The debate about outsourcing tech jobs overseas has become so stormy that it seems to have overshadowed what may be an even larger trend in outsourcing -- outsourcing to application-specific software services firms within the U.S. With the exception of the CRM market, where Salesforce.com has become a well-know burr in the saddle of Siebel and other established CRM vendors, the explosive growth of software services has been comparatively quiet, but may be the real "news" in the outsourcing business.
The market for on-demand application services is projected to grow from $425 million in 2002 to $2.6 billion in 2007, which represents a compound annual growth rate of 44 percent, according to a May 2003 IDC report. This past February, Gartner forecast that the number of businesses starting new outsourcing deals will grow by 30 percent this year, amid a shift away from full-service, multibillion-dollar outsourcing deals. In the future, Gartner said, the trend will be toward smaller outsourcing agreements with specific business goals.
This leads us to the comparative question: will software services companies add more jobs than overseas outsourcing is taking away? It's hard to say. But something we can say with certainty: Software services are a superior option for outsourcing application-specific or business process-specific IT functions.
The objectives of business managers when outsourcing IT functions are the pursuit of cost savings, core business management focus
Outsourcing to companies with specialized expertise and a fully configured infrastructure is a smart alternative, and it's not necessary to go halfway around the world to realize the considerable benefits of this emerging trend. Outsourcing at home -- what some are calling "onshoring" -- can deliver cost savings that are as good or better than typical offshore engagements. Software services are often 50 percent or less the cost of installed and internally managed software when outsourced here at home, while most analysts predict between 15 percent and 30 percent cost savings from overseas outsourcing. Moreover, overseas outsourcing projects can often take years to capture cost benefits, given startup costs, knowledge transfer and process issues. Software services, on the other hand, can often be live in weeks or months, and cost benefits begin to accrue immediately.
A bid to reduce risk
As a rule, software services companies provide fixed costs on long-term contracts, delivering on service level agreements (SLAs) guaranteeing service levels. If a software services firm doesn't deliver, it can be replaced quickly. The better software services providers include an API for internal IT staff to implement and manage the application, if desired. Most software services provide industry-standard developer environments. And because software services technologies routinely include powerful developer hooks, internal teams and third-party integrators can work with the products, as they would any installed product.
In this domestic outsourcing alternative, the risk of project failure is minimized in part because software services firms are paid monthly. If the system isn't being used, it can be shut down. Software services companies are specialized and typically only provide and manage one or a few applications, and often have hundreds of clients running on their software. These providers are especially security-conscious, since most stake their reputations on high security.
Security can be a deciding factor in a company's decision about where and to whom to outsource networking services. While there's no guarantee that choosing a U.S. firm will mitigate that risk, there's certainly a greater sense of control and supervision when the outsourced firm is within the same borders.
Onshore outsourcing also bypasses the complications of communicating across multiple time zones, cultural and language barriers. By virtue of the contracted revenue model, software services firms typically have a high percentage of their revenue committed years ahead and, accordingly, tend to be highly stable.
In short, U.S. software services firms provide a much lower-risk solution to offshore outsourcing, enabling companies to obtain the cost/benefit they seek without the gamble of going overseas.
Just another step toward maturity
The trend toward outsourcing is a sign of developing maturity in the IT sector. Over time, companies will no longer feel that they have to hire programmers to develop and manage their own software and IT infrastructure, any more than they have to hire power engineers to generate their own electricity. The outsourcing debate clearly shows that that trend is under way. Larry Ellison famously said a few years ago that the software industry has stopped growing. That seems clear today, given that companies are not spending a higher percentage of their income on software than they did the previous year. Even so, the industry is changing quickly, and software services and on-demand software is the wave of the future – and a growing part of the here and now.
The good news is that the U.S. (and Canada) can boast a genuine, and possibly sustainable, advantage in the software services sector. Because the U.S. and Canada have leaped ahead of the rest of the world in this new area, we have a great opportunity to continue to lead the world in software development in the near future. As organizations outsource to North American software services companies, they will develop relationships, create customer-specific configurations, and integrate more tightly with other applications, barriers to switching will develop. In fact those relationships are being created and being strengthened with every passing year.
The upshot of these factors is that the U.S. has the opportunity not just to continue our leadership in the software industry, but also to continue to provide economic productivity gains through lower cost, better managed IT systems. And as nations overseas continue to develop their economies -- in many cases by selling to the U.S. -- they will become better and better markets for our goods …and our software services.
About the author:
Jim Howard is CEO of CrownPeak Technology (www.crownpeak.com) in Marina del Rey, Calif.
This was first published in April 2004