The Global Software Industry
McManus, John, Floyd, David, Management Services
John McManus and David Floyd compare the offshore market strategies of the US, India and China.
Companies in the US more openly admit the growth of offshore outsourcing to countries like India and China now that the presidential election is over. The rise of India and China as potentially high technology software competitors and important participants in the world's software industry seems to have come as a surprise to foreign observers. The surprise is often accompanied either by overestimations or underestimations of these countries' actual capabilities, rather like foreign reactions to Japan in the 1980s.
While there are many important distinctions to be made between the Indian and Chinese cases, they are similar in that the development of software and technological capabilities in both countries has long been a goal of political, administrative and industrial elites, and both countries have records of policy intent, planning, and resource commitments for meeting that goal. This paper examines some of their competitive strengths and weaknesses and the future market challenges faced by India and China in the next decade.
The world software industry and associated markets are estimated to be worth US$1300 billion and 90 per cent of the world's exports in software is from the US and Europe. Evidence also suggests that outside the US, UK, Germany and Japan, the new and emerging countries within the software industry are India and China, and to a lesser extent Singapore and Malaysia.1 Although figures vary, these emerging markets account for around six per cent of global export markets.
While 'lower cost' is the most commonly cited reason for offshore offshoring, intense global competition in an environment of slower growth and low inflation demands constant vigilance over costs. Due to the low costs and high quality, using offshore resources in selected countries makes good economic sense. Beyond the cost incentive, global sourcing provides several other practical benefits, including the ability of multinational organisations to efficiently stage 24/7 operations; the opportunity to customise products and services to meet local needs; and the means of geographically deploying workers and facilities to succeed in globally dispersed, highly competitive markets.2
A key driver in the US pursuit of offshoring is cost savings. For example, Global Insight predicts that total savings from the use of offshoring are estimated to grow from $6.7 billion to $20.9 billion between 2003 and 2008. In corporations with annual turnovers in excess of $100 million the decision to use internal or external resources is determined by a mixture of both the hard dollar (quantitative) and the soft dollar (qualitative) costs.3 Key reasons for perusing offshoring arrangements include:
* The ability to leverage value from its IT operations and add dollars to the bottom line;
* The ability to gain access to technology, skills and knowledge not internally available;
* The ability to improve business processes and enable organisational change;
* The ability to provide needed short-term services without adding to ongoing operational costs;
* The ability to focus internal IT resources on core strategic plans and projects.
In high technology markets significant benefits can be realised from prioritisation and determination of success criteria, as the firm is able to identify a complete and comparable set of costs and benefits regarding investment choices." For example, resource limitations, in-house skill sets and knowledge, and expected performance and outcome measures are important factors that must be analysed in making the decision to offshore. Establishing and analysing quantitative and qualitative criteria provides a bottom-line total that indicates which investment decision is most effective and states the reasoning used in reaching that decision. …