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Outsourcing
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Software
Development
An Insider Note for German Companies
(Version 1.0)

A white paper
(A perspective)

Infoteq Global Solutions GmbH

Kassel- Germany
Nov 2006
Contents

CONTENTS......................................................................................................................................... 2
FOREWORD........................................................................................................................................ 3
ABSTRACT: ....................................................................................................................................... 4
INTRODUCTION: ............................................................................................................................. 5
GERMAN CONTEXT........................................................................................................................ 7
WHICH SERVICE PROVIDER SUITS BEST............................................................................... 9
OUTSOURCING MODEL .............................................................................................................. 11
DO’S AND DON’TS OF SOFTWARE DEVELOPMENT OUTSOURCING ........................... 13
CONCLUDING REMARK.............................................................................................................. 14

Copyright © 2006, Infoteq Global Solutions GmbH 2

Foreword

After the USA, the UK and Japan; Germany - the largest economy of Europe, is opening up to outsourcing
(offshoring) software development. There are hectic initiatives and studies being conducted within German
IT industry, to harness the benefits of offshoring. Companies are in a hurry to make themselves more
productive and cost effective by leveraging advantages of offshore software development.

Infoteq Global Solution GmbH, based out of Kassel –Germany is engaged in providing software solutions
that provide its clients time to market advantage. Infoteq being an insider of German industry is working out
with other companies to evolve a suitable offshore development model that best suits German companies like
itself. Some of these models are already proven elsewhere, as well as within Infoteq. By sharing these
experiences, Infoteq believes that it would make useful contribution to the strategic decisions of German
companies, who are new to outsourcing software development.

This paper is focused on SME segments, since SMEs form a sizeable part of German economy. The target
audience of the paper are the senior executives and policy makers of German organizations, that are
considering off-shoring as a strategic initiative for the first time. Its emphasis is on software development
companies, as well as traditional companies who have significant dependency on software. This paper
available in both German and English version, is high on perspective and is written in a marketplace
vocabulary and approach, that is expected to make reading easy for its target audience as well as for a
general business reader.

Dr. Shridhar Lolla

Bangalore
18th Nov 2006

Copyright © 2006, Infoteq Global Solutions GmbH 3

Abstract:

This paper is an experience sharing note on outsourcing of software development work of German companies
(like ourselves, Infoteq Global Solutions GmbH). Outsourcing being a major business innovation; like
companies in other geographies, we (companies in Germany) are gearing up to exploit benefits of
outsourcing opportunities. While we could pick up lessons from other’s experience, much of the homework
needs to be done by ourselves. The paper covers the critical issues that would enable us to start planning
software outsourcing as a major initiative for business benefits.

As a result of globalization, outsourcing has a big geographical connotation. In this context, the paper also
covers off-shoring i.e. conducting part of outsourced activities in different geographies.

Infoteq’s experience does not recommend fundamental changes in the way we operate. In fact, it provides an
insight into the inherent characteristics of German companies, leveraging which as a first step, we could
possibly leapfrog into outsourcing bandwagon. Infoteq believes that we continue to use our inherent
strengths that have been driving our businesses. It recommends that we adopt an outsourcing process that
complements our existing business characteristics, rather than adopt a set of processes that may force us to
redefine our businesses.

Copyright © 2006, Infoteq Global Solutions GmbH 4

Introduction:

Outsourcing has been a major business innovation of today’s marketplace owing to its significant impact on
business results. This prominence of outsourcing is driven by globalization and deregulation. Now,
organizations increasingly bank upon outsourcing to provide financial, strategic and qualitative benefits.

The most successful stories of outsourcing are found in the software development industry. The very nature
of software development process makes it readily amenable to outsourcing across boundaries. The intrinsic
characteristics of software development include its being human intensive, modular and non-materialistic. It
has allowed organizations to have software developed in distributed fashion. Today, software is designed at
one place, developed at another place and maintained from yet another place. It allows the same work-in-
progress(WIP) to be accesses by multiple developers simultaneously or disparately from different locations
without needing it to be transported like physical goods. This has led to having part of the development
process being done and outsourced to a location(s), that gives the best business proposition, in terms of cost,
talent, quality etc.

