Software Development Offshore Outsourcing: Main Growth Drivers

June 19, 2015
|By Garegin Hakobyan

The main drivers of growth are quality of infrastructure, global connectivity and availability of human capital.

Quality of Infrastructure

Infrastructure refers to basic facilities like telecommunications, power or electricity, satellites, and transportation facilities for roads, railways, ports all over the country, and air travel. Quality of infrastructure is the stability, pervasiveness and robustness of a country’s infrastructure. In the Gartner report, the quality of infrastructure of each country was rated on a five-point scale: poor, fair, good, very good, and excellent.

Infrastructure assessment can be scored through individual components like the number of fixed telephone lines, mobile phone subscriptions and available airline seat kilometers. A fixed telephone line is an active line connecting the subscriber’s equipment to the public telephone network. Cell phone subscriptions cover the number of active prepaid SIM cards and subscriptions to a public mobile telephone service. The number of airline seat kilometers is a variable measure of the passenger-carrying capacity of domestic and international scheduled flights originating from the country.

Quality of infrastructure has a great impact on a destination’s economy as well as its attractiveness to foreign investors. For example, poor or low-quality infrastructure and limited transport can increase transaction and logistical costs and limit the population’s access to markets, reducing the competitiveness of a product or service.

Improvements in infrastructure quality and existing investment climate often lead to gains in economic performance metrics such as productivity, employment, exporting activities, and foreign direct investment. However, congestion, rising property prices, and lack of business-equipped infrastructure in Tier 1 cities may drive BPO companies and investors to consider smaller areas outside central business districts (CBDs).

For example, India has many cities that belong in all tiers, a good indication that the country has plenty of space for foreign investment and economic expansion. As rental prices rise in Tier I cities, the country offers many alternative locations for offshore software R&D. Tier II and Tier III cities make it possible for companies to expand and establish operations quickly and easily.

Global Connectivity

Global connectivity is a component of infrastructure. A country’s global connectivity can be measured in terms of investment in information and communications technology (ICT), the intensity of use, and its pervasiveness. Strong global connectivity drastically lowers barriers to research, knowledge and entrepreneurship.

Destinations that rank high in global connectivity enable software R&D providers to become more agile, innovative and collaborative. Buyers can easily communicate with their offshore software developers through global connectivity, turning offshore R&D teams into seamless extensions of internal development teams.

Countries ranked highest in global connectivity boast higher internet speeds, strong reliability and security, zero wait time, real-time display, and ubiquitous coverage. However, global connectivity alone does not make a destination an ideal location for offshore software R&D. Buyers also consider the labor pool, other infrastructure, political stability, and most importantly, costs, when choosing service providers.

For example, China has high telecommunications investment per GDP with its Broadband China policy, widespread 4G availability, and massive ICT consumption (from Huawei’s Global Connectivity Index 2014), making it a very attractive market for offshore software R&D. However, some firms may be put off by the level of English proficiency of software developers and the lack of intellectual property/privacy protection.

Similarly, Canada’s international bandwidth per user and IPs per capita are very strong, combined with fixed broadband affordability. Costs are high, but buyers in the U.S. and Western Europe may be willing to pay the price for the ability of software engineers to handle advanced and complex software development as well as near-shore benefits.

Availability of Human Capital

Human capital is the collection of skills, knowledge, habits, experience and abilities possessed by individuals or a population in term of its ability to produce economic value through labor. A country’s human capital is the collective value of its labor force. Like any other type of capital, human capital can be improved through different means, like investing in education and training to raise productivity and quality.

According to many global competitiveness studies, the most competitive countries tend to have more highly-skilled and better educated workforce than others. This is also true about a country’s attractiveness as an offshore software R&D destination. Although it remains an important channel through which high software R&D proficiency can be acquired, education is not the only way to attain skills. Work experience and doing other activities increase an individual’s proficiency.

Gartner used the labor pool measure to assess the availability of human capital and the attractiveness of the destination for offshore software R&D. Gartner looked at both quantity and quality of the current labor pool and future scalability, evaluating skill levels in areas of expertise. These included software development competency (design, architecture and analysis), R&D experience, business process experience, and project management skills.

Gartner assessed the number of graduates in the country’s existing talent pool and made future projections. They also assessed career opportunities, work conditions, employee benefits, quality of facilities, labor advocacy, and adherence to high standards that ensures a country can provide the labor skills and experience required by software R&D buyers. Gartner rated the country’s labor pool as poor, fair, good, very good or excellent.

India’s strong ratings in the labor pool category combined with a solid performance in all other categories, the country’s track record, and ongoing improvements in delivery, made it one of the best destinations for offshore R&D. The very large pool of software engineers, programmers, and developers and excellent IT education system also contributed to India’s rating. On the other hand, companies are attracted to the Philippines’ young and experienced labor pool.

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