I am not a big enthusiast on outsourcing the development of projects, having done that for more than a couple of years. Actually, it’s fair to say that I am mostly out of this business. From the point of view of the supplier, it’s very difficult for a small company to compete effectively and seriously.

Suppose you have a software development project that would cost US$500k. Ok, estimates are difficult but I have to start this discussion from some point. My company offers to do the job for US$600k. Then another guy offers US$300k and gets the bid, maybe knowing very well that it’s impossible to deliver the product for this price. The manager of the hiring company is a genius for saving the company money; if it’s a long project he may even be promoted before the time bomb goes off. Sometimes he even gets some sort of kickback from the seller, varying for a trip to an international conference to money under the table. At the contracting moment, the buyer has all the power.

Sometime along the project, it becomes clear that the project will not be completed on budget and on time. Now the power is with the seller. The buyer has already spent money and time – remember he needs the software for some concrete business need. He can fire the contractor and start over – maybe with somebody else who would pull the very same trick on him! So the buyer plays along and accepts some “changes of scope” so as to: 1)justify raising the price with some overpriced “new” functionality and 2)drop some expensive features. See, it’s not his fault: “everybody” knows software projects run over budget and over time; he might even have budgeted for it beforehand without telling the seller. And an over budgeted US$300k contract is better than an over budgeted US$600k contract, isn’t? The project ends up costing more than US$600k and doing less. The seller can claim he developed such a product and use it as a recommendation for a similar project elsewhere!

Serious bidders *always* have the higher prices. There will always be somebody with a much lower price. No matter how much a customer likes you, it’s pretty much impossible to justify those prices differences. This situation has some interesting consequences:

• Crooks have a competitive advantage;
• The primary skill required to run the outsourcing company is *not* good software development but people to manage the project (and the costumer), trying to recover from the hole you are in and making a profit. Indeed, that’s precisely what I see: the best salaries are for the “account managers”; technical people are seen as disposable cannon fodder.

You might say that one can write good contracts, hire insurance etc. I doubt those are as effective as one hopes. I see that problem happening big time in the USA. Big-ticket military weapons contractors are known for doing precisely what I described earlier. And you don’t even need the government to “help” you: The Boeing 787 is a textbook example of the problem above. After developing the 777 internally on time, some Boeing executives years ago “invented” a new manufacturing concept based on outsourcing as much as they could. They twisted the suppliers’ arms into giving low estimates - and I am sure, very stringent contracts. This allowed Boeing to sell a very capable and very cheap airplane in record numbers, some 800 even before the first flight! Boeing’s stock value tripled and I am pretty sure all of those executives got fat bonuses for the “outsourcing miracle”. This outsourcing involved not only manufacturing parts using new carbon fiber technology, it also included designing the stuff! Boeing would become more or less a “branding” operation (not engineering, not manufacturing). Final “assembly” would be done in three days!

A few year passes and now it’s crunch time. Now the suppliers simply can’t deliver and Boeing had to nanny them and bail them out, no matter how “airtight” the contracts were. The “airplane” rolled out on the 2007/8/7 ceremony was an empty husk put together with fasteners bought at a local hardware store. The project is a money pit and terribly late. Despite record sales of the 737 and 777, the stock price took a dive.

There are of course outsourcing exceptions, usually companies with such a reputation that they can command “fair” and much higher prices. The costumers agree to pay a premium when the project is very critical and absolutely must be done right and on time.

One can buy off the shelf, of course, which should be the “default” choice for any company.