Perhaps the most important ingredient in the success of a software development team is the raw talent of its team members. This is supported by the so called 10x rule, which states that the strongest developer is about 10 times as productive as the weakest. This huge variation in productivity has long been observed among development managers and is also backed by a significant body of research [1].

The 10x rule supports the view that no other decision is as important as who you hire. While you can nurture talent and help the good become great, transforming poor performers into coding rock stars is completely impractical in a development team with deadlines and deliverables. And all development teams have deadlines and deliverables.

The 10x rule also supports the view that you have to filter out many of those on the low end of the 10x spectrum to find the gems, or even the 5x supporting players. How can this be done? One of the best ways to know if someone has mastered a skill is to have them perform it and evaluate the results. If you need a musician, there’s the audition. If you need a chief, there’s t he taste test. If you a need a software developer, there’s the coding test.

Coding tests are nothing new and have many variations: simple paper exercises, whiteboard algorithm problems, or mini development projects that can be completed in an hour. More recently, startups like HackerRank, TestDome, and Codility offer cloud-based testing solutions that have the potential to make pre-interview testing faster, easier, and more effective.

This post reviews Codility from the CTO or software development manager’s standpoint. It’s based on my experience using Codility to evaluate the performance of a software engineering team I’d been brought in to manage, improve, and expand while CTO of a large digital marketing company. I began by testing existing team members and then tested prospective new hires.

Codility is a cloud-based developer evaluation tool that:

• Allows development managers to create online coding tests in most popular languages by combining carefully designed standardized programming tasks.
• Provides developers with an online test environment to read the task, code a solution, and run that solution much as they would in a standard code editor.
• Automatically evaluates test session results for correctness and performance against multiple test cases.
• Compares results with those of thousands of other test-takers that have completed the same test.
• Reports test session results to the development manager and optionally provides feedback to the developer.

Ten years ago, Greg (Grzegorz) Jakacki was facing a problem that many development managers struggle with: only a small proportion of applicants for programming jobs could actually program to a level even close to what he required. Using principles inspired by coding competitions like the International Olympiad in Informatics [2], where he had won a bronze medal, Greg and his colleagues developed automated testing software that filtered out 90% of applicants, allowing Greg to focus his interviews on the better skilled developers who passed the test.

Greg then pitched the idea of a web based version of his software at the 2009 Seedcamp competition in London. He won, and Codility was born. Today, Codility has offices in London, Warsaw, and San Francisco that support 200 corporate customers in over 120 countries. Since 2009, Codility has run over 2 million tests, which provides a significant dataset with which to compare new test takers.

Codility is primarily used as a pre-interview test for software developers. It can also be used to evaluate performance of an existing software development team in order to facilitate professional development or restructuring.

For Developer Recruitment. Codility is not intended to be a one stop evaluation tool. Rather, it filters out poorly performing developers so the hiring manager can focus on strong candidates. Additional interviews and evaluations are required. However, Codility can greatly reduce the number of interviews you must perform to build your team, it’s not uncommon to filter out 80% to 90% of applicants in the initial testing. And because you can compare a candidate’s performance to thousands of developers worldwide, test results are more meaningful than if you can only compare to the developers within your organization.

For Development Team Restructuring. Imagine that you’ve been brought in to fix a poorly performing software team. You find issues with product definition, development process, team tooling, etc. The team may also have some underperforming members who are reducing overall productivity and impacting moral. But, given the less than optimal work conditions, it’s hard to be sure if they simply don’t have the support they need to thrive, or if they don’t have the raw talent. Testing all team members can help you understand the team’s talent landscape and take action to improve it. It also helps you understand how test scores translate into actual developer quality and productivity, providing a meaningful metric for new candidates.

Criticisms. The primary criticism of Codility and controlled testing of software developers in general is that the tests are too academic and do not measure what’s needed to succeed as a real life developer. In real life there is teamwork, Internet resources, and time to mull things over. In real life you might do it differently than what you learned in school, as long as it works and works on time.

While all this is true, it does not diminish the value of testing. Remember that the purpose of testing is simply to create a short list of candidates to interview and further evaluate, not to rank all candidates. While a candidate with a score of 85% may or may not be a better choice than one with a score of 75%, ones that do not pass at all are almost certainly a bad choice. They are unlikely to contribute more to the team then they require from it, so even if they are nice people, they will not be good team members.

I’ll walk you through the basics steps in using Codility, and later give you some pointers of how to make it work for you.

1. Name your test and select the language or languages you want in which developers will code. Choose any combination of C, C++, C#, Go, Java, JavaScript, Lua, Objective-C, Pascal, PHP, Perl, Python, Ruby, Scala, and VB.NET. If you choose more than one language, the test takers can select whichever they prefer.
   

   
   

2. Select a few tasks for the test. Three is the most common number for a test, since it allows you to vary the type of tasks without exhausting the test taker. Tests are categorized by difficulty (Easy, Medium, Hard) and type (coding, algorithm, bug fixing, and SQL). Each task typically requires the developer to write or modify a short program (usually 10–20 lines).
   
