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October 27, 2003

Selecting an offshore software development partner

The McKinsey Quarterly recently published a primer on offshore software development with an aim to help US companies identify which projects they should outsource to an offshore vendor and to whom.

Some extracts:

* Only companies with fairly large IT staffs—more than 50 in-house employees focusing on software development or maintenance—should consider offshore software partnerships, since much time and substantial resources are required to negotiate them and to oversee the work and the integration of development teams. Furthermore, a company that outsources software development shouldn't have a taste for "bleeding-edge" technology, which ought to be created in-house since it requires a high number of design-code test-redesign feedback loops.

* Offshore outsourcing is a particularly important option for maintaining legacy systems—often a large and onerous part of an IT organization's workload and one that is getting harder to accomplish given the relative rarity of legacy skills and the unattractiveness of the work.

* Offshore partners may have difficulty maintaining application designs for projects such as e-commerce applications, which have short time frames or call for feedback from users. But once these projects enter the later stages of development, even they can benefit from outsourcing.

* (The client company) should maintain its ties with other vendors so that they can serve as backups for local or highly specialized work or in the event of emergency development efforts.

An interesting feature of this primer is that quotes from real examples (based on McKinsey's work with clients and interviews) for quite a few of the recommendations. For its recommendation that a client company "should make every effort to ensure that its in-house staff stays up to speed technically with its offshore vendors so that it doesn't become entirely dependent on their assistance", McKinsey provides the following example: "A financial-services company we encountered in our work found itself almost held hostage by its offshore vendor: no one in the client company had supported one of its legacy systems for three long years, which meant that it had no substantial knowledge of this system and thus simply couldn't switch vendors. As a result, the company was unable to negotiate a favorable deal with its current vendor, which was in a position to charge $1 million more than any competitor would have done for similar work—on a contract that totaled only $3 million to $4 million. The client company escaped from this trap only when it finally replaced the legacy system in question"

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