Historically companies have outsourced product development for some combination of three reasons: Faster, Cheaper and Better. By 2010, a fourth driver will become prevalent, if not dominant. Companies will start to evaluate their sourcing decisions around the question of “Closer” — closer to talent and closer to customers. The landscape and promise around each of these drivers is evolving. By looking at each in detail, you can position your company for success today, and into 2010.
The Outsourced Product Development (OPD) industry certainly faces major consolidation in the coming years. As this plays out, execution will differentiate “the best” from “the rest.” Economic Darwinism will prevail, and the strongest and the best firms will come out on top.
The high process orientation used by Indian OPD firms as a market differentiator will continue to evolve across this sector; and that evolution should translate into a promise, and eventually a contractual obligation, for timely delivery.
Lastly, in order to stay competitive against emerging low-cost markets, tier-1 providers will have to develop re-usable frameworks, free of customer IP, to bootstrap development and delivery of new solutions. By 2010, you should be able to find a provider that can offer talent and process, but also a significant head start against your time-to-market requirements.
As non ISVs come to depend on software to generate revenue, more and more such companies will see their software as “products,” and look to third-party experts for development. An example of such companies will be Web 2.0 Websites
Driven by pressure by investment funds to develop “faster and cheaper,” startup software companies will come to depend on the global product-development model
I recently discussed a Rural Business Process Outsourcing (BPO) strategy with an Indian BPO and OPD firm. They described a situation where they can hire computer-literate rural workers in remote villages, for something in the range of a few hundred rupees a day (that’s about $5 a day for work). That would cost at least minimum wage in the U.S.A. Those kinds of economics are very seductive. However, data entry is a long way away from software development and testing.
Highly skilled, experienced and credentialed software engineering roles are quickly approaching global price parity. With over 15 percent annual wage inflation in the Indian technology sector, it’s only a matter of time before the price differential disappears. There will always be some place on the planet where engineers will work on the cheap, but that place will never stay a secret, and it will always suffer the consequences and benefits of supply and demand. If you care about “cheaper,” you need to look at cost in concert with quality and speed, not as a measure of simple labor arbitrage.
Savvy companies are looking at short-term financial savings as a way to justify and fund their global OPD campaigns. You can still effectively create in two to three years a “self-funding development center.” This can allow you to set up shop with a partner by focusing on “cheap,” and then evolve your program into higher value as the economic situation in your sourcing locale inevitably changes away from your favor.
To most companies, the promise of building and delivering a better solution through OPD is even more seductive than the promise of massive cost savings. Process doesn’t guarantee quality, but it goes a long way toward enabling it. In the early days after Y2K, Indian IT outsourcing firms set the bar high with respect to process orientation. The rest of the industry has followed, and CMMI Level-5 qualification is almost table stakes for winning sizeable OPD deals.
It stands to reason that a company (OPD provider) that works on 1,500 software releases a year should be better at it than a company (a typical customer company) that puts out two or three releases a year. A company with 5,000 software-engineers will have much more core technology expertise than a company with 15 engineers. As the OPD landscape consolidates, only the best will survive. The better OPD firms will offer their core expertise as a sustainable advantage, and they will partner with their customers to “build a better mousetrap.”
Closer to Talent
Sources vary widely, but it seems safe to estimate that India graduates more than 200,000 engineers each year, with that number rising. China claims to produce 600,000 new engineers annually, with actual numbers probably just north of 450,000.
The U.S.A., still the single largest economy on the planet, produces nearly 100,000 engineers per year. Eventually, there will be a global disparity in the talent pool, with the favor going to India and China.
In order to find qualified engineers to work on your projects, you’ll need operations in India, China, or a tier-2 locale — not to save money, but simply to be able to hire engineering talent. The prospect of OPD offers the upside of having operations in proximity to a global talent “hotspot,” without the cost, trouble or risk associated with setting up captive development centers.
Closer to Customers
The traditional “big four” outsourcing destinations, Brazil, Russia, India and China, represent the 10th, 9th, 4th and 2nd largest economies respectively. Where there is technical proficiency and an economic force providing low-cost labor, there will be economic growth. Where there is economic growth, there is economic opportunity.
For global companies, where there is economic opportunity, there should be presence. As a means to understand local-market forces, and as a means to begin servicing local customers, OPD firms can, and will, provide that presence as an extension of their product-development practice.
Pulling it All Together
The promise of the OPD landscape changes as we approach 2010. By deciding your priorities against the traditional drivers you can plan your OPD efforts now, to allow you to capitalize on the emerging “closer” driver.
A window remains wherein companies can use cost savings to set up operations, and ready those operations for higher efficiency and global excellence as the cost savings evaporate. The continued evolution of this industry will strengthen the companies that survive, and should virtually guarantee that great OPD firms can continue to deliver faster and better, as long as your company continues to care about it.
Tom has over 15 years of experience leading software engineering, quality assurance, product management and consulting-engineering teams. At Iron Mountain, a global leader in information protection and storage service, Tom drives excellence across the company’s portfolio of offshore product development and ITO partnerships. Iron Mountain has partnered with Symphony Services for global product development .