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September 20th, 2009 | Tags: , , , | Category: Software

Software outsourcing, a necessary evil

Here are the definitions of two words that have a bad press, especially in these harsh economic times:

  • Outsourcing (included in dictionaries in 1979): the procuring of services or products, such as the parts used in manufacturing a motor vehicle, from an outside supplier or manufacturer in order to cut costs.
  • Offshoring: relocation by a company of a business process from one country to another –typically an operational process, such as manufacturing, or supporting processes, such as accounting.

In many service and manufacturing industries, outsourcing implies that the 3rd-party provider is established abroad, where the cost of labor and production is lower, or where the environmental laws and ethic is held to a lower standard.   Signs of the times, outsourcing is often used interchangeably with offshoring.

Massive offshoring started with textile and clothe industry in the late 70’s.  Then came toys, TV, hotlines, help desks, cars and electronics in the 80’s, to be followed by software in the late 90’s.  Over the past 30 years, people have accepted the idea that the products they buy and use in everyday life can be produced and assembled on another continent, where the cost of labor is lower and the labor and business laws are less restrictive –today nobody expects a toy to be produced anywhere but in China.  Soon people will be insensitive to the idea that their software is designed and produced in India or China, especially if it is embedded in ubiquitous hardware like cell phones, game consoles, or digital cameras.  It will even be less of a question with web-based applications, where cloud computing and distributed data centers make physical location irrelevant.

Software offshoring results from a natural evolution of the industry.  Like for so many other industries, complexity required a more organized production process.  Software development evolved from a highly specialized, hand-crafted process, to an application-driven, methodology-centric, maintenance-heavy operation.  The availability of skilled labor and software development methodologies open the door to outsourcing, then offshoring.  For long held as a high-intellectual product that could only be conceived in a handful of countries in the western world, software can now be designed, produced, and maintained in any place that have access to highly educated engineers, with a relatively simple infrastructure –computers and fast internet connections.  One should rejoice to the idea of an industry that can be established anywhere innovation has the opportunity of blossoming, as opposed to a monopoly held by a few companies in a couple of countries.

Indeed, outsourcing of intangible products –e.g., service, consulting, design— and BPO (Business Process Outsourcing) which started in the early 80’s, got a huge boost in the 90’s.  With the tech and telecommunication bubble, massive investments in submarine cables for intercontinental high-bandwidth communication were done.  Running from Europe to India via Egypt, hub centers in Bangalore, New Delhi, Hyderabad, Chennai, Pune, and Mumbai saw their capacity increase dramatically.  Soon real-time and reliable data exchange via the internet made high-tech outsourcing a reality.  After being a BPO bonanza, Bangalore quickly emerged as the Indian Silicon Valley.  Hundreds of software and hardware design companies set foot there, first with help centers and QA engineering, then with HW/SW supporting development teams, to finally complete design and development entities.  Other countries have developed huge HW/SW outsourcing businesses –China, Philippines, and Malaysia, to name a few, as well as some east-Europe countries.

Today, the cost of a software developer in India is about a third to a fourth than in the US –the figure varies depending on the industry, and it becomes cheaper as the experience and complexity requirements decrease.  In China, it will cost about a fifth to a tenth –very dependent on the industry domain, as well as the location in China.  Major US and European high-tech companies like Oracle, ST, Intel, Adobe, SAP, IBM, Microsoft, Google, Yahoo!, have very large R&D campuses in India and China.  For many, their facilities in India are the biggest outside of the US.  For some, most of the R&D growth is seen outside of the US/Europe.  It is not rare to see successful high-tech companies, created in the Silicon Valley 10+ years ago, but with 90% of their R&D today outsourced in Asia.

As a consumer, pretty much nobody complains about outsourcing: in today’s world of rapid consumption of electronic gadgets and complex software, one needs to spin new products at a rapid pace and for an ever more competitive price.  However, offshoring costs jobs at home, which eventually translate to lower disposable incomes and additional social costs, both negatively impacting the local economy.  The creation of wealth in the host country has a side effect though: increasing the disposable income abroad creates new customers for the home business, thus at the end everybody may benefit from it.  This is a more positive scenario, probably true in the long run, but the lag between the disappearance of an activity and its replacement with another comes with a significant social cost.

Also we have seen offshoring displace industries entirely, and the intellectual-content of the displaced industry keeps increasing:  there is virtually no textile industry in Europe and in the US, and UK’s manufacturing industry is trailing in Europe.  The usual response to these displacements is that more lucrative activities replace those that moved abroad.  London has long promoted the dismantlement of its manufacturing industry via offshoring as a chance to move to a service and finance fueled economy, which produces a higher added-value.  But with the recent economic downturn driven by the finance industry, one cannot help though but question the soundness of that claim.

At the end, software outsourcing is here to stay: there is too much to gain for the home companies and the host countries, and the low cost of the infrastructure makes it flexible and easy to extend.  On Sand Hill it is common to hear VCs asking “What is your Indian strategy?”.  Some startups in the Bay Area even start from day one will a full software development team established in India, with just the executives, sales and support located in the US.  Needless to say, these companies could not thrive or even get started without outsourcing part of their software development.  Since they eventually contribute to the high-tech industry, one should endorse the long-term benefit.

Does that mean that being a SW/HW engineer in the Silicon Valley has become a high-risk job?  Software innovation still relies on individuals with bright ideas for technology and products, thus these individuals will always be in high demand.  But it has certainly become much harder for the general-purpose software developer.  The Silicon Valley has benefited from a unique highly-educated engineer pool, entrepreneurs, and VC money.  As long as these three components remain, there is no threat in sight.  But if more and more VCs and entrepreneurs start to establish themselves in India, we will see a very serious competitor to the crown of software kingdom.  Software outsourcing will not kill the Silicon Valley.  Lack of innovation will.

5 comments to Software outsourcing, a necessary evil

  • Now a days not only big companies like Adobe, Microsoft are doing software and product development in India at their development center. But now many other small to medium scale companies have started software and product development and started entering into outsourcing software product development. It is considered that, increase in business will be around 100% in offshore outsourcing product development.

  • i have read your article Really Nice one.because Now a days not only big companies like Adobe, Microsoft are doing software and product development in India at their development center. But now many other small to medium scale companies have started software and product development and started entering into outsourcing software product development. It is considered that, increase in business will be around 100% in offshore outsourcing product development.

  • outsourcing is really necessary specially if you want to cut the cost of production.,,,

  • outsourcing is always essential to businesses coz it helps reduce the cost of production~~-

  • cool information! Thanks! blog

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