Offshoring Must Be About Finding Good Developers

Over the last 1.5 years, I worked with two Western automotive tier-1 suppliers who use near- and far-shoring to develop most parts of their infotainment systems. Both suppliers use offshoring to reduce their development costs. But how can these offshoring projects be cheaper if a good developer is easily 10-20 times more productive than an average developer?

When I compared the efforts of two pretty similar projects – one done onshore in Germany and the other done offshore in India, the result was very clear. The onshore development team was 15-20 times (!) more productive than the offshore team. Senior managers at the automotive suppliers have typically seen productivity differences of 5-10 times.

Let us do some simple math. Let us assume that a supplier gave a project of 3.5 million dollars to an offshore company in India. The project duration is 2 years (1800 hours per year per developer). The average rate of an offshore developer is 20 dollars. The team would have a size of nearly 49 people. If we had developers with, say, a 7 times higher productivity, we could do the same project with 7 people at a 140 dollars per hour. As we can hire really good developers at 100 dollars per hour in the Western world, we could do the same project for 2.5 million dollars – saving the customer a whopping 1 million dollars!

It comes even better! I am deeply convinced that the distribution of bad, average and good developers is the same everywhere in the world. Hence, the Indian offshore company could easily find 7 good developers for an hourly rate of 50 dollars and bring down the project cost to 1.25 million dollars. Even if the offshore companies adds two good developers from the West at 100 dollars the hour, the total cost would be under 2 million dollars – saving the customer 1.5 million dollars in total.

A nice side effect would be that the offshore companies could pay their good developers much better salaries. The good developers would stay longer with their companies. The companies would save significant amounts of money on bringing new developers to the same level. And, good developers attract more good developers.

So, why do Western companies go for cheap and average offshore developers over and over again knowing full well that this approach doesn’t work and isn’t cheaper? The main problem is that productivity is hard to measure, whereas hourly rates are hard facts.

This problem already becomes visible in the hiring process of many companies. Many companies are not able to tell apart good, average and bad developers. They end up with a lot of bad and average developers and the accidental good developer. This problem is exacerbated by the belief of many managers that developers are just “resources”. They believe that they can easily replace one “resource” by another one – the same way they could replace a factory worker with another one (interestingly, automotive tier-1 suppliers are mostly manufacturing companies with some software development attached). Offshore companies are corroborating Western companies in this belief for obvious reasons: “You need 100 more resources. No problem, Sir!”

Even if a company understands the importance of productivity, they still don’t act on it. Here is a recent example. The Director of Engineering of a tier-1 supplier rolled like a tank over the managers of an offshore company. His analysis was spot-on: The offshore company had far too many average developers and far too few good developers. The offshore company would have never expected to get the project after this merciless bashing, but they did. Most likely, he gave the same bashing to all contenders for the project (all of them offshore companies). He achieved that all offers were in the same low-price ballpark. Purchasing was certainly happy about the low rates, because that’s all they care about. Hourly rates or fixed prices are hard facts. Purchasing loves hard facts. And, they love low rates even more. This is a disaster in the making!

It would be easy to avoid disasters like this: Add productivity to your calculation of total costs! In other words: Hire a few good developers instead of many average ones!

The good news is that hourly rates do not increase in proportion with the productivity of a developer: far from that actually as I explained at the beginning of this post. For Western companies, this means that you get good developers at a relatively low price. For offshore companies, this means higher margins per developer. The other good news is that there are many good developers – in absolute numbers – in offshore countries like India. This is a win-win situation!