3. Administer tests sessions. These can be done onsite or emailed to the test taker for offsite completion. The test-taker reads the problem and initial code, then works in the provided online editor (or optionally in their preferred editor, pasting it in when complete). They run the code and if it compiles and provides the expected result for the example test case, the system says “OK.” However, in order to get a 100% score, the code must run correctly and efficiently against all possible inputs. Test takers can run their solution as many times as required and submit the task when they are happy with their code.
   
4. Review task results. You’ll be notified when the test is complete and can then review the score for each task and see the actual code submitted as well as the total time spent working on it. You can run a screen-cast video of the code as it was typed to get an idea of how the developer arrived at the solution.
   

   You can also see the pass/fail results of each correctness and performance test:
   

5. Review test results. Each task is graded for correctness, and some for code performance. These task scores are averaged to produce a composite test score.



6. Compare results to all test takers. What does the test result mean? You can compare individual task scores with the scores of all test takers, usually thousands of developers. The results are displayed when you select a task. Some tasks are very easy, for good developers they are more of a warmup round. For example, 73% of test takers got 50% or more on the SqlDepartments task, while 71% got 100%.
   

   Other tests are much more difficult with almost everyone failing:
   

Here are some pointers to get the most from Codility:

1. Try the free trial to help you understand how Codility works and what the tests are like. The trial allows you to test up to 50 candidates in a 14-day period, but unfortunately you can only draw from a pool of six tasks to develop your tests. I found this to be insufficient for testing existing team members and new recruits. Additionally, since anyone can sign up for the trial without paying, developers could practise the six trial tasks before you test them. Therefore, I suggest using the free trial only for an initial walk through and for a complete evaluation pay for a month's subscription.
2. Test your existing team to better understand its strengths and weaknesses and to provide a metric against which to measure new candidates. You'll want new recruits to meet or exceed test scores of your top developers.
3. Select relevant test tasks. Test tasks should be similar to the kind of work your team does. This ensures the testing is relevant and not simply an academic exercise. A typical test will include two to four tasks and last an hour or two maximum.
4. Blend test task difficulty. Test task results on the easiest or hardest end of the spectrum are somewhat binary, with almost everyone passing the easiest tasks and almost everyone failing the hardest ones. If you choose only these, most test-takers will have the same score which will not help you choose between them. Instead, use published results to select tasks at varying levels of difficulty which can discriminate between varying talent levels. Getting the right combinations of tasks may take a few iterations of testing with your team.
5. Encourage test-takers to try a demo test. Codility publishes lessons, challenges, and demo tests for developers. Taking a demo test and reviewing the developer FAQs is a great way for developers to get comfortable with the test environment and process. This makes for more accurate test results since test anxiety will result in scores that do not reflect the test taker’s full potential.
6. Review the results. Compare task scores with Codility’s published results and against your team’s scores (if you're testing new hires). For a more detailed understanding review the analysis section to see which test cases passed or failed and to review the code. You can even play a screen video of the code as it was typed to understand how the developer arrived at the solution.
7. Passing the test is important, the exact score is not. The exact passing score you choose will vary with the position, the candidate pool, and the tasks selected. Run the same test with your team and come up with a passing threshold which you can adjust up or down if required, depending on candidate performance. For borderline test results you can review the code to make a final decision. While a minimum level of competency is vital, slight variations above the threshold may or may not be meaningful. The best developer may not be the one with the highest score, so move to other evaluation methods like the interview to determine suitability before making job offers.
8. Provide feedback, or not. Codility can optionally share complete test results with test takers. If you’re testing your team, I recommend sharing the results with individual team members and perhaps discussing them in a one-on-one. However, I don’t like sharing more than the test score with the external candidates since the detailed feedback could be shared with future test takers and give them an unfair advantage.
9. Test onsite if possible. I prefer to test onsite to ensure test takers don’t get help from a more experienced or competent friend. I’ll make an exception if a candidate is out of town, in which case a simple phone conversation about the coding choices they made during the test will reveal if the code submitted was theirs. Allowing online references can be OK, since time limits will prevent a test taker from using them for more than a supporting resource.
10. Answer questions about the tasks. I’ll make a senior developer available to answer questions during the test. Obviously, questions like “how do you solve this problem” will not be answered, but those that help the test-taker understand what is being asked of them are OK. This is especially important when testing developers who are not native English speakers.

• Free Trial: Up to 50 tests during 14-days created from 6 tasks.
• Startup Subscription: 199 USD monthly for up to 30 tests created from 86 tasks.
• Enterprise Subscription: Custom pricing for unlimited tests created from 136 tasks
• Per Test Package: Starts at 17.50 USD per test with discounts for volume.
• Discounts: One time 50% discount for startups that purchase a Per Test Package.

Used as the first step in a comprehensive strategy, Codility can increase both efficiency and effectiveness of your organization’s software developer talent evaluation. Given the importance of talent acquisition in a software team’s success, using it to find those 10x developers is a smart choice.

