21 February 2007 23:42

Initially when we heard of software outsourcing, we thought of their fundamentals as flaw and would think of they could never yielding the customers needs, how much ever the person may try hard to provide. Effectiveness of the early dealing was difficult because of two reasons:

• They could not eliminate the waste
• Exploited the economy of scale in mainframe operations.

But those days are gone, the software outsourcing transactions have developed and become more responsible to the consumer and client's needs.

Offshore outsourcing : Organizations, which moved towards the practically non-existent unique product in Offshore Outsourcing category in the late 90s, are now reaping rich rewards. Annual revenue growth rates for most of the top 10 companies are in the range of 50 to 150 per cent for the last two years. Never the less comprising a miniscule Rs 2,000 crore out of the nearly Rs 76,000 crore expected to be earned by software exports from the country this year, the segment has been doubling its revenues for the last three years

The Information Technology industry is achieving phenomenal economies of scale; reduced the unit cost of hardware and communications dramatically. Any sensible prospect for outsourcing will get their house in order, so eliminating waste, before approaching the market, and mainframes have given way to server technology which does not lend itself in the same way to economies of scale.

The most significant thing which drives these firms is the huge potential for growth. They point out that out of the $40 billion (Rs 180,000 crore) that product companies in the US are supposed to have spent on Software development this year, India has barely scratched the surface by attracting just around Rs 2,000 crore by converting it into Software Outsourcing Development.

Purely increasing scale does not bring economies of scale. They rely on being able to spread costs which do not vary with volume (fixed costs) over a greater volume. Phenomenal economies of scale were achieved, through massive investments in Software Developments, chip plants and infrastructure spread over hundreds of millions of units and squeezing labour costs. In these cases the marginal cost of producing each additional unit is now insignificant. By Economies of scale level off unless investments are repeatedly made in technology to shift more of the variable cost into the fixed base.

Offers by outsourcing : Specialist services where suppliers are investing in technology, such as application-specific Offshore Software Outsourcing to reduce labour costs, can also deliver benefits. The only way to alter the economics is to Outsource and cut out any of the suppliers' profit and management costs that arise purely from labour. Insourcing projects cost a lot more than Offshore Outsourcing and the subsequent reductions in running costs can be very substantial. Further, the difference between what supplier's staffs is paid and what the user is charged for them makes the greatest contribution to suppliers' profits.