Offshore IT outsourcing 1 Offshore IT Outsourcing: Making it a Win-Win for Everybody By Boniface C. Nwugwo, Ph.D., MPA Every decade, a new fad comes along that affects various industries. Be it the fashion industry, the music industry, or the information technology (IT) industry, people or companies often feel that they have to jump on the bandwagon of the new fad or be left behind. For the IT industry, the new fad is offshore outsourcing (i.e., the farming out of a company s business activities to another person or persons who reside outside the company s shores, mostly for cost reasons). This practice of the buyer of a service located in some other country and the provider of the service located in another country where labor is cheap began in the mid-to-late 90s and has taken hold in the 2000s. A lot has been written about the trend of U.S. Companies outsourcing of IT jobs overseas, specifically to India, China, Russia and other countries with cheaper labor market, therefore, in this article, I will not argue the merits or demerits of outsourcing of U.S. software development jobs offshore, rather, the paper will simply present how it can be done to benefit both the U.S. workforce, the overseas workforce, and the companies involved. No question, the driving force behind outsourcing is profitability. Every company wants to be successful to guarantee its survival, which means, companies have to create wealth for their owners. To do that, companies have to be competitive. And being competitive in the IT business means providing distinctive quality products to consumers at lower cost. Incidentally, there are various specific steps in the lifecycle of a software-based product and each step has costs associated with it. Although there are variations to the software lifecycle model depending on the type of organization and other factors, they all have a lot in common with the typical model depicted in Figure 1. If we assume that Figure 1 captures a typical software lifecycle phases, then if we can treat each phase as a value-creating activity, it is easier to visualize software product lifecycle s interrelated phases in terms of what Michael Porter [4] called a Value Chain. The goal of these lifecycle phases (or the value chain activities) is to create value that exceeds the cost of providing the product or service, thus generating a profit margin.
Offshore IT outsourcing 2 CONCEPT REQUIREMENTS DEFINITION DESIGN Figure 1: Software-based Product Value Chain Activities. IMPLEMENTATION (Code, Unit Test, Integration) TEST OPERATION & MAINTENANCE A business is profitable if the value it creates exceeds the cost of performing the value activities. Therefore, to gain competitive advantage over its rivals, a company must either perform these activities at a lower cost or perform them in a way that leads to differentiation and a premium. For a company to gain competitive advantage in the Information Technology (IT) business, it needs to assess its software-based product value-chain and identify those activities in the value chain that cost the most and do whatever is necessary to lower costs in those areas. So, let s take a look at these activities and the costs associated with them. SOFTWARE LIFECYCLE PHASES AND THEIR COSTS There have been a number of studies and publications about the cost of each phase of the software lifecycle since the eighties. As illustrated in Figure 2, software lifecycle cost distribution has not changed much from the 1980s. Although in the late 1980s and early 1990s, software maintenance phase climbed to as high as 80% of the total software cost [5], but recent surveys by software statisticians show that it has retreated back to the 50-70% level.
Offshore IT outsourcing 3 Concept 1% Requirements Definition 3% Design 9% Implementation 7% Figure 2: Software Lifecycle Cost Distribution Maintenance 65% MAKING IT A WIN-WIN FOR ALL PARTIES Testing 15% A simple analysis of the software-based product lifecycle value chain shows that over 85% of the Source: Arthur, 1988 total cost of software is spent during implementation, testing, and maintenance, with maintenance accounting for the majority of the cost. To gain competitive advantage, companies engaged in softwarebased product development would have to try to cut costs in these activities that consume the most amount of resources. Given that most of these activities and costs are labor-related, the most likely choice for many companies is to seek out cheaper labor, which means outsourcing these jobs to India, China, Russia and other offshore places where labor is cheap compared with the United States. It is almost a forgone conclusion that American companies have embarked on shipping IT jobs overseas and will continue to do so in the foreseeable future. So the question then becomes, how can these companies tap into the cheap labor markets to remain competitive and at the same time maintain the skills at home that helped make the United States the most innovative country of the twentieth century? How can the U.S. continue to lead in the twenty-first century? The answer lies in what I call collaborative global job sharing. Collaborative global job sharing means when a local company in the source country (say the United States) works cooperatively with another foreign company where work is being outsourced to (say India or China) on a project with each responsible for one or more phases of the project. As we have seen
Offshore IT outsourcing 4 already, more than 85% of the total cost of a software-based product is spent on implementation, testing and maintenance with maintenance accounting for 60-70%. As it is often easier for an organization that developed a system to maintain it, if an American company is contemplating outsourcing its IT work offshore, the right thing to do then would be to handover the Implementation, Testing and Maintenance of the software-based system to the offshore company after its American engineers have completed the Concept exploration, Requirements Definition, and Design of the system. Since Implementation, Testing, and Maintenance account for more than 85% of the costs, American companies will gain more competitive advantage if they can reduce those costs at least 40-60%. Doing those activities offshore would guarantee such savings and at the same time, the American companies would still retain the expertise and innovative genre of their American high-tech workforce. To do these activities offshore, the software lifecycle that was depicted in Figure 1 needs to be refined a little bit to show how this would work. Another outshoot of the Test phase, Acceptance Validation phase would have to be added right after the Test phase for the source company to verify that its acceptance criteria were met by the outsourcer. In addition, the Operation & Maintenance phase would have to be separated into two separate phases Operation and maintenance with a loop back to the Test phase. Figure 3 captures this refinement graphically. CONCEPT REQUIREMENTS DEFINITION DESIGN IMPLEMENTATION (Code, Unit Test, Integration) OPERATION ACCEPTANCE VALIDATION TEST Figure 3: Refined Software Lifecycle for Offshore Outsourcing MAINTENANCE