1. Productivity Variations Among Software Developers and Teams: The Origin of 10x. Steve McConnell, March 27, 2008
2. Application of Olympiad-Style Code Assessment to Pre-Hire Screening of Programmers, Olympiads in Informatics, Grzegorz Jakack, Marcin Kubica, & Tomasz Walen, 2011, Vol. 5, 32–43<

I recently led an Info-Tech Research Group study that reviewed the key low-cost Asian destinations of China, India, and the Philippines for IT Outsourcing services like helpdesk and application/Web development and maintenance. The study included in-depth interviews with clients and vendors, site inspections, and analysis of published data. My intention was to take the guesswork out of choosing the most suitable offshore outsourcing destination. This post pinpoints some the key findings of one report based on the study, entitled China for Outsourced IT Services [1]. Philippines and India are covered in other posts.

We put together eight evaluation criteria: (1) affordability, (2) language, (3) cultural affinity, (4) resource availability, (5) government support, (6) geopolitical stability, (7) infrastructure, and (8) data security. Here is how China stacked up:

1. Affordability: China offers affordable labor, with average IT salaries in China at approximately $10,000 US per year, lower than India [2]. China also has low real estate and power costs compared to other outsourcing destinations. However, a shortage of qualified English-speaking IT professionals allows these workers to command a higher salary. Costs also tend to be higher in special economic zones, as these locations often have a large number of qualified staff who can demand higher wages. A shortage of experienced managers means that these employees can also command higher pay. External factors, such as inefficiencies from poor language skills and inexperienced project management can also lead to an increase in the total cost of projects outsourced to China.
2. Language: Censorship and isolation from other countries have contributed to a lack of English proficiency in China. Chinese providers tend to leave project communication requirements in the hands of a project manager responsible for the initiative, since individual team members do not often have the English language skills to communicate effectively. Written English skills of Chinese providers are generally adequate for e-mail communication; however in most cases, verbal skills are not adequate for helpdesk services. The Chinese government is attempting to improve English proficiency in the country; however, at present many organizations struggle with English language issues with Chinese providers. This lack of English language proficiency can lead to other issues such as inefficiency and poor quality, and also means that the customer must be vigilant when it comes to requirements gathering and other project communications.
3. Cultural Affinity: In general, China does not have a strong affinity towards Western cultures. Censorship and a general isolation of the country have led to a lack of influence from and knowledge about western countries. The 2008 Beijing Olympics helped China to increase its ties to other nations; however it will take a long time to fully rectify the years of isolation that China has experienced from other countries.
4. Resource Availability: China has a large labor pool, with graduates from 1,300 colleges and universities, and around 15.6 million students enrolled in post-secondary education. The number of graduates located in cities with technology parks is between 10,000 and 100,000 per city per year [2]. Despite this large labor pool, there tends to be a shortage of qualified individuals for middle management positions. Staffing demands often outstrip supply, which can cause hiring and retention problems. The primary experience of many Chinese outsourcers is with small projects. Thus, Chinese providers might lack the ability to handle large application development or maintenance initiatives. For example, leading Chinese outsourcing providers have an average of 1,000 to 3,000 full-time equivalent employees, which is equivalent to a Tier 3 Indian outsourcing provider [3]. However, small to mid-sized organizations can sometimes benefit from this situation, as they might be able to get more attention from Chinese providers due to their smaller size. It can be difficult to fire workers in China, as most terminations require communication with local labor bureaus and unions. These requirements vary depending on location, making it important to check in with providers about termination regulations.
5. Government Support: The Chinese government has been making strides in increasing its support for the IT outsourcing industry. Due to this increased government support, China has begun to establish technology parks with solid infrastructure and technological capabilities. Many of these technology parks have completed at least Phase 1 of their build-out plans. China’s technology parks are designated Special Economic Zones. Providers in these areas are eligible for tax incentives. Suzhou technology park for example, allows providers to pay an income tax rate of 15 percent as compared to the rate of 25 percent found elsewhere in China [4]. Outsourcing providers are also eligible for favorable tax policies in 20 Chinese cities, and providers based in central and western China have been given favorable policies for loans to get IT outsourcing projects up and running.
6. Geopolitical Stability: China is controlled by the Chinese Communist Party, which is an autocratic but highly stable government. The Chinese government tends to be business-oriented and has contributed to China’s growing wealth, with an expected GDP growth of 8% in 2011 [2]. China’s political and economic environment does pose some risks, with a tendency for inflation, a decline in the rate of GDP growth, and strong control of apparently private organizations by the government. In general, China’s political and economic landscape provides a bit of a mixed bag for organizations interested in outsourcing to this destination. China’s economy is expected to remain strong, and so far the Communist government has not hindered the country’s ability to increase its wealth.
7. Infrastructure: China has very strong infrastructure in its Tier 1 cities, and major efforts have also been introduced to develop the infrastructure of Tier 2 cities. The country also has a strong internal transportation system, with 1,870,661 kilometers of roadways, 74,408 kilometers of rail transport, and 123,964 kilometers of water transport [2]. Infrastructure is particularly strong in the technology parks, which are all within 20 to 40 minutes of the airport and are able to meet the technological needs of providers in these areas. Long-term energy demands are somewhat of a concern; however, China currently has a solid infrastructure to meet its customers' demands.
8. Data Security: China has historically had issues with Intellectual Property (IP) and data security. For example, the Business Software Alliance estimates that up to 80% of business software used in China is pirated [5]. IP rights infringements tend to go unpunished by the government. China also continues to lack comprehensive data privacy laws. Despite these problems, Chinese providers are making strides to improve their IP and data security. For example, Chinese providers are increasingly implementing IT governance standards and process controls such as ISO and CMM. Chinese companies are also increasingly training their employees about IP protection and data security. China’s membership in the World Trade Organization (WTO) also brought with it a commitment to comply with the WTO’s Trade-Related Aspects of Intellectual Property Rights (TRIPS).

