Professional auto mechanics know that when it is time to buy tools, they have two basic choices. They can buy the least expensive tools available, knowing that the steel will be inferior and likely to bend or break under stress, and then replace the tools frequently. Alternatively, they can pay a little more initially to have a high-quality, long-lasting tool that they can count on. After all, when there is work to be done, they do not have the time to fix a broken tool or go shopping for a new one.
When your business needs custom software tasks performed and you decide to outsource the work, you face a similar choice. You must decide whether to choose the cheapest vendor and take a chance on quality, or choose to pay a bit more to get a product that you know will perform as expected. If the software does not perform, the costs related to the failure can easily exceed the price differential. There are tangible costs, of course, such as lost sales, impaired employee productivity or additional labor to fix the product. However, there are also intangible costs, such as customer goodwill or damage done to your company’s reputation.
Software Outsourcing – An Offshore Boom
In the late 1990s, the demand for programmers in the U.S. far exceeded the supply. Companies were virtually hiring anyone who could fog a mirror and regurgitate a little information from a do-it-yourself book on programming. Some of these workers had never attended college, and few had a degree in any technical field, especially computer science.
As a nation, India was the first to see the opportunities created by the demand. The country had a wealth of well-trained, experienced programmers. Wages were substantially lower, and opportunities were fewer. The primary selling point was that by outsourcing work to India, clients received better-educated, experienced programmers at a greatly reduced cost. In the early days, it was a win-win situation, because Indian programmers were typically of high caliber.
Anytime there is a good opportunity to make money, people tend to flock to that opportunity. This is true whether the opportunity is building video game consoles, selling through online auction sites — or providing outsourced programming services. More Indian software companies were formed and began to compete for work. Outsources also began to flourish in other countries with wages below the U.S. rates.
When competition exists, companies must choose how to best position themselves in the market. They can bill themselves as the premium provider, keep their rates high and be content with a smaller share of the market. However, most respond by slashing their prices — and when one reduces rates, the rest must follow suit if they are to remain competitive. Rates began a downward spiral among companies providing offshore programming services.
As tough economic times spread, the demand for outsourced services decreased. When the market shrinks, the competition becomes even more intense for the jobs that exist, and this has happened with all offshore software providers, but particularly in India.
Downward spiraling rates put pressure on outsourcer margins
Obviously, no company can stay in business if it is not making a profit. In the early days, Indian companies providing outsourced programming services had a margin of 30 percent or more. By the end of 2012, that profit margin had fallen to 20 percent and was expected to slip to 10 percent within two years. Companies realized that they had to take action if they wanted to get the margins back to higher levels.
There are only two basic ways to increase a company’s profit margin — increase sales or decrease costs. Outsourcers have found the first option to be a difficult task although they are still making every effort to do so. Therefore, most of them have opted for the second choice and slashed their labor costs by reducing wages for many workers.
In any nation, the most highly qualified individuals have the most options for employment. They are seldom willing to work at the same wage as an entry-level or intermediate employee if they are highly experienced and have a proven track record.
The solution to this quandary currently being used by most outsourcers is to hire less experienced programmers. Many of the developers now working for these companies have less than two years of experience. Even at the reduced rates, they are under pressure to complete tasks as quickly as possible so that they can move on to the next project.
The results have been predictable. Clients are no longer getting the same quality of work that they used to receive from offshore programmers. What they think they are saving is quickly spent to clean up the mess after the project ends.
Choose quality with reasonable cost expectations
Avoiding these issues is relatively simple. Clients need to think ahead when preparing a budget for an outsourced project. They need to have realistic expectations about what they will actually receive for their money. In most cases, it makes much more sense to “front-load” the investment and pay the higher rate for a superior product. This will typically save money over the long term.
It is also important for clients to make realistic demands. For example, if a provider states that a project will take three months to complete, insisting that it be completed in six weeks is inviting problems. The provider will be tempted to cut corners in order to meet the deadline, or simply deliver the product late.
Two-way communication is essential if the project is to be successful. Providers need to communicate an accurate timeline and clearly state what is — and is not — feasible. Clients need to make sure that the provider understands exactly what is required before entering into a contract.
There is an old marketing tagline that states that quality does not cost — it pays. This is especially true for outsourced projects; clients cannot be there to supervise the work or keep a close eye on progress. Unpleasant surprises are becoming more and more common with vendors offering “bargain-basement” rates. Clients should keep in mind that they really do not want their profits to join their providers’ downward spiral in a race to the bottom.
