January 11, 2007 4:32 PM PST

Survey: Software companies increasing offshoring work

Offshoring work at software companies continues to rise, according to the results of a new online survey.

Of the respondents, about 57 percent of software companies that have offshore operations said they increased offshoring work significantly within the past 18 months, according to the report by the Software & Information Industry Association (SIIA).

While responses were confidential, the survey was sent to software companies on SIIA's membership list, which includes Sun Microsystems, Oracle and IBM. Executives from 114 companies responded to the survey. Of those 114 companies, 68 have offshore operations.

Of those respondents, 48 percent said their company had started "global software development initiatives" within the past one to three years, compared with 19 percent that began projects within the past three to five years and 18 percent more than five years ago. About half the offshore outsourcing companies used an offshore provider, while about one third operated through a subsidiary and a quarter used both. (For some questions, multiple responses were possible.)

Of the companies that looked overseas, 84 percent said growth was one of the most important incentives for offshoring; productivity and "increase speed to market" were the next biggest incentives.

India was the country that respondents listed most often, at 65 percent, as a current or potential offshore partner. That was followed by Eastern Europe/Russia at 29 percent and China at 21 percent.

Moving operations overseas didn't guarantee profits, the survey found. Of companies that did see a gain, their profits were in the 10 percent to 20 percent range--not the wider margins seen by manufacturing outsourcers, according to David Thomas, executive director of the software division for SIIA. The reasons given for this were higher than expected salary costs, turnover rates and infrastructure costs.

"The real drivers in terms of people moving to a multishore model are speed to market, not necessarily cost savings anymore," said Thomas.

In recent years, many tech companies have said that a lack of qualified U.S. workers has forced them to hire educated non-U.S. citizens to stay competitive. The U.S. government, however, restricts the number of visas it gives to qualified college-educated foreign workers, a source of tension and controversy among tech companies, the U.S. government and qualified American workers.

Many executives interviewed by Thomas specifically cited a shortage of available H-1B visas as one of the reasons for hiring offshore workers. Executives said it could be faster to set up a team with foreign workers overseas than in the U.S.

"They told me speed to market (in the U.S.) would sometimes take two to three years. Some of them told me (that) by leveraging a provider and having 200 workers overnight, I could get my product out in just over a year," Thomas said of the executives he interviewed.

He said he found two vastly different responses regarding cultural adjustments.

"For some, the cultural difference and time difference didn't get in the way and, in fact, made things faster because they managed the processes so they could have 24-7 development by having teams hand off to each other. Others said the cultural and time differences were insurmountable," said Thomas.

"Companies that had good business processes and development processes in place found that it worked. The companies that were creative and from the hip with their development, but didn't really have the discipline just found it a disaster. So...make sure you have your house in order and your force in place before you attempt to do this," said Thomas.

In fact, one of the main reasons given by companies that stopped offshoring was a loss of control over their teams because of the time differences and challenges of managing people remotely.

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