While not uncommon for offshore destinations to have weak IP laws or law enforcement, there is evidence to suggest that the Chinese government is behind cyber-attacks intended to access private data and steal IP from Western companies like Google and Adobe [6] [7]. Although companies with high-value intellectual property could be targeted regardless of the location of their development activities, locating activities within China could serve to increase an organization’s vulnerability to industrial espionage. Companies with highly valued IP must carefully weigh these risks against potential benefits.

Additionally, organizations interested in outsourcing to China should assess potential providers’ security controls and monitor their providers closely. Organizations also need to include appropriate IP protection clauses in their outsourcing contracts and insist on no subcontracting. A SAS 70 audit is one way to mitigate intellectual property and privacy risks, but rigorous due diligence with auditors is required since graft is possible. Also, consider consulting with firms that specialize in Chinese IP laws before inking an outsourcing contract with a Chinese provider.

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China’s Strengths

There are several factors that make China a strong offshoring location:

1. Large labor pool. China has a large workforce with many post-secondary graduates every year. However, organizations should be prepared to pay more for workers with high quality English speaking skills.
2. Strong infrastructure. China has invested heavily in its infrastructure, particularly in designated technology parks. It is also very easy to get from place to place in major areas.
3. Low cost. Salaries for IT employees in China are comparable to India, and are quite low compared to what an organization would pay for the same services onshore.
China’s Weaknesses

China also has several weaknesses that need to be taken into consideration:

• Poor intellectual property and data security. China is taking steps to improve its IT governance standards and process controls; however, IP laws are not often enforced and organizations must often create their own data security laws contractually.
• Lack of English language skills. A lack of English fluency can make it difficult for Western organizations to communicate with Chinese providers. The Chinese government has invested in English language education, but it could take years before these changes make a noticeable difference.
• Project management deficit. Many Chinese providers deal primarily with small outsourcing projects, and thus lack the project management maturity to handle large application development or maintenance initiatives.
• Asynchronous time zones. North American customers sometimes find that communicating with Chinese providers means meeting very early in the morning or late at night. This can strain resources in both the client and vendor organization when compared to near-shore locations. While some projects leverage the time zone difference with around the clock development - for example handing off changes at the end of the business day and getting them back first thing in the morning - only a minority of outsourcing clients we spoke to were able to get time zone differences to work in their favor.
Recommendations

Follow these recommendations when considering China as an offshore destination:

1. Shortlist vendors. In some respects vendors are more important than locations because a skilled provider can work around the limitations of their location, but a location cannot control all of its vendors. Find prospective vendors through a professional association like the International Association of Outsourcing Professionals, from colleagues, or thorough an advisory service. For outsourcer selection advice, refer to the ITA Premium research note "Selecting an Application Outsourcer: Eight Key Criteria."
2. Discuss weaknesses with prospective vendors. In addition to evaluating a vendor's general outsourcing strengths such as technical competency, governance, and project management, questions them about how they handle location specific limitations. Be prepared to walk away from a vendor if the answers are unconvincing. For China, include questions like:
• What level of English language proficiency can we expect from your managers and technical professionals?
• How do you ensure effective English language skills among your managers and technical professionals?
• How do you deal with cultural differences between onshore and offshore team members?
• How do you recruit and train middle managers?
• How do you ensure data security and protect intellectual property?
• How do you deal with time zone differences?
• How do you manage time zone stress in your staff?
3. Assess and monitor providers’ IP and data security. China’s security issues are far from resolved, making it important to audit prospective providers’ physical security, processes, and technical controls. If necessary, consult with a legal firm that specializes in Chinese IP laws, and create contractual terms to protect the organization.
4. Consider China for small, low-end projects. Due to a lack of project management experience and specialized expertise, much of the outsourcing work done in China is low-end, involving basic applications and software testing. Small to mid-sized organizations might actually benefit from the relatively smaller size of Chinese providers as these providers can devote more attention to the initiatives of smaller organizations.
5. Avoid China for helpdesk services. China’s low English speaking skills make it a poor candidate for helpdesk outsourcing. Other destinations, such as the Philippines or even India, have higher English proficiency and more experience in this area.
References
1. A copy of the full report is available from Infotech Research Group
2. Introduction to The Services Shift: Seizing the Ultimate Offshore Opportunity, FT Press, Ajay Sharma and Robert E. Kennedy, January 2009
3. Proceed With Caution When Considering Large-Scale ADM Outsourcing in China, Technology Partners International, Greg Blount and Paul Schmidt, 2011
4. China Approves Tax Breaks and Subsidies for Service Outsourcing Industry, China Briefing, February 2009
5. SIXTH Annual BSA-IDC Global Software - 08 PIRACY STUDY, Business Software Alliance, May 2009
6. Capability of the People’s Republic of China to Conduct Cyber Warfare and Computer Network Exploitation, Northrop Grumman Corporation, Bryan Krekel, October 2009
7. A new approach to China, Google, January 2010
]]> https://howardkiewe.com/china-for-it-outsourcing/feed/ 0 https://howardkiewe.com/india-for-outsourced-it-services/ https://howardkiewe.com/india-for-outsourced-it-services/#comments Wed, 04 Aug 2010 02:37:21 +0000 aaron http://howardkiewe.com/?p=1077

