InformationWeek

Like many U.S. companies, Farmer's is using outsourcing as a way to keep up with the pace of technological change. "The IT landscape is changing so quickly that we no longer can afford to have technology as a core competency," Mukherjee says. "Our approach is to look to others for IT and develop a core competency in IT project management." A focus on project management is exactly what's needed when outsourcing development to offshore firms, according to U.S. executives. Whether the supplier is in India, Europe, or Latin America, project management can often be a weak link and should be given almost as much emphasis as software development itself, they say.

The Principal Financial Group, for instance, initially experienced communication and coordination challenges when working with its development partner in Mexico. Principal, in Des Moines, Iowa, works with Softtek in Monterrey, Mexico, on the development of a systems administration package used by its affiliates and branches in other countries. To resolve teething troubles, both sides worked together to install a frame relay connection and hire a bilingual project manager. "By focusing on improved communication, Softtek became very responsive to our needs," says Jim Allen, a senior IT analyst at Principal. "As we continue to grow, I can see us outsourcing a lot more of our development work to Monterrey."

To avoid management glitches-and to make it easier to win business with U.S. companies-offshore firms are establishing a stronger U.S. presence. Akshay Software International Inc. has 60 U.S.-based workers handling on-site development and coordination with clients. CEO Anant Viswanath recommends three ingredients for harmony between clients and offshore partners: putting in dedicated communication links, finding a supplier with a well-organized U.S. base, and appointing someone with full responsibility for project management.

Establishing U.S. offices may also reassure prospective customers who are worried about disputes with offshore services firms. Few would savor a lengthy legal battle waged in either India or Russia, but if offshore partners have a significant U.S. presence, there's the prospect of resorting to the American legal system. However, big companies with the resources to establish U.S. offices may not always be the best choice, says Lovely of Offshore Software Consulting. "Unless you have an established relationship with one of the big Indian firms, you may be better going to a smaller competitor who is more focused on your needs," he says.

The amount of coordination involved in offshore outsourcing leads some to suggest that small outsourcing projects should be avoided. It can take months to lay a solid foundation between partners, so fast-turnaround jobs may not succeed, particularly in a new relationship. "Longer projects or continuing maintenance-type tasks make better candidates to send offshore," Lovely says. "But once the lines get established, it isn't a resource that you'd ever want to get rid of. You can ramp it up at will, hire a core team that is dedicated only to your needs, and reduce costs considerably."

As offshore suppliers, such as the big Indian services companies, become more established and accepted, their prices will inevitably rise. However, there will still be bargains as suppliers from Eastern Europe, Latin America, and the Middle and Far East offer lower rates in order to enter the market. Another way to land a good deal, Lovely says, is to find an Eastern European or Indian who's just spent a few years in America and is moving back home to start an offshore business. "That usually guarantees you a great price from someone who has already established credibility in the home market," Lovely says.

With the U.S. Department of Labor predicting that 1.7 million IT jobs will be created this year-and that up to half of them may go unfilled-the continued growth in offshore development seems inevitable. "No one can grow as fast as they want to due to the chronic shortage of programmers," says Carlos Cashman, CTO of Opus360 Corp., a New York supplier of offshore development services. "It's all about supply and demand. The supply is abundant overseas and the demand in America will continue to grow."

Russia, the rest of Eastern Europe, Latin America, Jordan, and even China are gearing up to develop the software the West requires. And many U.S. companies are discovering that, as long as projects are carefully managed, entrusting foreign suppliers with systems development can be highly rewarding. Wayne Norris, manager of research and development at Santa Barbara, Calif., software provider Biopac Systems Inc., has four Russian developers working on site in California, with another in St. Petersburg, Russia. All are supplied by Contex, a Russian services firm. "While the price is certainly right, what is more important is that I trust my St. Petersburg resources to get the job done," Norris says.