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Small Business Internet Development Offshoring

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Posted by Paul Reilly at 10:15 pm on October 5, 2010 • General,Programming,Vendors

Considerations, Concerns and Suggestions for Success

Small businesses that create websites and other internet based digital products are at a disadvantage to larger firms for several reasons.  Because they are small (for the purposes of this article, small means less than 50 employees), they lack the resources of the bigger firms.  This means that the projects they take on must be smaller in scope and usually timeframe. A paradox forms because of this relationship. Small businesses take on small projects because they lack the resources for big projects, yet to be competitive, they must take many small projects on at once, many of which will inevitably have delays and changes to timeframes, and lead to the firm lacking resources anyway when deadlines coincide.

When small business owners, well aware of this predicament, read about competitors that have begun offshoring development, they are tempted to jump ‘on the bandwagon’, thinking of offshoring as the solution that will provide both productivity and profitability.  They can have a band of developers at their disposal, for a fraction of the cost of domestic developers. Unfortunately, research has shown that although it can sometimes provide productivity boosts and labor arbitrage opportunities, more often the projects either outright fail or deliver nowhere near the anticipated savings. It is especially difficult for the small business owner to offshore, again due to the lack of resources compared to their larger competitors. Below is an explanation why offshoring small development often misses expectations, along with ways to approach the process that could make it more rewarding.

The Argument for Offshoring Internet Development

The initial arguments for offshoring are logical and persuasive.  Having additional workers on call helps managers flexibly deal with capacity issues, when not enough talent is available in house. An offshoring arrangement can help with skills shortages as well, when the talent necessary for a project is not available locally.  Of course labor arbitrage is a strong argument, as many offshore developers charge just 10-30% of domestic workers[1]. Of course, at face value, these value propositions of offshoring are all quite attractive.

It is easy to fall for the “bandwagon” effect as well.  It seems that all businesses are now offshoring.  In 2008, Gartner estimated that by 2015, 30% of information technology workers will be working from emergent markets and IT outsourcing will continue to grow at about 8% a year.  It is easy to justify considering the switch to offshore providers.

Common Issues and Concerns when Offshoring Internet Development

However, a 2005 research report from the Ventoro Institute suggests that over 25% of polled offshoring business owners experienced an increase in costs! Another 25% experienced no tangible savings at all and 30% experienced less than 20% of savings. This leaves only 20% of the respondents experiencing a tangible amount of cost savings. Therefore, 50% if not more of these offshoring participants failed to achieve their goals of cost savings.  When asked what lead to root failure of these projects, poor planning, preparation and execution was the main cause almost 50% of the time[2].

According to a CIO Magazine estimate, the extra costs of offshoring, which include vendor search, restructuring, additional communication expense, etc., can cost an additional 17-80% of the project cost – if your labor savings are not significant enough, offshoring can easily become economically irrational.  Other hidden costs occur when offshoring, such as layoff-related expenses and overtime costs (for remaining employees who may now have more work to do)[3].  If the switch to offshoring is managed poorly, remaining employees may feel violated and either quit or become apathetic or vindictive, dooming the project as well.

General Offshoring concerns always need consideration, including culture issues and macro-level uncertainty. Often projects collapse with poor communication and assumptions due to culture differences. Instead of working through the differences, stubbornness can prevail, leading to distraction and bad decisions. From a macro perspective, many countries that offer the most attractive labor costs do so because they are underdeveloped. Working with these countries, or even less developed regions of stable countries, exposes you to various economic, political and infrastructure risks. There could be dramatic inflation or changes to tax benefits, military uprisings or natural disasters. Poor infrastructure could bring down the internet for days on end in some developing areas. Factor these risks into any offshoring decision.

As a small business, unfortunately many other issues arise where larger organizations are immune. The relative size of the average project a small business will offshore is significantly smaller than a large organization.  Therefore, the transaction and setup costs, such as vendor searches, negotiations, legal and contracting costs, process codification and more take up a much more significant chunk of the project budget than for larger organizations. Small businesses simply lose many economies of scale and scope due to their limited project size[4].  Small business also lacks the resources of larger organizations domestically when setting up an offshore project. Instead of having dedicated employees to manage the project, existing management must be pulled off other projects to manage the outsource team.  Small businesses have a capital disadvantage as well – they do not have the same deep pockets of larger organizations and cannot make the upfront investments sometimes necessary. They often lack onsite staff for finance, legal or IT as well and are less likely to have the resources in house for these functions[5]. Unlike larger organizations that are offshoring large documented processes, small web development tasks are likely poorly documented and described as well, which lowers the ability of the vendors to successfully produce the correct end-product.

