What's wrong with offshoring R&D
By David Watkins, Tech Update
January 20, 2004
COMMENTARY--In the warp-speed competitive climate of software development, no company has the timetable that affords them repeat trial and error labors based on logistical snafus. I fear the thousands of companies jumping on the off-shore bandwagon, even if working to appease shareholders and investors with lower labor expenses, may be undertaking a dangerously short-sighted practice that has macroeconomic impact.
IBM's announcement to grow the high-level technology skills of its U.S. employees, versus further advancing the workforce housed in distant countries, was a valiant step for the economy, but it was also a very strategic step for the company itself. Yet, it seems to me that IBM appears to be in a small minority. Most surveys and reports indicate that the majority of software companies, both large and small, are planning to send some amount of R&D offshore, if they are not doing so already.

In an October report, AMR Research told vendors that the benefits of offshore development are simply too great to ignore. The report references some cost savings, but acknowledges in the fine print that it typically takes three projects to get it right. Given the significance of that fact, this subtle concession should have in bold and up front.

Pioneering software development is just not suited for offshoring, particularly for smaller, more nimble vendors that wield competitive advantage by being able to innovate and deliver on a dime. Keeping your most strategic and competitive functions in-house is key. Offshoring inhibits engineering teams from directly and consistently interacting with critical cross-functional teams to ensure direction, control, quality, and the speed of rapid implementation. The cultural, language, and time differences can hinder simple communications, often creating an "us vs. them" mentality and impacting the development process. And, the absence of interaction with sales and usability functions, or exposure to industry-specific U.S. business requirements, also limits overseas engineers in managing more than a component of a project.

More importantly, the practice trades off security and confidentiality for the perception of lower labor cost. Sure, a full-time or contract engineer located on-site might leave and create security problems, but a motivated, engaged and well compensated employee is less likely to be a risk than someone you've never met.

Offshoring typically lends itself to high turnover. A part-time or full-time engineer in India or China, who works unseen in a virtual world, has few deep loyalties to a team or vendor. They potentially could share a company's knowledge base and core intellectual property with a competitor.

Beyond the supposed "painless" logistical challenges afforded by network, telecommunications and storage advances, I've read that there are significant cost savings via offshore outsourcing. Yet, there's still no word about how such cost savings are quickly negated if you lose six months of version development or intellectual capital to a competitor.

Sure, reducing R&D labor by as much as 50 percent is compelling, even with an increase in communications and other information technology. For the highly competitive and nimble software companies, however, the risks quickly outweigh the cost savings given the possibility of losing any portion of your intellectual property, knowledge capital, or competitive edge.

To consider the ultimate risk, perhaps the sector should closely explore international law and its ability to police patent infringements across oceans and silicon. That's not a battle I'd ever want to take on.

Back to the big picture, offshoring R&D has a direct impact on both local and national economies by taking jobs away from a plethora of native IT talent. Additional harm to the broad U.S. workforce also impacts businesses, and therefore the number of companies that have the money to purchase enterprise software. I encourage any vendor hoping to stay the course to scrutinize the "why2offshore" hype, as it brings both industry and macroeconomic ramifications that we may live to regret. Let's hope that reports of a decline in R&D emphasis aren't true, and that we aren't shipping out the future of U.S. technology strength.

biography
Dave Watkins, is the founder of Softscape, which provides Web-based human capital management and case management solutions.