Outsourcing Software Development Delivers Productivity Benefits to Small and Midsize Businesses. Beyond Cost-Cutting WHITEPAPER

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1 Outsourcing Software Development Delivers Productivity Benefits to Small and Midsize Businesses Spurred in part by the recession, median spending on outsourcing as a percentage of total information technology (IT) spending grew from 3.8 percent in 2008 to 7.1 percent in 2010 IT Outsourcing Statistics 2010/2011 Computer Economics Small and midsize businesses increasingly are learning that outsourcing long used by larger organizations can help them tap into large pools of talent, allow them to compete with enterprises, and speed-up delivery of their products and services. Although businesses typically associate outsourcing with contracted software engineers in China, India, or Russia, organizations have a range of options that provide them with more control, access, and language and cultural similarities. When businesses turn to an outside partner, they are most likely to contract-out website and e-commerce sites, a task outsourced by 43 percent of respondents in Computer Economics study. In this relationship, a service provider develops, hosts, or maintains the customer s sites, perhaps combining multiple services into the client s offering. More than half or 58 percent of respondents outsourced at least some of their Software as a Service (SaaS) and hosted applications, while 51 percent of those surveyed turned externally for some application -development. Beyond Cost-Cutting Prevented from hiring additional employees by constraints of the challenging economy, some companies turned to outsourcing to supplement their internal resources. But finances are not the only reason that companies turn to outsourcing. In some cases, businesses are looking for experts who can design a specific solution such as Web 2.0 applications, an internal back office tool, a website, or a smartphone or mobile app. Alternatively, an existing or legacy application requires periodic updates or fixes. Sometimes a strategic new product requires additional resources to meet critical customer or market deadlines. Hiring new full-time employees is expensive and time-consuming: Companies must first recruit quality workers, train them, and offer competitive salaries plus benefits. Once a project is completed, staff remains. Training existing employees in new skills takes time and may require expensive third-party educational firms or training software. Instead, outsourcing gives companies immediate access to a team of experts already proficient at programming websites or e-commerce engines, immediate competency on legacy application development, and proficient skills to augment new development efforts. Once their services are no longer necessary, there are no employees to worry about.

2 Contracted as a variable expense, companies are discovering the competitive advantage of a strong outsourcing relationship, leveraging the partnership as a way to deliver more products, faster without impacting long term fixed costs. Indeed, organizations that successfully outsource credit this approach for delivering best-in-class products and services; accomplishing successful implementations; increasing business agility; improving innovation, and increasing customer satisfaction. Offsetting Offshoring In any case, the bottom line is that IT organizations are outsourcing a greater portion of their IT functions today than just a few years ago, ~ John Longwell vice president of research at Computer Economics Sometimes, business people automatically couple thoughts of outsourcing with far-flung destinations such as India and China. These nations, among others, have enjoyed rapid growth as providers of call centers and outsourced software-writing, often due to the lower cost of using resources in these regions. Cultural differences often make properly managing a schedule and truly knowing and understanding an issue a challenge. For example, in several Asian countries, it is unacceptable to question a client s instructions. They follow customer requests to the letter, and steps that might seem obvious or implied are often skipped. Further, a lack of clear-cut standards on product quality and legal issues may make some organizations leery about entering the outsourcing arena, as well. After all, businesses are turning over some control whether it is of their website, their e-commerce engine, or an in-house or commercial software application. In many new economy countries, there is high turnover, resulting in knowledgetransfer challenges for both end-customers and outsourcing service providers. Once competency is achieved, these employees move onto other projects and companies are faced dealing with new, inexperienced resources. Communications are often delayed as well, simply because of a difference in time zones. There are two ways of addressing the situation. Either U.S.-based management must communicate with offshore staff in the wee hours of the morning or management must accept that their instructions are likely not going to be received until the next business day in another time zone. In many cases, either alternative is simply not workable. When it comes to selecting a location, the most important criteria is the availability of specific skills, followed by references and reputation, and price, according to IT Match Online. Other top assets include geographic location; language and culture; scalability; certification level; flexible contract terms, and available resources, the site said.

3 The Nearshore Solution There is, however, a middle ground, a place that delivers on the promises of outsourcing without the many risks associated with offshoring thousands of miles away. Neighbors Canada and Mexico are near-shore options, but Canada does not offer many cost-savings compared with U.S. labor. Mexico next-door to Silicon Valley and many other high-tech regions of the U.S. delivers cost reductions and has more than 2,000 IT companies with 550,000 trained IT professionals, according to Forbes. Violence in that region, however, is taking its toll: Experts at Forbes recommend that businesses with Mexican-based near-shoring partners mandate viable disaster recovery and business continuity plans to ensure ongoing operations and development in the wake of any violence. While disaster recovery should be a standard precautionary plan for any business, few are comfortable with it being a function central to completing daily operations. Working under constant threat of disruption is unsettling at best and potentially profitdampening at worst. After researching its options, Growth Acceleration Partners (GAP) discovered nearby Costa Rica, a politically stable nation located in the Central time-zone, easily accessible by air from the U.S.Unlike some outsourcing locations, the proximity of Costa Rica, availability of skilled engineering combined with stable political environment and similar cultural alignment with the U.S. made this a very attractive option. GAP, in fact, built an organization of full-time employees, most of whom stay with the company for years. We don t have the 40 percent turnover they have in India. In Costa Rica, the turnover is very low, said Joyce Durst, co-founder of GAP. The Costa Rican s have a culture where they want their work environment to be like a family. As an outsource partner, this is ideal. GAP is part of the nearshoring movement, which involves a U.S. company investing in a nearby foreign nation. Because the country is close-by, there is less risk involved and, usually, there is a closer cultural relationship as well.

