One of the engagement model choices for outsourcing your software development I have described in the past is the Body Shop. Another name used by Reza Imam in his recent article is Software Sweatshop!

The problem is in most cases, you don’t need just bodies (sweating or dry) to develop your software offshore. You need a team that can work together well to get the job done. The reason the body and sweat shop fees are so low is they don’t invest in a good recruiting process or effective software development methodology.

Avoid them!

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Selecting the right kind of engagement model with your offshore programmers (and / or the company where they work) is the best way to ensure you get more dynamic engineers that will deliver your software with the level of quality you would expect from your own software engineers in the U.S.

Generally you want a model where you have more control over the programmer hiring process and the on-going management of the software development process. But you may have to trade-off control with your budget and ability to manage the software development process. Below are the six engagement models most commonly used.

Choosing the right offshoring engagement model is a key to your success

From left to right, each model is capable of handling an increasing level of resources and control.

Freelancers – complete control over the programmers hired, but you have to evaluate each one individually. It is common to hire several on a trial basis and even have them create the same software and then keep the ones that do a good job. Managing more than three freelancers at different locations and time zones is very challenging! Good for small projects for several months or longer if you can get the freelancer(s) to commit.

Body Shops – very little control over the programmers hired. This type of vendor is famous for giving you transactional programmers cheap, but without management or software development process. You have to tell them what to do and manage them yourself. At least they’re in the same room! Okay if you have the time and resources to manage your programmers from a distance.

Software Factory – or a vendor that bids on your software project on a fixed-price basis where you generally have no control over the kind of programmers that are used. Your specifications need to be as complete as possible and have a clear definition of what it means for your software to be finished. Some disreputable vendors will deliver some software for the first several progress payments and then drop you as a client if you make many changes or have no clear definition of what “finished” really means.
Yet, this is one of the most common forms of offshoring. Works well if you have a well-specified programming project and have the budget to try several

Offshore Development Center (ODC) – a vendor that gives you a dedicated team of programmers and you can usually participate in the interviews. You pay a monthly fee for each programmer and their activities are often managed by a team leader you also help select. Good for developing multiple releases of the same software application where consistency of the programming team improves productivity over time.

Build, Operate & Transfer (BOT) – like ODC but with an option to transfer your team of programmers into your own captive operation or offshore subsidiary in future, usually two or three years.

Captive Operation – most appropriate for larger software companies that are developing complex software applications and systems needing fifty software engineers or more. You have complete control (and responsibility) for the hiring and management of the programmers.

Accelerance services can help you with the more complex, rightmost four engagement models. Use Offshoring Jumpstart to find partners that will bid on your fixed price projects and / or build your ODC. Use Rapid Ramp-Up consulting for more complex ODC, BOT and Captive Operations.

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Just finished the panel discussion at SD West on Offshoring and  we had about forty people attending. I was joined on the panel by Jim Tooley from Ariba, Julie Iskow from WageWorks, moderated by Ross Wheeler from Paravirtual.

My fellow panelists have experience outsourcing to India, China, Canada & Romania.
One is now looking for a partner in Latin America to enable real collaboration during normal U.S. work hours. And in the audience were two professional software developers from Mexico & one from Brazil showing the attraction of professional events like SD West extends to these nearshore locations.

We had several questions about how to find vendors and websites that rate them. There is no website I know of that does a good job of rating offshore vendors in general. Outsourcing is a relationship business and most deals come from personal referrals and contacts. Of course I mentioned that the Accelerance Global Partner Network is also a good place to find a great offshore partner.

Someone asked about outsourcing development of embedded software for custom hardware.  This was not recommended but outsourcing embedded software development for various processor families and real-time operating systems is popular.

We also discussed using an offshore partner versus setting up your own operation. You will face a challenge recruiting for your own small operation in India because Indian engineers are more interested in working for large companies. Ariba is a relatively large company and they are able to recruit and keep engineers. Attrition at the Ariba operation in India is well below the industry average of around 20%. That means that 2 programmers on a team of 10 at most offshore operations in India will be gone by the end of the year.

We agreed that use of offshoring to simply augment your software development team with additional engineers does not work well. It is better to hire an offshore team and give them full responsibility & autonomy for projects and modules.

Finally, we had fun raffling off a signed copy of my book Software without Borders. But everyone was a winner because I am sending a free eBook to all that entered the raffle – even my fellow panelists requested and will receive a copy.

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A cut to two undersea communication cables in the Mediterranean Sea caused greatly diminished bandwidth to India on January 30th. You need to consider possible disruptions to communication if you are considering offshore outsourcing.

Meanwhile, a third cable was severed a few days later in the Persian Gulf near Dubai.

An analysis of the impact on modern Internet communications is sobering. Is it a conspiracy?

There isn’t much of an impact on the U.S. and Europe if it is.  According to the Analyzing the Internet Collapse article in Technology Review, “This kind of damage is rarely such a deep concern in the United States and Europe. The Atlantic and Pacific Oceans are crisscrossed so completely with fast fiber networks that a break in one area typically has no significant effect. Net traffic simply uses one of many possible alternate destinations to reach its goal.”

Good thing. I’d hate to think the rest of you could get cut off from California.

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A survey made by CIO Insight says there will be a shortage of IT workers for smaller companies that will cause salaries to increase by 25% in 2008. This could be a double whammy if a recession hits us this year too.

Lack of viable candidates may force more companies to seek talent, and lower costs, by looking offshore. So far, there is not a talent crunch offshore but you have to be careful and select the right kind of partner company that is prepared to deliver the kind of services you need.

Accelerance partners are carefully screened to collaborate with you to deliver software development services in a reliable way.

