2015-01 Software Development Outsourcing Provider or Partner

White Paper: Software Development Outsourcing: The Evolution of the Offshore Model 2 | © Daitan Group 2015 | Accelerating.TM
The Maturing Landscape of Outsourcing
In the early 1990s, outsourcing really took off as an identifiable business
strategy for support services, IT and soon after for a wide variety of business
processes. Now, in recent years, companies have moved to outsource partial,
and entire, application development workloads to offshore providers. This
has become a critical trend, forced by critical needs to:
• Find, hire, and ramp up software product development teams
with the right expertise in a tight employment market,
• Accelerate time to market in a competitive, fast moving
business landscape, and
• Reduce costs, in a market where salaries and benefits demanded
by technology professionals are continually increasing.

Outsourcing a company’s application software development has placed
new challenges on engineering leadership. Because hiring and ramping
up qualified internal teams is a huge burden, companies are commonly
outsourcing software development to speed their time to market. But in doing
so, two new business risks emerge — delivery quality and timeliness. This is
leading to a change of mindset both by teams selecting an outsource provider,
and by those providers themselves. A partner mindset. Because a close
partnership is the only way to meet the high demands of innovation in today’s
technology market — which dictate that companies must deliver a fast time to
market with high quality software.
This paper presents a framework for that partnership mindset — with a model
that can deliver innovation and manageable cost of total execution, without
introducing increased risk.
DAITAN WHITE PAPER
Software Development Outsourcing
PROVIDER OR PARTNER? THE EVOLUTION OF THE OFFSHORE MODEL
White Paper Contents
The Maturing Landscape
of Outsourcing
The Expanded Offshore
Promise
The Business Case for a
Full Outsourcing Partner
Today’s Challenges
with Outsourcing

The Expanded Offshore Promise
Initially, low cost was the primary driver for outsourcing projects. That
has continued. IT outsourcing, where the drive has been toward lower and
lower costs, has been typical of providers that push prices down with savings
generated by labor arbitrage1
.
However, as outsourcing has expanded from just IT services and business
process outsourcing (BPO) to development of a company’s core application
products, new requirements, beyond merely lower costs, are being set. A top
tier of outsourcers are moving to become software development partners,
responsible for strategic applications development in areas core to a
company’s business. A recent KPMG / HfS report, “The State of Services and
Outsourcing in 2014”2
reported:
• Seven-out-of-ten (72 percent) of major enterprises are making increased
investments over the next two years in their outsourcing services and 61
percent in their global shared services.
• One-in-four firms are making significant investments in shared services, a
marked increase after several years of tepid investment.
• On average, enterprises are increasing their offshoring activities by 20-30
percent over the next year.
• Integrated global services models that incorporate both shared services
and outsourcing are the core focus for most enterprises.
As outsourcing increases, companies need more than just low cost labor
— they need a partner that offers them a competitive technical advantage
— one that speaks specifically to a client company’s bottom line and
competitive leadership. Just focusing on the low cost of labor overlooks critical
requirements around the business value offered by the outsourced team.
The Case for Competitive Advantage
As companies face their own challenges of building strong in-house teams,
they are looking for ways to gain competitive advantage through outsourced
services. And competitive advantage is met by outsourced teams in just the
same way that it’s met by internal teams:
• By harnessing the very latest technical expertise;
• By applying a deep understanding of market trends in technology to
deliver great ideas; and
• By delivering high quality products to market faster than the
competition.
Today, client companies should fully expect, and demand, that their
outsource teams help them gain critical competitive advantage in these ways.
Over 80% of those interviewed in the previously mentioned KPMG and HfS
report, believe that access to strategic talent, and access to new technologies,
will be considered to be important in their offshore plans over the next
two years. However, not all providers are effective in offering the level of
service to deliver on this promise. As KPMG and HfS reports: outsourcing is
teetering at a crucial juncture between providing genuine value and low-cost
staff augmentation. The report emphasizes the need for outsourcers to prove
they can do more than basic operations, by offering a strategic partnership
between provider and buyer that can add more skill, technology, and
analytical capability for clients.
1 “The outsourcing pricewards are on”, CIO.COM, April 2014
2 KPMG & HfS: Executive Report: The State of Services and Outsourcing in 2014, October 2014
As outsourcing increases,
companies need more
than just low-cost labor —
they need a partner that
offers them a competitive
technical advantage
Outsourcing is
teetering at a crucial
juncture between
providing genuine
value and low-cost
staff augmentation.
– KPMG AND HFS RESEARCH

The Business Case for a Full Outsourcing Partner
In developing the business case for a full partnership outsourcing partner,
companies should consider the following fundamental benefits:
Scalability
An outsourced development partner brings flexibility to increase or decrease
resources as projects demand, without the fixed costs and investments
required by permanent employees.

