Academic journal article The McKinsey Quarterly

Programmers Abroad: A Primer on Offshore Software Development

Academic journal article The McKinsey Quarterly

Programmers Abroad: A Primer on Offshore Software Development

Article excerpt

Developing software in foreign lands can save time and money--but only if companies do it right.

More and more companies are going offshore to develop and maintain their software: GE, Bank of America, Target, and American Express, for example, have formed partnerships with Indian firms such as Tata Consultancy Services, Wipro, and Infosys. A recent survey by the Indian National Association of Software and Service Companies found that almost two out of five Fortune 500 companies currently outsource some of their software requirements to India. The reason is simple: this approach saves time and money. Moreover, it is growing steadily more attractive: last year, North American companies alone spent $114 billion on in-house software development, contracting, and purchases--and costs will only go higher as additional basic business processes are conducted over the Internet.

Nonetheless, the benefits of going offshore can be hard to capture. The development of custom software is different from most other business activities, since it requires a detailed understanding of business processes and the way IT supports them. Building an offshore partnership therefore requires much effort and delicate handling by senior managers. What is more, the field of software engineering is relatively new, and procedures for quality control and project management, though developing fast, have yet to evolve fully. Without discipline in managing offshore relationships, a company can not only squander the cost and time savings it had hoped to gain through them but can also face other problems, such as late deliveries, escalating costs, mismatches between expectations and deliverables, and even outright failure.

Despite these problems, successful offshore partnerships can be forged. Through our work with clients and interviews, we have created a diagnostic approach that helps companies to segment their software development and maintenance projects and thus to pinpoint good candidates for offshore outsourcing.

The offshore attraction

In the 1970s and 1980s, manufacturing companies around the globe began to move large parts of their operations to places such as Mexico, the Philippines, and Puerto Rico, where lower labor costs made them more cost competitive. For the same reason, some companies attempted to outsource their software development efforts offshore in the 1980s, but it took the enormous amount of reprogramming required by the Y2K transition to catalyze the process. In the course of carrying out those projects, the poor reputation that most offshore firms had in the early 1990s was transformed: many of them did high-quality work and used sophisticated application-management processes to do it.

As a result, over the past five years, companies have begun to outsource many of their internal IT services, such as help desks, software support, and software development. The most popular offshore location is India, which combines high quality with low costs. Other possibilities, involving a variety of trade-offs, include China, Ireland, and Israel. Companies in the most popular offshore locations have excellent capabilities and are now in an ideal position to provide more sophisticated value-added software development services (see sidebar, "Quality and quantity offshore," on the next spread).

And that is a very good thing. Labor accounts for more than 75 percent of the cost of developing software, and the market for highly skilled IT professionals is very tight in the United States (Exhibit 1). Recruiting, hiring, and training people to meet the constantly changing needs of the IT environment not only costs a great deal of money but can also delay the completion of projects. The Gartner Group reports that because of high turnover--the average stay of a programmer in any one job is only 11 months--companies spend more than 10 percent of their IT budgets recruiting and training new staff. …

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