Offshore IT for Start-ups

Tax on Outsourcing!

2009-05-14T08:32:00.000-07:00

In recent days, I have heard a lot of comments on the effect of President Barack Obama's plan to close overseas business tax loopholes on offshoring industry. In researching the facts, I came across the following article in CIO magazine, which is a must read for anybody interested in this subject:
http://www.cio.com/article/492414/The_Truth_About_Obama_s_Tax_on_Outsourcing_?page=1

India Offshoring Quarterly Snapshot

2008-10-10T14:10:00.000-07:00

Interesting read...
Excerpts from Gilford Securities analyst Ashish R. Thadhani's recent report to clients on the Indian offshorers from Seeking Alpha

Interesting article from Investors Business Daily

2008-10-04T07:35:00.000-07:00

Investor's Business Daily
India Increasingly Seen As A Center Of Tech Innovation
Wednesday October 1, 5:41 pm ET
J. Bonasia

Outsourcing has long been a low-cost way to offload mundane tasks such as payroll, computer network management and manufacturing.
Automatic Data Processing (NYSE:ADP - News), now the world's largest outside printer of paychecks, launched in 1961. Tech services giant Electronic Data Services, now owned by Hewlett-Packard (NYSE:HPQ), was founded in 1962 by entrepreneur-cum-politician Ross Perot. And countless companies use outside contractors for nitty-gritty manufacturing jobs.

But some managers still frown on outsourcing the research and development of products. Many see the R&D process as a core mission to be closely guarded within the four walls of the business.

That's changing as more global companies ship R&D duties to India -- by either hiring workers overseas or contracting outside companies in the region.

Can Always Localize Products

"Innovation is now coming from global locations much more than in the past," said Vamsee Tirukkala, co-founder and managing partner of Zinnov, an offshore advisory firm based in Bangalore, India. "Once you have the products, you can customize and localize them for the local audience."

Global tech outfits like Intel (NasdaqGS:INTC) and Google (NasdaqGS:GOOG) are betting that offshore R&D will help them save money, tap into faraway talent and speed up product development.

This approach also provides a way to penetrate fast-growing markets in India, Tirukkala says.

Outsourced R&D can boost profit and per-employee sales, says Paul Spence, global leader of outsourcing services for Capgemini. By hedging the risks inherent in product research -- many ideas never lead to a commercial product -- companies can get more products into the market faster.

"This makes the most sense for companies with long product development cycles," Spence said.

Nearly 600 development centers have cropped up in India, up from 180 in 2000. About half are based in the tech hub of Bangalore.

Roughly $9.4 billion will be spent on R&D services in India this year, according to a recent study from Zinnov. More than half that amount comes from spending on internal R&D centers in India by American tech firms such as IBM (NYSE:IBM) and Motorola (NYSE:MOT). The U.S. firms hire staff in India to develop products on their behalf.

Overall R&D spending in India is forecast to grow 23% per year to $21.4 billion by 2012, according to Zinnov. Most of that growth will come from the big India-based outsourcers such as Infosys Technologies (NasdaqGS:INFY) and Wipro (NYSE:WIT).

Infosys does R&D for clients from startups to large multinationals, says Ram Kumar, Infosys associate vice president of product engineering. For instance, Infosys develops new broadband components and software for Alcatel-Lucent (NYSE:ALU).

"Our vision is to establish Infosys as the leading R&D hedge," Kumar said. "We want to be a one-stop shop from the product concept to design, to validation and engineering."

India's largest outsourcer, Tata Consultancy Services, announced a partnership with Saab on Sept. 10 to build an aeronautical design and development center in Bangalore. TCS will operate the center to focus on projects for global defense and civil aeronautics projects.

Over the past decade, 30,000 Indian employees have returned to India after working at tech firms in the U.S. and Europe, according to Zinnov's report. The study was based on interviews and surveys of managers at 594 development centers across India.

