June 22, 2017
What is offshore outsourcing, and how is it popular for software development? Read the article for more details about successful outsourcing examples and best market practices to work to your advantage and your business.
List of the Content
- Definition of offshore outsourcing
- Successful offshore outsourcing examples
- Advantages of offshore outsourcing
- Offshore outsourcing challenges
- Best practices for successful offshore outsourcing
DEFINITION OF OFFSHORE OUTSOURCING
Offshore outsourcing in software development is a business practice involving contracting a third-party company in a foreign country to handle certain aspects of software development. This practice has become increasingly popular in recent years, allowing companies to reduce costs, access a wider talent pool, and benefit from different time zones.
Offshore outsourcing differs from onshore outsourcing because the outsourcing company is located in a different country. Onshore outsourcing, on the other hand, involves hiring a third-party company located within the same country.
Offshore outsourcing can offer several advantages over onshore outsourcing. One of the main advantages is cost savings. Labor costs are generally lower in countries where offshore outsourcing is popular. Additionally, offshore outsourcing can provide access to a wider pool of expertise and talent, and cultural diversity.
What is offshore outsourcing?
Offshore outsourcing is the process of hiring a third-party company located in a different country to handle certain business functions or projects.
One of the key steps in managing offshore outsourcing is to establish clear communication channels with the outsourcing company. This includes setting up regular meetings, using collaboration tools such as project management software, and having a designated point of contact on both sides.
Another vital step in managing offshore outsourcing is establishing clear expectations and project milestones. This includes setting clear deadlines, outlining deliverables, and defining the project’s scope. This helps ensure everyone is on the same page and the project stays on track.
It is also important to establish a clear process for managing and monitoring the quality of the work being outsourced. This includes setting quality standards and regularly reviewing the work of the outsourcing company to ensure that it meets these standards.
Offshore outsourcing in software development is a common practice that can offer several benefits, including cost savings, access to a wider pool of expertise and talent, and improved efficiency. However, offshore outsourcing also comes with its own set of challenges, including communication and cultural differences. By managing offshore outsourcing effectively, through clear communication, proper planning, and monitoring quality, companies can successfully outsource software development and achieve their desired results.
OFFSHORE OUTSOURCING: 3 SUCCESSFUL EXAMPLES
Offshore outsourcing for developing or improving the informational system is a widely popular practice. But in most cases, it’s about engaging the contractor based on a “fixed price” model or “actual work.” But the forms of cooperation dedicated to offshore development can’t be missed by IT managers. Using a dedicated development team is much more useful and financially attractive than other outsourcing schemes because of the rising effectiveness of those investments from a long-time perspective.
Crossing the line between the organization’s need for a dedicated offshore development center and choosing another model of IT outsourcing is simple. If one company needs to realize a one-time and small project, its IT landscape is clear, and the influence level of IT on the business is insignificant. So, the traditional outsourcing schemes are a better choice in this case. Another option is where several development systems are used within the company, but the technical knowledge and workflow are lost. The business-critical dependence is on the reliability and quality of IT solutions: the lack of operative involvement becomes a critical brake for the development. So, recruiting the external specialists’ team long-term is the best choice.
With close and permanent cooperation between customer and provider within a dedicated offshore development center, the optimization of the next processes can be seen: analyzation, research, and development – this minimizes the number of errors and lowers the amount of force “re-doings.” Using the model with a fixed cost may cause the price of such finalizations to exceed the starting expectations, which were pinned in a tender or in a first deal. The advantage of using the dedicated center is a factor of a total workflow. It guarantees the absence of communication and unpredictability, which may appear if a company is looking for a new provider every time.
Despite such attractive features of offshore outsourcing, there still are opponents of such an idea, proving it with arguments that using a business model like this takes away the working places for the people inside the country where the company belongs. However, hundreds of major corporations ship numerous jobs overseas with offshore outsourcing.
As an example, first, we look at IKEA. In 2013, IKEA groups announced a joint offshore outsourcing project with Wincor Nixdorf for setting the IT solutions to all the cash settlement units in all their branches. During 2014-2015, Wincor Nixdorf set up 12 thousand POS systems in 300 IKEA stores in 25 countries. A 6-year deal between them includes the installation and exploitation of POS systems. The deal includes the point of use and further improvement of Wincor Nixdorf software – TP.net, which is in charge of all the transactions in cash units and collects the data from all over the commercial network. Having a single software provider offshore, IKEA not only lowered the work to run the stores but also significantly reduced implementation and exploitation costs.
The second outsourcing example represented here is General Electric. GE was a pioneer in many business branches, including offshore outsourcing. They were among the first to transfer its operational department, data maintaining department, and call center into a country of low expenses – India, creating a special GECIS (General Electric International Service) department. GECIS provided finance and bookkeeping services, customer verification, e-learning and business analytics, IT outsourcing, and software development support, securing thousands of business processes in 11 GE branches. By the end of 2004, over 12 thousand people were working in GECIS. You can imagine how much General Electric saved on people’s salaries only because they were working in India, not in the US.
