In-Depth

Internet Opens Market for Offshore Development

• By George Lawton
• February 1, 2001

In today's tight labor market, the addition of new software development talent might prove a godsend to overtaxed IT shops. Fortunately the Internet is creating a viable world market for software developers. For example, Mike Caul, CEO of Mountain View, Calif.-based Hot Dispatch, said that more than half of the development work done through their service goes outside of the U.S. India accounts for 26% of their total business, Russia another 5% and other countries make up the balance.

While it has been possible to work with large offshore development companies in the past, companies can now contract directly with individuals of exceptional talent. Traditionally, much of the offshore development work was done through development houses, which were akin to information-age sweatshops. They would manage projects on behalf of the U.S. companies and then reward the developers with a small fraction of the proceeds.

A number of different Web sites, such as Collab.net, Ants.com, Elance.com and HotDispatch.com are enabling companies to form relationships with individual developers. Other sites like Componentsource.com, based in Kennesaw, Ga., enable foreign developers to create and customize components for the U.S. market.

John Egan, Account Coordinator at Brisbane, Calif.-based CollabNet said, "What we do is level the playing field and eliminate the geographic barriers that may exist to really give everyone a chance to be part of this process. It depends more on your ability to code, and that is one of the reasons it is more of a worldwide phenomenon."

There can be some distinct advantages to working with offshore programmers. Clients can feed them projects at the end of the day in the U.S. and have them completed by the next morning.

In addition, businesses can tap into local technologies. For example, Rick Davis, CEO of Ants.com in Santa Barbara, Calif. noted, "There is some truth to the folk wisdom that Eastern European countries have good encryption technologies."

Opening the world market with open source
Open source development programmers from around the world have built key applications, such as Linux and Apache, from the ground up out of sheer passion. CollabNet has sprung up as a tool to allow these developers to channel this passion into various corporate development projects.

The open source effort is attracting a lot of programmers from around the globe. Many of the major open source projects are not even based in the U.S., such as Apache, which is based in Germany, and NetBeans, which is based in Slovakia.

CollabNet works with a project's sponsors throughout the process to ensure the project's success. It starts off by ensuring that the sponsor understands the skill sets and technology that are necessary to meet its needs. Then it helps the sponsor define the RFP and post it online. In some cases, the project will receive a number of bids on its own, while in others, CollabNet acts as a liaison to identify developers that would be suitable for a project.

An open bidding process runs the risk of attracting numerous bids, which could water down the interest of serious programmers who might not want waste time on a proposal for only a slim chance at a new job. CollabNet's Egan said that he works to ensure that he does not invite participation in a bid from more than a handful of highly qualified bidders. Consequently they have never received more than fourteen bids for an RFP, and in many cases it is far fewer than that.

Once an RFP has been accepted, CollabNet steps out of the way unless certain milestones are not being met. Egan noted, "There have been certain projects that just sort of flamed out. Usually that is because the developer has become really isolated and for whatever reason is not remaining accountable. Usually the sponsor understands that it can sometimes be difficult to work within the time frame, so as long as the developer is remaining accountable and is convincing us that he or she can get the project completed, we and the sponsor can be quite reasonable."

According to Egan, about half of CollabNet's programmers are international. This leads one to wonder about the potential for international developers to drive down the rates for development, because a programmer in India or Romania can buy several times as much shelter, food and other basic necessities as a programmer in Silicon Valley or New York. Egan said that he has not noticed this downward pressure on prices, but that it may be a factor.

The side benefit of the monetary difference is that foreign developers, as a whole, value their success more importantly than their American counterparts. Egan said the developers that "flame out" have all been American. He has never had a problem with a foreign developer.

Can language barriers lead to project discrepancies?
As the project is being developed, discrepancies can arise between the sponsor's expectations and the developer's code. At this point, a CollabNet reviewer can step in to judge whether the code is up to par and whether it meets the desired goals.

Egan said, "This whole thing mimics what happens in the open source framework. If you think of peer review, you think of best engineering practices. Every engineer has a peer reviewer looking at the plans to make sure the building or bridge does not collapse."

Language and cultural differences could possibly create expectations that lead to these discrepancies. But here again, perhaps due to the higher perception of compensation, language has not been a problem, since most of the discrepancies have involved Americans.

Egan explained, "In general, foreign developers have more of an appreciation. You have people like Remus Pereni in Romania, who will not take things for granted. He is more willing to be part of the process. He is, in my opinion, one of our strongest developers and he is amazingly accountable, excited and passionate about what he does.

"I think the medium of SourceXchange eliminates the challenge that someone like Remus has in working for the American market. Remus has an impressive resume, but he is not going to be forever satisfied on one project. The monetary factor is there, but there is something more to that. I think that he is appreciating the opportunity to do this."

