Should Commercial Software Companies Create A Captive Or Outsource? | Article

softwareThe global marketplace has determined that offshore outsourcing is an accepted business practice; the cost savings are just too compelling. But the jury is still out on the best way to offshore applications, development, and maintenance (ADM). Should commercial software companies create a captive organization or outsource that work?

Sean Walsh, President, Symphony Services’ Commercial Software Group, has crunched the numbers and come up with an answer. The supplier, which has had its own operations in Bangalore and Pune, India since 2002, found that 400 is the magic number. If a company needs more than 400 people working on its projects, it is cheaper to set up a captive. But if the task needs less than 400 seats, “it’s cheaper or comparable to outsource,” says Walsh.

Two More Votes for Outsourcing

Two other factors favor outsourcing regardless of size, according to Walsh.

One is what the Symphony Services executive calls “the ramp up factor.” An outsourcer can get the center up and running sooner–sometimes as much as 12 months faster, he maintains. “The ramp up factor makes it hard for a captive to catch up,” he explains.

Walsh says “the sustained productivity model” also favors captives. He’s observed that Indian workers are 60-75 percent as productive as American workers when they start a project. He needs 10 offshore employees to do the work of seven Americans until they get into the rhythm of the project. He says they typically take six to nine months to achieve productivity parity with their American counterparts.

“As outsourcers, we focus on training. We do that every day,” he says of Symphony’s offshore centers.

Walsh says American software companies that opened a captive with less than 25 people are finding they are not capturing the value they expected. He says Symphony is taking over some of these centers, charging the original owner an operations fee to run them. “We think this is the tip of the iceberg,” he says.

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