What is the influence of distance on the location strategy of Software-Development outsourcing?

Abstract

This study investigates the influence of distance on the risk reward balance for software development outsourcing and the subsequent location strategy of Software Development outsourcing. Findings are based on 9 semi-structured expert interviews with decisions makers from both outsource clients and providers operating in India, Vietnam, Romania, Ukraine and The Netherlands. Additionally, the 2018 Stack Overflow developer survey (n=98.856) provides insight in the price and quality factors. The findings show the large effect of geographical and cultural distance on the success of software related outsource projects. Institutional distance is found to have a lesser effect. These factors add to the costs of outsourcing. Other risks like a lack of creativity and autonomy, intellectual property risks, security risks are identified. Speed,scalability, availability of labour/skills and costs are cited as drivers of software related outsourcing. The study finds that the main driver (reward) for going offshore is not only price but mainly quality, especially for knowledge intensive tasks like programming. The shortage in skilled labour at client’s locations make outsourcing a necessary rather than a voluntary decision in which price is not the main driver. Due to the complexity of the knowledge intensive tasks being outsourced to these locations, a short cultural, geographical and institutional distance is required. For less knowledge intensive tasks like software maintenance price remains the most prominent factor. In these low labour cost locations, the increased ‘distance’ adds more risks (costs) to the low labour costs. All these findings accumulate to a divide between quality focused locations and price focused locations for software related outsourcing.