Pereni started his software development career outsourcing for a Dutch company. He worked alongside hundreds of other programmers on various applications for companies in the Netherlands.

When CollabNet opened up, Pereni got really excited at the prospect of creating open source applications. He said that it would not have been possible to go out on his own without CollabNet.

Pereni explained, "The process of finding clients would have been very difficult, because we would have had to do a lot more marketing. It is tough because you have to make your name and service known. It would only have been possible through spamming, and that is not an acceptable solution. We might have been able to survive without CollabNet, but with CollabNet we can do very interesting jobs."

CollabNet opened an exciting chapter in Pereni's programming career by allowing him to work on projects that fascinated him while still being able to pay his bills. He explained, "Working with CollabNet is a huge difference from traditional outsourcing in which you are doing regular stuff for regular companies and where you remain anonymous because no one is supposed to know about you. In my previous job, I never had such interesting projects. All of the projects here are very interesting, so it is really fun working on them. We can do open source every day and still feed our families."

Pereni has grown his operation to six people, three of whom are full-time programmers and the rest of whom work on taking care of business details or research. It is not an issue for Pereni and his team to be in a different time zone as the American companies with whom they work. He said, "One condition to enter the team is to be really passionate about programming software. We are here all day and sometimes all night long."

Although Pereni and his team do not have perfect English grammar, he noted, "We manage to get our ideas through so that we can communicate." It helps that most of the communication is done through the Internet and E-mail.

Growing the software colony with Ants
At Ants.com, about 40% of its 67,000 developers work outside the U.S. Rick Davis, President and CEO of that company explained, "It does not matter if you are in the same room or the same country, defining a good RFP is the key to success."

Ants.com uses a rating system similar to eBay's, which allows companies and programmers to rate each other's performance in delivering code and compensation in a timely manner.

One of the potential problems with Ants.com's current marketplace is that it tends to be more active than CollabNet's; some RFPs get as many as 40 different responses. This can be frustrating for both sides, because developers have only a slim chance that their proposals will pay off, and the companies must wade through a deluge of proposals.

Ants.com plans to charge a small amount, such as $1 to $10, in the future to submit a bid to discourage bidders who are not really interested. Davis said, "The buyer wants three to five great bids; they don't want 50."

Low-cost foreign talent does not water down the compensation at Ants.com because price is not the most significant factor; only about 11% of the projects are awarded to the lowest bidder. Davis said, "The first issue on most companies' minds is can the developer deliver what they claim? The second issue is quality and [then] responsiveness. Price is way down on the list."

Component development attracts foreign talent
The development of software components is an area that naturally lends itself to small software entrepreneurs. A programmer or small team can create a component to fill a specific need and sell it through marketplaces such as Component Source. Sam Patterson, CEO of Component Source said, "Outsourcing pieces is easier to manage than outsourcing an entire application. [Components] are easier to spec and easier to test and do quality assurance on."

Right now 25% of Component Source applications are developed offshore, and Patterson said they have seen far more growth offshore than in the U.S. A great deal of this success is because Component Source's market eliminates many of the marketing barriers for foreign programmers.

Two of the most successful component developers on Component Source have been Jose and Fernando Castaneda. When the brothers first wrote an application called Admin Folders, they were certain it would be a big hit in Mexico, especially after they received an award from Bill Gates for it. Unfortunately, even though the software was quite popular, the company was not able to make any money with it because of the rampant culture of piracy in Mexico.

Jose Castaneda explained, "People copy a lot in Mexico and they are not accustomed to paying for software. You may make money from corporations, but it is difficult to make money from small businesses because most of their software is bought on the black market. Component Source allows us to reach a wider audience. Otherwise, we would have to create a special marketing department. They have created brand recognition. Working with them has helped us reach a lot of market we would not have otherwise considered."

The major problem the brothers have had to overcome has been potential customers' fears about working with Mexicans. Jose Castaneda said, "There is a fear about using components from countries like Mexico. After we establish a relationship with [a customer], they are happy about the way we can work with them. A lot of people don't even realize that we are based in Mexico. A programmer from Merrill Lynch even asked us for a job because he felt that we were the kind of company he would like to work for. We said, 'OK, but did you know we are in Mexico?' He decided to look elsewhere."

Dawn of a new age
Software markets are erasing the geographic boundaries for IT managers. Over time it could spur people in many less developed countries into becoming software developers.

Egan said, "We are spreading the message that as long as you have the skills and ability you will be judged solely on the merits of your proposal and ability. As long as you have the skills, the location or even your age should not be a problem."

These new markets might erase age boundaries as well, enabling bright teens to compete on a level playing field with other programmers. For example, CollabNet's youngest developer is only 14 and is nearing completion on his first project. Egan said that the boy was not sure if he would even be allowed to do the work, but "he submitted one heck of a proposal."