Offshore development can save money

Outsourcing has long been the salvage of many an overworked IT department and companies looking to concentrate on their core competencies. And many businesses aren’t just looking past their own offices for help, they’re looking beyond their borders and across the ocean where there are large pools of talented labour available for a fraction of the cost.

The main advantage of offshore product development is the cost savings.

“It could be considerably less expensive to go abroad. You can see savings anywhere from 20 to 30 per cent compared to what you can get in the U.S.,” said Gartner Inc.’s Chicago-based principal analyst, Ted Kempf.

When compared to New York prices, the cost savings are closer to 50 per cent, according to Mukesh Mehta, vice-president of information technology at MetLife in New York. His company is currently using an offshore team to help it upgrade its version of PeopleSoft’s HRMS.

But working with a company halfway around the world can be complicated, said Alister Sutherland, director of software at IDC Canada in Toronto.

“The challenges are manifold – language is an issue, as is project management and the ability to respond quickly.”

The key to successfully project managing the upgrade at MetLife, Mehta said, is making sure that there’s an onsite team that can help coordinate communications between MetLife and the offshore company, Cognizant Inc. in Teaneck, N.J. – which draws on development teams in India.

The onsite team can handle anything that needs immediate attention, Mehta said. “As far as we’re concerned, we’re dealing with a team that’s onsite on our premises.”

Those considering offshoring application development should look for companies that will place at least one individual onsite, Kempf said. That person should be someone who is culturally acclimated and who understands the idiosyncrasies that arise when dealing with another culture.

Forgetting those cultural differences can be costly, said Brian Phelps, president and CEO of offshore company Vested Development Inc. of Burlington, Mass., which uses developers in Russia.

“It is deceivingly easy to forget that it is a foreign culture and they don’t act in a business situation the same way we’re going to act. And I’ve got burned, both personally and professionally. That’s a mistake I’ve had to make and make and make.”

Worthwhile Investment

But the cost savings and access to a large talent pool are worth the occasional misunderstandings that might arise, Phelps said.

The education structure in the former Soviet Union was set up to churn out technical graduates, he said. His development groups in Moscow and Tevr, Russia, looks a little bit different than the average North American development team. There are a lot of 40-something physicists, engineers and chemists who learned programming as a by-product of their scientific work, he said.

“With that background, our people then bring some real interesting strengths to our problems, because in the old days, computers there were scarce and therefore highly valued. They write amazingly tight code that is very clean, very efficient,” he said.

Salary Gap

In the U.S. developers get paid anywhere from US$50,000 to US$80,000. In Russia, the range is closer to US$5,000 to US$15,000, according to Phelps.

The salary difference is just as startling in India, which graduates about 80,000 software engineers a year, according to Cognizant’s Larry Gordon. Whereas an average associate developer in the U.S. earns US$63,000 a year, in India it’s US$5,850, Gordon said.

That’s why the larger the offshore team, the bigger the savings, said MetLife’s Mehta. This means that projects that require less people onsite, such as reengineering or replatforming projects, are ideal for offshoring, he said.

But it wasn’t the cost savings that attracted Dino Speziale, a professional services engagement manager at Compaq Canada in Winnipeg to India’s UshaComm. The company, which has offices in Calcutta, India, already has a product that’s a good fit for one of Compaq’s clients, Speziale said. Compaq is currently working with UshaComm to customize the product.

So far the experience has been positive, though bringing people from 40 C to -40 C can be a shock for them, he said.

Dealing with an offshore company can also mean dealing with a red tape, a process that’s become more difficult since the attacks on the World Trade Center, Speziale said.

“Sept. 11 hasn’t been without its impact. It takes longer to clear people (to bring them to Canada), things like that.”

And, as with all projects, it’s important to plan for the worst.

“You have to make sure you have a good contingency plan. So that’s why we keep code on a server in the United States. And we’ve identified key individuals that if something happened over there, we’d have them over here.”

Though offshoring means that some jobs do go overseas, it’s not quite that simple, said Paul Swinwood, president of the Software Human Resource Council in Ottawa. Most offshore companies also hire onshore people to help them sell and coordinate projects, which means they also create jobs.

“What’s happened is the simple coding portion of these projects, which in a lot of cases takes straight manpower, means a lot of what we would call the entry level jobs have gone overseas.”