Today, software is rapidly becoming the nervous system of the organizations across industry segments.
Further, software technology has been evolving faster than ever. It makes, therefore, sense for organizations
to reduce the risk of skill obsolescence, cost of learning and burden of managing own technology teams.
Organizations can continue to make themselves more competitive by focusing on their core strengths and
outsourcing modularized software development activities to those, who provide the benefits of scale and
scope. Further, continuous changes in market conditions force organizations to limit their fixed cost by
making much of their costs variable. By outsourcing software activities, organizations make high cost
elements outsourced and make their costs
more controllable. The service providers in Why Software Development is Outsourced>
turn, build enough scale and scope of
operation to provide the flexibility to meet the
1. Focus on Core
variability in the market place. Often
2. Save Cost
outsourcing results in quality improvement,
since, business models of service providers 3. Improve quality
are more tuned to software development than 4. Acquire Skills
the outsourcing organization. 5. Improve innovation
6. Improve flexibility
Definitely, apart from strategic and qualitative 7. Save capital
reasons, there are countless success stories 8. Increase Revenue
that show case significant cost savings. The 9. Seek Inorganic growth
cost effectiveness of outsourcing is of varying 10. Access new markets
degree due to difference in development 11. Own software companies
models adopted by organizations. Some
companies outsource to offload their non-core activities, others to accelerate their core activities and then
others to meet time to market. There are also companies, who feel that the cost and the risk of carrying out
early stage R&D could be significantly reduced by outsourcing their ideation/ feasibility stage of R&D to
places that have large number of quality engineers and scientist at significantly lower cost. India and Poland
lead destinations supporting such outsourcing activities. Couple of years back, several technology companies
had pruned down their research portfolio significantly, as the time to market, cost and skills were becoming
unmanageable. Outsourcing of R&D has been a big relief to them.

Copyright © 2006, Infoteq Global Solutions GmbH 5

In many cases, off-shoring saves significant capital cost and helps in improving financial results. Almost
always the general infrastructure including office space, power and office machinery, would be lower in
outsourcing destinations. Sometime, its possible to have a lower cost of the involved technology
infrastructure, as well.

Outsourcing is often a part of the long term strategy to go closer to emerging market or building strategy to
own development center in other geographies that offer better business sense. In terms of strategic
importance, many companies have taken outsourcing process as a line of strategy to initially outsource
development in low cost – high quality manpower countries, learn the local as well as software development
skills and subsequently, buy out the service provider’s operations. This route of inorganic growth has many
takers today.

In software development industry, execution of complete value chain is termed as complete Life Cycle
Service, that spans concept to maintenance phase. Only at a very high level of maturity of relationship, such
work is outsourced. Most of the outsourced work are actually various parts of the lifecycle. Technically, the
software development outsourcing could be classified into following types:

1. R&D services
2. Product Development
3. Full life cycle Development
4. Pure implementation
5. Custom Application Development
6. Package Implementation
7. Technology Migration
8. Testing
9. Maintenance

Copyright © 2006, Infoteq Global Solutions GmbH 6

German Context
The outsourcing process depends on the nature of company and its strategic objectives. Often, the regional
business structure, legislations and culture make significant impact on the way we conduct business, and it
lends business a distinct characteristics. Thus, European companies are quite different than American
companies, in the way they do business. Today’s outsourcing is mostly dominated by American companies,
and hence, although it is tempting to adopt the best practices from them, it would be prudent to look at
outsourcing from the perspective of German companies. There may be a possibility to derive similar levels
of benefits that may neither demand significant changes in the core practices of German companies nor a
redefinition of the existing base of service providers.

We have our own characteristics. We obtain our characteristics by being a part of the Europe as well as their
being in Germany. Inherently, innovation is fundamental to our companies and it needs to be nurtured
internally as a core activity to remain competitive in the market.

Majority of our companies are still family owned and are closely held. Which may also mean that we have
our strategies and key processes as part of some exclusive group within the companies.

