Bhoo wears the thinking cap!

As if that is possible!

Outsourcing is not offshoring – More so for Software Product Companies today!!!

Posted by bhoo on October 1, 2006

Of late, we see that the terms “outsourcing” and “offshoring” are used interchangeably. 
There is no need for a substantial explanation on what the differences are.  In simple words, offshoring is just a subset of outsourcing. 

Outsourcing is a very sound idea successfully adapted by numerous companies.  Let’s take a few examples.  As a software company, if you want some legal paperwork to be done, do you generate that expertise internally or hire employees for that?  Absolutely no.  You always hire a legal firm.  Same applies for CPA firm, payroll processing, benefits administration, and so on…

Outsourcing takes several indirect forms.  If Intel or AMD’s business is making chips for computers, they do not make computers.  Compaqs, Dells, IBMs of the world make the computers.  This is a classic example of outsourcing.  Both the PC makers and the chip makers are essentially outsourcing to each other.  One is outsourcing the packaging and marketing, and the other is outsourcing manufacturing of a core part.

The essential and central idea here is:  Outsourcing of non-core activities.

Thus, Outsourcing is not necessarily done for cost-cutting, but for

— The professional expertise the other firm has over what we can internally groom
— Spare the management bandwidth for core activities rather than non-core activities
— Best practices in that outsourced function, with the outsourcing firm, by virtue of working with several similar customers
— Faster turn-arounds and better quality due to their scale in that function

This should be precisely the case for outsourcing, and not essentially cost-cutting as a single focus, as is made out, when we interchange outsourcing and offshoring.

The mandate is very clear – if you are looking to deploy any offshore resources for software product development, it should be for the above reasons, and not necessarily for cost-cutting.  Cost cutting should be a by-product, and not essentially the objective.

Today, software companies are identifying the importance of outsourcing many functions, that
so far appeared to be their core competence:

— Usability and user interface
— Documentation
— Licence management
— Infrastructure management (more pronounced in case of ASP software companies)
— Product Development
— Product Testing

The good news is, there are a new genre of outsourcing companies, who offer the outsourcing advantages, while retaining the offshoring advantages.  We are talking about the growing trend of “Outsourced Product Development”, pioneered by companies like Aspire Systems. 

In essence, you should outsource your product development to an expert in product development.  If they provide an additional benefit of using the offshore cost advantage, that is an additional benefit.  That should not be the primary consideration.

Let’s spare “outsourcing” off the “offshoring” taint.

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