Offshore IT outsourcing 5 At a first glance it may seem very simple and not much for the American engineers to do, but when you examine it further, you begin to see why it s not that simple and why it is to the best interest of American companies and American engineers to concentrate on the first three phases of a software-based project as well as the Acceptance Validation and Operation phases. The ideal thing for companies that want to ship IT jobs offshore would be to just turn over the maintenance of their systems to offshore countries where labor is cheaper since maintenance accounts for 50-70 [3] percent of the overall cost. However, it is not so easy to transfer implementation and test knowledge, including development environment and all the support mechanisms that go with building a new software-based system from one development team to another, not to talk about transferring knowledge to another country where language and cultural barriers might play a hindrance role. For this reason, it would be much more cost effective for the companies involved to simply turn over the requirements and design specifications to the offshore companies and let them do the implementation. By allowing the offshore companies do the implementation, they can easily transition into maintenance mode after they have delivered the product to the U.S. companies. It is also to the best interest of American engineers to concentrate on the innovative aspect of specifying, designing and architecting the systems. The American engineers would also be responsible for the Acceptance Validation of the system delivered by the offshore outsourcer as well as the Operation of the system. This at least guarantees that American engineers are not left out completely. However, there are some implications. IMPLICATIONS One implication is that the American software engineers would now have to focus more on the systems engineering and software architecting aspects of software engineering. Software requirements and designs would now have to be well documented and they can no longer be things that people just wave their hands or document haphazardly. For the offshore companies to deliver exactly what the American companies want, the American companies would have to specify clearly what they expect from
Offshore IT outsourcing 6 these offshore companies. Well-documented acceptance criteria would have to be defined, which would be used during Acceptance Validation. The key to a smooth knowledge transfer and handover is excellent documentation. Having well documented requirements and design would make the handover of activities from the American engineers to the offshore company engineers a smooth transition, and guarantees that the U.S. companies would get what they need. Another implication is that the American companies would have to train their software managers and lead software engineers in software subcontract management. Good set of expectations in terms of a well-documented agreement covering the technical and non-technical (e.g., delivery dates) requirements would have to be established and would be used as the basis for managing the subcontract. The work to be done by the offshore companies and the plans for the work would have to be documented. The standards that are to be followed by the offshore companies would have to be compatible with the American companies standards (i.e., code standards, documentation standards, etc). This in effect implies that the American companies would have to have standards, otherwise, there won t be anything to compare against. Software configuration control and configuration management standards would have to be established and strictly adhered to. While the software planning, tracking, and oversight activities for the implementation, testing and maintenance work are performed by the offshore companies engineers, the American software managers and software engineers would ensure that these planning, tracking, and oversight activities are performed appropriately and that the software products delivered by the offshore companies satisfy their acceptance criteria. Formal reviews to address the offshore companies software engineering accomplishments and results would have to be conducted at selected milestones according to a documented procedure. Again, this implies that the American companies must have and maintain documented procedures for doing this.
Offshore IT outsourcing 7 SUMMARY As offshore IT outsourcing has become the new trend for American companies, and it does not appear that there is an end in sight soon, there is no reason for U.S. companies to jeopardize their technological advantage by sending everything overseas. The real need for U.S. companies is to save cost and this could be achieved optimally by outsourcing only those activities in the software-based product value chain that cost the most while retaining the activities that allow their own engineers to continue to innovate. This paper simply identified the cost of the activities in the software-based product value chain and showed those activities that cost the most and proposed that if U.S. companies have the desire to outsource IT work, only those activities that can save them the most should be outsourced, while leaving the concept exploration, analyses, architecting of systems, acceptance validation and operation of the systems to the U.S. engineers. REFERENCES [1]. Arthur, L.J. (1988). Software evolution, the software maintenance challenge. New York: John Wiley & Sons. [2]. Jones, C. (1998). Estimation of software costs. New York: McGraw-Hill. [3]. Nwugwo, B.C. (2003). Impact of developer attitude on software maintenance cost: A descriptive study based on the Technology Acceptance Model. Unpublished Dissertation, Capella University, Minneapolis, MN. [4]. Porter, M.E. (1998). Competitive advantage: Creating and sustaining superior performance. New York: Free Press. [5]. Pressman, R. S. (1997). Software engineering: A practitioner's approach (Fourth ed.). New York: McGraw-Hill. [6]. Putnam, L. H. (1980). Software cost estimating and lifecycle control. Los Alamitos: IEEE Computer Society Press.
Offshore IT outsourcing 8 About the Author Boniface C. Nwugwo has 20 years of experience in the IT profession. He is the Principal Consultant and Chief Technical Officer at BTC Technologies LLC in Columbia Maryland, which provides outsourcing and consulting (staff augmentation) services in support of software testing, test automation, software quality assurance, business process improvement, and configuration management activities for software development organizations and users of software-based systems. Prior to BTC Technologies, Boniface spent 16 years at Eastman Kodak Company working in various capacities as software development engineer, software test engineer, software quality engineer, quality assurance manager, test manager, software project manager and site manager for Kodak's Washington Development Center. Boniface earned a doctorate degree in Organization and Management with an emphasis in Information Technology Management from Capella University, Minnesota; an MS in Software Development & Management from Rochester Institute of Technology; a Master of Public Administration in Information Management Systems; and a BS in Computer Science from the State University of New York at Brockport. Dr. Nwugwo also serves as an adjunct faculty at the Capella University School of Technology. He is a senior member of IEEE and IEEE Computer Society and the chair of the Baltimore Chapter of the IEEE Computer Society. He can be reached at (410) 964-1080 or (443) 956-6360 or by e-mail at bcn@btctechnologies.com or bnwugwo@ieee.org.