Compared to the USA or the UK, at an average, we Characteristics of German Companies>

have less international experience i.e. the benefits of
Globalization is still to be tapped in a big way in 1. Family owned
Germany. Comparatively, we are new to 2. Innovation based
outsourcing beyond Europe. As compared to the 3. New to outsourcing
USA that has been outsourcing over 50 Billion Euro 4. Local language and culture
of IT work offshore, Germany is expected to reach 5. Local structural system
barely 1 Billion Euro figure, only after year 2008.# 6. High taxes
7. Have own processes
The structural, legislative and the labor laws in
Germany are more towards welfare state than the 8. Import averseness
market driven approach of the USA. Further, the 9. High regards for own standards
overall economic growth in Germany (as well as in 10. Need wider international experience
majority of the Europe) is productivity improvement 11. Productivity based growth strategy
based and is often organic; as compared to that of 12. Vertically integrated
the USA, where the economic growth is largely 13. Local relationship
investment based. Hence, we have our own way for
gradually tapping onto new business concepts and
changes.

# Broß, P. (2005). Herausforderungen an Unternehmen und Politik – Chancen und Risiken aus politischer Sicht für Offshoring.
Speech delivered at the conference „Chancen und Risiken von Software-Offshoring“, February 11, 2005, Munich.

Copyright © 2006, Infoteq Global Solutions GmbH 7

Most of our companies being closely held and innovation driven, we have our own process of development
that best suits us on company to company basis. Hence, we have not yet modularized the value chain the same
way as the rest of the world. Often, we consider closed room discussions more beneficial than an open
presentation. Although, off shoring is the major gaining element of outsourcing, a majority of our companies
has more faith in the quality of local products/ services than from abroad and it will take a while before
importing work from other countries becomes a norm.

Our SME segment is very strong and often, these companies are located away from the metros in localities
that have very local business behavior. This demands a high degree of informal business relationship. These
companies are comfortable doing most of their work in-house; at the best outsourcing to a very local and
known service provider (here, outsourcing is meant more from the point of view of ‘focusing on core’ than of
any financial gains). In fact, medium to large organizations still focus on vertical integration and are only now
leveraging the benefits of outsourcing.

The entry time of Germany into software outsourcing (off shoring) is at a different time phase. The
outsourcing from American, Japanese and British companies was led primarily by large organizations, who
subsequently established the benchmarks. World over, Software development outsourcing is only now
touching the SME segments. However, in Germany, large enterprise and SME segment are simultaneously
entering into outsourcing wave. This could create a different dynamics in the marketplace that is yet to be
witnesses. Perhaps, this is one issue where German companies have an opportunity to make some innovation
in software outsourcing model at the national level.

While there are many typical behavior patterns or characteristics of German companies, those with
significance to software development outsourcing are listed below.

1. Majority of our companies are Family owned companies

2. Our companies have a high dose of innovation
3. We are new to mass scale global outsourcing
4. We have a typical local language and culture
5. We have a typical structural system
6. Our taxes are high
7. We are comfortable with our own processes
8. Majority of us are import averse
9. We have difficulty in acceptance of other’s quality standards
10. Our companies need wider international experience
11. Productivity and not investment has been basis of our growth strategy
12. We are highly Vertically integrated
13. We are comfortable in building strong relationship to local IT companies

Copyright © 2006, Infoteq Global Solutions GmbH 8

Which service provider suits best
Since, off shore development is the corner stone of major benefits of outsourcing, and innovation being
inherent in German companies, an ideal service provider is the one who starts his business in Germany and
has an execution center in most advantageous outsourcing destination. If the service provider has a base in
Germany, it helps us in gradually making entry into outsourcing. In building a business relationship,
understanding of local laws, business structures, regulations, taxes and culture may take from several months
to years. For a local partner, these could be resolved in just a few meetings. Ideally, we would be starting our
outsourcing with an organization that has an international office and a local outsourcing experience.

