Many proponents of application development (AD) outsourcing believe external service providers (ESPs) using primarily U.S.-based labor have little chance of competing with ESPs from countries with low labor costs, and resulting low billing rates. However Gartner, Inc. analysts said that isn't always true, because billing rate isn't the only factor.

Gartner has developed an AD sourcing cost model to assist users in making the most cost-effective choices. This model is driven by the total cost of labor adjusted by location-sensitive parameters of communication and effectiveness. Gartner's AD sourcing cost model evaluates a variety of factors to assist in developing an accurate comparison of different staffing approaches to sourcing AD projects.

"Enterprises shouldn't rush to source AD projects offshore without considering factors beyond billing rates, particularly the communication and effectiveness factors, in addition to the amount of work that can be done properly offshore," said Joseph Feiman, research vice president for Gartner.

The communication factor reflects the complexity of conducting AD projects off-client's-site (domestically or offshore). This factor reflects cultural and geographical distance from a U.S. enterprise to a domestic or offshore ESP. It estimates the difference between the client's and the ESP's conversational language skills as well as the collaboration environment established between them.

The effectiveness factor reflects an ESP's (and the enterprise AD organization's) technological, project management and business domain expertise.

Gartner analysts said that when the amount of offsite effort is increasing, ESPs that use primarily offshore labor achieve an advantage over U.S. ESPs, because of lower billing rates based on low developers' salaries. However, when more efforts need to be put in onsite, ESPs that use primarily U.S.-based labor attain the advantage because the communication and effectiveness factors are higher for U.S. ESPs and may outweigh their higher billing rates. To realistically assess the savings to be gained from global sourcing, enterprises must also account for and measure the effectiveness and communication factors, and adjust the total project costs to reflect that measure.

The impact of low effectiveness and communication is reflected in increased AD cycle times and increased staff requirements. Low effectiveness and communication could cause project development to take longer with the same number of people, or more people might need to be involved to accomplish the project in the planned time frame. The impact of using more-effective providers and providers with higher communication factors is likely to decrease cycle times and reduce staff requirements.

"ESPs using U.S.-based labor will find it impossible to compete with ESPs using offshore labor for the lowest billing rates, but they can compete in communication and effectiveness," said Audrey Apfel, vice president and research fellow for Gartner. "Offshore ESPs, such as vendors located in India, that are capable of maximizing the amount of AD efforts conducted offshore will improve their chances of winning bids for AD projects over U.S. ESPs. ESPs using U.S.-based labor that target projects with onsite needs (for security, regulatory or other purposes) or require AD resources with high scores in effectiveness and communication will improve their chances at winning bids for those projects, as well."

Additional information is available in the report "AD Sourcing Cost Model: Can Indiana Compete with India?" This report examines how AD project costs vary with change in billing rates, as well as such parameters as the amount of AD effort per phase and the level of the AD teams effectiveness and communication. This report can be purchased on Gartner's Web site at

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