I recently led an Info-Tech Research Group study that reviewed the key low-cost Asian destinations of China, India, and the Philippines for IT Outsourcing services like helpdesk and application/Web development and maintenance. The study included in-depth interviews with clients and vendors, site inspections, and analysis of published data. My intention was to take the guesswork out of choosing the most suitable offshore outsourcing destination. This post pinpoints some the key findings of one report based on the study, entitled The Philippines for Outsourced IT Services [1]. China and the Philippines are covered in other posts.

Info-Tech’s Eight Location Criteria: How Does India Stack Up?

We put together eight evaluation criteria: (1) affordability, (2) language, (3) cultural affinity, (4) resource availability, (5) government support, (6) geopolitical stability, (7) infrastructure, and (8) data security. Here is how India stacked up:

1. Affordability: Rising wages for experienced workers make India no longer the cheapest offshore destination available. However, India still has offers a competitive cost advantage. The average IT/BPO salary in India was about $12,877 US per year in 2010 [2]. Typical fully loaded costs per technical resource is $18 to $32 US per hour.
   Recent economic conditions have helped slow rising wages among Indian service providers, with Infosys raising wages by 10% and others freezing wages [3]. Additionally, lower costs can be found in Tier 2 cities. In general, India has often been seen as the top offshore destination for organizations looking to cut costs. While this is no longer the case, India continues to offer relatively competitive pricing. Outsourcers can also leverage accumulated offshoring experience, which continues to make India a top choice as an offshore destination.
2. Language: English is the standard language for business across India. The popularity of English in India contributes to its large English speaking workforce, particularly in major cities. Heavy accents are not often an issue in Tier 1 cities such as Delhi and Bangalore, as many vendors give their staff accent neutralization training. English speaking skills might decrease in more remote Tier 2 cities, making it important to evaluate the English proficiency of vendors in these areas. English language proficiency in India is less of a problem than it used to be. However, it is still necessary to check into the English speaking abilities and training provided by Indian vendors, particularly for organizations interested in outsourcing helpdesk services and/or those organizations outsourcing to Tier 2 cities.
3. Cultural Affinity: India tends to show good cultural compatibility with the US and the UK. Many established vendors offer cultural training for employees. Understanding of cultural nuances may be less prevalent in remote locations. As Tier 2 cities become more developed, it will be important for Indian vendors to continue to provide cultural training in these areas. Factors like increased adoption of social networking, increased global tourism into India, and a growing interest in Indian culture will contribute to India’s cultural connectedness and improved work results.
   Non-English speaking markets, such as Japan and some countries in Western Europe, tend to have cultural compatibility problems with India. However, India has started to reach out to a broader range of locations as Indian vendors look to grow their organizations in other countries. Cultural issues that do arise with Indian vendors can often be mitigated by having face-to-face meetings, either through video conferencing or by having a few key personnel from the offshore team spend time onsite.
4. Resource Availability: India has a large technically proficient workforce, and adds over 3.5 million graduates and postgraduates to its talent base every year, with most students preferring technical careers [4]. Indian IT employees display particular strengths in application development and maintenance as well as help desk services. Attrition levels tend to be high in Indian companies, which result in reduced productivity as new staff ramp up on a particular project. Turnover rates have dropped due to the global economic slowdown, but are likely to increase as demand increases during the recovery. Attrition rates also tend to be lower in Tier 2 cities.
   India boasts a large workforce with many graduates coming from universities and institutes of technology; however, not all graduates are employable right out of school due to differences in educational quality across institutions. Associations such as National Association of Software and Services Companies (NASSCOM) [5] and partnerships between IT and academia are currently trying to address this issue. Despite this, India stands out from other countries for its ability to draw on a large labor pool of technically proficient employees. In addition to a deep pool of technical talent, India has developed skilled middle and upper managers capable of managing technical resources.
5. Government Support: The Indian government is highly supportive of the outsourcing industry, with competitive tax breaks and designated technology parks for IT vendors.
   Software Technology Parks of India (STPI) [6] also helps to provide infrastructure in technology parks, and has the goal of making India one of the largest software exporters in the world. India also has a government body in charge of communications and information technology, which is involved in setting up policies and standards as well as advocating for the government use of IT. India also receives support from NASSCOM, which promotes the Indian offshoring industry.
6. Geopolitical Stability: India is a relatively stable country and represents the largest democracy in the world, with an expected GDP growth of 7.9% for 2011 [2]. Two events have recently called India’s stability into question: the terrorist attacks in Mumbai in December, 2008 and the Satyam scandal of 2009. Satyam founder Ramalinga Raju confessed to falsely reporting $1.02 billion in non-existent cash reserves. These have caused concern for organizations that are currently offshoring to India, with some companies looking for alternative vendors or scrutinizing their current vendors more closely. There is currently no indication that the Satyam scandal represents a systemic problem with India’s corporate governance, or that there are any additional terrorist threats looming on the horizon. However, it is always a good idea to evaluate disaster recovery capabilities, and to contemplate the option of diversifying risk by offshoring to more than one country or with a vendor that has locations in multiple countries.
7. Infrastructure: India’s popularity as an offshore destination is a blessing for the country’s economy, but a curse for its infrastructure. India’s infrastructure cannot keep up with high demand, with power supplies and both local and international connectivity straining under the load. Infrastructure reliability varies depending on location. For example, technology parks have redundant telecom and power as a standard; however, power and telecom are not as reliable outside of the technology parks, which can cause service disruptions.
   India is working to improve its infrastructure, results still pending. It is important to assess how often vendors experience disruptions due to poor infrastructure, and if things like application availability are a critical factor for the enterprise, then consider going with an Indian vendor located in a technology park. Ask prospective vendors how often they experience power disruptions, and whether or not they have redundant telecom and power.
8. Data Security: India does not have breach notification requirements or industry privacy legislation such as the US Health Insurance Portability and Accountability Act or the Gramm-Leach-Bliley Act, and also lacks European Union style privacy legislation. Associations such as NASSCOM are lobbying the government to bring India’s security standards up to par on a national level. Individual IT vendors have also made strong efforts to protect their clients through compliance standards such as ISO 270001, SOX, and PCI. India has not shown a disproportionately large incidence of security violations as compared to global standards; however India’s gaps in data security and privacy legislation do need to be addressed.
India's Strengths