As a long journey starts with a small step; our software development outsourcing could, preferably, start with
couple of small works. A small project will helps in quickly going through a full off-shoring cycle and
provides immediate inputs to subsequent outsourcing strategy. It helps in fine tuning the process based upon
our needs before we go for larger outsourcing. This would balance out our newness to the world of software
development outsourcing with the size of the project and will provide the right pace of learning curve. Thus
we would need a service provider who is conscious to our initial strategy and gives us that opportunity to
grow our outsourcing strategy. Usually, we would need a service provider who guarantees its more than 100%
attention into our organization. This is of course
needed when we are beginning a long term Choosing the right Service Provider>
relationship. A dedication from both the groups would
help in nurturing and building a relationship, that will 1. Main location in Germany
be far more strategic than any other configuration. It 2. Multi-location offices
seems that there are too many variables in the process 3. Local business knowledge
of software development outsourcing, and these would 4. A strategic partner
come to us un-announced. Flexible business terms, 5. Honor long term relationship
agility to respond to changes and growing relationship 6. Flexible business terms
to meet our needs will be the main operational 7. Ready to adopt your processes
qualifiers for our service provider. 8. Technology Neutral
9. Pure Service Organization
Most of the service providers are actually pure play
10. Overall Cost Effectiveness
software developers and their fundamental
11. Capable of providing entry into
competency is in software development and related
technologies. Although, many would place high offshore local market
claims in other industry domains, in the beginning of 12. Outsourcing history from
the relationship, it would be good to depend upon the Germany
service provider more for its software skills than the 13. Pure service provider
domain competency. This will allow us not to get into 14. Sensitive to IP and confidentiality.
cross domain relationship tussle. We need to also
remember that our team is the best to talk about our
domain and not the service provider’s. At the best, the service provider can provide resources who understand
our domain and could translate our requirements into software. But we may not gain much by transferring our
domain responsibility onto the service provider.

When we outsource software development to offshore, consider that our organizations have many other areas
of operations than software. And the location where we are outsourcing software development to, could be a
high potential destination for outsourcing other activities, e.g. development of graphics, hardware, marketing
collaterals and posters, participation in local market, local event management, finding a local domain partner
etc. A check with our service provider, might also reveal that it would also be having these needs and it

Copyright © 2006, Infoteq Global Solutions GmbH 9

might as well have these coordinated for us. Ideally, in a long term relationship, we could look out for overall
cost-effectiveness and not just cost effective software development.

Checking out for over-ambitious service provider is important. While providing services, the service provider
may be tempted to productize development services provided to us or reuse the work, that might lead to
conflict of interest. Organizations that are purely service oriented and that are without product development
ambitions will give more confidence to us in this respect. While agreements of different levels ensure a
certain degree of confidence in protecting our business interest; having a strategy to mould the service
provider into our own culture and making them a part of our organization will go a long way in drawing up a
line that the service provider does not infringe upon our rights.

Sometime, choosing a small service provider might seem good for us. If we are in software centric business,
we would have reasons to go beyond the obvious. A majority of these service providers are just a few years
old and they are always in need of funds. We could probably be able not only to mould such companies into
our way of operation but could leverage our relationship to buy out them at very low rate. Buying a company
in Germany will be very costly today as well as tomorrow; but acquiring one that has a majority of execution
strength in emerging markets would be dirt cheap.

When we are first timer to off-shoring, following key points will help us in choosing a suitable service
provider:

1. Multi-location offices: One in Germany and other in service provider locations

2. Local knowledge: Local knowledge that includes business structure, laws, regulations, taxes etc.
3. Business Terms: Flexible business terms and easily moldable to our needs and processes
4. German Jurisdiction: Ready for a relationship in German jurisdiction
5. Process: Ready to follow our project management process
6. Change Management: Easy to take care of project variations in scope, time, cost, resources
7. Offer Cost Effectiveness: Look beyond IT cost. Should look for other processes that it can support
that are cheaper and better in those localities.
8. Offshore market: Can provide entry into local market, if required. Can take forward our products into
local market.
9. History: Has an Outsourcing history to Germany
10. Ready to Buy out option: If we are a software company or there is any indication that software could
become a key differentiating feature of our organization and it would be worth considering in-
sourcing the development activity back.
11. IP Protection: Must be sensitive to IP and confidentiality. A pure service provider is ideal that will
avoid conflict of interest. This sometime may mean avoiding large organizations, who by their design
or strategy can easily get into product or services that might compete with us, if not today then in near
future.
12. Adaptable Process: The process need to evolve and it will be our responsibility to guide the service
provider.
13. Shared resources: Agreeable to transfer resources either way if the business demands.

