5.11.07

Reduce, Reuse, Recycle

So, it might be more fair to call this post a "pre-cycle". This is the text of a magazine article I submitted to Global Services Magazine. The article was titled something innocuous like "Sourcing Drivers in 2010." It should hit the press in December of this year.

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Historically companies have outsourced product development for some combination of three reasons: Faster, Cheaper, and Better.

By 2010, a fourth driver will become prevalent, if not dominant. With the flattening of the world and the massive economic boom fueled by technology outsourcing, companies will start to evaluate their sourcing decisions around the question of Closer - closer to talent and closer to customers.

The landscape and promise around each of these drivers is evolving. By looking at each in detail, you can position your company for success today and into 2010.

Faster

The outsourced product development (OPD) industry certainly faces major consolidation in the coming years. As this plays out, execution will differentiate “the best” from “the rest.” Economic Darwinism will prevail, and the strongest and best firms will come out on top.

The high process orientation used by Indian OPD firms as a market differentiator will continue to evolve across this sector; and that evolution should translate into a promise, and eventually a contractual obligation, for timely delivery.

Lastly, in order to stay competitive against emerging low cost market, Tier-1 providers will have to develop reusable methodology and frameworks, free of client-IP, to bootstrap development and delivery of new solutions. By 2010 you should be able to find a vendor that can offer talent and process, but also a significant head start against your time to market requirements.

Cheaper

I recently discussed a “Rural Business Process Outsourcing (RBPO)” strategy with an Indian BPO and OPD firm. They described a situation where they can hire computer literate rural workers in remote villages, for something in the range of a few hundred rupees a day - that’s maybe $5 a day for work that would cost at least minimum wage in the US.

Those kinds of economics are very seductive. However, data entry is a long way away from software development and testing.

Highly skilled, experienced, credentialed software engineering roles are quickly approaching global price parity. With 15+ percent annual wage inflation in the India tech sector[1], it’s only a matter of time before the price differential disappears.

There will always be someplace on the planet where engineers will work on the cheap, but that place will never stay a secret, and it will always suffer the consequences and benefits of supply and demand. If you care about “cheaper” you need to look at cost in concert with quality and speed, not as a measure of simple labor arbitrage.

Savvy companies are looking at short-term financial savings as a way to justify and fund their global OPD campaigns. You can still effectively create a two to three year “self-funding development center”. This can allow you to set up shop with a partner by focusing on “cheap”, and then evolve your program into higher value as the economic situation in your sourcing locale inevitable changes away from your favor.

Better

To most companies, the promise of building and delivering a better solution through OPD is even more seductive than the promise of massive cost savings.

Process doesn’t guarantee quality, but it goes a long way toward enabling it. In the early days after Y2K, Indian IT Outsourcing firms set the bar high with respect to process orientation. The rest of the industry has followed, and CMMi Level-5 qualification is almost table stakes for winning sizeable OPD deals.

It stands to reason that a company that works on 1500 software releases a year should be better at it than a company that puts out 2 or 3 releases a year. A company with 5000 software development engineers will have much more core technology expertise than a company with 15 engineers. As the OPD landscape consolidates only the best will survive. The better OPD firms will offer their core expertise as a sustainable advantage, and they will partner with their clients to “build a better mousetrap”.

Closer to talent

Sources vary wildly, but it seems safe to estimate that India graduates more than 200,000 engineers each year, with that number rising.

China claims to produce 600,000 new engineers annually, with actual numbers probably just north of 450,000.

The US, still the largest single economy on the planet, produces 100,000 engineers (or less) each year.

That means that there will eventually to be a global disparity in the talent pool, with the favor going to India and China.

In order to find qualified engineers to work on your projects, you’ll need operations in India, China, or a second-tier locale – not to save money, but simply to be able to hire engineering talent. The prospect of outsourced product development offers the upside of having operations in proximity to a global talent “hot-spot”, without the cost, trouble or risk associated with setting up captive development centers.

