Surviving and Thriving as an Inshoring Software Company

Everyone has heard of Offshoring. Clothing, automotive, and other mature industries have found that low wage centers overseas make good financial sense for certain types of work. In manufactured goods (particularly in mature industries), technological developments have allowed low skill, low wage workers to supplant highly skilled, highly paid workers in many tasks. Software is a bit different than manufactured goods in that it still requires skilled workers, but the draw of low wage centers certainly applies. And, technological development has simplified some aspects of programming and made common all types of computing technology. Cutting through all the hyperbole, Offshoring in IT/software is simply an indication that software is a maturing industry in a global economy. No longer are all software development projects cutting edge and comprised of the latest technologies. In a maturing industry, there are many needs that can, in effect, be met through commoditized services competing on price.

In comparison to Offshoring, Inshoring is not generally a readily known and used word. And where it is used it’s typically only as the yin to Offshoring’s yang, i.e. Inshoring is selecting a domestic vendor instead of a low cost overseas alternative.

The common understandings of Offshoring and Inshoring simply miss the full reality of what’s going on in the market. Domestic software companies are not recognizing the need to change the way they do software and do business. To survive and thrive, domestic software companies must truly understand the business model of Inshoring and embrace it.

US companies jumped at the promise of Offshore software development a few years ago. It took a while for the dust to settle, but some important aspects of these business moves have emerged:

  1. If a client is accustomed and willing to accept low quality (buggy) software, shipping non critical development work overseas where the same quality can be achieved for significant cost savings makes sense. Carl Erickson did a great presentation on this very topic for his GLSEC 2006 keynote making the case for quality and innovation to drive domestic software development now and in the future (more on this later).
  2. Bleeding edge technology and new product development is best suited for the home turf of the United States. The Overseas development model works where there is a large pool of workers skilled in “commodity technologies” clamoring to work for the going rate. The culture, limited access to technology, and motivation to move from agrarian or manufacturing lifestyles to that of the knowledge worker make China and India fertile places for certain types of projects – namely, those that are easy to specify, require little innovation, and do not require a tight lock on trade secrets. There is a reason why US companies ship IT/software work to India, but there are not yet prominent, wholly Indian software companies introducing innovative software products capturing the global marketplace. Thanks goes to Chad Fowler for sharing this insight at a recent XP West Michigan meeting.
  3. Contrary to popular belief, the domestic US IT industry is actually growing despite Offshoring. The growth rate of the IT industry is one of the strongest in the US economy. Due to the drastic drop in job growth after the Dot-Com bust and because of the ensuing media attention on said bust and Offshoring, there exists a misperception that all domestic software jobs are evaporating and/or going overseas. This is not so. I wrote a two page summary on the reality of domestic software development jobs.

Hanging out your shingle in the domestic software market requires understanding and embracing the Inshoring business model.

By Inshoring, I mean:

  1. Primarily competing with Offshoring alternatives by providing quality and innovation. A domestic software company must deliver value that justifies its cost. Producing software that has the same level of quality as overseas alternatives but at a greater cost is a losing proposition. Similarly, offering nothing more innovative than butts in seats doing basic programming will not support the cost of domestic software development.
  2. Taking advantage of cost disparities within the domestic market. For those software companies not located in metropolitan areas with high costs of living, there is a real opportunity to compete on price with other domestic software companies. It simply costs less to do business in the Midwest than it does in New York or Los Angeles. A Midwest company can charge more than it does locally and yet still undercut the competition on the coasts. If work can be shipped overseas, it can just as easily be shipped across the Mississippi. This is a fascinating notion. The same market forces that have spawned the Indian software market have created an opportunity here at home. Extending this thinking all the way out, then, the highest cost software firms (generally in the largest cities) must also provide the highest quality and greatest innovation to survive and thrive.

Atomic Object has, in fact, actually won work because of disasters due to low quality work done overseas even though we cost a multiple of overseas alternatives. Because of the way we work (we embrace Agile techniques utilizing iterations and test first development), we produce so few bugs that email and note cards are sufficient to manage and tend to them. And, we’ve found that one of our best business opportunities is acting as a value add to clients developing new products. It is our quality and innovation that secure us new work and preserve long-term client relationships.

The majority of our clients are local, and this certainly has advantages: good face-to-face time and a sense of security with regard to trade secrets. However, recently, we’ve even begun to pick up clients on the coasts. It will be interesting to see how more of this develops because of our cost, quality, and innovation advantages.

If you are a domestic software company you must do three things to survive and thrive in the coming years:

  1. Deliver real quality and true innovation.
  2. Educate your market about the value of quality and innovation.
  3. Think larger than local or regional markets. Pursue possible clients in areas where the competition costs more than you do.

Historically, software development has been soaked in innovation. It’s not been until the recent past (15-25 years) that there exists a significant amount of work that can be tackled by those not of a PhD pedigree. Still, simply adopting the latest buzzword in technology is not innovation. Innovation is inspired by tackling difficult problems in creative ways – may it be through process, technique, business model, testing, etc.

When it comes to quality, the software industry as a whole has woefully underperformed – to the tune of trillions of dollars in failed projects and cost overruns. Somehow, this standard of performance has lived on for decades. However, with the maturing and globalization of the market, quality will (must) improve. Those that cannot produce software free of bugs will not survive in the developing marketplace.

Technically inclined individuals seem to naturally shy away from marketing. There are longstanding jokes about engineers and marketers. However, particularly when competition on price develops (such as in Offshoring), true value is what will support a thriving business. Identifying, naming, and making the market aware of that value requires effective communication. This means marketing.