Copyright © 2006, Infoteq Global Solutions GmbH 10

Outsourcing Model
The outsourcing model comprises a set of inter-related sub models. The model is time and space dependent;
and therefore, the attributes of the model at any point will depend upon the stage of the outsourcing
organization with regard to their outsourcing readiness. Depending upon organization readiness and strategic
objective, a suitable model could be configured. For example, a company could choose to outsource because
it wants to be more competitive and excel in its core competency. On the other hand, a company dealing in
software products might be working on a long-term strategy to move closer to a specific geographical market.
Outsourcing to a local player in that geography could be an easy route to learn the nuances of local business
and market condition. At a later stage based on time and scope possibilities, it could choose to go for a
stronger relation ship with the service provider.

The location model is perhaps very critical for innovation driven companies. The office culture and business
interaction mode of German companies demand that the service provider is available next door to us. In
having a team of service provider who shares intimate business relationship and understands our business is
paramount. But from the point of view of cost and time to market, we need to leverage the financial benefits
of outsourcing by going offshore. Regions like India, Russia, Philippines, Poland etc. will

Figure1. Software Development Outsourcing Model

Copyright © 2006, Infoteq Global Solutions GmbH 11

provide us a level of bottom-line benefits that would keep our stakeholders happy for a longtime. Usually, as
a first step, we would get into a relationship with a company who is next door to us. We could consider that
this outfit is run by people who understand the native characteristics of German business and not just have
another office of a main organization from abroad. Ideally, the near shore should be the center of relationship
than the remote office of the service provider. However, when we have a trusted relationship or we intend to
enter deeper into the territorial benefits of the offshore location, we could shift our focus onto that location.

We could choose to outsource part or whole of the software life cycle work. Depending upon our
organization readiness, to start with we could choose to outsource implementation(coding) only or may be
implementation and testing. In cases, where we are a product company and want to either have quality
problems resolved or have our partner engaged in product development; only testing outsourcing at the
beginning could work wonders. As the relationship grows our service provider starts understanding our
inherent needs better, it would be in a position to participate in requirement discovery and design phase. If we
are looking out for a long term trusted partner or if we have any thought to own the outsourced partner or
activities, we would like our partner to even work with us at the concept stage of the development activities.
In those cases involving the partner in technology feasibility studies and proof of concept development would
not be a bad idea. In fact the companies for whom, innovation is key for success as well as survival,
continuing technology feasibility has become very costly and difficult as high end resources are very rare.
Further, in the early stage of research, resource and skill requirement is very unpredictable; however, having a
service provider who can support the variability of skill and resources, helps considerably.

Before getting into an engagement with a service provider, consider the timeframe that we want our
outsourcing practice to flow through. Depending upon nature of our work we could choose fixed time or
variable timeframe projects. One time engagement is rare and may not provide much strategic benefit. Ideally,
we would be looking out for a long-term partnership that could start with small projects of definite and
controllable timeframe; and would then grow to multiple projects of all type of timeframes. Yes, in the long
term, portfolio management of outsourced project will be one of the key activities. The financial model would
also vary. Innovation driven work demands high skilled resources and does cost higher than the average
market figures. It is difficult to place a fixed price on a continuous research project; however, majority of the
product development activities could be broken into 7-8 milestones and could take a mix of fixed price and
viable component, depending upon success rate of the development. Some pro-active service providers may
as well be interested in sharing part of the development cost and it becomes part of risk sharing model. Do
check when we want to outsource product development, our service provider might have libraries of small
components or generic functions that it could either rent or sell out. It will, significantly, reduce our time to
market and most often the cost.

Project management is the most crucial part of operational success of outsourced software development. It is
many times critical than an in-house development. Initially keeping the project management role within
ourselves is ideal, that leaves the service provider to do what they are best at. This also helps us in gradually
introducing the processes that our organizations have learnt over the years. In due course of time, we may
have to learn a few things from our service provider in terms of process tricks and standards, but in most of
the cases, we will have to consciously make changes and tailor these processes as per our organizational
needs. All said and done, processes may be readily available in external standards but their implementation
varies, and implementation of these processes could be a key area of our engagement. Once the processes are
in place and the project teams on both sides are in synch, we are ready for transferring project management
responsibility to the service providers. Our team could then review the project remotely.

