IT departments are more squeezed than ever. Funding for new projects is scarce, yet there is the same pressure to support and develop business applications, just this time with fewer resources, less cash and tighter deadlines.
Consequently, more and more organisations are looking at outsourcing application development offshore – a trend that took off in the late 1990s as businesses rushed to build Internet-based applications. Then, the key driver was that organisations had trouble finding the appropriate skills at home. Now, the focus is on driving down development costs and shortening time to market. Organisations are, therefore, outsourcing projects to areas where the required skills are cheaper and can be deployed quickly.
In terms of cost, offshore outsourcing can certainly help organisations make big savings. Offshore development specialist Cognizant, for example, claims that one of its customers, US insurer Met Life, saved 65% of its development budget or nearly $2.5 million overall using its offshore resources. Another customer, financial services company Royal and SunAlliance, made savings of $16 million or 57% of its development budget over four years.
Most companies look to India, where labour is cheaper (typically, a programmer in an Indian development company would cost around £200 per day, as opposed to £350), but other areas offer similar skills at similar prices, including China and Vietnam.
As a rule, the larger the project, the greater the potential savings, according to Antoine Viale of IT services giant EDS. "For project of five to 15 person-years you will certainly be able to reduce costs by 25% and by around 35% for a 15 to 30 person-year project," he says, adding that development projects that can be carried out almost entirely offshore, tend to be more cost-effective than service projects requiring a significant on-site presence.
For companies such as Racal Instruments (see In practice: Racal Instruments), cheap labour is not the main reason behind their decision to outsource offshore. It is also a way of getting access to skills that are scarce in the UK. Racal was developing testing equipment for the next generation of mobile phones and registered a blank when it looked for the appropriate development skills in the UK.
It is a similar story at UK-based pharmaceuticals research company Current Drugs. It outsourced its Intranet development to Anglo-Indian development consultancy Rave Technologies because it offered greater knowledge of technologies such as Enterprise Java Beans (EJB) and Oracle's 9i application server, than Current Drugs had access to in the UK.
The decision to outsource, it says, was driven by the fact that it wanted to focus on its core competency – producing the content that would populate the intranet.
A key incentive to outsource, according to Stuart Haughton, business development manager at Rave, is that offshore outsourcing teams can quickly perform arduous but necessary tasks that would normally occupy much of the IT department's time, such as accessing and integrating legacy applications.
With this taken care of, says Haughton, organisations can focus on working with more leading edge technologies.
In the same vein, organisations can turn to offshore developers if they want to perform ‘proof of concept' tests – something that would be more expensive in the UK or the US. UK-based systems management software developer Vector Networks, for example, tracked down a number of development teams in the former Soviet Union and asked them to carry out a trial project using Vector's development tools. Vector now uses the group on a wide range of projects in R&D. "They have had a significant impact on the timing and content of new releases," says Colin Bartram, product marketing director at Vector.
Offshore, off limits?
But however skilled a project team may be, how do clients communicate effectively with developers who are more than 1,000 miles away, some of which may not even speak the client's language?
Increasingly, this is not an issue. It is now expected for offshore teams to have at least one liaison person on the customer's site at all times. "We always have someone working on-site so we maximise communication between the customer and ourselves, and minimise the risk of miscommunication," explains Parmenter at Cognizant. Parmenter says Cognizant's teams communicate regularly with offshore developers using audio and video conferencing. They also share project metrics. "We've developed a digital dashboard with key performance indicators within the project, and that's made available to our customers over the Internet," he explains.
Saab Europe, which used another Indian offshore development company, Tata Consultancy Services (TCS), for a customer database project, reports that keeping track of developments in India was never an issue. "We had concerns about control at the outset but they never materialised," says Saab's IT project manager Chris Howse. "There was a large team in Delhi working on the project. We visited them once or twice, they sent a team over here for requirements gathering and so on, and it worked well. We may have had to wait now and again until the evening to phone them up but it was never any great problem – we could sort out any issues by email, and response times were very good. Basically, it was no different from working with an outfit in Manchester."
So are there any limits on the kind of projects that can be carried out offshore? In practice, the potential barriers are as much about cost as logistics. There is a basic overhead involved in setting up the communication links that make offshore services work, and for very small projects this overhead is likely to wipe out any potential cost savings.
For the same reason, say the offshore development companies, it helps to have a well-defined project that can be easily divided up into ‘parcels' of work, without the need for a significant, and more costly, on-site presence.
"The most cost-effective projects to take offshore are those that lend themselves to a high degree of definition," says David West, VP of European operations at offshore outsourcer NIIT. "Rapid application development projects, or those where the customer hasn't defined the requirements are trickier. Once you've pinned down elements of the project, then you can start to use offshore resources."
But Amur Lakshminarayanan, UK country manager for TCS, argues that even this isn't a hard and fast rule. "The common perception is that an offshore project has to have a boundary drawn around it and no-one else has to work on it. We can point to at least half-a-dozen to a dozen projects where that hasn't been the case," he says. "We're now starting to take on business process automation projects that involve high levels of client involvement, but if we get involved at an early stage we're still able to do close to 50% to 60% of the work offshore."
Organisations are also increasingly looking to outsource services, as well as application development, offshore (see Round the clock service). "We have projects where we completely manage the application and service delivery; the application isn't necessarily developed by us, just managed. In those circumstances, once the project gets to a steady state it can be run 20% to 30% on-site, 70% to 80% offshore," says Lakshminarayanan.
Ultimately, the sophistication and global nature of communications technology means that the most significant barriers to offshore projects are probably in the customer's imagination. "Challenges to offshore development? Probably the biggest is getting potential clients' mindset to the point where they're confident it can work," West concludes.