The good news first: over 83% of software companies in the US see the benefits of offshoring and are satisfied with the results. These companies are pushing their offshore vendors (read Indian software companies) to specialise, develop domain expertise and go beyond just the cost advantage. The bad news is that an increased number of US-based software companies are not happy with the quality of work being done by their offshore entities.
These, broadly speaking, are some of the findings of a survey of over 50 respondents, comprising CEOs, CTOs and VPs of engineering and product development, in the Sand Hill Group's most recent report, 'Software's Offshoring Leaders: A study of product development trends, strategies and best practices '06', co-commissioned Persistent Systems (PSPL) of Pune . This is a follow-up report by the group, which carried out its first such survey in '03, when off-shoring was not an accepted business practice.
The relevance of the report for the offshored, outsourced Indian software industry is the cautionary note sounded. Indian industry needs to watch out for rising costs: the cost of offshoring to India has grown 15%-20% annually. Experienced technical staff is hard to find, and then retain, and quality and productivity are suffering. The survey notes the rise in numbers of people citing product-quality problems, from 20% in its '03 study to 37% in '06. Communication issues also became more common, rising from 44% to 535.
Some of the respondents are considering moving the work back to the US due to high costs or other hassles. However, the offshore cost advantage remains even as respondents spoke of their dissatisfaction with work being done at the off-shore location. The Sand Hill Group has clarified that since India is the most popular off-shore destination (over 80% respondents off-shored to India), hence most of the information gathered is related to India-based operations.
Among the steps India can take to get the advantage back in its favour is to offset cost increases by moving up the value chain. This can be done by developing domain expertise, Anand Deshpande, chairman & MD, PSPL, said. Of the over 50 companies surveyed, 49% had revenues in excess of $10m, which means 51% of companies had revenues less than $10m, qualifying as small and medium-sized.
Nearly three-fourths of the respondents in the survey-run companies are backed by venture capital funds. Mr Deshpande admitted that this is one reason for the impetus for off-shoring: VCs insist on an off-shore, hybrid model. The report notes the organised sophisticated efforts of other countries to build technology services and infrastructure to take on the Indian. While it may take time for any one country to come close to India's capabilities, some could emerge as significant players in certain special segments.
For instance, Russia could become a database centre while Brazil could become a Java expert. "At that point, offshorers will begin making best of breed versus suite decisions when choosing an offshoring destination," it says. Mr Deshpande said that globally, Indian firms often wind up bidding against other Indian firms, since the country has the widest range of skills set.
Non-Indian firms get the contract only if it is very niche, an Indian company is absent, there are other interests or due to government pressures. He cited the example of China, where a company has to do something locally to sell anything . The software industry will in future require a more specialised, domain focus and the scale to handle the work.
"At the time of vendor selection, the doma in expertise will become increasingly important. There is also a reduced dependence on captive centres. In fact, VCs are advising against captive centres unless the start up requirement is for 150 people. Vendors also need to be proactive and innovative," Mr Deshpande said. He noted this would mean consolidation at the lower-end. It means mid-sized Indian IT vendors will have to have domain expertise and scale. Or else become niche, boutique players.
For the Indian industry, the report suggests the need to create good people in large numbers, while at the individual vendor level the need is to develop domain skills and have the strength to absorb large numbers of people. Currently, the depth needed for domain expertise is missing in India.