However, this is not the end of this story. GE decided GECIS could bring more income if it evolved from a subsidiary company to a standalone unit, and it will provide analogical services to other companies. Intended – done.
All these operations were maintained within a framework of unified policy, founded by General Electric CEO Jack Welch, and it’s called “70:70:70”. That number combination means 70% of their work in GE must be outsourced, 70% is given to dedicated offshore centers, and 70% will be in India.
Another example of successful offshore outsourcing is IBM with its Canadian subsidiary company that made a 10-year contract with the National Bank of Canada for $700 million; accordingly, IBM Canada heads over the bank’s informational structure maintenance, including its websites and call centers. Besides, the partners will join for future development projects in the IT sphere.
But IBM obtained a much bigger contract with $4 billion in February 2002. Following a 7-year outsourcing contract, IBM, alongside American Express, will manage the “americanexpress.com” website, administrate computer network AmEx, the process around 1 billion credit card operations daily, maintain the database, and keep the technical support to company employees. Most American Express IT staff (around 2000 specialists) are formally transferred to IBM. And American Express leaves new services, product development, and customer relationship to itself.
In its turn, other financial institutions follow these examples, outsourcing the development and implementation of new software, information processing, websites, and call centers. According to experts, this trend will only grow. Overall, the outsourcing evolution follows the tight cooperation between financial and informational technologies. They evolve from separate contracts to a wide, mutually beneficial partnership that enriches both sides.
Looking for some other successful outsourcing examples?
You can find more examples of successful IT outsourcing projects in our Case Studies section.
ADVANTAGES OF OFFSHORE OUTSOURCING FOR SOFTWARE DEVELOPMENT
Offshore outsourcing in software development is a popular practice among companies seeking to increase efficiency, reduce costs, and access a global talent pool. Let’s explore the advantages of offshore outsourcing for software development and how it can benefit your company.
One of the primary advantages of offshore outsourcing in software development is cost savings. By outsourcing software development to a company in a country with a lower cost of living, businesses can save money on labor costs. This is because the cost of living, as well as wages, is often lower in developing countries than in developed countries. For example, outsourcing software development to a company in Eastern Europe can result in cost savings of up to 60% compared to doing the same work in the United States.
Access to a global talent pool
Offshore outsourcing in software development also provides companies with access to a global talent pool. This allows companies to tap into the expertise and skills of software developers from around the world. This is particularly useful for businesses that are looking for specific skills or expertise that may be in short supply in their own country. For example, a company based in the United States may outsource software development to a company in China to take advantage of the country’s strong expertise in artificial intelligence and machine learning.
Ability to focus on core competencies
Another advantage of offshore outsourcing in software development is that it allows companies to focus on their core competencies. Outsourcing software development allows companies to delegate non-core tasks, such as software development, to experts, freeing up their own resources to focus on their core business. This can result in improved efficiency, increased productivity, and a better return on investment.
Offshore outsourcing in software development also provides companies with scalability. By outsourcing software development, companies can quickly and easily scale up or down their operations to meet changing business needs. This is particularly useful for businesses that experience fluctuations in demand, as it allows them to respond quickly to changes in the market.
Therefore, offshore outsourcing can provide companies with cost savings, access to a global talent pool, the ability to focus on core competencies, and scalability. By taking advantage of these advantages, businesses can increase efficiency, reduce costs, and improve their bottom line. However, it is important to note that offshore outsourcing can also come with its own set of challenges, such as language and cultural barriers, time zone differences, and legal and compliance issues. Therefore, it is important for companies to carefully research and select a reputable outsourcing partner and to have clear communication and expectations in place.
Looking for a professional offshore outsourcing provider?
Feel free to contact Existek. We are an offshore software development company with a decade-long experience that knows how to turn your ideas into successful full-fledged solutions.
OFFSHORE OUTSOURCING CHALLENGES
Offshore outsourcing has become a popular trend in the software development industry in recent years. Companies often turn to offshore outsourcing to save costs, access a larger talent pool, and improve their time-to-market. However, offshore outsourcing also comes with several challenges that can negatively impact the success of a software development project.
One of the biggest challenges of offshore outsourcing is the potential for communication barriers. When outsourcing software development to another country, there may be language and cultural differences that can make communication difficult. This can lead to misunderstandings, delays, and mistakes in the software development process. In order to mitigate these communication barriers, it is important for companies to establish clear and effective communication channels, such as regular video conferences, and to ensure that everyone involved in the project has a clear understanding of the project requirements and goals.
