Offshore costs hit software vendors

The majority of software companies now do offshore software development but rising prices and managing far-flung teams is posing new challenges, a study has found.

Consulting company Sand Hill Group last year surveyed executives from about 50 software companies and found that offshore software development has become standard practice. Eighty-four percent of companies said they use offshore developers, an increase from about 63 per cent two years earlier.

MR Rangaswami, co-founder of Sand Hill Group, said: "Core software development is done offshore, not just maintenance and testing. These executives said they are more reliant on offshore development than ever before."

With that reliance comes risk and even some disillusionment, Rangaswami said.

He said many software companies expected massively lower costs by hiring offshore developers. However, those companies found that prices were about 40 per cent lower when all factors were included.

Rangaswami said: "Most people were satisfied. It's just that they thought it'd be a nirvana."

Offshore companies are already reacting to higher prices and shortages in skills in well-established offshore centres such as Bangalore, India, he said. To meet demand, less-developed centres in Indian cities, including Chennai, Hyderabad and Pune will establish new offshore development capacity and keep prices from rising rapidly, he predicted.

India maintains an advantage over other offshore locations such as China, in large part because of Indians' proficiency with English, he said.

Overall, the movement toward offshoring is forcing software companies to improve their processes for managing distributed teams, Rangaswami said. Typically, Silicon Valley software companies had a single team clustered in a single location and have not been good at distributed programming.

Rangaswami said that because most software companies use offshore development, they will need to more closely integrate their distributed development groups to stand apart from competitors.

He said: "You can't treat this as a cost issue, which is what most people did initially. It was us and them. Now you have to look at it as one team with one goal and one set of metrics."

Martin LaMonica writes for CNET News.com