Outsource Bulgaria

I was going through an issue of the Economist from last year. I’d like to see what they got right. In an article about Skype, the VoIP pioneer, it highlights that their R&D department is located in Eastern Europe.

In a nondescript Soviet-era building in a suburb of Estonia’s capital, Tallinn, is one of the telecommunications world’s most important research outfits. It is the development centre for Skype, a software product that allows free, or very cheap, phone calls from any internet-connected computer.

I’m not sure if the correct term in this case is outsourcing. It’s not offshoring either. What happened is that Skype built their own team in a location where they felt the best talent is. Costs are probably low as well but keep in mind they could find much cheaper. After all, Estonia is part of the European  Union now, as are Romania and Bulgaria.

The important point is that based on the strength of that team AND Skype’s established “distribution channels” (from their Kazaa days), Skype was acquired for close to three billion dollars. That’s about twice what Google paid for Youtube, the prodigy of the web 2.0 generation.

The Economist had an interview with Steve Keil, CEO of Sciant (Bulgaria’s leading IT outsourcing company) about an year ago. Here’s some of the key points raised when they discussed outsourcing in Bulgaria vs. Vietnam.

Mr Keil maintains that costs are crucial. And Bulgaria, despite being one of the poorest post-communist countries of eastern Europe, is losing ground. Outsourcing is close to being a commodity, Mr Keil explains, and Sciant is losing out to Asian competitors, including nominally communist Vietnam, where taxes are low or negligible, officialdom actually helps, and qualified and willing labour is plentiful.

In many respects, Vietnam does look like the promised land when it comes to IT outsourcing. The problem with promised lands is usually twofold: the promise is too good to be true, or it remains just that – a promise.

Although a small country by any standard (except maybe Luxumburgs), Bulgaria has a very strong tradition in IT. This might be a bold and arrogant statement to westerners but ask anyone whose been part of the Soviet bloc and they’ll tell you Bulgaria was “selected” to be the bloc’s Silicon Valley. Apple clones were manufactured as early as 1982 and although these facilities were dismantled with the fall of communism, they helped build an elitist geek culture that at one time produced over HALF the viruses, some of the most malicious ones.

With the fall of communism, some of these geeks have gone west but the culture of uber geeks with top mathematics skills continues. Recently, Bulgaria took four (4!) of the top prizes at the International Olympiad in Informatics in Seoul. Vietnam’s team wasn’t even there.

Keil is right about there being a cost difference for hiring programmers in Ho Chi Min city. There’s no arguing with that. Yet, the focus on quantity could be misleading.

In his essay, Great Hackers, Paul Graham states the obvious (to anyone who’s worked in IT) that one great programmer cannot be substituted by 100 recent graduates:

The variation between programmers is so great that it becomes a difference in kind. In every field, technology magnifies differences in productivity. I think what’s happening in programming is just that we have a lot of technological leverage… you reach the point where 90% of a group’s output is created by 1% of its members.

As you can see, this all ties to the recommendations for improving outsourcing results - getting the top people to work on a challenging project will yield the best results.

Projects involving data entry or payroll should go to the low-cost provider but would you trust your long-term competitive advantage to a bunch of college kids in Vietnam? When shopping for an IT company to work on your outsourcing project, shop for expertise and experience. The cost for doing it right the first time is always lower.

Outsourcing software development to South Africa is a relatively new phenomenon. The South African government has been pushing for changes in the country’s legislation in order to attract more companies. A blurp from ZDnet:

A delegation from the country, including deputy president Phumzile Mlambo-Ngcuka, addressed industry members at the South African embassy in London on Monday, with Ms Mlambo-Ngcuka insisting that information and communications technology (ICT) was not merely “flavour of the month” in South Africa.

“We’re not necessarily trying to compete with the cheapest localities in the world,” said Mandisi Mpahlwa, a South African trade and industry minister, at the event. Mpahlwa pointed to recent investments by Barclays and Vodafone as examples of the “fair balance between cost and quality” the country could offer.

Although the South Africa claims it’s not competing with India on price, they’ve introduced one-off investment grants that partially offset the labor cost difference.

The two biggest problems that investors are facing are the state monopolies and the very high crime rates. Obviously, if you’re simply outsourcing a project (rather than setting up a company), you’ll not be directly affected by this.

I just read an article in ComputerWorld which focused on the MYTH of outsourcing. According to the author, Mohan Babu, most people keep confusing the two concepts.

In fact, the majority of concerns expressed about outsourcing actually had to to with offshoring. For example, one of the central concerns expressed is the “sending of jobs overseas”.

Obviously, not all outsourcing has to be international in scope. While outsourcing might affect the local market, it doesn’t automatically mean that the company will be sending these jobs overseas.

Dictionary.com provides a pretty straight-forward definition of outsourcing:

The procuring of services or products, such as the parts used in manufacturing a motor vehicle, from an outside supplier or manufacturer in order to cut costs.

Which gets us back to the American Chopper example.

In a recent post on outsourcing, I reviewed a new book (Multisourcing: Moving beyond Outsourcing to Achieve Growth and Agility) which tries to change the way we think about outsourcing in general. It seems that the specifics are changing quite rapidly as well.

In an interview published Monday (in the German edition of the Financial Times), SAP CEO’s said that outsourcing software development to India is proving to be more and more expensive.

India’s the world’s largest market for offshore software development services. The increased competition from global companies (IBM, Microsoft, etc.) and local offshore companies is driving personnel costs higher and higher.

Frank Hartman, SAP’s spokesman, confirmed this and added that the major contributing factor to the high personnel costs is the high turnover. Recruitment and training costs have escalated rapidly in recent years.

Discussing plans for growth, SAP’s CEO said that the business software vendor is looking to Eastern Europe and China. China’s potential is seen as limited because of its lack of protection for intellectual property rights. At the same time, Eastern Europe offers political and economic stability. “Turnover is low and the costs aren’t too high,” he said.

The consensus in the “blogosphere” is that the three factors for successful “offshoring” are:

• Offshore interesting and motivating projects
• Develop local leadership talent
• Hire, train and manage local staff with a long term view in mindI’d like to add that all this holds true UNTIL Microsoft moves into the local IT market. Once this happens you either run (like SAP) or you switch all your products to open source. Steve Ballmer’s love for developers (video) is a well-known fact.