Closer to Customers

The traditional “big four” destinations for outsourcing – Brazil, Russia, India, and China – represent the 10th, 9th, 4th, and 2nd largest economies on the planet[2]. Where there is technical proficiency and an economic force providing low cost labor, there will be economic growth. Where there is economic growth, there is economic opportunity.

For global companies, where there is economic opportunity, there should be presence. As a means to understand local market forces, and as a means to begin servicing local customers, OPD firms can and will provide that presence to their clients, as an extension of their product development practice.

Pulling it all together for your enterprise

The promise of the OPD landscape changes as we approach 2010. By deciding your priorities against the traditional drivers - faster, cheaper and better – you can plan your OPD efforts now, to allow you to capitalize on the emerging “closer” driver.

A window remains wherein companies can use cost savings to set up operations, and ready those operations for higher efficiency and global excellence as the cost savings evaporate. The continued evolution of the OPD industry will strengthen the companies that survive, and should virtually guarantee that great OPD firms can continue to deliver Faster and Better, as long as your company continues to care about it.

Back story

Someone recently asked me in an e-mail message what we do for background check in our partner teams in India. I had some time on my hands so my response was actually decent... I've de-identified it and reproduced it below.

First, it’s important to understand that India as a country is a federation of strong states, not a strong Republic like the USA. My understanding, for what it’s worth, is that Indian Federal law, including employment law, is often weaker and less well defined than their State laws. So, what is true in Karnataka may not be true in Tamilnadu.

It has been alleged to me by both our partners and by my peers in the industry that substance screening in India is not legal. It is certainly not a matter of normal practice. FYI, there are certain organic substances that are deemed to be sacramental to Hindu festivals (particularly Holi) the use of which would disqualify a candidate in the US. There are also over the counter meds in India (as in most countries) that are on our restricted list, and which would show up as red flags (or at least amber flags) in a US substance screen. We don’t substance screen our third party contractors.

We do, however, send on-site contractors from India through screening when they come to the US for extended stays.

Background checks are also quite different. As I mentioned above, India is a federation of states. There is not a unified federal ID database. That is, they don’t have anything analogous to Social Security numbers. There is an evolving federal tax ID, but that’s still of only marginal utility.

Through our partner, we’ve settled on a third party service, through a firm called ONICRA Credit Rating Agency of India Ltd. They screen and verify the following:

* Employment check for last 2 years
* Address verification
* Reference checks
* Education verification
* Police and criminal verification

This allegedly costs around $75 per employee, and is done with human labor rather than databases. They apparently will often go to the former residences, and ask neighbors if the person in question is known to them, and will ask local magistrates whether the person is known to them as a “bad guy”. (in addition to checks against what ever local data repositories might exist)

One approach that other companies have used, but that I don’t support is the “passport proxy”. To get a passport in India you have to go through a detailed screening process, and an in-person interview. So, for the price of the passport application you can get the Indian Government to do the BG check and criminal check for you.

The problem with this approach is that passports are good for 10 years, and renewals are done with lower scrutiny. So all you get for this is the assertion that the employee wasn’t a bad guy some number of years ago. You also don’t get a “report” to keep on file with this methodology, so it’s not really auditable. Better to have a real company do this, in real time.

PS: As editorial, my standard sound-byte when I do my all-hands in India is along the lines of: “MY COMPANY is a service provider to the most highly regulated companies on the planet. If there is a compliance regulation in any jurisdiction on this blue orb, you can bet we’re subject to it by proxy, through our customers. And we sell one thing and one thing only to those customers – Trust. So MY COMPANY ill be the first employer to ask you to go through a comprehensive criminal background check. But if you stay in this industry for any length of time, I can guarantee you we won’t be the last employer to ask this of you.”

So far, no one has protested, and to the best of my knowledge, no one has been flagged as an employment risk. Either the engineers in India are too timid to protest, or they really don’t mind submitting to this process. (Basically, my opinion is that there aren’t as many aggressive libertarians in the software development world in India…)