I was talking with a colleague recently about offshore outsourcing and he said with a solid conviction about India "Forget all that CMM stuff, we have just been through a major project and what you get is cheap average quality software".
And a CIO recently told me how he now regretted outsourcing to an Indian company. He said that although the project was delivered on time change requests take months and are jeopardizing the total acceptance and benefits from the system.
On the other hand, NASSCOM, the chamber of commerce of the Indian IT software and services industry, recently announced their review of the past year and their forecast for the coming years for software exports. Jerry Rao, the Chairman, said that India was "riding on the crest of a wave" caused by the squeeze on IT budgets in the west over the last couple of years.
Indian IT-related exports are predicted to rise +32% for the current year to March 31, 2005, and that on top of a 31% rise for the 2003/4 year. The predicted export value is US$16.3b, and by March 08 is predicted to reach $50b. The US remains the largest buyer, representing 70% of Indian exports, and the UK 15%.
To me, it doesn't make sense that a $50b export industry can be built on cheap and average quality software alone. Perhaps the bulk can be built on "average and cheap", but there must be a core of top quality world-class software practices underlying such growth. Even if this top quality work is only 10% of the total that will still represent a $5b industry by 2008.
So what's the missing ingredient leading to the comments quoted in the opening?
Probably faults on the buyers' side – the main one being inadequate due diligence and the second poor management and the third mis-aligned objectives and expectations.
This means that where due diligence is done properly, and where world-class software is required, then Indian for certain can produce it, now and into the future.
How about China and how does it compare to India?
In simple terms China is a viable option now, but with a different risk profile.
The facts speak for themselves to China's role in becoming a major software and IT exporter. For example, IT-related activities account for 6% of GDP, and the GDP is growing at around 9%, leading to massive compounding of IT activities. IT export related activity grew 31% lat year, and in fact Chen Kai CEO of Comlent Holdings believes that China will be the world's #2 IT exporter by 2008, as well as being the #1 semiconductor producer and exporter.
The number of college graduates will exceed 2.8 million in 2004, passing India’s 2.4m and 1.2m from the US. While in India the market is "hot", as acknowledged by NASSCOM’s characterization of "riding the crest of a wave", in China there is still underemployment of graduates in IT. Thus while India is approaching saturation of recruiting opportunities, and suffering from wage escalation and difficulties in retaining stable teams, China will be immune from these problems for a considerable time ahead.
India has the obvious advantage of English, and of course this is so obvious that the Chinese are addressing this need by insisting on English skills in their recruits, and sometimes enforcing an all-English policy at work.
There is no doubt that Indian has the benefits of experience in producing world-class software, and a long history of good training, both of which are lacking in China. On the other hand China offers raw engineering talent and huge pools of it.
In terms of sheer cost-competitiveness I don't know how to compare the two countries, but for China most commentators see raw ratios of about 1 to 8 in favor of China versus the US (Silicon Valley costs) for programming costs. But of course this is not comparing "apples with apples" since the US programmers have actually developed world-class software and the comparable Chinese employees have not.
According to Frank Yu from Augmentum the real ratio of all-up fully absorbed costs to the company is 1 to 5 in favor of China, bearing in mind escalating costs in the major Chinese cities like Shanghai where development is centred.
Silicon Valley VCs are all too aware of these cost ratios. The first outsourcing company to produce a solid track record in delivering world-class software from China will be in huge demand to reduce burn rates and to allow investment dollars to be directed towards marketing and sales.
The key for outsourcing to China is to select the right local partner, by doing a full and extensive due diligence and ensuring objectives and expectations are aligned.
Don't make any assumptions about experience since the experience is not in delivering world-class software (this is India's advantage not China's).
Make sure that you have your right management team in place but do not impose your foreign "world-class software team" structures and processes on the local team. Choose a partner that understands how to build a Chinese world-class software team being cognizant of the local work ethic and culture. Putting this another way, China can produce world-class software but not by imposing a "US world-class software team" on the local culture.
And finally, put in place a proper risk management process and apply it diligently in order to offset the different risks in China from India, and involve the local partner deeply in this process.
The truth is that successful outsourcing requires a lot of effort and planning, and in China training, and the best return will be derived over the medium term of say 3 years, not on a single short-term transaction.
In the case of both India and China they will continue to grow and succeed, and in China's case begin, in producing world-class software and be attractive to global partners. The industry and country and demographic forces are unstoppable as enablers for this outcome.
The challenge for the established countries like the US and Australia and the UK is how to most effectively enhance their productivity through engagement with Chinese and Indian IT service providers.
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