Change is the only constant; we live in a continuously shifting state of reality, where the only predictable constant is the inevitability of more change.
With globalisation geography has become history! Organisations are under increasing pressure to maintain their competitive advantage. Today, organisations have understood that manufacturing alone does not enable differentiation and that although they may manufacture their product, the art of manufacturing is merely a process they follow to bring their core product to market and not the core product itself.
Following a similar theme, software product companies, most commonly known as ISVs (Independent Software Vendors), have begun to look at outsourcing their product development, labeling the activity as “non-core" while concentrating on product innovation, marketing, financing, and customer relationship as their core activities.
The offshore concept started with the globalisation of product development, not IT services, and will return again to its roots. The massive growth and widespread adoption of offshore IT services have created a foundation of maturity in quality and process that will attract smaller software companies unable to expand globally without an outsourcing partner. Indeed, technology product life cycles will continue to mature, and global resourcing will become a critical success factor in embracing the full dimensions of product architecture, development, and deployment – META Group
During the early 1990s product development drove initial investment in India with companies such as IBM and Hewlett-Packard developing system software and operating system kernels in India.
Slowly other product companies decided to explore offshore outsourcing opportunities. iflex (which was initially part of the Citigroup US and now majority owned by Oracle) and Kindle Banking Systems of Ireland, initially used the offshore staff augmentation model, where low cost resources were used for product implementation at client locations.
After this model became tried and tested, organisations moved to set-up their own captive centres for product development. The primary reason for this at the time was the lack of vendors with product development expertise. As offshore capabilities have expanded and the market has matured this scenario has changed considerably and there now exists a vast array of suppliers and services competing in a rapidly expanding market place
Initially ISVs were less inclined to outsource activities that involve intellectual property, such as research and development, today this resistance to outsourcing R&D is decreasing. According to a recent survey by the Economic Intelligence Unit the number of companies with at least some R&D activity occurring overseas is set to increase from 65 percent to 84 percent. The number of companies outsourcing R&D to third parties is also expected to grow from 64 percent to 75 percent.
ISVs will continue to use outsourcing and offshore outsourcing as a strategic initiative. The factors affecting this are increasing customer demand and ever increasing pressure to reduce cost of delivery and time to market – in short to remain competitive ISV’s must:
• Reduce Product Lifecycle
• Preven a product from reaching the stage of technology obsolescence
• Build modular, tightly integrated products and add on functionality
In today’s environment, product development is not just about developing a product but also involves watching competitors, defining the product road and the product technology road map, planning early releases, testing through different approaches, targeted industry trends, trends in technology usage and acceptance, pricing, marketing and promotion, finding add on features and so on. Applying the 80:20 rule, in the entire value chain of product development, "core product development" execution contributes less than 20% of value but takes away as much as 80% of management time. That is where the profitability of companies still concentrating on developing products in-house can take a real hit.
According to a recent study profitability is directly proportional to time to market and number of release and indirectly proportional to the number of bugs.
Product Profitability = K *(Shortened time)*(Number of release)/(Number of error)
By outsourcing product development, companies are able to shorten time to market, increase the number of releases and decrease bugs.
K becomes the value factor that the outsourcing service provider can bring to the table.
The emerging best practice for product development outsourcing is to develop a solution that is modular – this is a similar model to the automotive industry, where manufacturers have decoupled the product design and development elements of the value chain. Separating the development process enables organisations to understand the value proposition of each stage — and potentially the return on investment (ROI). The life cycle of product development is increasingly being divided into phases that require internal expertise (and value-adding) as well as steps that are highly commoditised:
• Value functions
o User specification
o Technical requirements
o Product design
• Commodity services
o Development
o Testing
o Support
With ISVs, there is usually a greater feeling of “comfort” in retaining “value capturing” services within the organisation. They find that defining user requirements, designing the technical specifications, and ensuring alignment with existing data and application architectures are best done in-house.
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The general trend with ISVs is to leverage outsourcing (especially offshore) for commodity development work. Though initially offshore outsourcing was regarded as a cost reduction initiative, today the benefits include higher quality and development standards. Many ISVs who are currently outsourcing software engineering, product development, testing, and support have seen benefits resulting from improvement in efficiency and productivity levels that are often far superior to their in-house engineering teams.
According to analysts, product development outsourcing will no longer be an optional business strategy by 2008. It will become standard operating procedure. With offshore outsourcing increasingly accepted as a key competitive strategy in the global economy, the production cycle for technology-centered products will require global resources and global delivery.
Akshay Upadhye is a Senior Consultant with Alsbridge plc, the award winning advisors on outsourcing, shared services and offshoring. The article represents his personal views.
