Offshoring software development is it the right choice?
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THE RESHORING OPTION:
Maybe it's time bringing production back has its own set of challenges
What are the driving factors and how could Reshoring benefits my company?
Several factors are driving Reshoring. These factors can be broken into three categories; landed cost, hidden cost and risk management. Companies can avoid international currency fluctuations, tariff and logistics headaches, and better protect trade secrets and patents by producing in the U.S. The abundant supply of natural gas in North America helps keep operating costs reasonable, and local and state governments are eager to recruit manufacturers by offering tax incentives and enterprise zones. Most importantly, companies are analyzing the competitive advantages of better quality control and a shorter, more responsive supply chain, which are Keys to a constantly changing technology-driven Marketplace.
By definition, Reshoring is bringing production back to the U.S. In general, the move to Reshore is being driven by a shrinking gap in landed cost per unit for the developing world relative to domestic production. However, there are a variety of hidden costs, business risks, and organizational fatigues asociated with having an elongated supply chain and managing a far-flung operational footprint. Disassociating from countries with sometimes questionable business practices such as China, India, and Mexico is an added benefit to Reshoring. Lastly, many U.S. municipalities are offering tax-abatements, grants, and other incentives in order to attract manufacturing employment to their region.
The main item driving the Reshoring phenomenon is a rapidly shrinking gap in landed cost between the developing world and the United States. Labor costs in China are rapidly inflating. while U.S. labor costs have remained flat for over a decade.
The boom in domestic natural gas production has created a huge cost advantage for domestic manufacturers. This phenomenon has led to a dramatic cost differential relative to other regions of the world. Not only does natural gas power the nation's factories, but it is also a raw material of certain products, such as plastic, ammonia, hydrogen, methanol, and feed stocks. Also, over the last decade, the Chinese renminbi has seen a 30% appreciation relative to the U.S. dollar. In addition, there is the cost of managing remote suppliers or production facilities. While most companies usually factor in certain costs associated with travel to the production sites, many companies underestimate the managerial requirements of global business. This leads to a situation where the business is inadequately staffed in either numbers or capability relative to the new business requirements.
Another area that is typically not fully considered is the cost associated with an elongated supply chain. With lead times reaching eight weeks, any production disruption or quality issue can become very expensive to a manufacturer. The age-old desire to have a transportation mode that is "faster than a boat, but cheaper than an airplane" appears to be destined to outlive us. Thus, small disruptions in supply can become quite costly when airfreight is required, rather than risking delayed production, to keep customers satisfied. Also, a quality issue discovered at the customer may require the screening of the more than two months of inventory sitting on ships between the factory and the customer.
The one aspect that is rarely understood and almost never calculated is the "hidden cost" associated with foreign production. Traditionallly low-cost manufacturing countries inevitably have a very large, elephant in the room: corruption. According to Transparency.org, countries such as China, Malaysia, India, and Mexico all have Corruption Perception Indices of below 50 on a scale of 100 (with 100 being the least corrupt). Corruption manifests itself in a variety of manners, including illegal payments, the deliberate omissions of quality processes, theft of intellectual property, and violation of human resource laws.
Even once all costs are identified, there are still business risks that must be assessed. Is your organization willing to accept the risks associated with an eight-week supply chain? Do you feel comfortable ensuring that there's no oversight of quality? Will your plant or supplier be part of a scandal related to environmental issues or worker rights? Can you endure the potential public relations issues associated with fraudulent or scandalous activity? Is your business valuation based on the intellectual property associated with your product, and can you risk having this copied? All of these questions must be addressed as part of your global manufacturing strategy.
Build an analytical model
Moving production back home is not a simple matter, and critics of Reshoring have valid points. Companies do everything they can do to keep employee counts low. A robot does not suffer from repetetive motion injuries or other fatigue. There is a greater abundance of highly skilled workers overseas today then ever before,- and a shortage in the U.S. Critics argue that there is also an experienced management shortage, an insufficient ecosystem, a lack of scale, and in some cases, lack of political commitment.
Middle market companies don't have the resources and international sophistication of large multinationals. Smaller companies do not have the capital to take the risk of rebuilding the domestic supply chain. New supplier arrangements must be made. Plant location near supplier networks and a well-trained workforce is particularly important. Do you build redundant tools or ship the existing tools from overseas? What is your inventory strategy to support the transfer? Who owns the toolong and how do you transfer it effectively to the U.S.?
Companies also need to create a project plan, or model, for the transition. If a foreign contract manufacturer hears you are leaving, the supplier could refuse to issue credit for accounts receivable, thereby creating a cash on demand sisuation, or just stop working for you altogether. If you have a foreign legal entity, liquidation might be challenging depending on the local laws. Moving cash out of a host country can be difficult to impossible. In short, there is no telling how the host country will react.
