Outsourcing Application Development and Maintenance

Today, most companies outsource at least some of their IT work — to India, the United States, and elsewhere — as companies in other nations try to follow India’s lead in providing highly skilled professionals at relatively low price points.

The top two pressures that drive the outsourcing of application development and maintenance should come as no surprise to executives: reducing IT operating costs and the desire to have internal IT focus more heavily on strategic tasks. But many organizations, especially mid-size enterprises, see value in human asset management in IT: tapping the superior expertise among some providers with the goal of having that knowledge transfused into the skill sets of their internal IT professionals. Also, more than one third cite a need for quicker turnaround in application development projects, a key performance measurement in a faster-paced business world in which delay and hesitation can impact competitiveness.

This article, excerpted from a report by the same title written by analysts at Aberdeen Group, shares key findings about what characterizes a company as “best in class” in application development and maintenance outsourcing initiatives.

While the drivers behind application development and maintenance outsourcing are clear, organizations — taken altogether — are receiving four key benefits from their third-party relationships: more time for their IT staff to focus on strategic work, lower costs, and improvements in version control, lifecycle management, and in documentation of procedures and best practices.

How Do You Win?

The criteria for winning at outsourcing application development or maintenance vary depending on the company. However, leading companies, what Aberdeen refers to as Best in Class, excel in three key measurements — higher cost savings, greater user satisfaction, and improved project delivery performance — over Industry Average and Laggard firms within Aberdeen’s Competitive Framework.

To determine the Best in Class for this report, Aberdeen looked at the major drivers behind application development and maintenance outsourcing, then examined respondents’ answers to a series of key performance questions, starting with cost savings. The companies that emerged at the top 20% of the survey field saved, on average, 56% by outsourcing application development and/or maintenance functions, compared with 26% for Industry Average firms, and very little for Laggards (Figure 1). Those same firms also performed better than the other two groups in improving user satisfaction and project delivery, as well as improvement in defect rates.

Competitive Framework Key

The Aberdeen Competitive Framework defines enterprises as falling into one of the three following levels of practices and performance:

Best in Class (20%). Practices that are the best currently being employed and significantly superior to the industry norm

Industry Average (50%). Practices that represent the average or norm

Laggards (30%). Practices that are significantly behind the average of the industry

 Figure 1: Key performance indicators by competitive framework.
Key performance indicators by competitive framework.
© Aberdeen Group, 2006

So, while cost savings is a top driver, it is not the driver in all organizations. Here’s what an IT manager from a mid-size company in the food and beverage industry has to say about his employer’s reasons for outsourcing: “We do not outsource to save (on costs),” he says emphatically. “We do it to gain access to superior expertise for short periods (of time) and then to free up our internal IT professionals to focus on their strategic work.

“We have done several exercises related to reduced cost through outsourcing and none — I mean none — has come out at a lower cost but rather higher cost at a promise of more benefits. Over time these promises actually fade … and the initial cost goes up or the service goes down.”

Table 1 highlights the other differences among the Best in Class, Industry Average, and Laggard firms in their processes, knowledge, and organizational strategies in application development and maintenance outsourcing.

 Table 1: Aberdeen's competitive framework for application outsourcing.

 Best in Class

 Industry Average

 Laggards

Process Call on relationship management skills that extend across all enterprise functions. Tend to take more of an incremental approach to outsourcing (e.g., outsource pieces of work, opt for longterm contracts) when launching a strategy. Heavy focus on systems analysis and quality assurance. Tend to outsource pieces of work to determine which providers can best meet their needs. Heavy focus on end-user testing and systems analysis. May outsource pieces of work to determine which providers can best meet needs; also look at pilot projects to help set expectations.
Organization CIO and CTO play major roles in outsourcing decisions. Most have cross-functional relationship management team to oversee relationship. CIO and CTO likely to play major roles in outsourcing decisions. Most manage outsourced work from within the company. Most CIOs play major roles, but not CTOs. Most manage outsourced work from within the company.
Knowledge Retain the most strategic functions, such as project management, acceptance, and business process optimization, and leave the rest to third-party providers. Most retain the most strategic functions, along with systems architecture and QA. Retain the most strategic functions, along with systems architecture, QA, integration testing, and installation.
Results Development process excellence with the metrics to prove it. Moderate development control and metrics performance. Most likely to cite suboptimal work by providers. Limited development controls; retaining of more functions limits ability to allow IT staff to work on more strategic initiatives.
 Source: Aberdeen Group, October 2006, © Aberdeen Group, 2006

Challenges and Responses

Outsourcing application-related work — especially for companies doing it for the first time — generally doesn’t come without hiccups. The top three challenges respondents cited (Table 2) demonstrate that being less than thorough in exercising due diligence in the provider selection process can strain a relationship with a chosen vendor. However, the responses to those challenges — especially the top two — echo a key finding from Aberdeen’s July 2006 benchmark report, The Business Value of IT Outsourcing: Achieving the goals of IT outsourcing sometimes requires stronger management of providers.

