Gartner predicts that Outsourcing Prices Could Fall 10%. It is hard to judge the accuracy of these reports because they cover several different categories of outsourced IT services – datacenter, helpdesk and network services – besides just software development. But there is no question that business is less than booming these days and buyers are in a position of strength when it comes to negotiating prices.

If it made sense to outsource your software development globally to save money in the past, then it is even truer today. That is, if American companies are not too afraid to develop anything these days!

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More details on how many and which jobs are being offshored from the U.S. are in a report called “Jobs Beyond Borders” just issued by the Wharton School and CareerBuilder.com.

The report has lots of statistics from a survey of more than 3,000 HR professionals and 6,700 workers in the U.S.

13% of companies surveyed outsourced to third-party vendors in 2007 and 7% say they moved job functions to offshore affiliates or subsidiaries.

The main reason is cost.

64% of companies are offshoring to save money. 32% of companies surveyed are offshoring software development work.

No doubt there are many ways to spin the numbers. One blog focused on the statistic that 27% of companies went offshore to find skilled workers, implying a shortage here in the U.S.

For me the handwriting is on the wall. American companies are offshoring for a number of reasons. And if your job is in the list of those most likely to be offshored, then it’s time to adapt to this reality.

If you are a company joining the ranks of those taking advantage of offshore software development then Accelerance global partners have the skills you need.

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Today I ran across this article in Baseline magazine that questions if there really is an IT labor shortage. It reports that the idea of a shortage is popularized by lobbying groups trying to convince congress to increase the number of H1-B visas.  I mentioned a looming IT talent crunch back in January.

This newer article quotes several experts and reports that state there are plenty of IT jobs available, just not high paying ones that Americans are willing to take. Instead companies are bringing in low-paid workers or just sending the work offshore.

I think this new article is closer to the truth based on the large number of comments from people that have actually lost their jobs due to outsourcing or offshoring.

But companies will always want to save money. It’s the main reason we don’t make shoes in New England, steel in Pittsburgh and grow apricots in Silicon Valley anymore. If you are running a company, how would you handle IT? If you are starting a software company with your own money, where would you do your programming?

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Last year a 25-page study Getting the Numbers Right: International Engineering Education in the United States, China, and India was published by several professors from Duke University (abstract & more download links available here).

This report is grasped at by both advocates and detractors of the H1-B visa as proof that we Americans are not doing so bad after all and that the specter of soon being overrun by hoards of qualified foreign software engineers is not a reality.   Notice my emphasis on the word qualified. That’s the main point of the study – yes, there may be a large number of IT workers being graduated in India and China (10 times the U.S. or more) but they are not at the same level of skill as software engineering and computer science graduates earning a Bachelors degree from a college or university in the U.S.

Hoards of Asian Programmers?

But here is the (incorrect) logic being used in applying the results of this study:

• Tech company executives (like Bill Gates) claim there are not enough skilled programmers in the U.S.
• The study says there are not as many qualified programmers in India and China as previously estimated
• Therefore, there is no shortage of qualified programmers in the U.S.

Wrong!

But this past April 1st or H1-B Visa day, an NPR interview says there is a 10 to 1 demand to supply ratio for talented programmers and software architects in the U.S.

Listen to another NPR interview with Vivek Wadwha one of the Duke professors and you will hear him say that most American companies are outsourcing offshore to save money NOT just to get hard-to-find talent.

I think it is for both.

But here’s the thing. American companies are offshoring even if they have to take a hit in quality of the programmers. The study discusses how much of a hit and why it exists to begin with.

The study draws on the previous 2005 McKinsey study that predicts a shortage of IT workers because only about 10% of graduates in Brazil, China and Russia and 25% in India are globally competitive programmers.

The study further characterizes these graduates as either dynamic or transactional engineers. Here’s a brief definition:

Dynamic Engineers

• Capable of abstract thinking
• High-level problem solving
• Using scientific knowledge

Transactional Engineers

• Solid technical training, but
• No experience to apply knowledge to larger domains
• Responsible for routine tasks in workplace

If 80% to 90% of the offshore engineers are transactional you have to wonder who’s going to be working on your software when you go offshore. That’s why it’s important to select a vendor that knows how to recruit the right kind of “dynamic” engineers up to American standards of excellence.

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It’s April 1st and no joke, it’s H1-B Visa day. This is the day that companies apply to the U.S. government to receive visas for foreign workers. There is a limit of 65,000 and they are issues within the first 24 hours.

NPR interviewed a software company CEO about his challenge in hiring a software architect here in the U.S.

This is a controversial issue that really strikes a nerve with those Americans that think companies (like Microsoft) are selling out by hiring cheaper foreigners instead of paying Americans what they are worth.

Even if it is true, there is reported shortage of IT talent in the U.S. that may drive up salaries anyway.

Mentioned in this interview was a study done by professors at Duke University that showed the quality of offshore workers is not. One of the professors is Vivek Wadhwa who was interviewed on NPR last year when the study was published.

I am going to post a blog about this interesting study of offshore talent very soon.

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A report from Dow Jones VentureSource described in a post on the Webguild blog here in Silicon Valley warns the party may soon be over for many Web 2.0 startups.

The blog post says, “Venture capital investment has been sustaining many Web 2.0 startups, which are often chasing the same users. When the money dries up so will most Web 2.0 companies unless they find a new source of revenue.”

Scary!  In the last bubble I thought we learned that venture funding is not the same as revenue!

Better close your funding quickly, and then use a global software development team to create your Web 2.0 application ASAP and minimize your time-to-revenue.

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Maybe but the number of students majoring in computer science has also cooled. There was a report on NPR this morning about this. No wonder there is a shortage of IT workers predicted for 2008.

I heard the same kind of numbers from my alma mater WPI where I am an advisor.  The number of Computer Science and Electrical and Computer Engineering majors have dropped precipitously over the last few years.

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Small company CIOs say they have little interest in increasing their offshore outsourcing in 2008. That’s according to a survey performed by the Robert Half recruiting company.

What’s more, 94% of CIOs surveyed said they don’t outsource IT jobs outside the U.S. at all. And 59% of have stopped IT outsourcing because of “management challenges” as the top reason.

Only 3% of companies with 100 to 250 employees do offshore outsourcing. Here’s several reasons according to a Robert Half executive:

“Researching viable vendors, and teaching them about the company and its products, management style and quality control require a substantial investment. Large companies may be better positioned to absorb the costs of both initial setup and ongoing oversight, and to benefit from economies of scale.”

I agree.

The survey deals with IT outsourcing in general and not just software development but I think the same lessons apply. Large or small, you have to be prepared to handle communication challenges and be able to describe what your software needs to do.

At least with Accelerance, you have instant access to those “viable vendors” that seem to elude the survey respondents.

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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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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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