Finding offshore software development partners

In a world connected by high speed Internet, businesses are increasingly seeking a competitive edge by outsourcing software development offshore. For many companies, the strategy promises dramatically lower labor costs and better access to a vast pool of talent.

Top line

• When a company seeks software development outsourcing from an online bidding platform, the distance separating the client from the developer matters, but only in one respect. When the east/west separation (longitude) is wide, the impact is negative, but there is no impact associated north/south distance (latitude).
• Moreover, providing more project details and allowing for longer bidding time seems to increase the probability of successful project completion. In fact, the opposite is true.
• When firms provide more project details and longer bidding time, the project proposals attract more bids but the bids tend to come from low-caliber software developers, thus hurting the chance of successful completion.

In a world connected by high speed Internet, businesses are increasingly seeking a competitive edge by outsourcing software development offshore. For many companies, the strategy promises dramatically lower labor costs and better access to a vast pool of talent. But in a pair of research studies, a team of W. P. Carey researchers including Associate Professor Benjamin B. M. Shao,  Assistant Professor Kevin Hong and Associate Professor Pei-yu Chen, discovered some unexpected risks associated with software development outsourcing.

Unless clients manage their outsourcing projects carefully and consider key attributes of vendors, projects are susceptible to failure, the researchers found in their studies, which lead to two working papers. "Technology has made it possible to connect potential vendors and buyers around the world," Shao said. "Our research finds that unforeseen things can happen when you outsource projects over long distances." Data for the research came from a global online platform that uses auctions to match clients and vendors. On the website, clients post information about their software development projects and vendors submit bids.

The data contained information about duration of auctions, how proposals were written and whether projects were completed successfully in the end. Geographic locations of clients and vendors were also included. Among the more surprising findings of the researchers: although long duration auctions attract more bids, they also tend to produce worse outcomes. When clients write lengthy, detailed descriptions of projects, bidders also tend to be less qualified. And being close geographically to a vendor can benefit a client — but only under certain conditions. "Both studies produce counterintuitive results," Shao said. "That's the fun part of doing research."

How distance matters

IT services outsourcing is an important industry, whose revenue was estimated at $288 billion in 2013 and expected to grow steadily in the coming years. With advances in computers and networks, software services "can be provided from anywhere and at anytime," Shao and Hong wrote in their working paper. Advanced project management tools also make it possible for businesses to monitor projects outsourced at sites far from company headquarters, according to the researchers. Although offshore software outsourcing is relatively new, academics already have begun studying it. Several studies have found that distance between client and vendor negatively affects the likelihood of a project's being completed successfully.

Using data from the online platform, Shao and Hong decided to try to find out why. For each software project in the dataset, Shao and Hong recorded not only the distance that separated client and vendor but also each party's coordinates in latitude and longitude. "Using the geographic distance alone, we affirmed the findings of prior studies that distance has a negative impact on successful completion of offshore software projects," Shao said.

But by examining distance not only in miles but also in degrees of latitude and longitude, the researchers found that only the longitude or east-west distance mattered. "Once we broke it down, we found that longitude has a negative impact, but latitude or north-south distance has no impact." The importance of longitude is that it measures not only distance but also time zone, according to Shao. With the Earth divided into 24 time zones, vendors and clients can find themselves on very different work schedules depending on their longitudes.

Phone calls in the middle of the night

To illustrate how geography can affect a software outsourcing project, Shao cited a case of a company in New York receiving bids for a project from vendors in Lima, Peru and Madrid, Spain. "Both vendors are exactly 3600 miles from the client," Shao said. "Madrid is 70 degrees east of New York in longitude — a time difference of six hours — but no difference in latitude. Lima is 52 degrees south in latitude but no difference in longitude.

