Offshore software development and Outsourcing have been quite popular throughout past decade. Today both simple outsourcing and more complex offshore software development are both quite established practices. The biggest incentive for development of this market has initially been costs reduction, efficiency and quality improvements all of which are rather short term goals; later on it has come to be the specific knowledge, expertise, tools as well as increased amount of additional services that made the companies grow in that kind of way. Now the question worries many: what is it now and how it’s going to work in future?
We have chosen 8 major as examples: Germany, Denmark, Finland, Netherlands, Norway, Sweden, Spain and the United Kingdom. These countries are ones of the most developed countries in Europe in terms of IT and are most widely taking advantage of outsourcing and offshore software development.
The Offshore Software Development
and Outsourcing Market in Europe
In today’s market, is a key business tool used by most major companies. Offshore development and outsourcing are perceived not only as means to cut costs for big enterprises, it is rather a way to enhance the overall performance of the company by employing experts and talents from other countries.
How and why do they go offshore?
The offshore software development practices differ in terms of services and the rate of outsourcing use from country to country in the EU. Finland, Spain, United Kingdom and Germany are the leaders in terms of using the offshore software development services, though the rate does not exceed 20% in neither of the countries.
The main resource being outsourced is IT and Software Development. With that being said, there are few restrictions for the different companies to practice outsourcing – if the security issues are crucial, the companies tend to keep their software development In-house. For some companies the cost reduction and productivity enhancement are less important than the security issues.
We know many cases of successful implementation of software development processes in offshore software development teams of the companies where security is essential. In case of offshore software development the security issues are being controlled by the customer; this can be considered as one of the major advantages of establishment of offshore software development teams over using the outsourcing services and that let the European banks to give 30% of their software development to offshore partners.
Offshore Software development throughout industries
The industries where the offshore software development is being used the most are Telecommunication, Automotive, Banking, Software Startups and Consumer products. Even there the offshore development does not take more than 25% of all the software development activities. Therefore although offshore software development and outsourcing are quite popular among the EU countries, it is obvious that they are not planning to move to that models entirely, at least not in the nearest future.
IT companies and Oil and gas companies rarely outsource their main processes in other countries. On the other hands other companies tend to give their IT related activities for outsourcing. Especially the Automotive and Telecommunication industry as well as Software Startups with Banking sector and Consumer products being not far behind.
- The companies that do the offshore development and outsourcing can perform it in few manners:
- Onshore – outsourcing in the same country that the company is located;
- Nearshore – from another country nearby;
- Offshore – from a location in another country relatively far away. Some say that offshore can also be considered as outsourcing on the different continent, though there are still arguments regarding that.
As it can be seen the European countries still tend to keep their development onshore. The three countries that do a lot of nearshore development are: Denmark, Finland and Germany. The situation is only a bit different when it comes to offshore software development: Denmark, Germany and UK are the biggest outsourcers among all with Netherlands being just a percent behind. In general the situation is relatively similar among all the countries, except for Spain and Sweden that tend to rely on themselves when it comes to Software development.
Reasons for offshore software development
The reasons for the offshore development are different from company to company, although one can distinguish the key features and key benefits that come with them. The main driver has always been and still is the cost level reduction, second goes efficiency and the improved focus on core business is the third. It is obvious that there are more reasons for turning to offshore software development, but they seem to be less valuable in current conditions.
Interesting pattern can also be seen in Additional services. This point has emerged relatively recently as some companies have started providing complementary services along with offshore software development. In 2014 it has been just outsourcing, now it's more services sometimes even for the same price, including but not restricted to HR, recruitment, business analysis and even Agile consulting, which itself includes analysis and software development processes setup and implementation.
Such companies for example in Ukraine prefer to be called “consulting”companies rather than outsourcing or offshore software development services providers, even though the latter being their main services. This tendency might drastically change the pattern of the market and the list of the reasons to use the offshore software development in the nearest future.
Risks of Offshore Software development and Outsourcing
Although outsourcing and offshore development are extremely beneficial, there are some risks that are connected with those activities. Dependency on external service provider is considered to be the key risk for outsourcing.
This risk can be reduced when dealing with offshore software development, when a company creates their own office in another country, rather than dealing with a outsource contractor who performs all the work. Loss of control and impact on quality are also considered to be highly vulnerable places. These issues can be mitigated through standardization, although it won’t work that well in software development processes that demand creativity. Loss of knowledge is a strong issue. If the easiness of transferring information does not depend on distance, the knowledge transfer does. In order to reduce the impact of this particular issue there are some practices that involve consulting or sending a representative from a mother company to share the values and provide the coaching needed to proceed with the working activities. Also this kind of issues could be solved in Offshore Software Development model with embedded Agile Consulting type of services.The loss of confidentiality is a strong obstacle for the financial companies and therefore some companies prefer to keep their software development onshore, even though offshore can bring more benefits.