Another unfortunate reality for small businesses that want to offshore web development is that many of the larger established international vendors will have no interest in working with you. These larger organizations have realized that working with smaller organizations on smaller projects is less profitable for them. Especially in cases where the vendor needs to learn your proprietary practices in order to handle your projects, the economies of scale argument again works against small business. This leaves smaller, less established vendors as the sole options, which have problems all of their own. These vendors are often more opportunistic, anxious to always pull their best employees from your project to one that pays the better. There is a ‘fly by night’ risk for these vendors as well – being less established, they could disappear overnight if they get bad reviews or a single large job.

Picking the Right Projects to Offshore

Despite all of these hurdles, with the right relationship and proper control, small-scale web development can still be offshored successfully.  The first step towards a successful experience is to pick the right projects. Because you will likely be working with an untested vendor, the projects you choose to offshore initially need to be both non-critical and non-core to your business. They need to be projects, that in the worst-case scenario, you can rework internally without catastrophic ramifications. Projects that include intellectual property are not ideal for a first-time vendor either, as contracts are notoriously difficult to defend internationally – the temptation to steal and profit from your ideas is quite strong for smaller vendors internationally.

A task that is easy to monitor and measure is ideal as well – the better understanding you have on project progress, the less likely issues are to occur. Hand in hand with this requirement is that the project is easily codifiable – both the process and the end result need well documented processes and procedures. Without this, the risk that miscommunication will arise is too great. With subsequent projects, as the vendor learns your procedures, the codification step becomes less important, but it is imperative for initial projects.

Vendor Selection Strategies for Offshoring Internet Development

As noted throughout this document, offshoring is not viable for a one-time small web development project. The initial costs and risk are just too high to justify the process. If however, multiple projects will be appropriate for offshoring in the future and with the right small web development project selected and well codified, it may be worth the gamble.  What steps can you then take to promote success? The first step is to select the right vendor.

When considering an offshore vendor for an established relationship, a logical first step is to get referrals. Speaking to others that have had positive experiences is always a good idea. If you do not have associates to get referrals from, you can utilize many different approaches to generate bids (see Appendix A for a list of resources).  If you are using vendor brokerage websites that provide ratings, this is certainly a better approach than flying blind. Be aware though that some less reputable vendors can game these online rating systems.

When you have narrowed down a list of potential vendors, it is time to do additional research.  First, consider the country and region where the vendor is located – is there a strong educational system there that will generate good talent? Does the region have strong infrastructure or is this a risk. Is the country stable or could political or economic distress destabilize the vendor? Gartner provides excellent reports on these matters for managers considering outsourcing. Google is of course your friend as well as the CIA Factbook and other geographic information databases.

If you are confident in the region, start to get a better feel for the firm itself. There is certainly more to a vendor than the price they charge. You want to assure a firm with the best  quality, response time, speed of development and care[6].  Ask about their standard practices. Ask about the employees as well. How the vendor treats their employees is very important.  Determine how long most have been there – a firm that has high turnover likely does not respect the employees well, and these turnovers will lead to delays and miscommunication on your projects as retaining must occur.  Try to get a feel for the employee education as well – are these vendors trying to be on the cutting edge, continually learning and suggesting better techniques? Are they going to keep up with your technical needs over time? When considering an offshore vendor for long relationship, you should not just be outsourcing for cost savings, you should also be purchasing expertise – select a vendor that will help your grow too[7].

Keeping Internet Development Offshore Projects on Track

Large organizations make efforts to meet face to face with their vendors.  They also hire consulting firms like TPI (http://www.tpi.net/) for help structuring and managing their offshore relationships.  For the small business though, these practices are beyond cost prohibitive! TPI states that their consulting services only start to be cost effective when an outsourcing project is at least $50mm!

Fortunately, inexpensive options for collaboration are continually improving. Skype (www.skype.com) is no longer nascent and is now very accepted for video communication, and is completely free.  They’re even offering screen sharing options, so you can see live demos, etc. Social networks like Facebook and Twitter are allowing co-workers to strike up relationships with each other on other sides of the globe better than ever before, and help to establish trust in the vendor/client relationship.  Internet based collaboration tools are continually improving as well.  Such services and products include Wikis, Basecamp (www.basecamphq.com), Zoho (www.zoho.com) and Google Docs, which enable rich yet inexpensive collaboration across continents. Time tracking, milestone settings, tasks, bug requests and more can be managed by these services and because they’re in the cloud, nothing needs to be installed and administered at the vendor or client sites. These applications and services make the exchange of information, project updates and deliverables much easier than in the past, and by being software as a service (SaaS) applications, they’re continually transparently added new and better features and functionality.

