Outsourcing Is Not the Enemy
As reported in the Wall Street Journal...
By Dr. Adam Kolawa
THE SOFTWARE INDUSTRY has of late been embroiled in controversy over the practice of outsourcing.
Fears about job losses and "brain drain" to Third World countries have fueled the debate.
As a manager who's spent more than15 years working in the
software industry, running multiple development groups, I can honestly say that I'm amazed at the furor.
Why is the industry so surprised that outsourcing has taken hold?
This trend is not a negative one, and it must be understood for what it truly is.
Outsourcing is a normal stage in the maturation of any industry-software is no exception.
There is no doubt in my mind that outsourcing is actually good for software,
and will eventually promote job growth both in foreign markets and in the U.S.
By looking at the history of other industries, we can discover what is in store for
software and why outsourcing won't destroy our industry. In a mature industry-auto manufacturing for
instance-no one makes an entire product themselves. GM doesn't make every part it uses.
Things were different 80 years ago. Making a car from scratch used to be how the industry operated,
when companies had virtual monopolies on their markets and no direct foreign competition.
Back then, production efficiency wasn't important and quality was a luxury.
Companies could afford to manufacture everything, taking the time and expending the resources to do so,
because there was little incentive to do otherwise.
However, market pressures and consumer requirements eventually forced many auto manufacturers
to begin outsourcing to remain profitable. By outsourcing I mean subcontracting.
They realized that some parts of their products were not critical to their competitive advantage and
did not need to be produced in-house. Subcontracting freed these companies to focus on their core competency.
Fortunately, it also increased the quality of the parts they outsourced. Parts providers,
because they focused on one or two parts, could master their manufacturing processes and
produce quality parts in ways that the larger manufacturer could not.
This forced the larger firms to build very close partnerships with their parts suppliers.
Now consider the software industry. Software suffers from a "Not Invented Here" mentality.
That is, developers think that one company can make an entire application in one place.
This type of thinking is widespread among software engineers and is
indicative of an immature industry-where engineers dictate how a business is run,
rather than management. This leads to low productivity, low quality,
viruses and bugs because no one is focusing on their core competency.
Outsourcing, which is currently used in software not as a means of subcontracting but
as a means of simple cost reduction, will eventually force the industry to change the way it conducts business.
In the long run, outsourcing will lead to specialization and fragmentation in software.
The fragmentation will be vertical-that is, what we will see is the development of organizations that
specialize only in software parts that are delivered to larger manufacturers for application integration.
This goes entirely against the current culture in software, where development firms think that
they need to build each part of an application in-house.
What do I believe will happen? Big software companies that outsource as a means to cut costs will have to
rethink this strategy. They will be forced to conclude that everything not critical to their business,
or that which does not give them a competitive advantage, will need to be subcontracted.
However, there are natural limits to outsourcing. Software manufacturers cannot and
will not subcontract their core competency and IP because that would jeopardize their very survival.
When this change occurs, the current practice of price outsourcing will cease.
Foreign outsource organizations will be forced to specialize and deliver bigger value to
their clients-just as parts suppliers in the auto industry did-or risk extinction.
Specialization will lead to job growth in parts markets as engineers learn specialized fields.
It will also spur growth in the larger software manufacturers as engineers learn to
focus on core competencies. More importantly, as part suppliers begin to specialize,
productivity will rise and bugs will decrease. As the auto industry shows us,
vertical specialization leads to better products and more efficient manufacturing.
We are just now at the beginning of this transition from price reduction outsourcing to
subcontracting outsourcing. Do not fear this transition, as it holds many benefits for our industry.
Mr. Kolawa is chairman and CEO of Parasoft Corporation.
To learn more about Dr. Kolawa’s background,
click here.
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