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.
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.
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.
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, 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.
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. 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.