Outsourcing: The Facts of the Matter

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Outsourcing is a pretty hot topic today. Most people focus on merely one aspect of the story: They see United States IT professionals losing their jobs as a direct result of outsourcing software projects overseas, and then they reject the entire concept. It is viewed as a black and white issue--with people being strongly against it. But what if we step out of the box for a moment? What if we look at the subject of outsourcing from a non-biased point of view?

Let's look closely at the facts of this intricate issue. Let's examine the pros and cons. Outsourcing is not for everybody. However, if you decide that outsourcing is a good route for your business to take, there are helpful tips that you should follow to reap the benefits it has to offer. We will explore those points after we look at some outsourcing facts.

Consequences and Benefits

"The Impact of Offshore IT Software and Services Outsourcing on the U.S. Economy and the IT Industry" is a report of a recent study conducted by Global Insight on behalf of the Information Technology Association of America (ITAA). ITAA, a group that consists of 375 corporate members, including Microsoft and IBM, released the report, which is based on research and forecasts conducted and calculated by Global Insight's chief economist, Dr. Nariman Behravesh, and his research team.

Some of the findings reinforce that the immediate consequences of outsourcing are of negative influence to the U.S. economy. Outsourcing has caused many IT professionals to lose their jobs. Global Insight estimates that 104,000 people lost IT software and services positions because of offshore IT outsourcing in 2003. And as long as outsourcing continues, it will remain a cause of displacement for IT software and service professionals.

However, in the long run, we are actually seeing that outsourcing has a positive influence on American businesses, the employment rate, and the economy. Here are some interesting--and positive--findings:


Outsourcing creates more U.S. jobs. Global Insight claims that as of 2003, over 90,000 new jobs were created due to the increase in economic activity that follows offshore IT outsourcing. By 2008, over 317,000 new jobs are anticipated.

Outsourcing improves real wages for American workers. Real wages increased by 0.13% in 2003 and are anticipated to increase 0.44% in 2008. Why the increase? It's all due to a flourishing economy. Take a gander at the next bullet point.

Outsourcing pushes the U.S. economy to perform better. Lower inflation, increased productivity, and lower interest rates are all results of saving money by outsourcing overseas. There is a direct correlation between an increase in business and consumer spending and an increase in economic activity.

So, there's the bad and the good of it. But, wait. There's more. So far, we've looked at outsourcing from a high level, an economic standpoint. What about from your perspective as a business owner? Ultimately, what you want is to grow your company. Is outsourcing a wise tactic for you? It's definitely not a maneuver that you want to make blindly. Analysis and strategy is involved from the moment you begin to even consider outsourcing until the moment your product is finished and delivered.

Key Elements

If you approach and implement outsourcing incorrectly, the effects are not pretty--anything from unhappy employees to the devastating blow of actually putting you out of business. However, if you do it right, outsourcing can be beneficial to everybody. You'll have happy employees, and you'll cultivate your business. To launch a successful outsourcing project, you should implement these key elements into your outsourcing plan:

  • Determine your core competency and what you should outsource.
  • Analyze, focusing on increases in quality and production.
  • Specialize, concentrating your efforts into your core competency.
  • Establish and maintain long-term relationships with vendors who specialize.
  • Increase productivity and reduce costs through error prevention.

Determining Your Core Competency

The very first action you should take is to determine your core competency. What exactly is the core of your business? Figure that out by answering these questions:

  • What is my competitive advantage?
  • What am I really in business for?
  • What am I trying to accomplish?

Analyzing Your Business

After you figure out what you are really in business to produce, it is important to evaluate and analyze the production of any product that you are thinking about outsourcing. You want to determine whether outsourcing is the most viable option for any given product or part. You need to answer these questions:

  • Do I really need to build the product (or part) myself?
  • Can I get somebody else to build it for me more efficiently?


With your core business in mind, you can really begin to specialize--and you should. The only way to move forward is to focus on your domain. Part of focusing on your core competency is making sure that your people are able to focus their time on becoming better and better in your core competitive business. Doing so increases your primary intellectual property and is critical to your advancement in the market.

You can upload everything that is not critical to your business and let someone who specializes in that particular trade concentrate their efforts there for you. You end up with a higher quality product than you could have produced on your own, in a lesser amount of time. And, since you are free of building your secondary intellectual property, which is not critical for you, your primary intellectual property increases.

Don't even consider cost analysis until you have identified your core competencies. For now, concentrate on increasing quality and increasing productivity. Cost savings is something you can explore later. Saving money is actually a benefit derived from increasing quality and productivity--not the other way around. Unfortunately, the gamut of most outsourcing projects occur merely because of the price tag, and no further analysis is made.

Often, companies focus on price when they are not certain how to improve productivity. However, it is important to not reach out and take hold of something just because the price is right. The price might be the only thing that's right. To avoid this common pitfall, you need to come up with a game plan. Simply put, figure out exactly what you want to do and what you don't want to do.

Establishing and Maintaining Relationships

If you determine that outsourcing specific parts or products is a wise move for your business, your next challenge is to establish and maintain good, long-term business relationships. More specifically, once you figure out your core competency and determine exactly what your team should and should not concentrate their efforts on, your next move is to find the right outsourcer, a subcontractor with whom you can cultivate a healthy working alliance that will last. This is critical. Without it, your outsourcing project will not be successful.