The decision model should take into consideration tax implications and strategies, as well as real estate analysis. The company should factor in all costs, including transportation, energy costs, inventory, wages, and other supply-chain-related costs. Once assessed, a decision can then be made as to the appropriate course of action.
Companies that made the move
Based on information collected by the Reshoring Institute, many companies have successfully Reshored. GE invested $800 million in Appliance Park, bringing back the production of water heaters, refrigerators, washers and dryers. The union facility in Louisville, KY, employs over 1,300. The company found that collaborating on design with employees was easier. In addition to tax incentives to return to the U.S., the company cited inventory and delivery problems and rising total cost production in China.
Scovill moved a button plant from China back to Clarkesville, GA. The reason for the move was higher labor costs, the rising Yuan, and a quarter of their Chinese employees did not return to worl after a holiday.
Bailey Hydropower moved from its 100.000 sq. ft. hydraulic cylinder facility in Chennai, India, back to a 60.000sq. ft. plant in West Knoxville, TN. The reasons cited were faster delivery and fewer supply chain and quality issues.
Local governments can make it attractive to Reshore. When appliance maker Electrolux was decidingwheter to move its Canadian plant several years ago, it considered Juárez, Mexico, and Memphis, TN. Memphis contributed land and cash, making it too attractive to turn down.
In 1978, the U.S. saw a high of 19 million manufacturing jobs and there were still as many as 17 million in 2000. It was followed by a sharp decline and the numbers have decreased every year, with small exceptions during the past two years, to just under 13 million. Expressed as a precentage of total U.S. employment, manufacturing has declined steadily from 20 percent in 1940 to about 10 percent today, according to the U.S. Department of Labor, Bureau of Labor Statistics.
As things stand today, Reshoring must prove it is more than a public relations stunt. The loss of manufacturing plants and employment continues to be a major trend, but with competitive incentives and benefits, the Outlook of Reshoring is promising. While it won't bring us back to the manufacturing employment levels of the 1960s and '70s, Reshoring can help balance the suply chain with some components made here, some overseas, and some "near-shoring" in Mexico for certain products. To reap the benefits of Reshoring and avoid difficulties during transition, companies should carefully plan for and execute their Reshore move to ensure that their supply chains are not disrupted.
WHY OUTSOURCING TO INDIA IS A BAD IDEA?
The Issue That Should Be Approached From Two Sides
Lack of Experience
Zhenya Rozinskiy wrote in his article “Why Is Indian Outsourcing Doomed?” that India is facing the so-called “Tech Bubble” which is, according to his words, a phenomenon when people with no technical background are becoming QA or software engineers just because these positions are prestigious and allow to earn money. He explains that this factor will affect the quality of the projects delivered to the customers of Indian IT firms as their projects will be a testing ground for the entry-level developers.
There are a lot of similar opinions you can find over the Internet. And all of them trigger an immense defensive reaction. My own argument is that this is a very frequent practice to provide a training ground for the entry-level employees all over the globe. That happens not only in India, remember that.
Another frequent argument that is against working with Indian engineers is all about the difference between the time zones. The difference is actually immense. The main problem about the difference that it takes over 24 hours to get a reply from a development team. However, a belated response can be caused not only by the time difference but also by the lack of information, for example. Usually, agile teams try to accommodate to the customers’ schedule if the difference in the time zones is little.
Rozinskiy mentions of “blended costs” in his article. He describes how a typical Indian team of developers looks like:
50% - juniors who can barely work;
25% - juniors that are a little bit better than the first group;
25% - middle developers that were juniors recently.
This distribution has nothing to do with how it actually looks like because influencers can’t simply generalise all Indian developers, even if you had a long-term experience in collaborating with some of the teams located there.
Along with the positions distribution of developers in a team, the author writes about the “blended costs” which means that you will pay for senior developers instead of those mentioned above.
According to the words of another author, Christophe Delsol, enlightening the readers about the risks of outsourcing to India, one of the major cons is that Indian developers prefer verbal communication rather than writing SRS documentation. This leads to the misinterpretation of the assigned tasks and misunderstanding between a customer and a developer. However, we all know that that’s the customer who chooses a vendor. Communication processes and issues should be discussed at the very beginning of your cooperation.
Are Indian Programmers Over-Rated?
I have found a brilliant answer to this question on Quora. Rambabu Thota, for example, considers that programming has no nationality or religion. It’s not correct to judge talents based on their race.
A lot of Indian developers are offended in Reddit threads, Facebook, or on other social media pages just because is widespread to consider that all Indians write the code of low quality. But do you remember that long time ago, in 2005, Bill Gates said that Microsoft’s best programmers are from India, don’t you?