Risk management
An outsource partner can take on, and maintain, established systems
and applications, thereby transferring the execution risk away from the
organization. This also mitigates risks involving fluctuations in needs
for resources and operational capacity that can occur over time.

Internal Focus
By outsourcing full — or partial — application development, companies
are able to focus their internal resources on functions specific to their core
business, such as research, planning, product design and innovation —
activities essential to building competitive advantage.

Technical Expertise
Client companies are looking to outsource partners to take more ownership
of product lifecycle, despite increasing product complexity. To meet that
demand, outsource partners must provide high technical capability within
their team. Outsourcers should be relied upon to provide technical expertise
beyond what is already within a company’s technology portfolio in order
to develop a new product or add a service. This is particularly pertinent in
today’s fast-moving technology marketplace, where technology changes so
rapidly.

Process Expertise
A well managed outsource team will demonstrate project management and
development cycle best practices, which can, in turn, integrate smoothly with
internal company processes and also positively influence and impact those
processes.
Financial Benefits
An outsourced development partner can shield the company from payouts
and overhead including employee benefits, taxes, infrastructure/facilities,
and administration or legal support for government regulations.
The Business Case
Scalability
Risk management
Internal focus
Technical expertise
Process expertise
Financial benefits

Today’s Challenges with
Outsourcing
Today, the business of outsourcing
has matured. There is now a wealth
of companies available to meet the
traditional demand of cost reduction.
But at the same time, demands on
outsourcing partners are increasing
— and expectations have risen.
Businesses expect more from their
outsourcing partners. Although the
outsourcing marketing has matured,
challenges and requirements
have also evolved. Key challenges
include:
Balancing Low Cost & High
Technical Experience
Offshoring technical functions still
saves companies money over keeping
work local, despite recent wage
inflation3
and a less competitively
priced workforce 4
in some leading
offshore geographies. However
outsourcers focused on low-cost
technical resources have a problem.
To maintain cost advantages,
many have concentrated on hiring
candidates early in their career. 45%
of new hiring in the technical sector
in India, for example, are “Freshers”
— i.e. candidates straight out of
school5
.
When outsourcers use recent
graduates in tandem with an
experienced — more costly —
developer to lower the average cost
per developer — it comes at a cost
to productivity — as this tendency
results in a slow learning curve.
And it adds substantial risk — to
both delivery schedules, and to
the quality of the end-product.
Client organizations should look to
their outsourcing partner for a full
commitment to the understanding
their domain, and should fully
expect that the Technical Lead
assigned to their project be a person
3 The Times of India,”Indian employees to see a 10.9% salary
hike in 2015,” November 2014
4 World Economic Forum: India’s Competitiveness Crisis, 2014
5 The Financial Express “Hiring in the IT Sector”, Dec 9, 2014
with pertinent domain expertise,
and that the entire team is tailored
to the needs of the project. Client
organizations should be able to
evaluate the expertise of all technical
resources assigned to their project.
And in the event of problems, there
should be agreements established
in advance as to the time needed to
replace personnel if required.

