Offshoring of software applications


Offshoring is nothing but outsourcing a business process by a company from its home country to another. The concept of offshoring came into existence by late 1980s and became prevalent in 1990s after the Y2K problem. Globalization of business has laid the strong basis for offshoring. Apart from globalization, wage difference, offshore labour pool, business friendly climate, drops in telecom costs and software commoditization are the principle forces for offshoring (Carmel & Tjia, 2005). This essay throws light on offshoring of software applications and other digitally provided services and their world wide impacts. The initial section discusses about the definition of offshoring and its evolution. Then the motivation for offshoring is explained in brief. The following section elucidates the services provided by software applications and other digital services. The final part deals in detail with the impacts of these offshoring services on various grounds globally.

Offshoring Defined:

"Offshoring can be defined as the act of transferring some of a company's recurring internal activities to outside providers, who are located in a different country and market economy, under a formal service contract" (Hunter, 2006). As defined, offshoring is the process of contracting with foreign companies to perform work that can be done domestically. The major reason for companies to approach offshoring is to utilize the advantage of low pay rates, which can reduce labour costs up to 90 percent.

Basically offshoring transactions consist of two parts. First there is the delegation of responsibility for the management and operations of organizations services to third party. Second, the vendor provides services to the client company, usually for a period of five to seven years. The key difference between vendor relationship and offshoring is that new services are being procured from the vendor where as in offshoring, the client transfers function or process to offshore provider and with it often needs to transfer employs, software licenses and so on (Hunter, 2006).

The evolution of offshoring:

The word offshoring entered the language in late 1980s. The term was coined by Information system trade press to describe the growing trend of companies who were transferring their information to third party providers. Offshoring is simply the extension of this concept where the work is relocated across geographical borders, for example, the transfer of payroll processing services from a UK based provider to India based provider. This reduces the cost to a great extent. If the right quality of service is obtained then geographical distances are of no concern. It is due to advancement of telecommunication services. The service may be thousands of mile away but can be reached immediately by phone, email or video conference. Offshoring in terms of a business tool is similar to joint venture, subcontracting and strategic partnering concepts dating back to hundreds of years in history of commerce.

Offshoring was actively used in early 1990s when the Chief Information Officers (CIOs) and Chief Executive Officers (CEOs) of large companies desperately wanted to reduce the Budget of software development. Information Technology was becoming a crucial part in terms of business perspective due to the advancement in web based activities and the spread of IT revolutionized the corporate world. In order to cope up with the technology advanced software technologies and designs were developed but at a cost. To curb this cost companies had to re - engineer their business strategy. The best possible option was to offshore the services to contractors and vendors at a cheap price with agreed terms. This has set the trend with many companies opting to offshore in order to reduce cost and maximize profit (Edgerton and Jiang, 2000).

Motivation for offshoring:

Offshoring has primarily been executives' aim to cut down operational costs. However, in some industries offshoring is being viewed as a strategic necessity. Executives refer to it as "offshore or die". Managing the cost efficiencies of one company helps it to expand its competitive options, the other companies must match to their competitors strategy, or fail. Offshoring is becoming a part of hyper - competition wherein many companies compete with each other in order to remain financially viable and cost competitive. An example for this is the case of America's largest television manufacturer, Zenith electronics, which resisted offshoring for years, while shrinking slowly, before it disappeared completely.

The above graph shows the differences in wages. Apart from the prime reason of cutting down operational costs, the other reasons for companies to offshore projects are speed, agility, flexibility and accessing talent. The speed factor makes use of follow - the - sun technique, also known as round - the - clock. As the name says, follow - the - sun technique exploits the differences in time zones to speed up the project work. For example, a team in America can pass their piece of work at the end of the day to another team situated in India or China, who can continue the work while the US team members are at sleep.

The abundant presence of labour offshore provides the company with agility, the power to move ahead quickly, by assigning large number of engineers to a problem and deal with it in several directions instead of one. This provides greater flexibility in dealing with business needs within days instead of months and years. Another important reason for software companies to offshore is for accessing talent. Innovation largely constitutes to the success of a company and the innovative capabilities come from their talent. Most companies expand abroad to tap this talent. They are referred to as "Knowledge seekers". For example, by 2003, 77 Global software companies moved into India (Carmel and Tjia, 2005). The graph shown below illustrates the key factors for deciding an offshore location.

