Hidden facts of an off-shore software vendor

Hidden facts of an offshore software vendor

Dated: 12/28/2011

Joseph Vargheese 

Atlanta GA USA


This article mainly reference operations in India and china, and assumes minimum knowledge of offshore operation in China, India, Brazil, Costa Rica, Russia and Vietnam.

Location of your ODC

Location of youroffshore software development (ODC) environment determines offshore vendor price point as opposed to single rate for a country. Resource cost attributes to biggest expense in an ODC. But those salaries are determined by the location. For example average software engineer salary in major cities is around 14000$ in china and 16000$ in India (as of 2011). As operation move from one city to other cost also changes. For example salary in Dalian (second  tier city in China) is 25% cheaper than Beijing (first  tier city in China) or Shanghai or Shenzhen. There will be another 20% resource cost advantage if company move to a city like Jinan, which happens to be located few hours from Beijing. Similarly in India moving from Bangalore/Chennai/Hyderabad to second tier city like Bhopal/Kochi/Mysore may have 30-40% cost advantage.

Not all cities are same

Not all cities are good for sourcing highly skilled software professionals. Companies outsourcing to second  tier cities have to think about the type of manpower they can source from that city. Generally second  tier cities have lower supply of highly skilled man power compared to first  tier cities. If your operation is a heavy R&D based, it will be advisable to stay within a first  tier city.

Challenge in English

Recognize the fact that English speaking resource is a challenge in many outsourced countries. It is very challenging to recruit English speaking resources in China and Russia. Unfortunately the client will have direct feel of the problem only when contract is done and the staff selection has started. To some degree, vendor could find English speaking resources in India/Vietnam/Brazil/Costa Rica because of the higher supply.

Infrastructure and Operations cost

Infrastructure and Operations cost are not always a component in many countries. It is not the same level playing field between outsourced countries. China has high federal subsidies to operate within a software technology park owned by government, including subsidized tax, electricity, water, rent for several years. Brazil, Vietnam and Russia have some subsidies. But operating cost in these countries is much lower than India and China. India has subsidies for operations mostly driven by state governments to attract companies to that state. It includes subsidized rent, electricity and water. The high federal subsidies make China’s operation cheaper than other countries.

Experience and Salary

Experience determines the salary not the technology. Many  vendors sell CRM and ERP skilled offshore technology worker for a higher price. But for most of these countries, including India/China, resource pricing is driven by YOE. That means SAP professional and QA tester will only have  a small difference in remuneration for same years of experience.

Employee turnover rate

Most of the time, “stated employee turnover rate” does not include first year. Most of the time, vendor will state a yearly attrition rate excluding employees leaving in the first year of their employment, unless specifically asked. That number alone could be an additional 10%.

Overlapping hours

Practically overlapping working hours are hard to realize. Many  vendors provide overlapping hours coverage with their USA counterparts as work from home option or office. Most often employees can’t stay during night time due to family commitment or transport etc. In case of  work from home, most of the Indian or Chinese homes are not equipped with internet and phone facilities. Yet another note is that, in large cities these professionals are staying with an extended family in a 2 or 3 bed room apartment, which will not give them enough privacy required to function.

Many cities in India and china get cold during winter time. Life becomes almost stand still after 8:00 PM. That means transportation is very minimal as well as safety become issue for female employee to travel alone.

One size may not fit all

A high performing vendor in one area may not be suitable for other type of efforts. Vendors like to get every type of business available within a company. Every vendor engagement is a standalone unit. Most people do not understand that it is very challenging to bring another horizontal knowledge base to that engagement. For example you have very successful .NET based engagement and suddenly an SAP requirement comes. Natural choice will be the vendor performing currently. But most often it will be as challenging as starting a new engagement.

Disappearing resources

It is usual to exchange experienced resources for other projects. As engagement gets matured, vendor will start pulling experienced resources stating various reasons. Reason is that they are more valuable somewhere else in their organization. This will reduce the quality of your engagement. Client should consider contractually binding these resources.

Plan for the worst, expect the best

Terminating the contract and knowledge transfer to another source is always a sticky point during the contracting process. As time goes your offshore vendor can grow significantly, which make your current operation very small for them. On the contrary, client could grow fast which warrants a better offshore partner to cover client’s needs. Client’s outsourced contract should be able to terminate any time and always add an option to do a knowledge transfer to another vendor. It should be at the discretion of the client to decide on the notice period and not all resources are required for knowledge transfer.

Bring Competition

Competition brings best out of everyone. Always consider  two vendors for your engagement, because inherent competition always brings better value for the client.

Reverse knowledge transfer

It is a challenging issue to bring back knowledge from outsourced engagement to onsite. The challenge will become very high if the resources can’t speak English. This issue  has to be addressed during vendor goverance process.

My special thanks to Rajesh Philip for reviewing this article


About Joseph Vargheese

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