One integral factor to consider when searching for the right subcontractor is location. Consider these important points during your search:

Personal relationships. Is it beneficial to have the subcontractor next door so that you can build strong relationships among team members?

Geographic location. Does it even matter? Is geographic location something you need to think about?

Culture. If geographic location does not matter, what about culture? Is it important that you stay within the same culture, or can you step outside of the culture?

At this point, you need to continue to think in terms of the business and the elements involved in building a successful product. Don't start thinking about money yet. You can evaluate the costs all you want, but if nothing is delivered--or it's delivered with poor quality--you've wasted money no matter what the cost. If you come to the conclusion that neither geographic location nor culture is important to the process of developing a strong business partnership or viable product, then you can evaluate your outsourcing project on a price basis. Just remember; there's always a relationship between how much something costs and how well it can be done.

So that brings us to the topic of quality. Although repetitive, the following statement ties all the philosophies of this article together. It cannot be said enough: You can greatly improve the quality of your final product when you develop a healthy working relationship with a company that specializes in a product (or part) that you need but is not core to your business. Because both you and your outsourcing partners are focusing more time on your respective core competencies, quality increases.

It is important that you communicate these objectives of specialization and improved quality to your employees so that they can see and understand exactly what you are trying to accomplish. Your team will appreciate that you are allowing them to focus on the core competency of the company and letting someone else--experts in their own field--focus on products or parts that are secondary to you.

So now it comes down to a very logical choice. If you can achieve what you want for the minimum price, go for it! There is nothing wrong with that. That's what business is all about. But, if you make your decision based solely on the price and don't get the results you want, the minimum price could become the maximum price. If your employees have to rewrite the code after the subcontractor delivers it, you've failed.

The subcontractor you choose must be an expert (or at least be emerging as an expert) in the particular area for which you need products or parts. It does not occur to most people to think that a subcontractor can be of long-term benefit because of their expertise level in a certain area. Instead, most people think of a subcontractor as a quick fix, beneficial merely because of their permanently low prices. This is a fallacy! Low prices do not exist forever. You only have a short window of time during which prices are low. Eventually, subcontractors will drive their prices up.

That is why expertise level is so important. Once you hire a subcontractor that is an expert in the particular area you need, your organization does not need to put forth any efforts to build products or parts that are not core to your business. Instead, you can leave that to the expert, the subcontractor who has the tools, experience, and skills required to deliver quality. Ultimately, it is a win-win situation--higher quality all the way around.

The result of these collaborative efforts is a worldwide network of companies who can rely on each other and trust each other. Outsourcing forces us to not only establish contacts, but also build long-term relationships in order to produce products more efficiently.

Increasing Productivity and Reducing Costs

Now, we finally get to the cost. The first fallacy we have in the software industry is the belief that the only way to reduce costs of production is to hire cheaper labor. This thought has short legs. At this moment in time, we can go round and round the world to obtain cheaper labor. We can go to India, China, soon it will be Africa, and then where will we go?

Nobody knows how long it will take us to go through this cycle. It could be 30 years. Eventually, it will come full circle. In the end, what matters most and what needs to change is an increase in productivity.

The main challenge with increasing productivity is that developers spend most of their time--80% of it--looking for and fixing bugs. If they can prevent errors, then they can increase productivity, thus reducing the costs. And costs need to be reduced across the board. Automated Error Prevention (AEP) is one of the ways to do that.

AEP is both a concept and a methodology. The concept of AEP is learning from your own mistakes as well as others' mistakes and then applying that knowledge in the software lifecycle to make software work. The Parasoft AEP Methodology is a specific and practical application of the AEP concept. It is not a product. Parasoft AEP Methodology is a process in which proven error-prevention practices are adopted and automated for the entire software development lifecycle. You can find more information about AEP at Parasoft's Web site.

Changing Your Way of Thinking

Before outsourcing came into the picture, nobody asked themselves questions about their competitive advantage. Nobody really analyzed the production strategies of their products. Historically, such analysis just hasn't happened in the software industry--perhaps on an ad hoc basis, but performing such analysis really goes against the culture of the software industry, primarily because it is still maturing.

Outsourcing is good for the software industry because it is forcing us to face tough issues that we've been avoiding for too long. It's opening our eyes to see that we need to analyze exactly what needs to be done to grow our businesses.

Along with the good points of outsourcing, there are bad points, too. In the short run, yes, bad things happen. It's definitely difficult to eliminate someone's job, especially when you know and work with that intelligent, hard-working someone. But, if you look at the big picture, outsourcing is actually creating more jobs and giving that intelligent, hard-working someone the opportunity to expand his horizons.

Do not act in haste where outsourcing is concerned! If you take the time to analyze your business needs and really outsource for the right reasons--long-term strategy rather than a quick fix to save money--your business and the economy can thrive.

Adam Kolawa Ph.D. is the Chairman and CEO of Parasoft, which he co-founded with a group of fellow CalTech graduate students in 1987. He holds a Ph.D. in theoretical physics. Dr. Kolawa is a well-known writer and speaker on industry issues and in 2001 was awarded the Los Angeles Ernst & Young Entrepreneur of the Year Award in the software category. Contact Dr. Kolawa at This email address is being protected from spambots. You need JavaScript enabled to view it..



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