High Attrition Rates
Multiple recent articles and studies
report on the double-digit attrition
rates within India IT outsourcing
firms6
. A recent report from
Deloitte indicated that the highest
attrition rate across industries was
seen in the ITeS sector, at 21.9%7
.
Citing various reasons — including
better pay elsewhere, better
career opportunities and better
work life balance — the impact of
this engineering turnover on US
businesses can mean decreased
productivity, delayed deliverables
and lower quality resulting in
additional time and costs to meet the
project requirements.
Further, the same economic
pressures that drive outsourcers to
employ less experienced developers,
force them to over-subscribe
and ‘float’ the more experienced
developers across multiple projects.
US companies often complain
that the team allocated to their
project changed within the first
year just as process and familiarity
were established. In high-volume
outsourcers, the most experienced
developers are often allocated to new
customers only at the beginning of
the engagement.
In working with outsourcing
partners, client organizations should
define an acceptable turnover rate
on projects and demand teams that
are assigned only to the client, to
protect themselves from excessive
attrition and ‘float’.
6 The Times of India, “Infosys attrition continues to be below
15% in Q1 2015” July 21, 2015
7 Deloitte Annual Compensation & Benefits Trends Survey
India FY 2014-15
Language Barriers
Although many offshore providers
have English speaking developers,
it may be spoken differently, with
unclear use of words or phraseology,
or not as clearly, such as when
a heavy accent is present. Client
companies should insist that the
Project Manager or Technical Lead
have top English skills and be a
strong communicator. However,
this does not always mitigate
all language problems. With the
increasing demand to deliver on
newer technologies, there is a need
to interact directly with various
technical experts on a team, and
language issues can interfere with
the free-flow of information and
progress of the project. Clients
should push for outsource teams
where every member has appropriate
language skills.
Time-Zone Differences
Real-time communication
technologies such as chat, audio and
video conference and collaboration
tools help to minimize geographical
distances and make distributed
teams potentially as productive as
co-located teams. But they cannot
make up for time-zone differences.
Particularly with teams cooperating
in an Agile environment, daily
standups ideally need to happen
as close to the beginning of a work
day as possible. For a manager in
California to review a project’s status
with a development team in India at
9 AM local time, the manager would
have to conduct the call at 8:30 PM
Pacific. In reverse, to hold a 9 AM
Pacific call in California requires the
India team to be on hand at 9:30
PM local time. While a key benefit
to working in different time zones
promised virtual round-the-clock
development, these time zone gaps
have proven to impede many projects
as resolution of issues or changes
that come up in the time zone of one
team require waiting until the team
in the other time zone is awake.

How Daitan Developed the Ideal
Outsourcing Solution: the Model That
Feels Like It’s ‘In House’
Today’s technology innovators realize that the value
of outsourcing is far beyond cost savings. They are
partnering with outsourcing organizations that not
only deliver on new technologies but do so with a
commitment to the business’ success, and a focus on
offering services that contribute new, value added
expertise to the team.
While at Lucent Technologies as vice president of R&D,
Augusto Cavalcanti, CEO of the Daitan Group, was
looking for an outsourcing provider that would help
his team develop next generation networks for data
and wireless. “The outsourcing contracts were very
restrictive,” stated Cavalcanti. “There will always be
unplanned changes when developing a new software
product and the offshore providers kept referring to the
original contractual terms rather than being flexible and
committed to helping us get the product to market as
planned.”
In 2004, Cavalcanti decided that it was time for a new
outsourcing model. “I started Daitan Group to give
companies another offshore development option. I could
see that what was missing was the partnership approach
to the business relationship between a company and
the offshore provider,” explained Cavalcanti. “It should
ultimately feel like the offshore team is part of your in-
house team with the same level of commitment to the
product’s on-time development and overall success.”
Daitan was formed based on the promise to match the
quality and productivity of in-house development at a
lower total cost of engagement while avoiding traditional
outsourcing drawbacks.

“From our point-of-view, an outsourcing engagement
that fails isn’t just one where the project was not
completed. It’s also the one that is technically
‘completed’ but at a cost of more time or money, or with
an unwelcome compromise on the initial requirements.”
To remedy this, the Daitan approach is based on a
very simple premise – to work with each client as an
extension of their in-house team, sharing the goals and
responsibilities.
Daitan Group technical teams make it feel like
it’s ‘in house’
– AUGUSTO CAVALCANTI
CEO, DAITAN GROUP
It should ultimately feel like the
offshore team is part of your in-
house team with the same level
of commitment to the product’s
on-time development and
overall success.”

The Daitan Outsourcing Model
The key elements of Daitan’s model is built on three fundamental core
values: nimble, expert and dependable.

Nimble
Agile software development methodology addresses the one constant that
most offshore providers unsuccessfully try to anticipate in up-front contracts
— changes to requirements or specifications. With Agile, the development
is iterative so that output and reviews are more frequent and course
corrections are done along the way to keep the project on track. At Daitan,
we combine Agile with proven test automation processes for frequent and
rapid release cycles.
Expert
When we build our project teams, we look on them as extensions of our
client’s own staff. We build that team around the client’s needs, and keep
that team 100% dedicated to the project. Team members stay on a project
right through to completion. Every team has its own technical architect
leader, who speaks fluent English, and is responsible for the project.
Dependable
Daitan believes in shared responsibility. In the real world, pre-determined
lists of deliverables, combined with a hand-off to a group of offshore
developers hired by a review simply of résumés and remote interviews, does
not allow for mid-project changes in requirements. Nor does it create a
stable or scalable working environment for team members.