That year during his visit to India, Gates has also announced about the contest for young Indian developers, the main objective of which was to find the rising talents. In his speech, he mentioned that his objective is to make digital devices inexpensive and easy to set up for users. Isn’t it the main reason why so many international companies outsource their projects to India as this country offers “cheap labour”. Let’s see how much Indian developers earn.
According to Payscale, Indian developers make around 391,000 Rs per year. That is approximately 5,700 USD. The lowest yearly payment is 179,000 Rs (2,600 USD) whereas the highest salary reaches 884,500 Rs (12,900 USD). The hourly rate ranges from 98,5 Rs to 1,230 Rs (14-18 dollars per hour). The high-paid skills include C++ and Java/J2EE. The data on Payscale is backed up by 11,410 individual reporting from the developers working in India.
Top Factors Affecting Developers Salaries in India
First off, we should mention the skills as the top factor affecting the payments. The skills that are the most sought among the programmers are as follows:
-HTML and CSS
-Microsoft SQL Server
Gender is the second factor affecting the job involvement as Payscale shows that 84% male and only 16% female work as software engineers.
Years of experience in programming also influence the engagement:
72% of developers work 1-4 years in IT;
14% work less than 1 year;
13% are occupied as developers 5-9 years;
2% only work for more than 10 years;
0% work more than 20 years.
The location of developers affects salaries as well. It is obvious that those who live in larger cities earn higher salaries than those who are located in small towns. Here is a visual aid demonstrating the pay difference by location.
What Are the Main Issues With Outsourcing to India?
While a lot of bloggers and influencers write that Indian programmers are incompetent, the latter are facing the issues that bother them greatly. Let’s see what pressing issues of the day are the most frequent within IT community in India.
There are a lot of reviews and stories written by Indian programmers. Below are some of the frequently reported issues they face, according to Payscale:
1-No compensation for overtime.
2-Low rates as compared to those paid in other countries of the globe.
3-Stressful work environment.
4-Poor project management.
5-Lack of recognition and no benefits.
6-Too many tasks per one employee.
7-No career growth opportunities.
8-No technology upgrades.
9-Unequal distribution of tasks between coworkers.
These were the major issues that can affect the entire situation with outsourcing to India.
Despite shortcomings, people working in India as software engineers, programmers, and developers describe the pros of their occupation in IT. Here is what Indians like about their jobs in IT:
1-The possibility to obtain new skills and knowledge.
3-The development of problem-solving skills.
4-The possibility to work with experienced developers remotely.
5-New technologies learning.
6-Flexibility in working hours.
7-Communication with clients.
What Are Other Disadvantages of Outsourcing in India to Take Into Account?
This article is not aimed at convincing you to throw away your thoughts about India as an outsourcing destination. Indeed, I’m trying to understand why so many people are against this idea. That’s why I have collected other disadvantages that you should take into account while planning to delegate your project tasks to an offshore vendor. So, here are some other cons:
1-You can easily meet scams who will copy and sell your project SRS or other data related to your project.
2-Due to the language barrier, for example, you may lose the time for the development. Some Indian programmers don’t speak English that’s why SRS documentation is translated into Indian often. It takes some time, surely.
3-According to Hewitt survey, this year, India is facing a salary hike of 9,4%. That will, surely, lead to the developers rates increase. That means that customers need to plan their budgets accordingly.
Among the threats that India faces today is the development of new centers, such as the Philippines and China, which are fast gaining ground among investors due to their low-cost advantages. Here is a need to compare Indian developers with their Chinese colleagues.
Indian Programmers vs Chinese Programmers
HackerRank concluded that the largest programmers communities are located in the USA and India, and the best programmers are based in China. HackerRank evaluates the qualification levels of developers and unites online communities of programmers all over the globe.
They analyzed more than 1,4 million test tasks done during the last years. Chinese programmers are superior to the representatives of other countries in mathematics, functional programming, data structures. According to this rating, India is a leading country in developers growth speed.
While Indians are complaining about overtimes, Chinese developers sleep at the workplace because of the rough competence on the domestic market.
Developer Salary in China and the USA
According to Payscale, the average salary of Chinese developers is around CNU 182,500 which is approximately $26,900 per year. It’s quite higher than Indian developers earn. The payment depends on the level of experience, gender, location, and a set of skills of a developer. Thus, those employees that are located in Beijing earn more than those who live in Shanghai, for example. Skills that are in demand in China include C#, C++, Java, and .Net.
If we compare Indian programmers vs. American programmers, we will surely need to find out how much the latter earn per hour and per year.
According to Indeed, American developers earn around $102,000 per year. Below are more details regarding the different jobs in software engineering:
-Software engineer - $102K
-Java developer - $100K
-Web developer - $71K
-.Net developer - $91K
-Application developer - $84K
-Full stack developer - $112K
-Front-end developer - $103K
-Senior software developer - $117K
As you see, the US programmers salaries are much higher than those in India or China. However, we should take into account that each single job position in the USA and in India may vary greatly, i.e. developers may be required to have a different set of skills.