Offshoring of software applications:

It all began when software industry began to offshore software services to developing countries. It was the first service industry to offshore as U.S companies began to recruit foreign software engineers, especially from India. In the initial stages, when internet was not widely spread, it was not economical to export software. When this was the situation U.S companies had to hire Indian programmers to work at their U.S office or had to invest in offshore affiliates to provide direct software services. In the later 90's due to the advancement in technology, internet along with the availability of satellite services reduced telecommunication cost. Hence it was possible for foreign software experts to work for their clients while remaining at their home location. Hence U.S companies began to re - engineer their priorities and concentrated on core content while other activities such as writing programs were offshored. The activities that were offshored could be digitized and can be performed at distance.

In the late 90s, due to the Y2K problem, U.S firms further used foreign software programmers who were experts in certain programming language. In the recent years more sophisticated and complex software services like researching, designing, developing and testing of new software technology are also being offshored. The reason behind offshoring of complex software services is due to high - quality work done in offshore locations at a much reduced cost. As more complex software services are being offshored, U.S firms in partnership with local companies have developed high - technology research and design facilities to perform high - end software services. These facilities employ hundreds of design experts and engineers who work on software design and development of new high - end technologies which are exported to global customers (United States Government Accountability Office, 2006).

Most of the U.S firms have targeted India as their offshore destination. However there are other developing countries who are trying to catch the attention and be recognized globally. The software exporting nations are generally categorized into 3 tiers. India and China come under Tier 1 nations, as they have huge exports and are growing very fast. Philippines, Mexico, Malaysia, Brazil and Pakistan constitute the Tier 2 nations who are emerging exporters. Tier 3 countries are Indonesia, Iran, Cuba and Vietnam. They are at the infant stage of exporting and still have a long way to go. It is because of the limited resources and the reduced number of exporting firms. Some of the poorest nations like Bangladesh and Nepal have begun to export software. Other nations are making the necessary preparations to enter this industry.

The combination of technical expertise, advancement in technology, availability of human capital and favorable government policies has created a suitable environment for offshoring (carmel and tjia, 2005).

Offshoring of digitally provided services:

Apart from offshoring of software applications, in the recent years more companies tend to offshore digitally provided services. Some of the digitally provided services that are being offshored are animations and multimedia, call centers, medical coding and billing, radiology, telecom and many more. As already discussed in this essay the prime factor for companies to offshore digital content is due reduced labour cost. Moreover advancement and growth in Information Technology has made it possible to transfer information over long distance and process it faster, allowing more opportunities to offshore these processes.

In the entertainment industry the processes that are generally offshored are post production work of films, animation and recorded music. The post production work involves editing, sound mixing and special effects. Offshore experts working on producing and editing of special effects have advanced domain knowledge. Barrie M. Osborne, the producer of popular films like Lord of the rings, The matrix and Face - off has co founded a visual effects studio in India. When it comes to animation the total cost of making a full length movie in US costs about $100 million to $ 175 million. Where as in India, the same movie can be made for $ 15 million to $ 25 million. Since the processes involved are time consuming and labour - intense, the best way is to offshore the process to trained professionals in India where as the studio back in U.S can focus on other aspects. Many companies such as Sony, Disney and IMAX are beginning to make use of this option. There has been a drop in sales physical copies of music in recent years. The sales have dropped from 942.5 million in 2000 to 750.4 million in 2005. This has made the recording companies to search for innovative ideas to boost their revenues. One of the major recording companies, EMI has started offshoring process in 2004 shifting the manufacturing of its products from Europe and United States to Japan, Australia and Canada (Schwender and Leet, 2008).

In the field of medical transcription, Telecommunication companies scan and submit the medical information to professional experts offshore. This is the way of cutting costs in business. The clinical testing and diagnosis results of many U.S patients are now being offshored to foreign countries. Many hospitals in U.S have been submitting digital X - rays to radiologists in other countries like India and Australia for professional review. These professional are staffed by U.S licensed doctors or Indian M.D.s who communicate with U.S physicians (Bliss, 2004).