Time zone differences
Another disadvantage of offshore outsourcing is the potential for time zone differences to impact the project schedule. Software development projects often require coordination and collaboration between team members in different locations. When team members are in different time zones, it can be difficult to schedule meetings and ensure that everyone is available to work on the project at the same time. This can lead to delays and disruptions in the project schedule. To mitigate this, companies can use tools such as project management software, which allows team members to collaborate and communicate in real time, regardless of their location.
Quality control issues
When outsourcing software development to another company, there can be a lack of control over the project. This can be especially true when outsourcing to a company in another country, as it can be difficult to manage and monitor the work being done. This lack of control can lead to delays, mistakes, and other issues that can negatively impact the project. To mitigate this, companies can use project management tools and establish clear communication channels to ensure that they can stay informed about the progress of the project and make any necessary adjustments.
Another disadvantage of offshore outsourcing is the potential for security risks. When outsourcing software development to another company, sensitive company information and data may be shared with that company. Also, if the company is located in another country, there may be different laws and regulations regarding data privacy and security, which can put the company’s sensitive information at risk. To mitigate this risk, companies should ensure that the offshore outsourcing company is compliant with all relevant laws and regulations and has adequate security measures in place to protect the company’s information.
As a result, offshore outsourcing can be a cost-effective way for companies to access a larger pool of talent and improve their time-to-market. However, it also comes with a number of challenges, such as communication barriers, time zone differences, lack of control, costs, and security risks. To mitigate these challenges, companies should establish clear and effective communication channels, use project management tools, and be aware of the potential costs associated with offshore outsourcing. Additionally, they should ensure that the offshore outsourcing company is compliant with all relevant laws and regulations and has adequate security measures in place to protect the company’s information.
BEST PRACTICES FOR SUCCESSFUL OFFSHORE OUTSOURCING
It’s essential to approach offshore outsourcing with the right mindset and best practices in order to ensure a successful outcome. Let’s discuss the key elements that are necessary for successful offshore outsourcing in software development.
Establishing clear and consistent communication
That is crucial for any outsourcing project, but it is especially important when working with an offshore team. This means that all parties involved should have a clear understanding of the project’s goals, timelines, and expectations. In addition, it is important to establish regular check-ins and progress reports to ensure that everyone is on the same page and that any issues are addressed in a timely manner.
Building a dedicated and experienced team
It is also essential for successful offshore outsourcing. This means that the team should be well-versed in the specific skills and technologies needed for the project and that they should be fully committed to the success of the project. Moreover, it is important to ensure that the team members have strong English language skills, as this will help to minimize communication barriers and ensure that everyone is on the same page.
Establishing clear project milestones and timelines
It is another key element of successful offshore outsourcing. This means that all parties involved should have a clear understanding of the project’s goals, timelines, and expectations. In addition, it is important to establish regular check-ins and progress reports to ensure that everyone is on the same page and that any issues are addressed in a timely manner.
Continuously monitoring and assessing performance
It is also crucial for successful offshore outsourcing. This means that the team should be regularly reviewed and evaluated to ensure that they are meeting the project’s goals and timelines. Besides, it is important to have a process in place for addressing any issues or concerns that may arise during the course of the project.
Offshore outsourcing in software development can be a great way to save time and money while also gaining access to a wider pool of talent. However, it’s important to approach it with the right mindset and best practices in order to ensure a successful outcome. By establishing clear and consistent communication, building a dedicated and experienced team, establishing clear project milestones and timelines, and continuously monitoring and assessing performance, you can increase the chances of success for your offshore outsourcing project. Offshore outsourcing is a smart business decision, but it’s also important to be aware of the potential challenges and to have a plan in place to address them. With the right approach, you can leverage the benefits of offshore outsourcing while minimizing the risks.
Offshore outsourcing in software development can be a great way for companies to reduce costs, access a wider pool of talent, and benefit from different time zones. However, it is important for companies to be well prepared and have a clear plan in place to overcome the challenges that come with outsourcing work to a foreign country.
Have additional questions on how to approach offshore outsourcing?
You can always get in touch with Existek if you need consultation on how to apply outsourcing to your specific business case. We are an offshore software development company with a decade-long experience and will gladly share it with you.
Frequently asked questions
What is offshore outsourcing?
Offshore outsourcing is the process of hiring a third-party company, usually located in a foreign country, to handle certain aspects of software development. This can include tasks such as coding, testing, and maintenance. These tasks are typically performed by in-house employees, but outsourcing them to a third-party company located in a foreign country can provide cost savings and access to a wider talent pool.
What are successful outsourcing examples?
Among companies applying for offshore outsourcing, you can find such known market representatives as
What are the advantages of offshore outsourcing?
This market practice of software outsourcing development has brought a large number of benefits for businesses and teams, covering
Access to a global talent pool
Ability to focus on core competencies
What are the offshore outsourcing challenges?
Challenges of offshore outsourcing in software development include:
Time zone differences
Quality control issues