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There was a short article in the New York Times about the benefits of outsourcing for small businesses. The article doesn’t deal with global outsourcing but just the concept of outsourcing itself.

The article will be helpful to you if you are thinking about outsourcing your software development and just cannot seem to find good programming talent to hire in your location. Instead of hoping for good programmers to arrive at your doorstep, you can have your own team of programmers provided by a vendor elsewhere in the world. And of course, it can be a lot cheaper than hiring employees.

The article offers these long term benefits of outsourcing:

• Control capital costs
• Increase efficiency
• Reduce labor costs
• Focus on your core business
• Level the playing field
• Reduce risk

OTOH, the article points out there are these risks to manage:

• Management: The outsourcing company must be prepared to manage projects across time differences and cultural barriers.
• Quality control: The outsourcing company needs a clear set of guidelines, expectations, and processes to manage the quality of products or services rendered.
• Taxes: Employing several outsourced for-profit enterprises can impact the taxes assessed on the outsourcing company.
• Liability: It can be difficult to determine the liability of different parties involved in complex outsourcing relationships.

But these risks can be managed and you can use a firm like Accelerance to do it if you need help. In summary the benefits of outsourcing, especially when you can’t find talent locally, can outweigh the risks.

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You may not be getting the savings and flexibility you need from your offshore captive center, operation or wholly-owned subsidiary in India, China, Russia and other countries according to a report from outsourcing consulting firm Equiterra.

The report Assessing the Role of Captive Operations (free after entering your contact information) presents some interesting statistics on the declining popularity and limited success of a captive offshore center compared to use of an outsourcing vendor partner to handle you offshore work. Here are the major issues to consider:

• Captives tend to pay more for rent & furnishings than local companies
• Captives lack institutional knowledge and take time to become efficient
• 25% of IT outsourcing to India in 2005 went to captive centers, 60% for BPO
• An underutilized captive center is more expensive than using a 3 rd -party provider
• Sending your executives for captive center set-up is 60% more expensive than using a 3 rd -party provider.
• Small captives do not compete well for talent with large multinationals and 3 rd -party providers
• Shutting down a captive operation can take up to 2 years

Hybrid partnerships between your own captive operation and one or more 3rd party provider is a way to improve your chances of success if you are still convinced a captive center is required. For example, a partner can recruit or provide resources on a contract basis to work in your captive center.

The classic approach of Build, Operate and Transfer (BOT) is another hybrid approach. That’s where the partner sets up or builds the center and then operates it for you. You have the option of transferring the entire operation into a captive center later. However, Equiterra reports execution of the actual transfer is limited.

In most cases, creation of your own captive center is overkill when you are outsourcing your software development. Use of small teams of 3 to 30 programmers at a reputable vendor is a much more cost-effective and flexible approach.

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The debate over U.S. jobs being sent offshore continues with Microsoft opening an R&D facility in British Columbia, Canada. A major reason they are opening the facility is it is easier to import workers to Canada where they are not subject to the U.S. foreign worker visa limit of 65,000 which is exceeded on the first day of applications (April 1) each year.

For an intelligent debate on the subject, including the opposite trend of Wipro opening a facility in Atlanta you can listen to this NPR discussion on the Science Friday call in segment that was on the radio today.

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A recent Gallup survey discovered that 77% of Americans say that outsourcing is bad for the U.S. economy. “Beware: Your Customers Oppose Outsourcing” (subscription required) is the provocative title of the article published online in the Gallup Management Journal where the survey results are presented.

The question posed to 39,000 households was:

There has been some discussion recently about “outsourcing,” which is when American businesses hire workers in other parts of the world in order to save money. Which comes closer to your view . . . Outsourcing is bad for the American economy because it sends good jobs overseas, or, outsourcing is good for the American economy because it keeps the cost of goods and services down?

There is additional information in the article about how opinions on outsourcing vary by subgroups of age, education level and political party. How many of these households are trying to run a software company or IT department? Probably zero.

Hmm. . . Should you not outsource your software development because of the survey results? Should you not tell your customers?

Your customers won’t care.

That’s because the survey shows that Americans’ poor opinion of outsourcing is created by a lack of satisfaction and poor communication when calling an outsourced customer service phone line. The survey results include answers to various questions about outsourced call support centers.

This is not a survey about outsourcing, and certainly not outsourcing of software development. It turns out that what Americans don’t like is poor customer service. And who can argue with that?

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“Why Small Tech Companies Aren’t Outsourcing” is a recent article in Business Week that draws its conclusions from a Columbia University business school survey of 105 venture capital-backed tech companies. The study, Offshoring: Why Venture Capital-Backed Businesses Stay at Home says that these specific kinds of companies are not using low cost global labor “on a widespread scale.”

But should they?

Part of the conclusion is that such companies must focus on product innovation “—and that’s difficult to shift overseas.”

Yes, but it depends on the nature of your innovation. If you have a team of programmers locked in the Bat Cave, tinkering away on experiments to create the world’s next software controlled mousetrap, then yes, that is a process difficult to shift offshore.

However, there are just as many examples of companies that are out in the market place discovering what companies and people will buy. Their innovation is not a technical breakthrough, but an innovation in understanding the market need or delivering the benefits as a service over the web rather than an application you install on your desktop computer.

As you decide whether global outsourcing is right for your company, keep in mind that your kind of innovation may enable you to take full advantage of low-cost offshore outsourcing. Yes, if you are building the next iPhone or a sophisticated backend server farm to comb the web for information like Google, then you probably need your version of the bat cave. But if you are creating a web or desktop application and can outline the use cases and stories of how your users will use the software then there are excellent offshore vendors you can hire to develop your innovative product. This survey reports what a small set of VC-backed technology companies are presently doing. Does it mean that offshoring should be avoided in all cases?  I don’t think so.

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