy for reducing software development costs is to ascertain
if the software development project qualifies for refundable R & D
tax credits. Scientific Research & Experimental Development (SR & ED)
is an incentive program administered by the Canada Customs and Revenue
Agency (CCRA) since the mid-1980 for Canadian companies who perform research
and development within Canada. It is designed to encourage the development
and advancement of Canadian technologies. The program offers tax incentives
in the form of refundable and non-refundable tax credits ranging from
20% to 35% on qualified expenditures.
Additional credits are available in most provinces including Ontario.
It offers a critical source of funding for many, as the refund is available
regardless of whether you have paid any taxes. These incentives reduce
the after tax cost of performing SR&ED in Canada to one of the lowest
in the world as noted by the Organization for Economic Co-operation and
Development (OCED). The SR&ED program provides nearly $2 billion in
credits to over 18,000 claimants each year. However, the rules are complex,
and changes in administration make it hard for companies to make sure
they are benefiting from the program. It is estimated that there is almost
three and a half billion dollars in funding that goes unclaimed, because
companies are not aware of the program, or are not aware of the types
of activities that are eligible for funding, or just do not know how to
go about it.
Canadian software developers are major beneficiaries of SR & ED benefits.
Software development and information technology claims represent 25 to
40 percent of the total claims. These claims are much higher in such jurisdictions
as Toronto and Ottawa than in manufacturing intensive areas like Hamilton
or Windsor.
For it to be eligible for the SR & ED program, a project is defined
as a set of interrelated activities that collectively are necessary for
the attempt to achieve the specific scientific and/or technological advance(s),
are required to overcome scientific and/or technological uncertainty,
and are pursued through a systematic investigation by means of experiment
or analysis performed by qualified individuals. This is a lot of mumbo
jumbo to a layman. Organizations often have struggles with the complexities
that arise in assessing eligibility because neither the legislation nor
case law provides much guidance on what aspects of software development
constitute technological advancement and uncertainty.
A number of tax consultants provide assistance in the area of SR & ED
tax credits. However, they are sometimes limited in their understanding
of what is eligible because SR & ED tax credits require someone with
a thorough grounding in the software development process and information
technology. The technical assertion is more critical and challenging to
deal with than the financial assertion. This has led to formation of consultancy
firms that specialize in SR & ED tax credits.
Typical services provided by SR & ED consultants are:
- Identify eligible
projects and develop claiming strategies
- Provide technical
writing or review your technical descriptions
- Identify
and help determine eligible costs
- Defend CCRA’s technical and
financial audits
Good consultants make the process painless for the organization, help
implement ‘best practices’ and train in-house staff to maximize
tax credits year after year. The better ones have a good understanding
of both the ‘intent’ and ‘letter’ of the program
and an excellent nose for smelling projects that may be eligible. They
conduct business and process reviews to ‘mine’ projects and
pre-qualify them with CCRA.
Summary
In summary, an organization can reduce software development costs by 15
to 30% by outsourcing the work offshore. Similar reductions can also be
obtained by improving productivity through process discipline and organization
effectiveness. Gains obtained through productivity improvement would be
longer lasting than offshore outsourcing as offshore rates could creep
up over time. Secondly, offshore outsourcing may not be a savvy business
decision as over time the vendor may gain control of the product and your
organization is reduced to nothing more than a marketing arm of an offshore
organization.
In addition to cost reduction through productivity gains, organizations
can recover a substantial portion of the software development costs through
SR & ED tax credits. These tax credits are available only for ‘bleeding
edge’ development and not for such routine development as feature
enhancements, increased functionality or fixing of bugs reported in commercial
use of software, etc.
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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