New York and Lima are in the same time zone. If you control for other variables, you find that the project in Lima has a higher likelihood of success." Shao and Hong concluded that synchronous work schedules explain why being at similar longitudes improves the likelihood of project success. "If there are any problems with the project, all you have to do is pick up the phone and call or have a videoconference," Shao said. "Even if you decide to use email, you know the other person will also be working and can get back to you immediately."

But in cases in which client and vendor are in different time zones, phone calls, videoconferencing, and texting often are not options. "If you run into a problem but you know that the person has left for the day, all you can do is email or leave a voice message." To discuss something in real time, the two parties in distant time zones have to make appointments, and it also can mean late night or very early morning phone calls. "Coordination costs go up as east-west distance increases," Shao said. This phenomenon is important in software outsourcing because U.S. companies are on the opposite side of the globe from India and other countries in Asia where many software developers are located, according to Shao. "They are completely opposite in night and day. There is no overlap in work schedules," he said.

Designs for project success

The online platform studied by the W. P. Carey School researchers uses a reverse auction format, in which buyers solicit bids from sellers. The process is the reverse of what happens on forward auctions, like eBay, according to Shao. "In a forward auction, the seller posts the item for sale, and the buyers compete with each other, so the price will go up. In a reverse auction, the seller submits the bid, and the price typically will go down over time," he said.

Shao, Hong and Chen decided to investigate how the design of the software development auctions affects project outcomes. They wanted to find out what roles, if any, the length of auctions and project descriptions played in a project's success. "The client can decide how much detail to provide about the project," Shao said. "It can be one sentence — 'I need someone to build a website for me' — or it can be 100 or 500 words describing details of the website you want to built." On this platform, clients also can determine how long auctions are open. "It can be ten days or seven days or one day.

It's up to the client," Shao said. Conventional wisdom about auctions holds that the longer an auction and the more details provided about a project, the better the outcome, according to Shao. "Longer auctions attract more bids, and with more to choose from, you should be able to get a better developer," he said. "And with more description, potential bidders have more information about what you want, which would attract more bids and result in a better outcome." In both of these areas, though, conventional wisdom proved wrong, according to Shao. Holding longer auctions and providing more descriptions did, indeed, attract more bidders, but the projects were less likely to be completed successfully.

In their analysis, Shao, Hong and Chen found that longer auctions and more detailed descriptions tended to attract low quality bidders and discourage high quality bidders. "If you keep an auction open too long, the capable developers are going to self-select by not submitting bids," Shao said. "The reason is that they are good. They could easily find other projects, so instead of waiting and enduring uncertainty, they bid in an auction that has a shorter duration and hence a quicker outcome." Low quality bidders, however, have little to lose by waiting out a long auction. "We found that even though you attract more bidders with longer durations, there are proportionately more low quality vendors submitting bids," he said.

A similar pattern occurred with project descriptions, the researchers found. Longer descriptions tended to attract proportionally more low quality vendors. "Experienced programmers are more competent and don't really need a long description to figure out whether they can do a project or not," Shao said. For a business conducting an auction, attracting a large number of bidders is not necessarily beneficial, according to Shao. "It creates information overload. The client has to screen out the bidders, and it makes the job of choosing the right vendor more difficult. In essence, more is not necessarily better."

Surprising conclusions, practical advice

These findings of the W. P. Carey School researchers have important implications for companies looking to outsource software projects, according to Shao. Because east-west distance has such a strong influence on project success, clients if possible should look for vendors in the same time zone or at least in a time zone where client/vendor work days overlap, Shao said. "On the other hand, if a vendor is far away and in a different time zone, you have to monitor the progress of your project more closely to make sure it is on the right track," he said.

The advice Shao would give to clients designing auctions for software development outsourcing projects is clear: keep it short and simple. Descriptions and auction durations should be as brief as possible. "You want to make sure that the auction goes on no longer than necessary," he said. While longer durations and descriptions attract more bids, they tend to come from less qualified developers and hence have a lower likelihood of project success, according to Shao. First published in the autumn 2015 issue of the W. P. Carey magazine.