China Software Outsourcing Company

Offshore Development Center ---Double Edged Sword to Software Outsourcing (Part I)

03 Feb, 2010
By William Zhu
Beijing RayooTech Co., Ltd.

Offshore Development Center as a special business model in software outsourcing industry doesn’t have a long history, especially in China software outsourcing market. In my memory, the first real offshore development center appeared in China around 2000. Though it is young comparing with project model, offshore development center has been enjoying a rapid growth in recent years. Now it is common that the largest offshore development centers run by China outsourcing vendor has more than thousand engineers. Also we can see some of the big players in China offshore software business have nearly hundred offshore development centers with diverse size from several engineers to thousands engineers. The most interesting thing is that both client and software outsourcing vendor like this outsourcing business model. I myself as a offshore business manager working in offshore software outsourcing company recommend it as the first option to my client if they still have not decided the outsourcing model. So is it a perfect outsourcing model which will bring benefits to both client and outsourcing provider, or even the entire outsourcing industry?

Of course, offshore development center brings lots of benefits to client when the client has stable requirement in software development in a relatively long term. For example, Company A is a telecom software provider which has a product development plan which needs 50 engineers in 3 years. Another example is that Company B is an asset management company in Wall Street running several systems support their front/middle/back office business requires 10 engineers to provide support and maintenance service every year. In these cases, beside the main purpose of cost cutting, there are many other benefits from offshore development center.

The first benefit is the control of Offshore Development Center. Offshore Development Center is co-managed by client and vendor. So usually the daily job of offshore development center is supervised and monitored by project manager from client. The project manager from vendor reports to project manager from client and works closely with client. It is very common that outsourcing vendor don’t know the detailed information about the daily work of offshore development center. Secondly, offshore development center can guarantee the stability of development team because team members work in offshore development for a long term and each engineer will be interviewed and approved by client before join or quit the offshore development center. Thirdly, as the offshore development center is dedicated to one client with separate working zone and isolated network, client can be rest assured with the information security. Ok, I stop here, though there are more benefits to client, they are not the topics concerned in this article. Let’s move to the vendor side.

Why we as vendor like offshore development center so much?

Business Stability
Usually, client signs relatively long term contract to purchase offshore development center service, for example 1 year or 2 years. So to outsourcing vendor, it is a stable business. Also as the payment method is time and material model in which vendor settle with client regularly. High profit with high risk and stable business, which one do you prefer if you are business man? I myself would choose the second without any hesitation.

Small Payment Risk
In Time and material model, the settlement is executed every month or every quarter. So that means vendor gets a stable income. Don’t like fixed price project, vendor has to worry about the next payment.

Time and Material Model without Requirement Change Risk
In fixed price project model, sometimes client and vendor just like enemies in a war. Requirement change is a main cause to raise conflict. Though there is a detailed spec in place before the project beginning, still no one can guarantee everything is clear and understood by both sides in the same way. It is no way to avoid this situation that client insists it is a well-defined function point in spec while vendor think it is requirement creeping. In my experience, most of the time vendor is weak in the quarrel and is the side who yields. No such worry in offshore development center as vendor works together with client and easily get understanding from each other.

No Heavy Burden in Management
In offshore development center, client co-manages the team with vendor. There is a project manager from client who is dedicated to supervise and manage the offshore development center. The team in offshore development center works closely with various development teams of clients in clients’ office. Every week or every month, client issue a statement of work to give job instruction. Every day both sides hold video/audio meeting to discuss the progress status and report problem. In the overlap time, engineers can chat with their peers in client side to discuss the technical problem. So it is common client takes half or even more daily management work and release the burden of vendor.

Stable Team and Low Engineer Attrition
In offshore development center, engineers are dedicated to this team for a long time. The working environment and job tasks are all constant. Most of the engineers are tired of switching from one project to another and having to face different challenges brought by different project environment and different client style. So offshore development center is easy to maintain employee loyalty and keep a low attrition rate.

Closer Relationship with Client, Client Investment
Working together, co-management, time and material all these elements make offshore development center a very good business model to maintain a close relationship with client. Totally differs with project model which is usually filled with argument, quarrel, conflict, and blaming, offshore development center goes smoothly in a friendly atmosphere. Both sides contribute and invest to it. For example, clients train new members when they join the team.

Without any doubts, offshore development center is a good business to outsourcing vendor. You get client, you get profit. But is it a perfect model which benefits vendor and this industry forever? Ok, let’s strip the beautiful coat and see something not so favorable to outsourcing vendor.

Low Loyalty of Employee (Poison Pill)
Engineers in offshore development center work with employees from client everyday and report to PM from client. Their work is arranged and managed by client. They contribute their effort to the products or projects of clients and feel pride for the success of software delivery. So it is easy that they have a closer relationship to client than to outsourcing vendor. In some cases, they even think they are client’s people. In fact, in a lot of offshore development center, the employees who perform well have the chance to join client’s company. So it is destined that offshore development center has very low employee loyalty.

No Experience Accumulated in both Technology and Management
The Confidential Agreement and contract clearly defined that all working result including documents, program and other deliverable belong to clients and outsourcing vendor has no right to use or distribute them. Yes, the engineers working in offshore development center grow and get experiences alone with the development of offshore development center. But the problem is they are dedicated to the client and it is no way to transfer them to other project without permission from clients. The only situation that vendor can use these engineers is the client shuts the offshore development center.

Easy Transfer
When the offshore development center grows mature, some of the clients intend to transfer the offshore development center to their own company. That happens more in China than other countries as most of the clients coming to China have another purpose of developing China market besides the outsourcing business leveraging China resource. Those clients prefer to set up their own office in China and transfer the offshore development center to their company when they start the development of China market. So outsourcing vendor just likes a babysitter who has to quit when the offshore development center grows up. I know in some case, outsourcing vendor intentionally give engineers higher salary than common market level to prevent the transfer or to some degree make it difficult to transfer. Is it something like poison pill in outsourcing industry?

Transparent Cost Structure
Now due to the fierce competition in outsourcing, some outsourcing vendors start to provide new form of offshore development center service. In this model, outsourcing vendor just provide office, facilities and HR services. Other jobs like team build, daily management and payroll are all taken by client. I feel a little sad about this business model. I just wonder if this kind of services a real software outsourcing service. Can the vendor who focuses on this business model be entitled Software Company? In a previous negotiation, we made an agreement which enable the customer to have the right to know our cost structure for each engineer and promote salary for engineers. Eventually we found that this lead to a bad result that it is very hard for us to manage the employees. Finally, the client transfers the offshore development center and sets up their own office in China.

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