Worlds apart: The end of offshore development?

The migration of software development to low-cost offshore locations has, thus far, been a major trend in the 21st century. Prompted by the dual challenges of reducing costs whilst simultaneously adapting to a new regulatory landscape, many large financial firms opted to migrate development functions to offshore locations, predominantly in Mid and East Asia.

Initially, this strategy was extremely successful. With software developers in India typically earning one fifth of the salary of a similarly skilled engineer in one of the global financial centres, firms were able to deliver software cheaply, quickly and to a relatively high standard. Predictably, these savings were too good to last.

Until recently the cost benefits of offshore development have outweighed the logistical disadvantages created by having vast distances between the development facility and the internal ‘client’. However, the influx of businesses to the most popular offshore locations has driven wage inflation to unprecedented levels (currently between 16% and 30% per annum in India) and employees on all continents are becoming increasingly disgruntled with the inconvenience of working with faceless teams in distant lands in inconvenient time-zones.

As time progresses, more and more cracks are beginning to appear in the offshore model. Foremost amongst these are:

• Staff costs are rising at an alarming rate. The annual wage inflation rate for top software engineers in India ranges from 16% to a staggering 30% and shows no sign of decreasing anytime soon.
• Low staff retention is having a negative impact on productivity and increasing the risk of delivery failure. With annual headcount turnover approaching 25% in some organisations, it is becoming increasingly difficult to hire people with the right skills or to keep them once they have been trained. This issue is particularly prevalent within the captive centres of the large banks that are having trouble competing with the massive India-based firms that have been honing their recruiting and employee retention techniques over the last decade.
• Time-zone fatigue by employees in financial centres is affecting morale and retention of top people. Employees working in New York, Boston, Toronto and to a degree London have spent a decade waking up to very early morning conference calls or staying up late for virtual meetings with their teams in India. The requirement to work off-hours in order to align to a working day in a distant time zone, some nine and a half hours from New York or five and a half hours from London, is wearing out IT leadership. In addition, the requirement to spend twenty-four hours or more on a plane, most likely crammed in coach class (given the cost controls in place across all firms these days), results in IT leadership not wanting to visit their India facilities. This fatigue impacts the quality of relationships across the global team and increases delivery risk.
• Erratic delivery performance in India has been a constant concern, especially for complex programmes that have tight deadlines. IT Managers have learned that it takes very tight software development and risk management processes to execute in India. While some firms have managed to produce repeatable successes, many have been unable to consistently execute IT delivery on-time and on-budget when their teams are half a world away. In some cases, firms have measured a 40% productivity reduction due to lack of time-zone alignment and the twenty-four hour turn-around to get questions answered and clarifications on requirements closed.

These problems all demonstrate the increasing difficulty and reduced return on investment associated with current day and future offshore development. Worse still, the severity of many of these issues will only increase over time. This raises a worrying question for financial firms: If the offshore model is broken, how can they continue to lower costs and improve efficiencies without compromising on quality?

As in many areas of life, the answer appears to lie in compromise. We are currently witnessing an influx of interest in development services delivered from countries that lie in-between the traditionally distant offshore locations and the global financial centres. These ‘nearshore’ locations offer many of the cost advantages and political stability of the traditional offshore development centres, but with the added convenience of increased time-zone alignment, cultural synergy and shared languages.

Nothing remains static for very long in the fast-moving race to find quality, service, and increasing cost efficiency. As such, it seems that nearshore development is definitely here to stay.