Software vendors face rising offshore costs

Consulting company Sand Hill Group last year surveyed executives from about 50 software companies and found that "="" said="" m.r.="" rangaswami,="" co-founder="" of="" sand="" hill="" group.="" "these="" executives="" they="" are="" more="" reliant="" on="" offshore="" than="" ever="" before."="" <="" p="">

With that reliance comes risk and even some disillusionment, Rangaswami said.

He said many software companies expected massively lower costs by hiring offshore developers. However, those companies found that prices were about 40 percent lower when all factors were included.

"Most people were satisified. It's just that they thought it'd be a nirvana," Rangaswami said.

Offshore companies are already reacting to higher prices and shortages in skills in well-established offshore centers like Bangalore, India, he said. To meet demand, less-developed centers in Indian cities, such as Hyderabad, Pune and Chennai, will establish new offshore development capacity and keep prices from rising rapidly, he predicted.

India maintains an advantage over other offshore locations such as China, in large part because Indians' proficiency with English, he said.

Overall, the movement toward offshoring is forcing software companies to improve their processes for managing distributed teams, Rangaswami said. Typically, Silicon Valley software companies had a single team clustered in a single location and have not been good at distributed programming.

Rangaswami said that because most software companies use offshore development, they will need to more closely integrate their distributed development groups to stand apart from competitors.

"You can't treat this as a cost issue, which is what most people did initially," he said. "It was us and them. Now you have to look at it as one team with one goal and one set of metrics."