Call center is the other digitally provided service which is offshored to large extent. Call centers include customer interaction services like telemarketing, credit card processing, helpdesk and so on. For many companies, call centers have become central point of focus as they are in direct contact with the companies' customers. Basically the working of call centers can be categorized into two types. In the first case, the firm deals with inbound calls, where customers call for service and in the second case, the firm deals with outbound calls, where the employees call the customers to offer service. The services are not only offered through phone, but also through online chat, SMS and e - mail (Subramaniam, 2008).

Global impacts of offshoring:

Offshoring of software applications has a prime influence on the economy as a whole. This is mainly due to influence of Information Technology in all fields of business. The impacts of offshoring have opened up both positive and negative impacts. While business world strongly supports the positive impacts, the negative impacts have invoked issues which need to be addressed. Researchers have identified that client country suffers more negative impacts that the country where services are offshored. In this section we discuss the global impacts and issues of offshoring. The impacts of software offshoring and DPS are as follows:

Social Issues:

The onset of offshoring has a major impact on local economy, where thousands of jobs were lost especially in software industry. Offshoring gained momentum during the Y2K issue where software experts were brought from foreign countries e.g. India to deal with the problem when the demand was high. This process continued till the dotcom burst. From global perspective, offshoring has been favorable in terms of economical growth and foreign investment for offshore country. In low wage countries, more job opportunities have been created. More ever growth in economy and infrastructure has taken a drastic change. According to McKinsey Global Institute study, every dollar spent on business process in United stated now goes to India. India gains a net benefit of 33 cents in terms of government taxes.

HR issues:

Another issue regarding offshoring is layoff. It can cause serious morale disturbances among employees in a company. The top management must allocate sufficient time to communicate with their employees. "If your intention is to layoff some workers and move work offshore, let them know" says Textron Financial's Raspallo.

Computer Science Education:

During the initial stages only low level programming jobs were offshored. In order to maximize the profits most of the major companies are offshoring high level programming jobs too which includes software design, development and testing. When jobs are offshored, skills move with them. With the rate at which United States is losing software jobs, how much longer will the engineering schools offer this major? Number of enrollments for computer science courses has declined since offshoring. This can be explained by the fact that most of the students doing Masters and PhD are international students. From global perspective students need not come to US with a dream of working with Microsoft or Google. Talented students can stay in their home country and achieve their dreams as IT giants like Microsoft, Yahoo, Google and so on are offshoring jobs to other countries.

Security and privacy:

It is very clear that a chain is only as strong as its weakest link. It is true that the security and privacy issues will exist until the end of digital world. As financial support services are being offshored, the personal informations are misused. Australian and British press reported a black market, where personal information is leaked from financial offshore processing centers. Recently in June 2006, there has been a security breach at HSBC's offshore data processing unit at Bangalore, where £ 233,000 was stolen from the accounts of UK customers.

Work Culture impacts:

Every country differs in the way of doing business. For instance Indian companies found the need to communicate with U.S clients and Japanese clients in different ways. U.S companies text agreements and documentation along with informal interaction through telephone and email contact, whereas, Japanese clients prefer verbal communication and negotiated agreements with formal usage of electronic media. Another work culture impact is that, where national holidays in one country may not be in another country. Some countries may have more religious holidays and national holidays when compared to client country. Some software companies in India who were the clients of US and UK were open on important holidays where other organizations were closed. This mode of work can definitely cause social impacts in offshoring country (Asokan, 2006).

In case of medical transcription field, offshoring of clinical and medical data compromises on the privacy issues. When patients come to know about the fact that their X - ray reports are being offshored to other countries, they are not happy. For example, The London Daily Mail reported the case of a patient whose treatment was delayed as her transcription data was lost in the transit to the offshoring country. Risk analysis experts predict that when medical information is passed through many sets of hands, the probabilityy of errors in transcription increases. Offshoring of medical transcription has an impact on patient's privacy.


Although the practice of offshoring became popular only at the end of twentieth century, it turned out to be the globally accepted trend in today's modern business. Offshoring had a rapid evolution all over the world in the past decade and became inevitable which is clear from the understanding of evolution and motives of offshoring. In the fields of software applications and digitally provided services, offshoring has gained tremendous importance by taking advantage of cheap labor and high quality service. It is evident from this report that offshoring of these services has profound impact across the world majorly in social issues, HR issues, computer science education, security & privacy and work culture. Albeit most of the positive impacts, there are also certain negative impacts of offshoring these services, both of which are comprehensively discussed in this report.


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