Introduction

The market for on-demand application services is projected to grow from $425 million in 2002 to $2.6 billion in 2007, which represents a compound annual growth rate of 44 percent, according to a May 2003 IDC report. IDC doesn’t project how much of that growth will be domestic, but the U.S. and Canada have taken a clear lead in the software services race worldwide, and have an excellent opportunity to develop the leading products and companies in the sector.

In late 2002, Forrester Research predicted that 500,000 computer software and services jobs in America would move offshore by 2015. This past February Gartner forecast that the number of businesses starting new outsourcing deals will grow by 30 percent this year, amid a shift away from full-service, multibillion-dollar outsourcing deals. In the future, Gartner said, the trend will be toward smaller outsourcing agreements with specific business goals. This leads us to the comparative question: will software services companies add more jobs than overseas outsourcing is taking away? It’s hard to say. But something we can say with certainty: software services are a superior option for outsourcing application-specific or business process-specific IT functions. The objectives of business managers when outsourcing IT functions are the pursuit of cost savings, core business management focus and reduced management overhead. However, along with potential controversy from overseas outsourcing comes a series of real challenges for corporate IT organizations: the risk of little or no cost savings, increased overhead for communication, project overruns, language barriers, risk of poor service, loss of business knowledge and security breaches. Outsourcing to companies with specialized expertise and a fully configured infrastructure is a smart alternative, and it’s not necessary to go half way around the world to realize the considerable benefits of this emerging trend. Outsourcing at home — what some are calling “onshoring” — can deliver cost savings that are as good or better than typical offshore engagements. Software services are often 50 percent or less the cost of installed and internally managed software when outsourced here at home, while most analysts predict between 15 percent and 30 percent cost savings from overseas outsourcing. Moreover, overseas outsourcing projects can often take years to capture cost benefits, given startup costs, knowledge transfer and process issues. Software services, on the other hand, can often be live in weeks or months, and cost benefits begin to accrue immediately.

A Bid to Reduce

Risk As a rule, software services companies provide fixed costs on long-term contracts, delivering on service level agreements (SLAs) guaranteeing service levels. If a software services firm doesn’t deliver, it can be replaced quickly. The better software services providers include an API for internal IT staff to implement and manage the application, if desired. Most software services provide industry-standard developer environments. And because software services technologies routinely include powerful developer hooks, internal teams and third-party integrators can work with the products, as they would any installed product. In this domestic outsourcing alternative, the risk of project failure is minimized in part because software services firms are paid monthly. If the system isn’t being used, it can be shut down. Software services companies are specialized and typically only provide and manage one or a few applications, and often have hundreds of clients running on their software. These providers are especially security-conscious, since most stake their reputations on high security. Security can be a deciding factor in a company’s decision about where and to whom to outsource networking services. While there’s no guarantee that choosing a U.S. firm will mitigate that risk, there’s certainly a greater sense of control and supervision when the outsourced firm is within the same borders. Onshore outsourcing also bypasses the complications of communicating across multiple time zones, cultural and language barriers. By virtue of the contracted revenue model, software services firms typically have a high percentage of their revenue committed years ahead and, accordingly, tend to be highly stable. In short, U.S. software services firms provide a much lower-risk solution to offshore outsourcing, enabling companies to obtain the cost/benefit they seek without the gamble of going overseas.

Get in touch