Offshore outsourcing, commonly known as offshoring, has been a popular business process strategy for over a decade. The information technology services, such as offshore software development, have been the most popular among others. Most small to medium businesses enter the offshore outsourcing scene for various reasons. This may be to address the scarcity of skills of local individuals, achieve efficient quality and process, cost-saving, and focus on core business activities.
Offshoring is a popular business strategy where a company moves a particular business process or production to an offshore third-party service provider. This method is usually implemented when there is a shortage of skilled individuals in the local area. To meet standard-quality output, companies opt to hire services from a third-party company given that hiring skilled professionals in neighboring areas are quite expensive, and hiring an in-house development team can even cost a lot more. This poses a challenge in the development cost of small to medium businesses. That is why these businesses resort to offshoring.
Most often than not, production cost creates a great influence in choosing an offshore service provider. To reduce development cost, companies choose to sub-contract a third-party company service provider from low-wage countries with the misconception of cheaper service equating to higher profit. This way of thinking is not good when you are planning to offshore.
Is Cheaper Better?
In a research study conducted by Nils Brede Moe, Darja Šmite, Geir Kjetil Hanssen, and Hamish Barney, they discovered why offshoring ventures fail. For the research, they interviewed four Scandinavian software companies that failed in their offshore outsourcing ventures. These companies chose a well-known offshore consultancy company to provide quality service. However, their business strategy somehow took the wrong turn. Instead of standard quality products, they got unsatisfactory output in an extended production timeline, longer than planned. Even more so, instead of saving cost, they’ve acquired a great loss. So what went wrong?
The companies stated their reasons for terminating their offshore contract with their service provider. Their reasons include the lack of technical capability, hidden costs, communication gap, poor infrastructure, and lack control on the project. These factors are the common risks of offshoring that businesses should avoid.
First off, the companies are first-time offshore clients. The companies that failed in offshoring are most likely oblivious of the risks it entails. As a result, the companies weren’t able to develop a comprehensive management process that may work for both the client and the service provider. They were too enticed with the thought of reducing production cost that they lost track of their goal which is to hire an offshore team with skills and impressive track record.
To achieve a successful offshoring venture, businesses should change their focus from cost reduction and leverage more on intellectual capital.
Intellectual Capital—Every business requires capital to transform from being a simple idea to an income-generating trade. For most people, capital can be thought of as the money to start-up the business. But money is not the only capital you invest when you offshore your services. Intellectual capital should be a top priority.
Intellectual capital is the intangible business value and is deemed the most valuable asset, especially in software development. This covers from the skills of individual employees, the whole organization, business process, and the organizational system.
There are basically three essential elements of intellectual capital namely; organizational, human, and customer.
Organizational Capital—This pertains to the management, processes, and systems within the organization. This refers to the value of the company as a whole and how they are able to deliver quality service or product output. Some researchers fused organizational capital with social capital. This refers to the relationship or connection of the organization’s individuals and how they coordinate. However, this does not limit within the organization alone. Social capital extends to the connection or relationship of the organization to their clients.
Human Capital—This element refers to the manpower of the organization. Their knowledge and capabilities of the members of the organization are regarded with human capital. In relation to software development, human capital covers the technical knowledge and commitment of the developers in an offshore team.
Customer Capital—An element of intellectual capital that refers to the organization’s value measured through satisfactory rates of customers or past clients.
You might ask why intellectual capital is very important in software development. The answer is simple. Intellectual capital leans more on the knowledge and relationship value and the software development field requires knowledge-intensive work. This makes intellectual capital an important factor within an organization.
Why do offshoring ventures fail?
The failure to accumulate intellectual capital can be regarded as one of the main causes of offshoring contract terminations. Again, in the research conducted by Nils Brede Moe and co-researchers, they discovered how failure to develop intellectual capital, specifically organizational and human capital, extremely contributed to their offshoring downward curve.
There are three common challenges faced by small to medium businesses that may root from the failure to develop intellectual capital. High turnover rates and offshore teams prioritizing bigger projects or clients are due to the lack of organizational capital, while lack of technical knowledge comes down from human capital deficiency.
High turnovers can extremely affect an offshoring team. In the end, the service providers are unable to develop a satisfactory product that the client highly expects. In offshoring, the two parties—offshore team and client—should communicate to properly convey and discover how the product is developed. If one of the parties constantly change members of the team, how are they able to learn and discover how the product is produced? This incident shows how communication is often taken for granted when offshoring. This may be due to the geographical difference of the offshore development company and the client, however, this can be fairly addressed with modern technology that we currently have.
Another challenge mentioned is offshore teams prioritizing bigger projects and clients. Why do these instances happen? The most common reason for this is the lack of motivation of the team to work on the project. The client’s offshore team most likely do not take pride in the project they are working on. In the defense of the service provider, these teams are demotivated due to the inadequate transfer of responsibilities and information from the client. In summary, both parties do not have the trust and confidence needed in a partnership. This outright lack of trust discourages service providers to carry on with their work.
As stated before, organizational capital includes the management, processes, and system of an organization. Other than that, it also covers the relationship of the organization and the client which happens through proper communication. The situations portrayed showed how the inadequacy of organizational capital can cripple the production and may lead to bigger problems in the future.
The next challenge which is the lack of technical knowledge. Since software development requires knowledge-intensive work, a software development team should be knowledgeable enough of the latest technology to achieve better results. Sometimes, this value or asset of an offshore development company is taken for granted. Most of the time, business-owners are dazzled by how some offshore consultation companies offer cheaper software development services.
By changing the viewpoint and expectations of clients or business-owners from reducing production cost, they should instead focus on looking for an offshore development company that has a high intellectual capital. If you have decided on hiring an offshore software development team, you must first create a checklist. (Read about Full Scale’s offshore software development center checklist here.)
Once you have your checklist, create the development process that you will use in managing your offshore team. The service cost should be the last of your concern. Remember not to look for a cheap offshore software development company but a reliable one.
Your offshore team should be technically skilled and knowledgeable, excellent in communication, trustworthy, and an established organization. That is what we offer our clients in Full Scale. Our company is built on trust and commitment that is why each team of skilled developers will dedicate their time and effort to develop a satisfactory product that you want.
Our company’s founders, Matt DeCoursey and Matt Watson, are entrepreneurs themselves and they have started to climb up the ladder of success. Stackify and GigaBook are perfect examples of the success of Full Scale’s skilled members.
Let us help you achieve your business goals.