 Table 2: Challenges and responses in application outsourcing.

 Challenges

 % Selected

 

 Responses to Challenges

 % Selected

 Securing a provider with the right skill set.

43%

  Dedicated more management resources.

58%

 Integration, testing and/or quality assurance work took more effort than expected.

43%

  Escalated problems to outsourcing provider’s executive team.

49%

 Communication or cultural “gaps” with the provider.

38%

  Implemented new/revised vendor management processes.

34%

 Missed project milestones.

29%

  Moved from single vendor to multiple vendors.

26%

 Less than quality work.

26%

  Renegotiated contract or statement of work.

25%

 Inadequate or insufficient skills to manage outsourced environment.

25%

  Dedicated more IT technician resources.

22%

 Source: Aberdeen Group, October 2006, © Aberdeen Group, 2006

An IT manager for an industrial equipment manufacturer believes anyone in a “relationship management” position for an organization that outsources application development and maintenance work must understand more than just management skills. “We hired two people from large-scale outsourcers” to build up a relationship management team, he said. “They had the necessary understanding to treat the outsourcer with respect and yet also to know when they were pushing the envelope (both ways). The key skills are those of any relationship manager — customer focus, experienced at delivery, relationship skills — but on top of that was the experience at large scale development and of outsourcing projects.”

In Aberdeen’s survey for The Business Value of IT Outsourcing Benchmark Report from July 2006, Best in Class firms excelled in this area. More than two-thirds indicated that they dedicate more management time and talent in answering outsourcing challenges while half escalate issues to provider executives, compared with only about half of Industry Average and Laggard firms. This survey reaffirms leading companies’ affinity for those two responses, along with renegotiating an outsourcing contract (Figure 2).

 Figure 2: Responses to challenges by competitive framework.
Responses to challenges by competitive framework.
© Aberdeen Group, 2006

A Truly Global Marketplace

The technology boom of the 1990s, coupled with the remediation work companies worldwide engaged in to ward off the Year 2000 (Y2K) computer problem, sparked India’s rise as an IT powerhouse, especially as a popular site for application development outsourcing work. Simply, Indian providers were offering established companies quality work at a fraction of the labor cost they had been paying. This is reflected in the following survey findings:

46% of respondents’ companies outsource the majority of their application development work to India; the United States picks up 30%.

More than half of the companies — 55% — outsource most of their application maintenance work to India, followed by the United States, but at less than half (27%).

Companies that outsource most of their application development and maintenance work to Indian providers are slightly more satisfied with the quality of that work than are companies that outsource primarily to U.S. providers.

But providers in other countries are muscling in on the action, notably in China, Eastern Europe, Brazil, Canada, and Mexico, offering companies more options. The right side of Figure 3 shows the proportion of application development work going to providers in India and the United States, as well as to other countries. Contrast that with the left side, which shows the primary application development outsourcing destinations for companies within North America.

 Figure 3: Top destinations for application development outsourcing.
Top destinations for application development outsourcing from North America.Top destinations for application development outsourcing from the rest of the world.
© Aberdeen Group, 2006

Key Takeaways

  • Best in Class organizations excel at cost savings, higher user satisfaction, and better project delivery performance over Industry Average and Laggard organizations.
  • Companies generally respond to outsourcing challenges by dedicating more management resources or taking up issues with a provider’s executives. This is especially true of Best in Class organizations.
  • While India-based vendors have emerged as key market players, buyers are looking to vendors in other countries that can provide quality work at lower costs.

Useful Links

Aberdeen Group
http://www.aberdeen.com/default.asp

To learn more about this topic, click on this link:
http://www.aberdeen.com/summary/report/benchmark/RA_ADMoutsourcing_RS_3597.asp

Purchase Aberdeen Group’s report, “The Business Value of IT Outsourcing,” here:
http://www.aberdeen.com/summary/report/benchmark/RA_ITOutsourcing_RS_3288.asp

Take the Aberdeen survey, “Delivering the Full ROI from Offshore Outsourcing,” here:
http://www.aberdeen.com/survey/offshoreroi%5Fb/
Participants will receive a complimentary copy of the full report when it is published.