Boosting Shareholder Value With Offshore Development
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By M. M. ("Sath") Sathyanarayan In a business as competitive as the software industry, many companies look at offshore development as a way to improve their competitive advantage and reward their patient, or in some cases, not-so-patient shareholders. Large software companies have taken advantage of offshore development since the early 1990s. However, for smaller companies with a growing business but without Fortune 100 experience and resources to "just do it" offshore development may be viewed as risky with an uncertain reward. By adopting the best practices developed and proven over time by successful companies, risk can be minimized, and the lasting payback can flow directly to the bottom line. Let’s take a look at the rewards first, because they can be considerable. You can: 1. Reduce cost and increase shareholder value: When managed effectively, utilizing offshore talent can save 25 to 50% compared with U.S development costs. Since most or all of the savings directly impact the bottom line, the effect on your company’s profitability and hence, shareholder value, can be significant. 2. Decrease development cycle time: A time difference of approximately 12 hours provides an effective method of increasing productivity and shortening the overall project timeline. By establishing two teams in two locations - for example, a development team in the U.S. and a Quality Assurance team offshore (or vice-versa), you can engage in "around the clock" development. Your development team in the U.S. can "hand off" the latest file at the end of the day as the offshore team is starting theirs. The faster time to market is likely to be an important, if not crucial competitive advantage. 3. Increase market share: Demands for new products and new features generally exceed most development budgets. Sometimes useful features are cut because they are not cost-effective or might compromise a release date. However, if the same features can be developed at a reduced time and cost, they are now justifiable, and therefore, can fit into the project plan. What are some of the challenges?
 What does it take to succeed? To answer this question, we approached senior executives of multinational companies already engaged in this activity to find out what is important, what works, and what doesn’t. Instead of gathering survey information or asking for overall recommendations, competency interviews were conducted in which participants were asked to describe both the nature and effectiveness of their offshore programs. In addition to this research, we drew heavily on our management experiences in offshore development both with a large computer company and with our clients. From these experiences, we identified the major factors that appear to distinguish effective from ineffective offshore development. Key Success Factors and Best Practices 1) THE STRATEGY - Creating a distributed development model and building a road mapMany companies ask themselves "how do we outsource our development offshore to reduce cost?". It’s not uncommon for some of these companies to expect overseas costs to be a small fraction of U.S. cost. They focus on salary differentials and tend to underestimate other costs. After trying this approach for a period of time, they find that overseas development does not provide the level of cost advantage they anticipated. Naturally, they become disillusioned. On the other hand, successful companies have quite a different orientation. They understand that thinking solely in terms of outsource, offshore, and cost is a sure way to create divisions and ineffectiveness. Instead of thinking "offshore" or "outsourcing", they ask "how do we distribute our development efforts to take advantage of geographical differences in skill set and costs to meet customer requirements in a more effective manner?". These companies have built and continue to successfully operate world-class offshore development operations, in which cost reduction is just one of many advantages. These companies recognize from the start that this is a significant multi-disciplinary effort requiring top-level commitment to succeed.
2) THE ORGANIZATIONAL STRUCTURE - Creating a distributed organization vs. "offshore silos" Rather than simply managing offshore organizations as silos, they must be established as a seamless extension of the parent to create a truly distributed organization. People in the remote location need to feel that they are an integral part of the "parent" company. Reinforcing a sense of belonging and importance promotes unity and cultural understanding, and maximizes productivity. This is more easily accomplished when setting up your own operation. However, it is perhaps even more important when working with an offshore partner. Web based tools enable collaboration among distributed teams. For example, using "white boarding" it is possible for one team to view the screen of another’s computer that may be thousands of miles away. Web based project management tools allow you to monitor progress and view issues from virtually any location around the world.
3) PAYING ATTENTION TO CULTURE - Operating in a new cultural environment Every part of the world has social culture unique to that area, which, in turn, impacts work cultures. Keep in mind that culture affects communications and provides the basis for self-identity. Successful companies take time to understand their own cultures in terms of values, rituals and behavior and how they can adjust and adapt to cooperating with different cultures inherent with new offshore members of the family.
4) AIMING FOR SEAMLESS OPERATIONS - Operating as a single geographically distributed organization Regardless of the form of ownership, offshore development has to join two teams complimentary to one another, and operate as one seamless organization. Develop processes and provide tools for seamless integration. One communication tool that can be particularly useful is video conferencing. Because of better equipment and faster connections, video conferencing is increasingly practical, time differences permitting. Both the quality and cost have improved in recent years.
5) MANAGING DISTRIBUTED DEVELOPMENT- Installing mechanisms for visibility and control Good processes are fundamental in any development environment. However, when you plan to develop products with groups distributed thousands of miles apart, it is crucial to the success of offshore development to follow good development practices at both locations.
6) MANAGING INITIAL SUCCESSES AND COMMUNICATING THEM - Making success breed success The offshore implementation team must focus on making sure that the initial projects are clearly successful and then continually communicate those successes. Otherwise, an "out of sight, out of mind" phenomenon can set in. This takes on increased importance when the U.S. organization undergoes change as most growing companies do. In one highly successful implementation that grew to 300 people in three years, the first year head count was deliberately held to 15 people. Only a limited number of projects with a high probability of success were chosen. Once the infrastructure and processes were established with these initial projects during the first year, scaling up was rapid and smooth.
7) PURSUING CONTINUOUS IMPROVEMENT (Of course!) A competitive edge that is won with offshore development can be forfeited without a sustaining effort in productivity improvement. Making continuous improvement a part of the offshore implementation effort will insure the rewards not only last, but increase.
Offshore product development can make a positive and lasting impact on profitability and shareholder value once the challenges are understood, the strategic plan is created, the commitment is made, and proven practices are implemented to execute the plan. In our global economy, some companies may even find it essential for survival.
Reprinted from April 2002 of Software Business Magazine ©Webcom Communications Corp., 7355 E. Orchard Road, Suite 100, Greenwood Village, CO 80111, U.S.A, Phone 720-528-3770 |