Forecasts of Offshore Software Development and Outsourcing growth
It is obvious that the offshore software development is growing and if to take a look at the trends, some forecasts can be made about the European companies. The question is where would they start their remote teams, to what extend and what kind of relations the companies will be having with the service providers.
The problem is that there is a shift in wages in the countries that used to be number one choice for offshore software development. For example, in India, the home for thousands and thousands of developers and source for offshore software development for thousands of companies both big and small, the services providers already understood their value and understood that those companies cannot function without them. Therefore the wages went up and although it’s still profitable to outsource in India, it is not as much attractive anymore.
The switching costs are high as well and therefore most of the companies tend to stick to the providers they are currently dealing with. Due to this fact, only few percent of the companies decide to bring the development process back to in-house. Those companies are either extremely unsatisfied with the services of their current providers or have other incentives on returning to the country (confidentiality, change in processes, etc.)
High quality technical education, economical and political conditions, worsening of the living conditions in the country of offshore software development services provider also influence the change in paradigms and further possible change in the ratios of the offshore software development market shares of the countries.
Read more - Software development in Ukraine: The Outsourcing Utopia?
Trends in outsourcing and offshore software development
What develops the most
Companies are seeking for more than just labor force when performing outsourcing. Nowadays they are looking for a specific qualification or set of skills or set of experiences to enrich their own functionality. Nowadays Cloud computing is one of the “trendiest” outsourcing directions. Big data is emerging too especially with large corporations. Software for gathering the data and its analysis is developing rapidly nowadays as it is extremely convenient to give out for outsourcing.
The clients are looking for industry specific solutions rather than dealing with generalists. But many companies, especially when growing in size, tend to go with generalist service providers as they would provide them with a wider range of services.
Issues in Offshore Software development and Outsourcing
Innovation is one of the key expectations from the outsourcing and Offshore software development services providers, although many companies claim it to be hard to achieve. Client organizations want to see more specific innovation from providers. Innovation can only be gained when the processes are fostered properly and if the right models are used during the service delivery process. Some of the companies use Agile Offshore Development teams service with built-in Consulting service services as a way to solve this issue.
Another hard thing about innovativeness is that it is hard to measure. Sometimes the views on what is innovative and what is not might differ.
One more important aspect is sustainability. Ethical issues, industry standards and certification are sometimes crucial when dealing with large projects.
Conclusion: the transition
Outsourcing services are being provided mostly on an as-it-is basis, going through hardly any transformation during the process of the services delivery. With development of outsourcing and with gaining trust in the outsourcing providers it is no wonder that the services will be transformed during further cooperation. The services are mostly delivered without transformation when the outsourcing is being done for the first time, rather than when it is being performed on a regular basis. As organizations move towards more mature form, they tends to optimize the production and therefore put more on the shoulders of the external service providers or offshore developers in terms of volume and responsibility.
Therefore simple outsourcing as most common form of external software development services providing kind will transform into offshore teams software development with higher responsibility, tighter communication and increase in innovativeness and creativity. The benefit for the organizations is obvious – for relatively same costs they don’t need to spend that much energy and resources on control. The pattern of communication will eventually transit from client-provider to partner-partner with the change of operational paradigm, communication peculiarities and increase in trust.
Most of the clients are facing problems of lack of integrity and alignment in the offshore software development teams and the new trend is providing quality processes implementation service in addition to the main services. Most of the companies face the problem of processes management ineffectiveness, which leads to reduction of productiveness of the whole team. When working with offshore models the communication and processes are the “weakest links”, sometimes the software development process is not built properly, there are no standards, no methodology; in other words, it’s chaos. Sometimes existing approach is chosen correctly but still demands improvements; the weak points and bottlenecks should be found as they increase drastically when dealing with remote teams. When these problems are solved a high boost in productiveness can be observed.
The tendency is such that simple outsourcing or offshore software developers recruiting is not enough and therefore Agile consulting is a definite option.
If you are interested in the right places for outsourcing and offshore software development, Ukraine might be your choice number 1:
- Software development in Ukraine: The Outsourcing Utopia?
- Offshore Software Development in Ukraine: Where to go if you need one?
Written by Taras Gudzovskyi