2/5/03
 |
Who
Can Do IT?
by
Erik Kruse, SCRC
|
| • |
By
2005, spending on IT outsourcing services
worldwide will increase at a five-year compound
growth rate (CAGR) of 12%, exceeding $100
billion USD |
| • |
By
2005, 30% of the Global 2000 companies will
have an offshore outsourcing strategy in place
(1) |
There is a significant growth trend regarding the
general idea of outsourcing the later stages of
software development and maintenance. Much of this
growth in outsourcing is expected to be offshore.
More specifically, many companies are finding out
that offshore firms can do IT at a much lower cost
than it can be done in the U.S (2).
India: A Global Hotspot
For firms doing software development wholly in the
United States, labor can account for 75% of the
costs. So companies are looking to firms that have
a better quality to cost ratio. Firms in India have
proven to be head and shoulders above the rest.
For example, companies such as GE, Bank of America,
Target, and American Express have partnerships with
Indian firms (2). Furthermore:
| • |
Over
40% of Fortune 500 companies outsource IT
to India (1) |
| • |
By
2008, IT & IT enabled services outsourced
to India will grow from $8.5 billion USD (2001-02)
to at least $50 billion USD (1) |
The
Software Engineering Institute’s
capability maturity model (CMM) is a framework
that is often used to evaluate the qualifications
of offshore software firms. India has about 32
firms that have reached their prestigious level
5 certification (3). By comparison, China, which
is another major player in the software development
market, currently has one firm at this level.
On an absolute basis, India has twice as many
technical graduates as the U.S. They offer lower
wages and benefits, which can be 40 to 60 percent
below those in the U.S. Because Indian firms couple
those lower rates with a high degree of quality,
their IT services are highly valued. As a result,
U.S. companies are pairing up with their partners
in India to do nondiscretionary programming. This
frees up capital for other proprietary development
efforts that give them a strategic advantage and
allows them to stay ahead of the competition (2).
Deploying an Offshore Outsourcing Strategy
First, the company should decide if they are suited
to offshore outsourcing. Because a great deal
of time and resources will be required to oversee
the work and integration of a development team,
only companies with fairly large in-house IT staffs
(over 50 employees focused on software development
or maintenance) should consider offshore partnerships
(2).
Next,
the company needs to evaluate the project and
decide which phases are the best candidates for
outsourcing. There are typically 6 steps through
which a software development project progresses:
project initiation, analysis, logic design, physical
design, implementation and maintenance. The good
candidates for offshore outsourcing tend to be
the later phases (2).
Finally, the company should use its formal process
for making its make-or-buy decisions. The final
decision should serve the needs of the company
as a whole. If a deal is made, a senior IT leader
should head up the process and involve any senior
business leaders who will be affected (2).
Offshore outsourcing is a proven cost-saving technique.
Selecting the right location is an important part
of an offshore outsourcing strategy. For many
firms, India’s experience, friendly laws
and high degree of English proficiency is tough
to beat (4).
References
(1) White Paper. (2002). The
Benefits of Outsourcing Information Technology
Offshore. Arackal Digital Solutions, Inc.
(2) Amoribieta, I., Bhaumik, K., Kanakamedala,
K., and Parkhe, A. (2001). Programmers
Abroad: A Primer On Offshore Software Development.
McKinseyQuarterly.com
(3)
The Hindu. (2002). Process
Maturity: India Way Ahead of China. IndiaSoftware.com.
((4) Guerra, A. (2002).
In Search of Savings. WallStreetandTech.com
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