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Outsourcing Journal, October, 2006

Open Source Offshore Doubles Cost Cuts For Software Companies

By John Harney, Business Writer

Intalio is one software development company that offers both open-source and commercial versions of its business processing management (BPM) solution. BPM is a technology that serves as the master management layer that controls the processes of all the applications with which it's integrated.

Offshore outsourcing was a key element of the young company's business strategy from the first, says Ismael Ghalimi, CEO. With only 55 customers, it had to accurately predict and tightly control costs to maintain cash flow. By using 20 software developers from Lohika, an outsourcing company in Western Ukraine, and four tech support staff from QASource, a similar company in India, he says Intalio paid half of what it would by hiring comparable talent in the US, a consistent cost which comes to just under $10,000 a month.

"Having an OS version of our product lures the buyer to adoption and requires training, support, and maintenance contracts and then software licenses for more advanced versions of the product that we charge for," says Ghalimi. This way, he explains, customers get free software while Intalio builds a user base at a very low marketing cost.

Lower-cost outsourced services nicely dovetail with an open-source computing model because OS software also attracts a different kind of customer. Intalio began by serving G2000s, says Ghalimi, but its lower-priced OS offering is now attracting small-to-medium (SMBs) businesses, too. In addition, many independent software vendors (ISVs) are rebranding Intalio as part of their larger solutions because they can integrate OS technology at a low price and still charge healthy margins for their final offerings.

Fewer Staff at Lower Cost

Intalio operates with a core staff of 11 people in Silicon Valley--eight software architects, two trainers and Ghalimi. Lohika's developers--a few senior overseeing several junior to keep costs down--create solutions in Ukraine and, via an Intalio VPN, transport them to the Lohika US headquarters in San Mateo, California. Here, Lohika and Intalio "share what we call a source control system and build management system," says Ghalimi.

Meanwhile, the QASource tech support team in India "collects queries from customers through phone or email and provides first-line support," he adds. "They record the calls in our incident-tracking systems and when they can provide the answer, they do that," he says. "When they can't," he continues, "they record a bug into our bug-tracking system, which is then handled by the team in the Ukraine, which comes up with a fix; or it's handled by some people in the US, depending on the nature of the problem and the time zone where it was recorded."

Internal collaboration is enhanced because the Ukrainian staff is English-speaking, while the Indian staff, which is also fluent in English, can provide professional customer service to Intalio's core customers in North America and Western Europe.

Because it opportunistically deploys the expertise of only some senior staff for programming to cut Intalio's costs, Lohika's costs vary slightly. Ghalimi says, "We pay them on a monthly basis; the price range, depending on the level of seniority, is about $3,000 to $5,000 a month." QASource's services are even more predictable--they consistently run from $3,500 to $4,000 a month for everything.

Other Benefits

With unemployment in the IT sector down around two percent nationally, getting good technology talent is difficult, period. But IT companies in Silicon Valley are especially hard-pressed because good developers can demand premium prices due to high demand.

Other subtler factors also complicate the staffing problem. "In the Bay area sometimes the very smart engineers tend to be very difficult to manage just because they are hot commodities -- and they know that -- and they sometimes behave like prima donnas," Ghalimi explains. By contrast, he claims, "We don't experience any of that working in the Ukraine. I actually find the output we get in terms of per capita per engineer is better and higher quality than what we get in the Bay area."

Also, with such a lean core staff, Ghalimi had no interest in keeping up with and managing the state-of-the-art infrastructure his business needed, so outsourcing much of that was a great relief.

But outweighing both these concerns, he stresses, was the fact that outsourcing let him scale staff up or down as projects demanded. "We can expand the team faster than if we were to do it ourselves," he adds, "and we don't have to work with recruiters and pay the recruiters' fees."

In the Ukraine, for instance, he can add 10 J2EE experts in four weeks, which is impossible to do in the US. "If we land a big project, we can scale up quickly, and we can also remove staff if business gets tough without having to pay for them." What's more, he's not responsible for paying severance packages and, importantly, "dealing with the psychological impact of doing a reduction in forces, which is a difficult thing to do" because of the hit to remaining staff morale, reorganization of responsibilities, and so on.

Equally key was the fact that in the Ukraine he gets more skilled and dependable staff for his buck. He says a full third of his developers have PhDs. Also, the Ukraine is a newer, less active outsourcing industry than India, so jobs are harder to come by and staff don't defect as capriciously to other companies for nominally better pay and/or benefits.

Since using Ukrainians, Ghalimi has had less than one percent staff turnover a year, whereas previously when he used Indian developers, turnover was 50 percent, an inevitable stumbling block to project progress and consistency of output.

However, Ghalimi is adamant that outsourcing to the right country is still not enough. Also, he warns, finding the right partner is critical. He was fortunate in finding Lohika. But he says in most countries there are very good companies right next door to "body shops churning through inexperienced staff" that will walk away as soon as they get a better offer. "I know a lot of software companies in the Bay area that tried offshore and just abandoned it," he attests, "because it didn't work for them for these reasons."

What's more, he's convinced that dealing with even a good offshore company is risky if you can't do so through its American division. "We don't work with the Ukrainian company, we work with the California company," he says. "I'd be worried to work directly with a Ukrainian company, especially with respect to intellectual property issues because I don't have in the Ukraine anywhere the kind of legal protection that I have in the US." "That applies to any business issues for that matter," he says.

Because of his positive experience with offshore outsourcing, Ghalimi also plans to outsource his telesales initiative to outsourcing providers in Ireland and India in the coming months--Irish workers will serve the European market and Indian ones the North American one.

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