4 In the case of- Costa Rica, the native language is Spanish, a second or first language for many Americans. And many Costa Ricans speak fluent English. Additionally, visiting GAP s Costa Rica office is only an easy plane ride from its Texas office.consequently, an onsite visit by personnel from GAP s headquarters is far less expensive than it would be for offshoring staff on the other side of the globe. Everything from dramatically decreased transportation costs to significantly increased productivity levels (since jet lag is not a factor with staff traveling from Costa Rica) add to the long list of advantages in using a near-shore supplier. Our end goal is not just building cool things. It is helping our clients increase revenue and profits, she said. We dig in and try to understand what the business objective is and make recommendations about what they might do differently. Paul Brownell Growth Acceleration Partners The Local Solution In yet other cases, clients work with a local outsourcing provider, one that may be located in the same city, state, or region of the United States. In these cases, customers enjoy a commonality of language and culture, which enables a speedy ramp-up for outsourced projects. Likewise, because all parties are located within the same country, it is easier to meet face-to-face or using technologies such as Skype, instant messaging, and other available tools to track a project s progress, make changes, or brainstorm. However, some of these same-country advantages are eroding. For example, Internet connection speeds in some non-u.s. countries are significantly higher than in the U.S. The higher speeds and lower latencies present significant advantages including higher conversion rates on websites and faster programming in the cloud. Further, many non-u.s. countries use mobile devices in different ways than U.S. consumers do. It can be helpful to have a partner familiar with the faster mobile Internet speeds and carriers related capabilities to work with on mobile app development, for example. Obviously, the inherent differences in Internet connection speeds will make a larger difference to some companies than others, but it is fair to say that the point bears consideration for most industries. Additionally, U.S. companies do not have access to the same lower pay-scales of overseas competitors, which can lead to slightly higher pricing. Yet experts often point to lower quality from these same offshore companies as a reason between 40 percent and 70 percent of offshore outsourcing relationships fail. Delivering quality by forging business partnerships and paying close attention to detail are critical differentiators for GAP.

5 The company partners with its clients, becoming a de facto and key cog in client s development, said Durst. GAP teams-up with companies that want to grow their business, providing clients with an array of services such as creative and user interface design, software development; quality assurance; IT and technical support, Web 2.0 and mobile development and strategies; marketing, and financial modeling. In fact, GAP s business is equally split between providing services for technologyrelated and non-technology companies, Durst said. Seeking Outsourcing Success Our end goal is not just building cool things. It is helping our clients increase revenue and profits Joyce Durst, Growth Acceleration Partners When researching and considering outsourcing, companies must consider why certain outsource projects don t succeed. The main reason an outsourcing contract fails is because of the buyer s unrealistic expectations, according to 23 percent of respondents in an Outsourcing Center study. Poor communication or a poor cultural fit accounted for failure in 16 percent of the cases, while the fact that interests became misaligned over time caused the poor results in 15 percent of the contracts, the survey determined. The dominant theme recurrent in the tips provided, whether from buyers or providers, is that those who spend more time and effort up front ensure predictable results and less chance of failure in their outsourcing initiatives, the report said. In some cases, the sheer geographical distance is impossible to overcome, which is why a growing number of businesses are turning to near-shoring and local-sourcing as cost-effective, results-driven alternatives to offshore outsourcing. Going Agile Outsourcing requires more than location, however, to ensure success. Since one of the main hurdles to a positive experience hangs on communication and meeting goals, it is vital that outsourcing clients and their service provider create procedures for updates, said Paul Brownell, principal of GAP. To ensure it is meeting all its clients goals and to keep customers abreast of all news regarding their project, GAP uses the Agile process in particular, the Scrum method, he said. Agile outsourcing uses flexibility, collaboration, and dedication as its foundation, valuing individuals and interactions over processes and tools, working software over extensive documentation, customer collaboration over contract negotiation, and responding to change over following a plan. As a result, at least every other week GAP communicates with clients about their projects, said Brownell. During the project, all involved GAP employees are involved, from engineers to marketing, he said.

6 Development teams are interacting frequently with the product-management person who guides the direction of the outcome. It is incremental in nature, said Brownell. We set out in the direction, then begin building, look and adjust and build some more. It s very flexible and our clients see the progress. One of the things you do in an agile process is you define what you want to do in bite-size chunks, called the backlog. You do the main priorities first. It reduces your business risk. You know the most important business objectives are met at the beginning. Once seen as an impersonal, cost-cutting deal, outsourcing can be an integral component of a company s growth strategy. By selecting a partner with extensive technological expertise and strong business skills, a collaborator with a proven methodology for communicating and adapting to change, the outsourcing relationship may become a vital part of an organization s path to success, and a outsourcing partner can become an extension of a company s in-house skillset and talents. PRODUCT BACKLOG DAILY SCRUM PRODUCT SPRINT BACKLOG

7 Ten Tips for a Successful Outsourcing Partnership 1 Define and create clear standards, including targets, deliverables, and timeframes 2 Consider the ramifications time zones, culture, language and other factors may have on the relationship 3 Spend time at the outsourcing service provider s facility 4 Find a partner that does not have extensive employee turnover 5 Speak to prospective partner s customers, preferably in your industry or using the same services 6 Create mini-deadlines within the project, and mandate frequent, scheduled updates 7 Ensure any outsourcing relationship meets regulations, privacy laws, and industry-specific rules such as HIPAA 8 Seek a partner that understands your business, not just the technology 9 Consider finding an outsourcing partner that can provide value-add services such as business advice, financial consulting, and marketing expertise, in addition to traditional IT outsourcing 10 Focus on benefits other than cost-savings: Look at time-to-market, customer service, and other factors when determining ROI