Bangalore calling

28 March 2008

Despite media scare stories about jobs disappearing off to the developing world, many companies continue to gain significant efficiencies by offshoring work. Starting with the call centre boom in India, offshoring of skilled labour has more recently spread to China, Vietnam, South Africa, Malaysia and the Philippines. Companies can even benefit from nearshoring to Eastern Europe, where skills bases are being built up in countries like Estonia and Romania around specific industries.

But what are the opportunities for smaller businesses to use developing world labour, whether it’s to research a market or develop a product? What are the risks, particularly in terms of quality – especially in the light of a 2006 British Computer Society report showing that around half of companies that have offshored plan to bring some jobs back to the UK? And what will investors think about handing development over to a third party?

No cost comparison

There’s no doubt that the cost of setting up operations in the developing world is a small fraction of the UK. According to a 2004 study by the Work Foundation, the average salary in India at the time was £2,500, just 14% of the UK/US equivalent. Skilled jobs like software engineers came in at 15-17% of the UK/US, market researchers at 13% and an experienced IT manager could be hired in India for just $36,000.

One company which found this cost argument hard to counter is Orderwork, which operates an IT services marketplace for the retail sector. Launched with Dixons Stores Group as a founding buyer, Orderwork wanted to take advantage of the “flexible sourcing” gospel it was preaching to customers in its own operation.

Starting out at the end of 2005, it began looking for an offshore developer to build its platform, but quickly determined it didn’t want to work with a big supplier where it might have come low down their list of priorities as a smaller customer. “We ran with two proposals,” recalls founder and chairman Toby Strauss. “One was a hybrid, part UK and part Indian, the other was Indian and came recommended. We put them through due diligence and reference checking. In the end, we decided that the price difference was so significant we had to go with the pure Indian option. It was half or a third of the price.” He stresses the importance of taking up lots of references on your chosen supplier – and in this case, they were all positive.

Strauss says the company spent a lot of time weighing up the different options – keeping the skills in-house, running with the hybrid approach or outsourcing the whole thing to India - but as it had already done much of the work on the specifications, right down to the level of wireframe diagrams of the screens, it felt it could manage the Indian supplier direct.

Quality assurance

So how do you ensure that quality is maintained when your supplier is thousands of miles away in a developing country? The first point to note is that those companies that are successful in offshoring tend to be selective about what processes they offshore. The same technical advances that allow work processes to be offshored in the first place also allow these processes to be chopped up into discrete components as part of a global sourcing strategy. Financial services firms, for example, have been farming out back-office processing to lower-cost centres for a number of years now, but many avoid handling actual customer contact in these centres, preferring to route that back to an agent in the UK.

Secondly, it’s important to manage the relationship carefully. For Orderwork, control came from specifying very clearly what the company wanted from the supplier, then closely monitoring its service delivery. “All my co-founder did for the first three months was manage that process,” says Strauss. “He worked very closely with the Indians and made sure they really understood our business. It’s worked really well. They almost think about it as a user of the system, rather than an IT firm.”

Orderwork has a codesafe arrangement, where its source code is kept in a safe place and it has ensured it owns all the rights to any development. It also has an independent quality assurance testing house audit the delivery of the Indian partner, ensuring, for example, that all documentation is up to scratch. An internal IT manager is now looking after the relationship with the Indian firm. “I do think you need somebody with technical, analytical and structuring skills to manage a relationship like that,” says Strauss.

Doubting investors

Finally, you’ll need to reassure investors that you’re in control. Backers are sometimes concerned about the risk of a relationship with a third party breaking down, either because the supplier realises its value and tries to charge too much, or because its services start to fall short of expectations. If the company subsequently has to take development back in-house or switch to another supplier and documentation proves not to be up to scratch, business can be badly disrupted. Having the resources in-house therefore represents a much lower risk to a small company.

Strauss admits offshoring was a new experience and raised some eyebrows. “We had long discussions with our private equity backers who initially said we had to get our own resources. But things were going so well and have continued to go so well that we haven’t needed our own people. The compromise we reached was we said we would pay to have a regular review done by a third party.”