There are several factors that make India’s a strong offshoring location:

• Availability of qualified staff. India has a large, technically proficient workforce including strong management ranks.
• Supportive government. The Indian government is extremely supportive of the IT outsourcing industry, and does everything that it can to make the offshoring experience as easy as possible on the customer.
• Reasonable prices. Even though India is no longer the cheapest offshoring option on the market, its costs are still substantially lower than rates in Western countries. These prices, combined with India’s strengths in terms of staffing availability and process maturity, continue to make India the top offshoring choice of many customers.
• Accumulated experience. In a sense, India founded the offshore movement as it began to gain momentum 10 years ago. Many of the established Indian outsourcing vendors have had locations in India throughout this 10 year period and have instituted mature outsourcing processes.
India's Weaknesses

India also has several weaknesses that need to be taken into consideration:

• Overloaded infrastructure. The high demand for IT outsourcing in India has placed pressure on the country’s power supply and connectivity. Designated technology parks have solid infrastructure, however service levels might be disrupted in areas outside the technology parks.
• Staff turnover. Despite the fact that attrition rates have dropped in light of the economic downturn, turnover is still relatively high in India and may return to higher levels as the demand increases.
• Laggard security. Compared to its maturity in most other areas of offshoring, India’s security and privacy laws leave much to be desired. Individual providers often have controls in place to ensure their clients’ privacy, and associations such as NASSCOM are lobbying the government to beef up its security legislation, however these changes will take time.
• Asynchronous time zones. North American customers sometimes find that communicating with Indian providers means meeting very early in the morning or late at night. This can strain resources in both the client and vendor organization when compared to near-shore locations. While some projects leverage the time zone difference with around the clock development - for example, handing off changes at the end of the business day and getting them back first thing in the morning - only a minority of outsourcing clients we spoke to were able to get time zone differences to work in their favor.
Recommendations

Follow these recommendations when considering India as an offshore destination:

1. Shortlist vendors. In some respects vendors are more important than locations because a skilled provider can work around the limitations of their location, but a location cannot control all of its vendors. Find prospective vendors through a professional association like NASSCOM or thorough an advisory service.
2. Discuss weaknesses with prospective vendors. In addition to evaluating a vendor's general outsourcing strengths such as technical competency, governance, and project management, question them about how they handle location specific limitations. Be prepared to walk away from a vendor if the answers are unconvincing. For India, include questions like: How can you ensure continued electrical, telecom, and data connectivity? How does your organization respond to infrastructure failures? How do you retain your technical talent? How do you ramp up new hires? How do you deal with cultural differences between onshore and offshore team members? How do you ensure data security and protect intellectual property? How do you deal with time zone differences? How do you manage time zone stress in your staff?
3. Consider Tier 2 cities. India’s Tier 2 cities offer lower costs, smaller providers, and are particularly well-suited for less critical and/or short-term outsourcing initiatives. These cities are also receiving increased attention from the Indian government as options to support India’s weakening infrastructure.
Links
1. A copy of full report that this post is based on, India for Outsourced IT Services, is available from Info-Tech Research Group.
2. Introduction to The Services Shift: Seizing the Ultimate Offshore Opportunity, FT Press, Ajay Sharma and Robert E. Kennedy, January 2009
3. Talking Outsourcing, Lulu.com, Mark Kobayashi-Hillary, October 2010
4. NASSCOM Strategic Review, 2009
5. National Association of Software and Services Companies (NASSCOM)
6. Software Technology Parks of India
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At the bottom of this post, there is an update for 2012, and a full version of the report on which this post is based is available as free download from this blog's sponsor [1].

