Across almost every industry in the U.S., businesses both large and small are highly dependent on software technology to support their operations. Whether they are manufacturing a product, managing a sales force, invoicing a customer, or paying employees, more often than not software plays a major role in getting the job done. With the increasing amount of software technology, including third-party applications, databases, operating systems, websites, and propriety applications, one of the key challenges that companies face is how to manage and maintain all of this software, in many cases mission-critical software, in a cost-effective manner. For software and technology providers themselves, the increasingly competitive marketplace is making it important to not only provide a lower total cost of ownership but also be fast and efficient in improving products and expanding feature sets.

One of the best ways to keep up with these trends is to leverage offshore software talent, especially in regions such as India and Eastern Europe. For many companies, especially smaller businesses, it is both expensive and difficult to find and retain software and technology personnel here in the United States. Working with reputable vendors who leverage offshore talent can be a great solution and can even become a competitive differentiator over time. While there are challenges to outsourcing software development and maintenance, below are what we believe are four key factors for success:

(1) Specifically define what you need, including deliverables (if any) and overall expectations
• Spend time internally scoping out your needs in writing
• Allocate extra resources to get vendor relationships off on the right footing
• Make sure your team understands what it means to work across time zones

(2) Make sure the vendor’s capabilities and experience match your company’s precise needs
• Know whether a vendor is better at product maintenance or can be entrusted with new product development
• Develop a robust scoring system if you are evaluating multiple vendors
• Check references and run a pilot project

(3) Structure contracts based on project type to maximize value
• For new developments, use Statement of Work (SoW) contracts and agile management
• For maintenance projects, use Time & Materials (T&M) contracts with traditional waterfall management

(4) Consider indirect factors in project planning and cost estimating
• Factor in costs required to manage projects
• Consider local factors such as talent supply, churn, and culture and have a contingency plan for natural disasters or political disruptions

Clearly, outsourcing software and technology is not an easy task. Keeping in mind the above factors and appropriating the right amount of resources toward any given project provides higher likelihood for success.

Agree or disagree? Comments or questions? Please send Virgo Capital your comments or questions or post them below.

For further discussion, Virgo Capital has developed a framework for managing outsourcing projects and has data on pricing, talent, and intangible aspects of most major outsourcing destinations. We would be happy to discuss with interested companies.