Offshoring Secrets: Why Small Tech Companies Should Offshore
Check other articles in the series...By Utkarsh Rai, Guest Author, Author of “Offshoring Secrets”
I came across this article in Business week July 2007 “Why Small Tech Companies Aren’t Outsourcing”. There are multiple reasons mentioned in the article which are portrayed as hindrances for small tech companies to outsource. I do not agree with the article and here are my responses against each of the points mentioned in it.
- Communications/Customer needs: In this global village and internet era, proximity with the customer does not necessarily play a significant role. The customers themselves are unwilling to spend significant amount of time and resources for interaction and therefore the interaction is limited to milestone meetings only. Having a couple of good employees define the customer requirements should be more than sufficient and would not necessitate a full team to be hired at the customer/onsite location.
- Components must fit together: Boeing and Airbus can get their various components sourced from different locations and assembled at a totally different location. With the right focus in defining the interfaces, even complex software can be easily integrated. It requires engineering discipline and good communication flow to accomplish this.
- Management bandwidth: It is true that more management bandwidth is required to accomplish offshoring, but it is not true that more layers of management are required. If the company promotes “engineer to engineer interaction”, then a flat organization can also deliver. The key is in empowering engineers to get the desired benefits.
- Fewer developers can often produce more: I totally agree with this. In my book also I have reflected on this topic. I do not agree that small teams need to be staffed at HQ only. The key is in hiring the right talent pool irrespective of geographical location.
- Skills scarcity: This is a global issue and not restricted to India alone. Staffing decisions need to be taken from the resource availability perspective. But to say that India does not have proper skills in specialized areas is not true anymore. Specialized skills are now available given the education and maturity of the IT industry in India. The reverse brain drain has also helped in augmenting the talent pool in India.
- Intellectual-property issue: This is not valid for India, and the article point is China specific.
- Competition for Talent: It is true that a potential employee in India puts greater importance to brand. But it is not an impossible task for smaller companies to hire, otherwise we would not have seen around 200 small high tech companies in Bangalore alone developing products for the international market.
[Editor's note: In my opinion, offshoring is necessary for small technology companies to conserve capital. However, Bangalore is one of the worst places to outsource to today, primarily because of the last point. However, elsewhere in India, the equation still works well, and you can find a stable, affordable workforce, especially in the second tier cities. Here are my prior articles on the topic: India's Real Estate Concerns Point to Second Tier Cities, Beyond Bangalore, The Case for Calcutta, and IBM: India, More Than Good. SM]
This segment is part 1 in a 6 part series A Personal Journey →
Jump to part: Why Small Tech Companies Should Offshore, A Personal Journey, How Can India Center Gain More Respect?, Is India Center Becoming Costly?, How Can Small Centers Attract Talent?, Offshoring versus Outsourcing
I respectfully disagree with author on outsourcing by smaller companies.
First, the cheap labor is a wash because of management overhead. The cultural and geographical differences make it very difficult for engineer to engineer communication. The outsourced team does not understand the business side and requires more management overhead. The other factors that needs to be considered is productivity difference between home office employee and outsourced country employee, the cost of managing an additional office, legal overheads to operate in more than one country, etc.
I think outsourcing is a success for medium to large enterprise only. I am hearing so many failures among small business. Some businesses are in very bad shape because in place of reinventing themselves they assumed that this is a silver bullet.
Ashish,
Small companies can always offshore to an outsourcer, which they do often, whereby, they get the cost structure benefits, without having to deal with legal, administrative, management, recruitment and other overheads.
Your point is absolutely correct, however. Below a certain critical mass, having an offshore operation of your own many not make sense. You need to be ready to hire at least 20-30 people for the overhead to be worthwhile.
Nonetheless, an operation that has only 20-30 people is still a very small company, and thus Utkarsh’s points hold true.
Also, I think you confuse outsourcing and offshoring. There is a whole category of companies called Outsourced Product Development (OPD) like Persistent, Symphony, etc. who develop products from India for smaller software companies, and they do just fine.
Sramana
@ashish
I think as with anything else in business, prudent research and application can lead to outsourcing benefiting companies at all levels, in fact especially small companies.
It really depends on the mindset of the company not its size.
Of course there will be an initial communication barrier and business requirement learning curve , but this is the case with even on-site new hires.
From my observations the real barrier is not “them” but “us”. Too many engineers lack communication abilities , and too many managers don’t understand the underlying technologies that drive there products.
It actually raises an interesting topic on how the industry and academia evaluate engineers.
An exceptional engineer with exceptional communication and people skills is over the long run magnitudes more valuable than a ‘genius’ engineer who needs 3 managers just to coordinate and track his work with the rest of the team.
It’s a shame its a talent that is so hard to quantify.
Sramana,
I couldn’t agree more. Sooner or later, all successful tech companies will need to adopt distributed development to scale. Believe me, it’s much easier to build it into the DNA of a company from the get-go, vs. trying to adapt mindset and development processes once a company is already mature.
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