I recently led an Info-Tech Research Group study that reviewed the key low-cost Asian destinations of China, India, and the Philippines for IT outsourcing services like helpdesk and application/Web development and maintenance. The study included in-depth interviews with clients and vendors, site inspections, and analysis of published data. My intention was to take the guesswork out of choosing the most suitable offshore outsourcing destination. This post pinpoints some the key findings of one report based on the study, entitled The Philippines for Outsourced IT Services [1]. China and India are covered in other posts.

Info-Tech’s Eight Location Criteria: How Do the Philippines Stack Up?

We put together eight evaluation criteria: (1) affordability, (2) language, (3) cultural affinity, (4) resource availability, (5) government support, (6) geopolitical stability, (7) infrastructure, and (8) data security. Here is how the Philippines stacked up:

1. Affordability: Salaries for technical professionals in the Philippines are among the world’s most competitive. Entry level positions average under $10,000 US annually. Real estate and telecommunications costs are also low, which results in fully loaded billing rates of $18 to $30 US per hour, depending on the skill set and experience of the resource. Wage inflation is lower than other locations like India.
2. Language: The Philippines was a US colony from 1899 to 1946. During this period American English became a medium of instruction in many schools. English is now an official language, and is widely used in business, education, and the media. The Filipino accent leans towards American English and the quality of spoken and written language is high. Service providers leveraged this competency to create a robust contact center outsourcing industry with revenues running a close second to India ($4.0 vs. $4.7B US; [2][3]). All major North American contact-center providers have a presence in the Philippines, including Convergys, ICT, Sitel, and Sykes. Most IT professionals in the Philippines are comfortable with English. This is ideal for helpdesk tasks but is also very useful in development and maintenance roles. Other language skills are also available in Mandarin Chinese, Spanish, German, and Japanese.
3. Cultural Affinity: While Filipinos have a distinct culture, they have absorbed many American cultural traits, and share similar interests to Americans. Basketball remains the most popular sport and shopping malls—a social hub for Philippine society - are filled with Western chains like Starbucks and The Gap. Many educated Filipinos have worked overseas and returned home to enrich the local culture with an orientation to Western perspectives. Still the Philippines maintains certain values that are more Asian, such as saving face. This can lead to behaviors that can be problematic, particularly for client organizations that have an open, collaborative management style. Team members (particularly junior staff) may be reluctant to challenge the proposals of other team members and this can reduce the effectiveness of collaborative brainstorming and review. Staff may commit to work deliveries that won’t work for them. Good outsourcing managers are aware of these cultural issues and have trained staff to become more comfortable with current Western behavioral styles.
4. Resource Availability: The Philippines has a population of 97 million, with a median age of 22, a 92% literacy rate [4], and a steady stream of college graduates entering the labor market ($2.4M US since 2006 [5]. The talent pool for service is reasonably deep and providers can draw from it, now and in the future. The only current weak point in the resource picture is a shortage of local, experienced middle and senior management.
   A tightening in the contact center sector, squeezed the number of available talent, which increased attrition, supply of the technical talent required by application outsourcers has been good. All service providers interviewed for this research reported very low attrition rates.
   Software development, maintenance, and helpdesk services account for $601 Million US of export revenue and employ 35,000 people full time in the Philippines [6]. These revenues are divided between about 400 players that vary in size and stability from large multinational outsourcers (e.g. Accenture), to established local firms (e.g. Point West Technologies with around 500 employees), to small niche players (e.g. ERP developer ASP with 40 employees).
5. Government Support: Government support for the outsourcing sector is significant and includes $24M US toward training and education, and, as part of the Philippine Economic Zone Authority (PEZA) program [7], a corporate income tax holiday, exemption from duties, simplified import and export procedures, and benefits are on par with other countries in the region.
   The Philippine government's Technical Education and Skills Development Authority started a scholarship program to subsidize training for the outsourcing industry. Subsidized topics include technical subjects like Oracle, Java, and RPG.
6. Geopolitical Stability: The rural region of the southern region of Mindanao is home to a secessionist movement that has erupted in occasional violence within that region. However, the violence has never extended to the Metro Manila and Cebu, and even Davao City (the capital of Mindanao) is well insulated from the movement, which does not engender the sympathies of the population at large. The scale of violence in the Philippines has been far below that of other developing nations like India, or even Western nations like the US and UK, security risk is likely in an acceptable range as long as appropriate precautions are taken by the outsourcing partner. Transparency International’s 2009 Global Corruption Barometer reported prevalent corruption in most developing nations and the Philippines are no exception, with 11% of respondents saying they had paid a bribe to receive a service, compared to 12% in India and 2% in the US. Interestingly, these figures are down significantly from the 2007 version of the same survey, which reported 32% for the Philippines and 25% for India.
7. Infrastructure: The Philippine telecommunications sector has been deregulated, resulting in a competitive industry that delivers low international transmission costs as well as redundant links to major centers. Fiber-optic backbones provide low-latency transmission (< 200 ms) that is adequate to support robust VoIP functionality, including hosted helpdesk technology. Air transport, telecommunications, utilities, and office space are good in the both cities of Manila and Cebu as well as cities of Clark, Subic, Baguio, Iloilo, and Davao.
   Additionally, the Philippine government has created the CyberServices Corridor, running over 600 miles from the North to the South of the country. It is supported by a $10B US high bandwidth fiber backbone and digital network, and is home to numerous service providers.
8. Data Security: The Philippines are compliant with WTO's Trade-Related Intellectual Property Rights (TRIPS) agreement on intellectual property. An e-commerce act was passed in 2000 and additional computer crime legislation is planned. However, enforcement of legislation can be weak. There is a backlog of copyright infringement cases in the courts, which are generally ill equipped to handle them. Organizations with intellectual property or privacy concerns need to add contractual protections and evaluate the service provider's business and development processes for their ability to deliver these protections. A SAS 70 audit can cover intellectual property and privacy risks.