So at Daitan, we start by understanding the goals and then we commit to
the output. Our teams are designed with an eye to the deliverable, not the
headcount. We share the responsibility not only in the development process
but also in the outcome, and even the risks, so that there is a true building
of one team. With this approach, both sides are committed, individuals
understand their role and responsibility, and everyone has a stake in the
project’s success.

We also focus on transparent communications. We know what it’s like to
hear bad news when it’s too late. In any given project, things happen that can
delay a deliverable or change a requirement. These things shouldn’t wait for
a formal review meeting. Our practice of open and frequent communications
at all levels within the team gives our clients the opportunity to make
decisions and avoid compromises in the outcome. It’s just another way
that we make our team perform like an extension of our client’s in-house
team. With the Daitan Model, initial projects quickly demonstrate the
quality, performance and ultimately the lower total cost of engagement.
This inevitably leads to ongoing development projects, team stability and
long term relationships. Our teams are not just a pool of developers, but are
dedicated teams that work exclusively for each client and enjoy access to
our CTO office and operations directors who provide additional direction on
innovation, new technologies and improved processes.

All of these elements of the Daitan Model contribute to the building of
trust-based relationships with companies that need predictable software
development at quality levels that avoid traditional outsourcing drawbacks
and compromises.
The Daitan Model
Nimble
Expert
Dependable
At Daitan, our focus is
on building a trust-based
relationship — essential
for companies that want
high-quality, predictable
software development —
without risk

Bibliography CIO.COM. “The IT outsourcing price wars are on.” http://www.cio.com,
April 2015. http://www.cio.com/article/2906755/outsourcing/the-it-
outsourcing-price-wars-are-on.html
KPMG & HfS. “Executive Report: The State of Services & Outsourcing.”
KPMG Institutes, September, 2014.
http://www.kpmg-institutes.com/institutes/shared-services-outsourcing-
institute/articles/2014/09/state-of-outsourcing-2014-exec-findings-hfs.
html.
Times of India. “Indian employees to see a 10.9% salary hike in 2015.”
http://timesofindia.indiatimes.com, November, 2014.
http://timesofindia.indiatimes.com/business/india-business/Indian-
employees-to-see-10-9-salary-hike-in-2015-Report/articleshow/45069857.
cms
World Economic Forum Global Competitiveness Report 2014–
2015. “India’s Competitiveness Crisis.” http://reports.weforum.org.
September, 2014.
http://reports.weforum.org/global-competitiveness-report-2014-2015/box-
indias-competitiveness-crisis/
The Financial Express. “Hiring trends in the IT sector rising, set to
continue in 2015 too: Indian Skills Report.” http://www.financialexpress.
com, December 2014.
http://www.financialexpress.com/article/industry/jobs/hiring-trends-in-it-
sector-rising-set-to-continue-in-2015-too-india-skills-report/17268/
The Economic Times. “Infosys attrition continues to be below 15% in Q1
2015.” http://articles.economictimes.indiatimes.com/, July 2015.
http://articles.economictimes.indiatimes.com/2015-07-21/
news/64683432_1_infosys-attrition-ceo-vishal-sikka-attrition-rate
Deloitte Annual Compensation & Benefits Trends Survey India FY
2015-2016. http://www.deloitte.com, April 2015.
http://www2.deloitte.com/in/en/pages/human-capital/articles/deloitte-
india-annual-compensation-trends-survey-report-fy-2016.html
Handfield, Robert, Ph.D. “A Brief History of Outsourcing.”
http://scm.ncsu.edu, June 1, 2006.
http://scm.ncsu.edu/scm-articles/article/a-brief-history-of-outsourcing

DAITAN GROUP HEADQUARTERS
5674 STONERIDGE DR, SUITE 107 | PLEASANTON, CALIFORNIA, 94588 | USA
PHONE: +1 (925) 475 8732 | FAX: +1 (925) 475 8739 | WWW.DAITANGROUP.COM
About Daitan Group
Daitan Group provides high quality software development services
to significantly accelerate time to market for global technology
companies. The company’s expert agile teams deliver full lifecycle
software product development, maintenance and quality assurance
services across today’s leading technologies, including: cloud
computing and virtualization; communications, collaboration and
messaging; and big data/analytics.
For more information: http://www.daitangroup.com.
“Their integrity, skill profile, attention to detail and performance to
schedule were superb and invaluable to the market growth and success
of Cedar Point. A true partnership in every sense of term!”
– LEN HAYES, EXECUTIVE VICE PRESIDENT,
OPERATIONS, CEDAR POINT COMMUNICATIONS.

2015-01 Software Development Outsourcing Provider or Partner

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