Keep an eye on our corporate objectives to understand how long we are looking at outsourcing software
development. The outsourcing models will depend on our mid-term views on outsourcings, as well. We may
like to keep the option open to call back the work after sometime; who knows software could replace major
hardware functionalities of our product tomorrow. And then, software development could become our most

Copyright © 2006, Infoteq Global Solutions GmbH 12

value added work as well as a need to be a core strength, whether we want it or not. In that case, do not
outstretch the short term benefits of outsourcing so much that we tend to outsource our homework.

A closer look at our corporate strategy (drivers ) for outsourcing will let us come out with the ownership
model of the outsourced model of software development. It may seem enough to see the service providers as
the normal supplier from a purchase department point of view. But it is not so. There are seldom outsourcing
relationships that have benefited the outsourcer, if it has been considered a pure job work instead of a strategic
relationship. The benefits of pure job work is very short term. More companies are, therefore, looking at
models as far as BOOT (Built operate Own and transfer models), where the service provider is a partner in
developing a sound outsourcing strategy and over a period of time ownership is transferred completely. There
are subdivisions of BOOT models that are also widely prevalent. It depends on experience of doing business
abroad, risks seen in changing technologies, time to market pressure etc.

Do’s and Don’ts of Software Development Outsourcing

A search in internet about ‘Dos and Don’ts of Software Development Outsourcing” provides a large number
of links that would provide a good reference information. Provided below are the critical concerns in
outsourcing software development for German companies.

Table-1 Do’s and Don’ts of Software development outsourcing

Dos
Initially, take up small projects.
Look for flexible service provider, who
understands our strategic intent.
Adopt combination of near-shore and
offshore options.
The service provider must understand
German business culture.
Allow the software development
outsourcing process to evolve. Propose our
process and make corrections in due course process that suits us the best.
of time.
Focus on project management. Our team
may need to build competency in this area.
We are equally responsible for project
success.
Consider Outsourcing as a revenue growth, Do not adopt outsourcing to reduce jobs.
qualitative and strategic initiative than a
cost reduction exercise.
Don’ts
Do not outsource large project at the first
instance.
Do not expect high returns immediately.
There would be startup cost that might
offset savings in initials few projects
Do not Outsource homework (unless there
is a strategic reason).
Avoid being biased by high vertical domain
knowledge of the service providers. They
are not a replacement for our own domain
knowledge.
Do not be blinded by claims of high quality
and process tags. We would need to have a
Do not force our organization to adopt
outsourcing. Rather, workout a gradual
business process re-engineering strategy.
Outsourcing is not a purchasing activity.

Copyright © 2006, Infoteq Global Solutions GmbH 13

Concluding Remark
A majority of us is more than a couple of years behind its peers in taking advantage of off-shore software
development. Although, there is very little downward risk as far as outsourcing is concerned, we need to find
a way that will allow us to leap frog in the global marketplace. Directly adopting the experience of other
countries may not be the best way to establish an offshore software development practice. As a first step,
leveraging our own distinct characteristics and strengths, could be a better option. It looks like, we need to
evolve our own process to benefit from off-sourcing(.)

Copyright © 2006, Infoteq Global Solutions GmbH 14

Search Keywords:

Off shoring, Outsourcing, Software Development, Information Technology,

Outsourcing Model, Outsourcing issues for German Companies, SMEs

Disclaimer:

This document is an inside account of Infoteq Global Solutions GmbH-Kassel, Germany and is created to
contribute its observations on software development business.

Part or whole of this document can be reproduced by citing this document and sending a written
intimation to Infoteq Global Solutions GmbH at info@infoteq-gs.de.

Factual material contained herein, is obtained from sources believed to be reliable, but the publisher is not
responsible for any errors or omissions contained herein. Opinions are those of Infoteq Global Solution
GmbH and are based on research conducted for this report. Infoteq Global Solutions GmbH holds no
responsibility for decisions made on the basis of the content of this report.

INFOTEQ global solutions GmbH

Ludwig-Erhard-Straße 8
34131 Kassel
Germany

Tel.: +49 561 9707499

Fax: +49 561 9707868
E-Mail info@infoteq-gs.de

Copyright © 2006, Infoteq Global Solutions GmbH 15