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Monday, April 03, 2006

Offshore Product Development – The Invisible Wave

I wrote a brief note for sandhill on Offshore Product Development.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. 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. 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.(The accompanying 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

As I see it, it need to 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. In conclusion, it may be noted that 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. Read the full note here.

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