Determinants of Offshore Outsourcing Software

1.1. Determinants of offshore outsourcing software

To evaluate location attractiveness for offshore outsourcing software, A.T.Kearney, a global management consulting firms annually ranked “Top 10 Best Consulting Firms” (Vault Consulting Rank, 2014) that focus on strategic and operational CEO-agenda issues, established the index metrics based on industry services and knowledge gained from client engagements over the past five years. Relying on the importance of location decision, A.T.Kearney decided the relative weights of each metrics. Financial factors constitute 40% in total weight because it is the most important determinants offshore outsourcing software. The two remaining elements – people skills and availability as well as business environment – each contributes to 30% of the total weight (A.T.Kearney, 2011). Table 1.3: A.T.Kearney Global Services Location Index, 2011

Category	Subcategory	Metrics
Financial attractiveness (40%)	Compensation costs	Average wages Median compensation costs for relevant positions (call-center representative, BPO analysis, IT programmers and local operational managers)
Infrastructure costs	Rental costs Commercial electricity rates International telecom costs Travel to major customer destinations
Tax and regulatory costs	Relative tax burden Corruption perception Currency appreciation and depreciation
People skills and availability (30%)	Remote services sector and quality ratings	Size of existing IT and BPO sectors Contact center and IT center quality certifications Quality ratings of management school and IT training
Labor force availability	Total workforce University-educated workforce Workforce flexibility
Education and language	Scores on standardized education and language tests
Attrition risk	Relative IT and BPO sector growth and unemployment rate
Business environment (30%)	Country environment	Investor and analyst ratings of overall business and political environment Foreign Direct Investment Index Security risk Regulatory burden and employment rigidity Government support for the information and communication technology (ICT) sector
Infrastructure	Overall infrastructure quality Quality of telecom, Internet and electricity infrastructure
Cultural exposure	Personal interaction score
Security of Intellectual Property (IP)	Investor ratings of IP protection and ICT laws Software piracy rates Information security certifications

(Source: A.T.Kearney, 2011)

1.1.1. Financial attractiveness

In recent research by KPMG, the consultancy, revealed that, when asked for the reasons for offshore software outsourcing in 2012, 70% of business decision makers said cost was a driver (Karl Flinders, 2013).

1.1.1.1. Compensation costs

One of the top determinants for offshore outsourcing software is cost control and the primary cost driver in the United States and Europe is compensation costs which consist of wage costs and relevant position costs like IT programmers and local operational managers (Chris Niccolls, 2012). Labor costs are monthly compensation for the clients because offshore outsourcing software lets them take advantage of lower labor costs of vendor’s nation.

1.1.1.2. Infrastructure costs

In cost-benefit analysis of offshore outsourcing software, infrastructure costs comprising of rental costs, commercial electricity rates, international telecom costs and travel to major customer destinations should be considered in cost estimation. Rental cost for office space for representative office is one of important determinants because potential expanding possibility requires client’s companies to rent office for their local employees and expatriates to manage outsourcing service as well as exploit new market to reduce delivery cost to and fro between the two countries of client and vendor. Besides, commercial electricity rate and international telecom costs are expenditure for operation and management activities in software outsourcing process, especially for partial outsourcing projects.

1.1.1.3. Tax and regulatory costs

Tax and regulatory costs are determinants of offshore outsourcing software since all clients always take notice of these factors to select the best destination of service. Vendors, hence, also research on such elements to reduce their operational costs. Types of tax are considered in offshore outsourcing software are: income tax for vendor’s corporation, preferential income taxation for software industry staff, Value Added Tax for software products and services, import tax for materials used for software production, export tax for software products, etc. Furthermore, some countries with encouragement policies for ICT development like low Internet price or low hiring price for industrial park are noticeable determinants of offshore outsourcing software (Athukorala, 2006; Auffret, 2003; Nguyen, 2004)

1.1.2. People skills and availability

In the report by KPMG mentioned in part 1.3.1, while 83% of client corporations chose cost was driver of software outsourcing in 2011, such number reduced to 70% in 2012. 53% of interviewees selected human capital to be a crucial determinant of offshore outsourcing software ((Karl Flinders, 2013).

1.1.2.1. Remote services sector and quality ratings

Size of existing IT and BPO sectors is sufficient background for development of offshore outsourcing software with existing facilities, market, models and framework of such activities. Size of existing IT and BPO sectors seem to be an evidence of experience for vendors, which acts like brand of offshore outsourcing software to vendors to make decisions. In addition, availability of quality ratings are determinants of offshore outsourcing software since one main characteristics of service is variability which requires specific standards to maintain quality of service (Ateeq Khan, 2009). Quality ratings of management school and IT training ought to be considered as staffing is a key organizational decision variable in software development (Pressman, 2005).

1.1.2.2. Labor force availability

Offshore outsourcing software frees a firm from gathering talents with particular skills to accomplish certain tasks and from developing management capabilities to control non-core tasks (Robert Kennedy et al., 2013). When researchers evaluate labor force availability, both of quantity and quality of human resources is taken into account. Total workforce and age of population presents potential quantity of talent pool for outsourcing software. Also, number of university-educated workforce is signal for quantity of human capital because offshore outsourcing software requires technical knowledge and skills. Hence, vendors should employ high quality employees with professional degrees in Computer Science, Engineering, Management and similar fields (A. B. Nauman, 2004). Last but not least, workforce flexibility show working cultures of outsourcing countries to forecast conflicts in relationships between vendors and clients.

1.1.2.3. Education and language

Not only does offshore outsourcing software requires significant of education but language literacy is also essential (Robert Kennedy et al., 2013). Education system and language proficiency are two determinants in human expertise and resources in offshore application outsourcing framework (Naumann, Aziz et al., 2004). The importance of education system is not just knowledge background of workforce; and it still concentrates on technical and interpersonal practice skills. Besides, English is compulsory language in offshore outsourcing software since it is the second language in the world and the main language in global software (Dorie Clark, 2012). If outsourcing staffs are fluent in language of clients, it will be a plus to enhance more effective communication.

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