Workers Get Bigger Stake

Large foreign companies are ceding more ownership of their offshore units to Indian employees. In this way, local workers get a bigger stake in the success of the business. They also help U.S. firms grasp the market dynamics within fast-growing India.

Much work in India is heavier on development rather than research.

Basic research is just one part of the development cycle. Most of the cost and effort in R&D involves fine-tuning new concepts by testing out prototypes, Tirukkala says.

"Once you have the product diagrams and data in place, it's all about product testing and servicing," he said. "You don't really need to do that part in-house."

That lets large companies outsource R&D functions for their more mature product lines, freeing up internal teams to work on their next generation of products.

Infosys got started in R&D outsourcing by working with Nortel (NYSE:NT) in 1992.

Today it provides R&D services to clients in the high-tech, manufacturing, auto, aerospace, energy and health care sectors.

After 16 years, the trend is finally catching on, declares Kumar. "Outsourced R&D is getting more and more acceptance," he said.

Some global firms have taken on a venture capital model to seed new concepts. The idea: Assume the role of a venture investment firm, financing promising startups to jump-start fresh ideas.

Cisco runs a $1.1 billion fund focused on computer chips, wireless technologies and optical networking. Oracle (NasdaqGS:ORCL) has a $500 million fund in India to develop products and services around its database software. Adobe Systems (NasdaqGS:ADBE) and Intel manage similar funds at roughly half that size.

Drug makers and biotechs are active in offshore R&D as well. Pfizer (NYSE:PFE) outsources tasks for clinical data management and software programming to Cognizant Technology Solutions (NasdaqGS:CTSH) and SIRO Clinpharm Pvt. Ltd. of Mumbai, India. Pfizer also has its own biometrics unit based in India that performs early phase drug trials for the parent company.

Drug testing is a good fit for outsourcing due to the high cost of drug development and the lengthy process for clinical trials, says consultant Spence.

"Pharmaceutical firms can really accelerate the development process by going offshore with parallel activities in multiple locations," he said.

Cost of Offshoring

2008-09-11T09:48:00.000-07:00

In a recent price negotiation discussion with one of our clients, they showed me a proposal from an offshore company quoting $10 per hour for .NET developers. Being a startup on a tight budget, they wondered whether they should try out the vendor.

Cost consideration is definitely the biggest reason any organization decides to offshore their IT, but it is easy to forget the risks of taking a decision on offshore vendor solely on price, especially when the organization has had success with offshoring with an existing vendor. Having a group of developers thousands of miles away without a well defined process to ensure that they are being effectively utilized is a sure recipe for failure. Building an effective process and monitoring it to ensure that the process is effective costs a significant portion of the offshore operation expenditure. Unfortunately, when the process works, the value is usually hidden from the clients. I am interested to know if readers have any suggestions on how an offshore vendor can showcase the value add such processes bring to their clients. I appreciate your comments on this blog.

Thanks,
Avik

Trying my hand at blogging

2008-08-28T12:25:00.000-07:00

This is my first blog post ever! Being in the IT industry for over 12 years and having created numerous sites that integrate blogging feature, I have seen the blog revolution first hand, and so decided to finally take the plunge.

IT service offshoring is nothing new, and a lot has been discussed on the merits and demerits of offshoring. However, offshoring IT for startups is a relatively recent development which is gaining traction in US. Startups have very specific needs from their IT operations which are distinctly different from larger and well established companies, which brings different challenges and opportunities. For example, a startup will need to build a working prototype of their ideas quickly to present to potential investors for funding. They may also require flexibility in terms of human resource management (quick team ramp up or ramp down) or payment (partial payment of invoice or deferred billing based on their cash flow projections). In order to successfully outsource their IT operations, they need to partner with an organization who understands these needs and support and guide them through the process.

Over the next few weeks, I will try to tell the story of how we at PlanLogix have navigated our clients through this process and the challenges that we have faced and overcame. I request the readers to provide suggestions on any specific topic that they would like to see, and I will try my best to address them.

Happy reading,
Avik