Among the things that US programmers don’t like about their work are the issues with project management, deadlines, and unclear SRS documents. A lot of employees complain about high responsibility and pressure at the workplace.
Why Do Americans Outsource Their Projects to India?
According to “The Indian Software Industry” report, the most frequently reported reasons for outsourcing have to do with the shortage of skilled professionals in the USA. Companies say that they can’t find a required number of professionals quickly.
Another reason for outsourcing to India is the fact that American companies don’t want to invest in in-house capabilities that don’t match with their core competencies (for example, developing apps for legacy platforms). Outsourcing such projects to India or another country frees their in-house employees to handle more creative projects.
Firms engaged in developing software products emphasized the need for accelerating product development in the face of ever-shorter product life cycles. In some cases, US firms outsource to Indian firms to get access to more specialized engineering talent, particularly in the area of telecommunications. Other reasons include the option of round the clock operations and the ability of Indian vendors to assemble "functional" teams of engineers at a very short notice.
The thing that surprised the authors of the report:
“One reason that we expected to hear, but frequently did not, was outsourcing to reduce costs. Many of the respondents downplayed this issue, insisting that cost was a relatively minor consideration”.
This appears to be a response to the prevailing concern in the US about the possible harm to US engineers from software outsourcing and inflow of foreign software programmers. It is also inconsistent with the extensive price competition that prevails in the Indian software industry. According to the report, most of the US managers commented on the excellent programming and coding skills available in India. They also noted that their Indian vendors were good and willing learners, and receptive to new ideas, and flexible in terms of the software and hardware platforms for which they provide services.
You might be interested in the related topic: “Outsourcing to India or Ukraine? Differences Between Top Destinations”
The Organization of Software Outsourcing to India
Software outsourcing and exports are divided into three categories based on where software is developed and how the development is managed and organized.
The 1st category is onsite consultancy or onsite projects, where the Indian company provides the US client with software professionals with the particular technical skills asked for by the client. These skills could vary from mainframe-related software to specialist expertise in UNIX and WinNT platforms with JAVA programming skills. In essence, the entire project is executed at the client’s site. The customer manages the project, controlling the deliverables and deadlines. The software is developed according to the customers’ processes.
The second category of exports has a mix of work done offshore (i.e., in India) as well as onsite. In this model, the Indian company sends a few software professionals to the client’s site for requirement analysis or training in a particular system. These professionals then bring back to India SRS documentation and have a larger team develop the software offshore. If the project is large, a couple of Indian professionals remain at the customers site acting as liaisons between the project leaders offshore and the clients. Sometimes these onsite professionals are needed for emergency operations and for reassuring the client that the project is proceeding according to schedule. To execute such projects, a firm needs not only skilled professionals, but also a software development process and methodology, and an ability to manage software development. Unlike in onsite projects, the Indian firm provides technical and managerial expertise as well.
The third method of software export is in the form of an Offshore Development Center (ODC/OSDC). An Offshore Development Center is a popular organization form especially for firms based in the U.S and Europe and who wish to take advantage of the skilled talent pool and lower wages in India. An offshore development center involves an umbrella contract with a long-term agreement on prices for time and materials (usually standardized on a man-hour basis). In this method of outsourcing, a large fraction of the project is executed offshore and the Indian firm is responsible for adherence to schedules for delivery. From time to time, the client sends projects to the center. For each project, the negotiations are largely restricted to the resources and time that will be required. In some cases, the place where the work is done is physically separate (from the rest of the Indian company) and secured. Many of the established Indian software firms will have more than one development center.
Firms that have been outsourcing software to Indian firms for a long period prefer this form of organization since they are confident of the Indian firm’s capabilities and rely on their processes for delivering software. Working together over time reduces the time for training as well as knowledge transfer.
To sum it up, I should say that the entire picture of the Indian IT market and outsourcing experience is rather mixed. On the one hand, the software development market in India is growing rapidly demonstrating a tendency to the development of product-based organizations. On the other hand, Indian developers have very few opportunities to enhance their skills, learn new technologies as well as to move up the ladder. The salary they earn is rather low as compared to the payment offered in the United States of America, China, or Europe.
We can’t just agree to the opinion “Indian outsourcing doomed” or else without even trying.
If you gonna get your project done by offshore developers, you should be very careful when choosing the right vendor. I have provided some helpful links within this article for you to learn how not to be deceived by a software vendor. Wherever you outsource your projects to, you should be aware of the tips and tricks to check if your vendor is cheating or not. Should you have any questions about offshore software development, feel free to ask our experts. They have a strong background in training, consulting, audit, and estimating.