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Philippines’ Strengths

There are several factors that make the Philippines a strong offshoring location:

• Excellent communication skills. High levels of English fluency, neutral accents, and good cultural affinity make it easy for Filipinos to understand Westerners and to make themselves understood. This is particularly needed for helpdesk services, but it is very important software development, where a mutual understanding of requirements is essential to success.
• Low churn. Demand for IT services in the Philippines is strong and growing at a steady pace, but has not seen the hyperactivity of the Indian market. As a result, resources tend to stay with the same outsourcer for years, which results in greater project stability and lower ramp up expenses.
• Low cost. Salaries, real estate, and telecommunication costs are low. Wage inflation is modest, so the overall cost of business is reasonable and likely to remain so.
Philippines’ Weaknesses

The Philippines also has several weaknesses that need to be taken into consideration:

• Large scale projects. Few Philippine providers have more than 500 technical resources on staff, making large engagements difficult to resource.
• Poor data security. Enforcement of intellectual property and privacy legislation is weak. These are not common, but organizations must take steps anyway to prevent issues from coming up.
• Asynchronous time zones. North American customers sometimes find that communicating with Philippine providers means meeting very early in the morning or late at night. This can strain resources in both the client and vendor organization when compared to near-shore locations. While some projects leverage the time zone difference with around the clock development - for example handing off changes at the end of the business day and getting them back first thing in the morning - only a minority of outsourcing clients we spoke to were able to get time zone differences to work in their favor.
Recommendations

Follow these recommendations when considering the Philippines as an offshore destination:

1. Shortlist vendors. By themselves Locations come with their own obstacles and challenges. Well selected vendors can work around these limitations. Find prospective vendors through a professional association like the Philippine Software Industry Association (PSIA)[6], the Business Processing Association of the Philippines (BPA/P)[2] or through an advisory service.
2. Discuss weaknesses with prospective vendors. Vendors' general outsourcing strengths can be evaluated, including technical competency, governance, and project management. However, question them about how they handle location-specific limitations. Be prepared to walk away from a vendor if the answers are unconvincing. For the Philippines, include questions like: How do you recruit and train middle managers? How do you deal with cultural differences between onshore and offshore team members? How do you ensure data security and protect intellectual property? How do you deal with time zone differences? How do you manage time zone stress in your staff?
3. Consider the Philippines for helpdesk services. High levels of English proficiency, cultural affinity, and an established contact center industry make this a natural fit.
4. Consider the Philippines for mainframe maintenance. The availability of resources with mainframe competencies makes mainframe maintenance and legacy conversion projects easier to resource in the Philippines than in other locations.
Update 2012

Since President Aquino took up his post on June 2010, he has pursued a selective anti-corruption agenda that led to the dismissal and replacement of the Supreme Court Chief Justice. He has also signed the Data Privacy Act 2011 and the CyberCrime Prevention Act in 2012, pending final arguments and voting.

Tax reforms, a balanced budget, disciplined fiscal measures (including modest economic stimulus and infrastructure expenditures) have worked together to raise the country’s reputation as an investment location. The country’s credit rating is on a 9-year high, and the Business Process Outsourcing industry is currently on-pace to exceed the annual growth goal of 15% for 2012.

There is also an emerging mobile development specialization. For example, Filipino app developers won two of three possible Google Apps Developer Challenge prizes for the South East Asian region in 2012 [8].

References & Links
1. A complimentary copy of the full report is now available from Code Crew > News & Downloads > Philippines for Outsourced IT Services.
2. Business Process Association of the Philippines (BPAP)
3. National Association of Software and Services Companies (NASSCOM)
4. CIA World Fact Book
5. Outsourced Work in Philippines BPO, International Labour Organization, Maragtas S.V. Amante, In press - January 2008
6. Philippine Software Industry Association (PSIA)
7. Philippine Economic Zone Authority
8. Google Apps Developer Challenge 2012
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