Today in an increasingly shrinking market, software product companies are reeling under pressure. The big gets bigger, the brutal market forces are punishing most of the players with reduced profitability, where it can be counted. While this happens, there is a concurrent pull effect that calls for widening the range of offerings, with reduced resource commitments. In instances where products are moving away from obsolete/aging technologies, it is a constant struggle to maintain resource commitments for support, enhancements and for developing migration kits while offering defined levels of support. In this age of turbulence, many enterprise software vendors are looking at gaining competitive advantages on all fronts. We now find that increasingly, in reality, gaining such an advantage through global product development takes a high rank in the order of important things. Product development is normally seen as an expensive process for software companies. The ballpark estimates suggest that in respect of established vendors, anywhere between 5% to 8% of revenues may get ploughed back into software product development. While the cost structure of the various players may vary, it is generally seen that this would cover amongst other cost elements, personnel cost working across the spectrum of operations. Needless to say, with varying nature of operations & owing to multitude of factors, there would be potentially a wide range of value additions that can be measured relating to various types of operations. In such a scenario, the productivity equation becomes an important operational parameter for review. Like in all competitive industries, companies that can develop great products with defined /lesser budgets compared to peers gain a huge competitive advantage. Turning out attention to other important driver for success - "Time To Market", it is found that the product companies need to have a high focus on balancing their efforts, resource consumption with outcomes (generally measured as inputs and outputs). The resulting solution therefore needs to be one centered on mapping business and technical maxims onto sourcing maxims covering business drivers like cost focus, value differentiation , flexibility & agility etc.

In specific terms, on an ongoing basis, the product vendors face challenges in terms of:

A. Slow pace of product rollouts
B. Limited/Reduced budgets
C. Poor sense and respond mechanism to spot and rectify defects.
D. Potentially missing out the rhythm for innovation.

Paradoxically, many in the software industry till recently believed that the traditional measures of economics viz the equation interlinking value add potential and locational costs are not so relevant to them. This meant that for a variety of reasons that include the likes of IP and varying scale of operations, product companies most likely ended up overpaying for the outcomes (outputs) that they managed to get. During times of across the board budget squeeze (this is too often the case - a look at the product development expenses of companies under the 200 million annual revenue runrate would show an interesting trend here- one of reducing outlay, the statistics also shows that this true for the large tech majors as well), the effects can be disastrous -these could show up in being late to market, provide lower returns, lead to diminished marketshare & very likely lead to being less innovative( though it is clear that levels of spend may not be the most determinant factor for being innovative). These can relegate the company to lower rungs and sometimes in the process push them into the "walking dead" category of enterprises. Enterprises are now realizing in larger numbers and in greater measures that across the globe, in various parts of the world,

• the potential for value add (factoring amongst other things the effects
  of productivity) could be different,
• the cost structures could vary
• global distribution of efforts are possible.

This realization is making them confident to make attempts to realign their operational cost structures to more competitive levels & get these factored inside the decision making frameworks of software enterprises. Not to overlook the fact new enterprises may not even get funded if an "India Leverage Plan" is not included in the operational business framework.


The activities that could get covered under product development ranges from activities that define customer needs, the planning and execution of engineering and development activities and associated documentation and process and continual development, support of the product throughout its lifecycle. Why this craze? What are the tangible benefits that one gets to see? Well for starters, the benefits are many - almost all benefits that gets factored in offshoring IT implementation/maintenance projects more or apply in this case as well. In qualitative terms, it is seen that for companies chasing growth, the operational efficiencies of offshoring can materialize into enhanced capacities, sometimes owing to improved process efficiencies and productivity increases with a predetermined cost structure. Monetizing productivity cascades into improved profitability and the potential benefit of an early entry into the market usually looks attractive. In empirical terms, for mature operations, a twenty percent reduction in product development costs could be the equivalent to 1% of company product revenue - if it gets measured at the lower side of the equation. Extend the equation further - if we do the math for this scenario, a total savings of 1% of revenue owing to offshoring l product development initiative ( this is possible when service industry shows much higher percentage number) would easily translate into a growth upwards of 8% stretching to 12% in operating profits, if taken to the bottom line (assuming typical manufacturing operating profit ranges of 6% to 12%) - this assumes that the capacities remain unchanged.



(The above graphic summarizes the rising trend of more and more enterprises adopting offshore outsourcing for product development, a few supplementing this with captive centers or vice versa).

