The decision to outsource product development to China pays off for NeatReceipts.

By Jeff Burk,  InformationWeek
Sept. 20, 2008
URL: http://www.informationweek.com/story/showArticle.jhtml?articleID=210602255

After several years of strong sales, a growing worldwide customer base, and increasing competition, NeatReceipts reached a crossroads in 2007: Should we continue product development efforts in-house in the United States, or outsource some of these efforts?

Several factors spurred us to consider outsourcing. For one, we'd been trying to fill a number of open positions without much success. We manufacture products based on cutting-edge optical character recognition technology, and the engineering is complex and demanding. Product development cycles are short. However, because we're based in Philadelphia--not a technology capital--we don't have access to a broad pool of engineering talent. Outsourcing product development could potentially lower our development costs and get products to customers faster.

The decision to outsource some of our development was by no means an easy one. We wanted to keep strategic development onshore, close to our stakeholders, and use an offshore team to add skills that we have a difficult time hiring in the United States. However, we were wary of outsourcing because we had to safeguard our intellectual property, as well as customer and employee data, and weren't sure outsourcing partners could deliver high-quality work against an aggressive product development cycle. We also needed to ensure that we could effectively integrate an outsourcing partner into an already high-performing team.

After detailed discussions with our IT and business decision makers, we decided the benefits of outsourcing product development did indeed outweigh the risks. Of course, cost can't be overlooked when determining whether outsourcing product development is the right decision. An analysis of the numbers validated our decision to move ahead with outsourcing.

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Outsourcing development would be significantly less expensive than recruiting, managing, and retaining a team of U.S.-based engineers, but India is becoming increasingly expensive--with engineering talent on average costing about 75% to 80% of what we would pay onshore.

China is decidedly more affordable, with engineering talent costing about half of what we would have to pay onshore.

NeatReceipts competes globally with larger rivals, so the cost advantages of outsourcing our product development to China were compelling. We also thought that since we have manufacturing operations in China, it made sense to build a software development presence there.

In October 2007, we decided to outsource our product development operations to China.

THREE CHALLENGES
China is a fascinating place in which to do business and is becoming a top location for outsourcing because it has a large supply of engineers capable of doing highly sophisticated product development work. Also, the rapidly expanding Chinese economy presents a major business opportunity. NeatReceipts saw establishing a product development team in China as an important step in expanding our business operations there.

There also were three distinct challenges to outsourcing our product development to China. First is the language barrier. Few engineers in China speak English, which is a challenge for any U.S.-based engineering team that must interact daily with Chinese colleagues.

The second obstacle is the general lack of project management expertise. China's universities produce software engineers who are just as skilled as their Indian and U.S. counterparts, but this is the first generation of engineers, and the workforce lacks people with project management experience. This can pose a significant management challenge, given the need for the Chinese team to work autonomously to deliver results.

Developing a strategy to manage the 12-hour time difference between Beijing and our Philadelphia headquarters was the final issue. And anyone accustomed to coordinating teams across time zones knows that this can be daunting.

With our decision to outsource to China made, we evaluated several outsourced product development firms on the quality of engineering talent available in the regions in which they'd established development centers and on their expertise and history of working with independent software vendors. We needed a partner who understood that our revenue is tied directly to the success of our technology.

We decided to work with Symphony Services because the company had product engineering expertise and strong test-automation and quality-assurance capabilities, which helped us improve the productivity of our development process and speed the time to market for our products. Symphony's newly opened China development center provided access to the growing base of engineering talent in Beijing.

We started building out the China development team in 2007; it's now 10 members strong and growing. The language barrier proved to be the least daunting of the challenges we faced. Working closely with Symphony to identify the right candidates to meet our needs, we were able to secure a team leader with strong English skills. This greatly facilitated communication between the Chinese and U.S. teams and ensured that issues could be resolved before they threw the product development cycle off-track.

We also made the appropriate investment to ensure that the Chinese team felt comfortable working within our agile product development framework. The reward systems inherent in this system were especially appealing to the team.

MANAGEMENT ACROSS TIME

Weigh Your China Options

PROS	CONS
Less-Expensive Labor	Cultural/language barriers
Faster project devlopment	12 hour time difference, or more
Establishing presence in potentially huge market	Potential for theft or loss of intellectual property or customer data

Few issues are more likely to knock a project off-track than delays caused by time-zone differences. The time difference between Beijing and Philadelphia is a massive 12 hours, and it grows to 13 hours when daylight saving time kicks in.

We address this by keeping product development plans extremely organized. Managers in the United States are in daily contact with their Chinese counterparts (at times when both teams are working) and the entire team meets twice each week via videoconference to determine where the team stands with regard to product development objectives. We also use TargetProcess software for project management, and instant messaging and e-mail for ad hoc communication.

It hasn't always been easy, but our outsourcing initiative has translated into results: Since December, the Beijing team has helped deliver two new products--a NeatReceipts upgrade and NeatDesk desktop scanner--and has played a central role in developing a robust automated software testing framework. These results, coupled with huge cost savings, have confirmed for us the business case for outsourcing in China.