For payments, PayPal has eased money transfer significantly.  PayPal is now available in 190 markets and 18 currencies around the world[8] and makes it easy for small businesses around most of the globe to make and receive payments easily.  PayPal’s services relieve a transaction cost roadblock that has stymied small business owners for quite some time.

Despite these greatly improving tools and services that small business managers now have at their disposal for offshore web development, they are useless if not used effectively. Once your vendor is up and running with these tools, you must use them to stay in communication and keep them accountable. Set up a communication schedule, where you discuss the project with your vendor at set recurring times. Make sure the update their status and provide status and sample code that can be reviewed and tested[9]. This frequent communication and monitoring prevents gaps and goofs, helping towards a more ideal end result.

Related to the discussion of vendor communication is vendor payments. Choosing between a fixed cost or time and materials basis determines who shoulders more of the risk. Under a fixed cost basis, the vendor is taking on a larger risk, but is also more likely to balk or disregard requests that would cost them resources. With a time and materials approach, the client needs much more oversight to make sure the vendor is operating efficiently. A common trend with web development offshoring to meld both approaches together. The initial requirements are done on a fixed cost basis, but the inevitably changes and additions are negotiated on a time and materials basis. This eases the risks for both sides. This combination pricing has saves off-shorers as much as 30%, avoided conflicts and aligned the interests of the buyer and the vendor[10]. A management technique to again assure collaboration is to tie payments in the contract to well documented project milestones. This also prevents miscommunication. One last suggestion on pricing is to avoid penny pinching the vendor up front. Research shows that when a vendor feels ripped off from the start, they’re more likely to show opportunistic or vindictive behavior. When they feel well compensated from the start, they will exercise more effort and care instead.

Finding domestic help can keep projects on track as well. Although your web projects surely are not at the $50mm TPI consulting size, that does not mean local resources aren’t available to help. If you’re project is large enough to require a customized contract, avoid mom and pop shop lawyers and find one that is specialized in offshore contracts. Martindale (www.martindale.com) provides methods to search for such specialists. The extra costs of a specialist will be worth it compared to an inexperienced lawyer if you ever have an issue that requires legal assistance, such as settling disputes, arbitration, renegotiation, litigation, lose of investment due to breakup, etc. Unfortunately, small businesses are much less respected than large powerful organizations when they are handled by foreign legal systems.

Alternatively, many offshore development firms have offices and representatives in the States. Although their prices can be a bit higher than working directly with an international-only firm, your contracts would be domestic and you’d have a local liaison that worked as an intermediary with the offshore workers. If you have projects with intellectual property risk or other similar concerns, this is a reasonable approach to take.

Strategies to Continually Improve the Process

Once you have a successful project under your belt, once you’ve breathed a sigh of relief, recap the high and low points of the process and start to address them. You have the groundwork laid, and future projects will require less upfront costs and learning curves. Do not be tempted to start offshoring more and more types of tasks right away though. The same steps taken to choose an appropriate project for your first offshoring experience remain.  As you are tempted to move more and more of your projects offshore, ask yourself if they are core to your business. If the next few experiences do not go as well as the first, will your business and reputation suffer? What value will you be providing your clients if you outsource all of your work?  Web projects that require both onshore and offshore team interaction or brainstorming won’t be ideal candidates. Self-contained tasks or projects are most appropriate[11].

With a successful and growing offshore relationship developed, it may seem crazy to voluntarily start the same search process over, but this is another necessary step if you anticipate offshore many more tasks.  This concept of ‘multi-sourcing’ acts as insurance against any one provider and now is the time to start the process.  As mentioned earlier, many unforeseen events can cause your once-reliable vendor to disappear – economic or political events, infrastructure changes or natural disasters, new larger vendor clients, etc. can all leave at square one at a moment’s notice. It is best to prepare for this scenario before it happens by establishing relationships with several vendors in several locations.  One option to find several possibly vendors is to try crowdsourcing a smaller project. This is a process where you put your defined site up on a site like Crowdspring, and let multiple parties compete to create the best solution. You then pay the best party for their solution. However, you can also use the experience to find other reputable providers.

Be cognizant of your internal workers as you continue to outsource as well. It’s best to appoint just one or two managers as liaisons to the offshore teams, so that the strongest relationships can be forged with the vendor and there is less erroneous or lost communication between the teams.  Make sure that your incentive systems don’t become misaligned either through offshoring – if your employees are constantly worried that they’re jobs will ultimately be cut as their tasks are outsourced, you won’t get much productivity out of them.

