Blog | Outsourcing in Industry

Pros and Cons of Offshore Software Development

Pros and Cons of Offshore Software Development
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by Sanjeev Kapoor 17 Jun 2019

Outsourcing is a popular concept in the enterprise world: For decades, companies have been outsourcing tasks in other companies in order to benefit from better prices or even access to expertise that they do not possess in house. In recent years the advent of globalization has opened new horizons to outsourcing, through enabling enterprises to benefit from outsourcing services all over the world. Nowadays, outsourcing is primarily a vehicle for accessing global talent, rather than a way to perform activities at a lower cost. Moreover, the IT industry is offered with an unprecedented number of different outsourcing choices such as delegating software developing projects to other companies, running entire IT services (e.g., e-mail, billing, marketing) on the cloud, buying and using software packages (e.g., Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) applications), as well as developing and operating private or hybrid cloud infrastructures. This wealth of operations enables enterprises to diversify their outsourcing decisions and select the outsourcing modality that suits best their business objectives. Nevertheless, despite its expanded use, outsourcing is not a panacea. There are advantages and drawbacks to each outsourcing decision, as some tasks are much more appropriate for outsourcing than others. In order to plan their outsourcing tasks appropriately, enterprises need to understand the pros and cons of offshoring different IT-related activities. Understanding these pros and cons is particularly important when planning to outsource 100% of your tasks i.e. when considering an “all of nothing” offshoring value proposition.

The Pros

Offshoring IT tasks comes with some clear benefits for enterprises, which form the main motivation behind outsourcing. These benefits include:

  • Cost Efficiency and Flexibility: Offshoring provides an excellent opportunity for accessing world class expertise at reduced costs. As a prominent example, it’s nowadays possible for Silicon Valley enterprises to access world-class data science talent by offshoring data mining tasks to data scientists in low labor countries, thus obtaining high quality data analytics results at a fraction of the Valley’s costs.
  • Access to World Class Expertise: Currently there is a proclaimed talent gap in many IT technologies such as data science, Big Data, Artificial Intelligence, development of software for drones and autonomous vehicle, advanced data-intensive animation and visualization, highly skilled DevOps engineers and more. Companies in need of teams with the above-listed profiles and expertise can fulfill their needs by resorting to offshoring. Entire teams with world class expertise in these subjects offer nowadays knowledge-intensive services based on outsourcing contracts.
  • On Demand Access to Knowledge and Expertise: Based on offshoring, companies can access the resources they need exactly when they need them. This boosts the notion of on-demand access to expertise, which is in-line with the popular concept of the on-demand economy. Instead of maintaining and staffing teams of highly skilled knowledge workers, companies can nowadays access the human resources they need on-demand.

Read Also: Top Reasons Why IT Outsourcing is Inevitable for Business Growth Today

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The Cons

There are also several arguments against outsourcing enterprise IT tasks at scale, in particular:

  • Limits to Innovation: A large number of enterprises view IT not simply as a support activity, but rather as an innovation activity that helps them build a strategic advantage that sets them apart from competitors. In such cases, enterprises prefer to maintain and control the innovation in-house, rather than outsourcing it to some third party.
  • Set back to Intellectual Property Creation and Exploit: In-house innovative IT activities facilitate enterprises to create and exploit IT-related IP (Intellectual Property). For example, retail enterprises may produce IP associated with data mining algorithms for identifying and satisfying the most profitable customer. When such IP is created offshore, its management, maintenance and further exploitation becomes much more challenging.
  • Hidden Costs: In many cases offshoring seems very appealing from a budgeting perspective, as labor costs of the IT personnel of the outsourcing provider could be less than half of the respective in-house costs. Nevertheless, the management and operation of an outsourcing agreement is likely to entail additional costs that are not evident at first glance. These include for example costs for establishing and managing contracts and Service Level Agreements (SLAs), costs for supervising personnel of the outsourcing provider, costs stemming from the need of improving or redoing poor quality work, costs associated with privacy management and data protection, as well as regulatory compliance costs. Ignoring or underestimating these costs can in the medium or long term turn an outsourcing agreement to a disaster.

Read Also: Eight Common IT Outsourcing Mistakes to Avoid

Decision Making Criteria

In this context, enterprises should attempt to balance and resolve the trade-offs that are associated with an outsourcing engagement. In this trade-off resolution attempt, they should take into account the following factors:

  • Nature of the Business Tasks: Some business tasks are much more appropriate for off shoring than others. As a rule of thumb auxiliary and support tasks like call centers, marketing campaigns and data entry can be outsourced much more easily than more strategic tasks like marketing planning, pricing and development of a Minimum Viable Product (MVP) for a new product or service. Thus, one has to consider the appropriateness of outsourcing for the business tasks at hand.
  • Duration of the Business Tasks: Offshoring is excellent for short lived tasks, but not always an ideal choice for longer term tasks of strategic importance. In several cases enterprises want to have fine control over longer term tasks and therefore opt to avoid their outsourcing.
  • Business Culture: Some organizations have a business culture that is more receptive to outsourcing. For instance, they have employees with knowledge about how to supervise tasks that are implemented by remote teams. Such organizations are more efficient in the implementation of offshoring. This is not however the case with other organizations, which do not have the capacity and skills to delegate tasks to outsourcing firms.
  • In-house Expertise available: The decision on which tasks to outsource and at what capacity depends on the in-house expertise available to a company. Enterprises are more likely to outsource tasks, which they are not able to carry out efficiently based on their resources.
  • Budget and impact of outsourcing in the enterprise bottom line: An off-shoring decision may be also driven by a company’s bottom line. Companies that are starving for cash and/or improvements to their bottom lines are mostly like to take a cost-driven decision to off shore some activities. On the other hand, companies that set other strategic priorities may be reluctant to outsource the same tasks.

 These criteria can be used to scrutinize and weight the benefits and challenges of an outsourcing decision. A 100% offshoring of key activities may not be always possible, as it is very likely to trigger some of the drawbacks of outsourcing. However, enterprises are likely to selectively outsource some of their activities, in order to benefit from cost efficient access to global talent. Managers are expected to weight the benefits and the costs prior to taking their decisions.

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