Build a Captive Development Center or Partner with a Service Provider?

As the offshore product engineering industry matures, independent software vendors (ISVs) and software-enabled companies (those that don’t sell software, but for which software is the driving force behind their business) are outsourcing more than the traditionally “must have, but don’t want to pay for” functions such as IT support or quality assurance. The rapidly increasing pace of innovation, coupled with a significant shortage of domestic talent, has created an environment in which executives are doing what many of them had sworn would never happen: sending high-value, knowledge-intensive software product engineering functions offshore.

A key initial decision executives face in launching an offshore software development initiative is perhaps the trickiest: do we build a captive development center or do we partner with a service provider? It is understandably difficult for leaders (particularly the technologists among us) to admit that another firm can build our software as well as (or better than) we can and too often it becomes an emotional, rather than a logical decision. Many voices internally push to keep this type of work within the company, even if it is offshore, and it becomes easy and convenient to believe that running an offshore development center will be as straight forward as opening another global sales office.

Unfortunately research indicates that this couldn’t be farther from the truth. Forrester recently reported that 60% of captives are failing. They found that captive centers are much more expensive, take longer to ramp up, don’t achieve the necessary scale and are less productive. The conclusion: if a company believes it can provide the focus, expertise, and has a plan to ramp to 1,000 or more people then managing its own offshore development center is feasible. Anything of lesser scale should come under serious scrutiny. Anything under 250 shouldn’t even be considered.

Companies are increasingly choosing to partner with a service provider. Even companies that have captives are working with providers. If you go down that path, consider a global services firm that demonstrates an understanding of your R&D goals and can deliver the resources, partnership model and measurement mechanisms to meet them. Because product development is fundamentally different from IT outsourcing, make sure your provider has product engineering depth, domain expertise and a demonstrated ability to ramp up teams of highly skilled engineers. These engineers must be capable of, and enabled to, drive innovative approaches to software engineering. It is this last point – creatinga an environment that encourages innovation and empowers engineers – that is the primary differentiator between global services providers, and most importantly, the results that you get.

We’ve all heard about offshore outsourcing engagements that fail – sometimes fantastically. You hear phrases like “low productivity,” “miscommunication of requirements” and “lack of technical skill or domain expertise.” But these are not the reasons for failure, merely the symptoms. The root cause of these symptoms is the way the teams were put together. Most outsourcing firms use the “tried and true,” approach to team development: look down the bench, see who seems to have the basic skills to meet client needs, shake well and serve. A great approach if you’re trying to make martinis, but not if you’re trying to deliver value to clients. This is why I would suggest taking a look at three things in particular when choosing your partner. How do they build development teams? Can they provide continuity in their team structure? What evidence can they show to indicate a commitment to innovation?

Instead of free-floating engineers who are shifted from client to client as they grow in experience to fill gaps across the providers’ business, you can hit the ground running from day one and drive product innovation each day forward with a dedicated, “purpose-built” development team. Purpose-built teams include people that match your needs and create a well functioning team: the right mix of experience, technical and functional skills, and relevant domain expertise. It’s like building a championship baseball team: you need strong pitching, superb defense, speed and power to win.

But putting that team together is wasted effort if it is disbanded in 6-9 months. Productivity and contributions to product innovation are greatly enhanced by team continuity. It takes a while to learn the ins and outs of a product and if team members don’t stick with it over a longer period of time significant value is lost and performance can be uneven.

Teams that are in it for the long haul build expertise in the client’s specific product, technology and domain. After the first year or sooner, product knowledge is high and trust between teams is cemented. It is from this foundation that invention and innovation flourish across domestic and offshore engineering teams resulting in the creation of new features and products. It’s critical that you view the relationship with a provider as if you were hiring the people directly. You are making the same investment in human capital as you would with any other employee. You should expect and encourage them to grow and learn so they can help you take the company forward. If you’re just trying to plug a leak and address short term needs or looking to get someone else to handle menial tasks you will never achieve significant benefit from your offshore initiative. And I can assure you that it won’t be worth all the overhead and headache of managing your own captive operation or the investment in building a relationship with a provider.

You can identify global outsourcing firms that operate purpose-built teams for their clients by their high productivity, and contributions to innovation. Many global software development firms are still focused on delivering sustaining innovations for their clients, which only add incremental value. Only a few are even thinking about playing a role in generating a steady stream of innovations for clients, let alone delivering against it. Look for providers who ‘bake innovation’ into their culture inspiring employees from the C-Suite to the newly hired entry-level employee, to actively participate in the firm’s sustainable innovation culture. Many firms openly advertise their innovation capabilities but I would suggest looking past marketing materials to ask potential outsourcing partners how they foster and deliver innovation to their clients.

A strong and steady stream of inventions and tight execution processes that transform them into innovations is a key differentiator-for software product and for global service providers. In my experience, the best way to harvest this kind of value is through an innovation ecosystem composed of interconnected nodes of highly-skilled engineers that are familiar with each other and the project at hand-no matter what country they work in. By seeding these nodes with dedicated engineers who have strong knowledge of your products, your culture, and each other’s work habits, companies more easily tie R&D’s impact to profitability. Next time you hear about a globalization initiative gone wrong or a wildly successful global engineering endeavor, ask about the team model. Purpose built teams trump teams recruited from a bench every day of the week.


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