Software development outsourcing for SMEs: strategies that make a difference

The highly competitive landscape of modern economy places immense impact on powerful and up-to-date technological capability. Replacing traditional local and regional markets, the global interconnected marketplace is currently sweepingly evolving, posing both chances and risks for the small and medium-size enterprises. The demand for greater flexibility and increased operational efficiency could be satisfied by the means of software outsourcing partnership, an option which often receives far less precise attention from small and medium enterprises than from their Fortune 500 counterparts that have been actively engaged in outsourcing for more than 15 years.

Common concerns : a look closer

For SMBs, it is commonly believed that the total per-worker savings associated with software development outsourcing are expected to be overweighted by the risk of setting up operations abroad. When talking about outsourced application development, especially product launch or new release, it is crucial for the provider working with SME to meet both deadlines and project budget limits, failing which could lead to severe financial problems within the enterprise. Another issue of concern is the desire to impose direct control over the outsourcing process, often leading to unreasoned choice to outsource to former employees or good acquaintances of the business owner. And last, but not least, one of the main constraints for outsourcing is significant internal resistance and lack of customers’ approval.

In D-A-CH region the SME segment is very strong and is commonly viewed as the main fuel for the countries’ economy engine. The small and medium business segment in Germany, Austria and Switzerland are comfortable doing their software development work in-house, as a last resort outsourcing their development activities to a local and personally known service provider. Their choice of the vendor is often preconditioned by informal business relationship. More venturesome owners of SMEs are working with either local or foreign freelancers found at freelancemap, rentacoder, elance. This approach could be feasible for very small businesses with limited operations due to significant cost savings and minimal overhead. However, for bigger businesses this model appeared to be counterproductive.

As for IT outsourcing in general, clear evidences exist that corporates are more willing to partner with external service providers than mid-size companies. According to the analytical data presented by Lünendonk and Techconsult 35% of companies with less than 500 employees have already outsourced part of their IT activities. For companies with staff number greater than 500, this indicator totals approximately 38%. At the same time, the study outcomes obtained by Experton Group certify that from 25% to 30% of small and medium-size businesses have an outsourcing initiative in place. According to IDC, in the years to come software outsourcing will take central stage for SMEs due to the pressure to cut costs and necessity to distance their companies from the competitors.

Next generation outsourcing for SME segment: a buzz word or a viable strategy?

When evaluating different outsourcing concepts, its worth pointing out that not all of them are perfect fits for SME business case. For instance, multisourcing – an outsourcing relationship that foresees the involvement of several providers – could impose crushing burden on small and medium enterprises, since it requires manifold increase in management and measurement efforts.

However, SMBs could take immensely advantage from the providers that incorporate other hallmarks of second generation outsourcing patterns into their common partnership practices. These enable the outsourcing buyers to leverage the IT environment for increased business benefits. The principles of second generation outsourcing, namely value, partnership and innovation orientation go in line with “SME-to-SME” concept, with its precise focus on tailored solutions and business attitude.

At bigger software outsourcing companies, smaller projects from SMEs may be given lower priority, with less qualified and experienced resources being allocated. The good advice for SMEs is to search for companies of similar size to obtain the tailored project team and flexibility inherent in clients’ expectations. The suggestion publicized by Forrester for small and medium-sized businesses is to look for second-tier providers that offer specialized knowledge and niche-based services along with implementation of recognized industry standards (ISO, CMM).

Another attribute of next generation outsourcing that could be advantageous for small and medium-size businesses is cultural compatibility between client and vendor that could be realized through partnership with nearshore service providers. In most cases SMEs simply lack the management bandwidth to work out effective sourcing strategies which foresee involvement of the partners located many time zones away. For D-A-CH SMEs one of the most crucial cultural alignment aspects is German proficiency, an advantage which could be rarely realized with Indian and Chinese vendors. Many SMEs attest that working with Eastern European vendors could be time-saving when frequent on-site visits are required.

Why is the proper planning of outsourcing strategy important?

The typical goals of SMEs engaged in outsourcing could be roughly divided into several main groups:

The outsourcing partnership with SMEs is expected to have significant impact on the company's overall performance and future evolution. It is worth mentioning that according to KMU Innovation, SME start-ups and spin-offs have far better chances for financing from venture capitalists and investors, when outsourcing their software development to vendors abroad.

Typically small and medium-size businesses do not pay enough attention to planning of outsourcing engagements. Prior to launching an outsourcing project, a potential buyer has to model-play possible reactions, both within the organization and from the customer side. Also, it is worth identifying various risks, constraints, business requirements and opportunities which apply to the particular case.

The detailed outsourcing roadmap should include a realistic business case, designed to showcase the suitability of the specified application for outsourcing, identify the outsourcing model applying for the particular project, and create the expenses & cost savings forecast for the next 3 years.

Outsourcing partnership: checklist for vendor selection and progress review

According to the well-established industry expert, Experton Group the provider selection checklist should incorporate the following aspects:

• Economic criteria (business plan, financial capabilities, customer satisfaction, risk mitigation strategies, price range)
• Technological criteria ( technological skill set, implementation of SLAs, innovation cycle)
• Organizational criteria (retention, escalation paths, recruitment procedures, costs)
• Exit criteria (non-observance, agreement expiry)
  

Many enterprises experience problems with proper structuring of the Service Level Agreements (SLAs) and establishing key performance indicators (KPIs) early in the initiation of the outsourcing partnership, resulting in poor management control over the process from the customer’s side. With properly established SLAs and KPIs the SME outsourcing buyer is able to permanently evaluate the outsourcing impact and perform regular progress reviews. These reviews are designed to implement necessary corrections in the service delivery, realize the potential of service improvements and discuss possible improvement suggestions and offers from the provider.

For SMBs the IP and confidentiality can be issues of particular concern. In most cases, for start-ups intellectual property constitutes one of the most valuable assets. For this reason, a substantial number of small and medium-size enterprises prefer to avoid collaboration with large outsourcing firms, since their product or service ideas could be possibly commercialized by the “big players” at some point in the future. The ultimate option might be choosing a pure service provider without product ambitions that would not be tempted to productize the development work provided by the client.

Intellias outsourcing practices with SME clients: what sets us apart?

With SME segment taking the lead in its customer mix, Intellias developed clearly defined methodology and tailored engagement models to cooperate both with mid-size software development companies and enterprises from industries that rely heavily on IT. The Representative Office in Switzerland and long track record in D-A-CH region enable the company to become “locally compatible” as well as achieve cultural and geographical alignment with its customers.

Intellias outsourcing package for SMEs also foresees flexible business terms that cater for varied budget scope, process maturity and outsourcing models. Depending on the client needs, Intellias can offer either project-based model for one-off projects or tailored and staff-based dedicated resources that serve as a virtual extension of customer’s organization.

The company is also highly adaptable to client’s project management processes and has a highly responsive change management system in place. Alongside with that, Intellias is very sensitive to IP and confidentiality issues and leverages well-defined policies to safeguard business knowledge of its clients. Intellias quality assurance approaches are based on the process-based engineering methodology, which is placed on the top of the Rational Unified Process (RUP) requirements, tailored to outsourcing peculiarities and the needs of our customers. The quality management system is ISO-9001 certified and CMM Level 3 compliant.

And finally, Intellias is well-aware of the underlying reasons that motivate SMEs to outsource. Plenty often, they go beyond the typical cost-saving intentions. Closely collaborating with our clients, we assisted them in generating additional revenue, automating their business processes, shortening time-to-market and distancing from competitors with the innovative products.

Intellias - Intelligent Nearshore Outsourcing