Software development outsourcing for SMEs: strategies that make a difference

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

While the officially recognized downturn in the US has seriously affected large enterprises, a greater number of small and medium companies are seeking new ways to stay competitive and increase profitability in the times of recession. This new “breed” of clients has become a target for major outsourcing providers, both offshore and nearshore. When talking about outsourcing deals, India alone has received deals worth $7 billion by March 2008. While Indian outsourcing providers are undoubtedly well-established players on US grounds, Central and Eastern Europe competitors can surpass them by lower attrition rates, greater cultural alignment and more sophisticated programming skills.

Common concerns : a closer look

For Small and Medium Businesses (SMBs), it is commonly believed that the total per-worker savings associated with software development outsourcing is 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 the Small and Medium Enterprise (SME) to meet both deadlines and project budget limits. Failing to meet these constraints could lead to major 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. Last, but not least, one of the main constraints for outsourcing is significant internal resistance and lack of customers’ approval.

As for IT outsourcing in general, clear evidence exist that corporations are more willing to partner with external service providers than mid-size companies. According to the analytical data presented by several market research institutions, 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 the IDC, in the years to come software outsourcing will take central stage for SMEs due to the pressure to cut costs and the 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 a substantial 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 some of the hallmarks of next generation outsourcing into their common partnership practices. These enable the outsourcing buyers to leverage the IT environment for increased business benefits. The principles of next generation outsourcing, namely value, partnership and innovation orientation are in line with the “SME-to-SME” concept, with its 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. It is recommended that SMEs 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, CMMI).

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 a partnership based on shared values and mindset.

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 a significant impact on the company's overall performance and future evolution. It is worth mentioning that 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 that applies to 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 improvement suggestions and offers from the provider.

For SMEs 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 possibly be commercialized by the “big players” at some point in the future. The best 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 the SME segment taking the lead in its customer mix, Intellias developed a 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 Intellias outsourcing package for SMEs foresees flexible business terms that are catered to varied budget scope, process maturity and outsourcing models. Depending on the client needs, Intellias can offer either a 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. Along with that, Intellias is very sensitive to IP and confidentiality issues and leverages well-defined policies to safeguard the 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.

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