Conclusion

The cards are stacked against small businesses that want to consider offshoring internet development tasks. Their projects typical lack the scale and scope of those of larger organizations, making the fixed transaction and coordination costs relatively exorbitant.  There can still be merit in the approach though; the process just must not be considered a onetime event. When small business plan for and manage the process as a long-term endeavor, eating some costs up front with the first project, success is still possible over time. As the process is better organized and understood by both the vendor and the client, it will become more efficient. Key to a successful experience is due care in both choosing the projects to offshore as well as the vendors to work with. Once these two choices are made, the responsibility continues for the client, who much work hard to keep steady communication with the vendor.  With proper control and learning through subsequent experiments, offshoring can become a valuable option for small web development businesses, but attempting it for just one project and not being prepared is a recipe for disaster.

Appendix A: Services to list your jobs:

1.       Your inbox – foreign firms frequently solicit their services to you directly – review their websites and qualifications, and ask for references.
2.       Craigslist.org – although Craigslist is meant for local markets, offshore firms view postings and are anxious to supply bids.
3.       Elance.com – One of the most established marketplaces for developers, Elance has many providers ready to tackle small projects. However many of these vendors are more of the fly by night variety.
4.       oDesk.com – Similar to Elance in terms of providers, oDesk provides powerful collaboration tools, including the ability to view your vendor’s screencasts. Again though the vendors many not be able to tackle very large projects.
5.       Guru.com – another established player that caters more to freelancers.
6.       Project4hire.com
7.       GetACoder.com
8.       CrowdSpring – a crowdsourced system for design and some development
9.       TopCoder.com – a crowdsourced ‘contest’ like system for developers.

Appendix B: Emerging Collaboration Tools

1.       Dropbox.com – allows for easy file sharing with great security between users
2.       Basecamp – Great online project management collaboration platform, with milestones, time tracking and more
3.       ActiveCollab – an installed free alternative to Basecamp
4.       Google Apps for Domains – email, calendar, document sharing and more
5.       Wikis – easy documentation
6.       Bugzilla – installed bug tracking system
7.       Mantis – installed bug tracking system
8.       SVN – file versioning system
9.       Trac – installed Project management and bug/issue tracking system.
10.   Assembla – web based online project management system with SVN hosting and Trac integration


[1] Small Firms and Offshore Software Outsourcing. Carmel and Nicholson
[2] Natalia Levina
[3] Tips for outsourcing your small-business needs, Joanna L. Krotz
[4] Small Firms and Offshore Software Outsourcing. Carmel and Nicholson
[5] Small Firms and Offshore Software Outsourcing. Carmel and Nicholson
[6] Ten Points to Ponder Before You Outsource http://www.smallbusinesscomputing.com/webmaster/article.php/3319531/Ten-Points-to-Ponder-Before-You-Outsource.htm
[7] Ten Points to Ponder Before You Outsource http://www.smallbusinesscomputing.com/webmaster/article.php/3319531/Ten-Points-to-Ponder-Before-You-Outsource.htm
[8] http://www.auctionbytes.com/cab/abn/y07/m05/i10/s03
[9] http://pmtips.net/managing-offshore-development-project/
[10] http://smallbiztrends.com/2009/02/top-10-outsourcing-trends-small-businesses.html
[11] http://www.microsoft.com/business/en-us/resources/management/recruiting-staffing/tips-for-outsourcing-your-small-business-needs.aspx

8 Comments

  1. […] This post was mentioned on Twitter by Paul Reilly, Unitz LLC. Unitz LLC said: My thoughts on offshoring Internet development from a small business perspective: http://is.gd/fO1CT […]

    Pingback by Tweets that mention Small Business Internet Development Offshoring | U-notez -- Topsy.com at 11:42 am on October 6, 2010

  2. vWorker is another resource, which can be extremely advantageous for those looking for a risk free, money-back guarantee.

    Comment by RACNicole at 3:26 pm on October 6, 2010

  3. As the process is better organized and understood by both the vendor and the client, it will become more efficient.

    Comment by Joe Parrish at 4:14 am on September 19, 2012

  4. This is nice and informative post.
    Thanks for sharing this..

    Comment by Robert Cruz at 6:49 am on September 24, 2012

  5. Despite these greatly improving tools and services that small business managers now have at their disposal for offshore web development, they are useless if not used effectively.thanks for sharing this..

    Comment by Donald Hogan at 4:11 am on October 8, 2012

  6. I am a team head in a foremost offshore outsourcing company from previous five years. I have wonderful knowledge and also technological skills of countless coding languages and web programs.

    Comment by Malik Gomez at 7:41 am on October 8, 2012

  7. The relative size of the average project a small business will offshore is significantly smaller than a large organization.

    Comment by Iliana Stephenson at 12:40 am on October 18, 2012

  8. It is especially difficult for the small business owner to offshore, again due to the lack of resources compared to their larger competitors.

    Comment by HakeemCarlson at 1:18 am on October 20, 2012

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