Clearly like every other business operation, offshore product development (OPD) too, would involve tradeoffs. Maximize productivity, Minimizing risk - seems to be the most prudent option that enterprises may choose to pursue while attempting OPD. The process of offshore outsourcing may be more evolutionary and a determined pursuit to engage more wide and deep would be a sure way to reap consistent benefits. Obviously, different enterprises are taking different routes towards offshoring services - this may be seen to be true in the world of product offshoring as well. Some keep the differentiating core processes insourced and the commoditized context elements outsourced and offshore and some companies look at retaining high value-add activities onshore while offshoring low value-add activities. Even while offshoring, some enterprises ponder about having captive units while most look at outsourcing partners and a few manage by balancing these options.

It is this context of exciting phase of offshore product development movement, comes the Sandhill group's recent research report on trends, strategies and best practices on OPD. The report is full of insightful findings and undoubtedly qualifies to be an important guiding research for product companies, service providers, industry analysts and observers concerned about OPD. The well researched report finds based on a detailed survey (perhaps the first of its kind by an independent firm in a focused way in recent times):

• 88% offshoring or planning to in the next year
• 2/3rd say offshoring is a normal business practice 80% of offshorers say they are more reliant on offshoring now than 2 years ago
• 83% satisfied with results

The report finds new levels of maturity being reached in the industry where visionary leaders with strategic plans for offshoring emerge and advises organizations to have good measurement frameworks making offshoring a virtual extension of the internal organization as an important criterion for cutting edge success. The report warns against raising costs, lowering quality standards and painful time zone management as major concerns and foresees the rise of technology specific geographic regions for offshoring and increasing emphasis on domain competencies as a means to offering full range of offshoring services. One important finding that stands above all key points is the fact that sole reliance on captive centers dropped while use of both vendor & captive center rises. The report concludes by predicting increasing offshoring traction and global sourcing as strong emerging trends along with a few others. India is the undisputed leader and the most preferred choice for offshoring. The report busts many myths - one that is noticeable is its reporting about china failing to raise as of date as a second offshore choice center besides India - with just 5% engineering activity happening just about equivalent to that of Canada, Vietnam and Philippines. This ought to serve as an eye opener to all .

The report finds that more than 80% of the offshore work gets done out of India. Not surprising when about a quarter of global IT professional pool happens to be available in India. India's apex IT body - Nasscom forecasts that the product and technology services revenue of Indian companies could reach $8 to $11 billion by 2008. Frost & Sullivan estimates the Research and Development (R&D) outsourcing market for information technology in India to grow to $9.1 billion by 2010 from $1.3 billion in 2003—a compounded annual growth rate of 32 percent!! This is not just happenstance. In less than a decade, Indian ecosystem has indeed grown by leaps and bounds .In less than a decade the improvements shown are very remarkable: (Source: Nasscom)

• The decreasing telecom (cost per earth station for 1 /yr.) has come down to <125 k from >900k
• The number of domestic carriers have increased from 2 to more than 50.
• The number of offshore outsourcers have crossed 1200 from around 300
• The number of captive units have gone upto 25 from around 4.

It may also be noted here that there are multitude of specialist/niche offshore product development players that serve the market beyond the established top tier offshoring players - giving rise to a new ecosystem in the process.


The key findings of the report include:

• Offshoring Is Now Business as Usual
• Offshoring Leaders Emerge
• Reality Sets In (concerns on quality factors)
• India, Beware (rising cost concerns)
• The Vendor Market Evolves Rapidly
• Offshoring's Future Impact (Increased usage for more strategic purposes)
• The Emergence of Regional Centers of Expertise
• The Rising Importance of Domain Expertise

The report replete with well designed graphics on all type of conceivable data (the likes of important factors to outsource, distribution of activities outsourced, pecentagewise improvement in offshore usages, trends in motivation & satisfaction, locational preference, challenges in offshoring etc) is an excellent reference. As it appears offshore product development may be the first step towards decentralizing & globalizing corporate R&D across industries. The contours of corporate R&D are now beginning to show signs of change - forward looking enterprises are working towards creating a flexible, market-focused, corporate R&D function, centered on partner friendly processes spanning across divisional, corporate and geographic boundaries. Offshore product development would not see intensified adoption; it would be the precursor of a major movement of changing the contours of R&D and perhaps the forces of creativity and innovation in the years to come.


S. Sadagopan, heads consulting and eBusiness for Satyam in the Asia Pacific, Middle Eastern and African markets based out of Singapore. He has led several consulting and technology transformation engagements covering multiple industries cutting across a wide variety of technologies around the world. His blog is focused on emerging technologies & trends. These are his personal views.