IN A SURVEY OF INDIAN OFFSHORE VENDORS, most mention financial services and manufacturing SIC codes as their target verticals. There are exceptions like Aztec and Rave that focus on software (and product management companies) but, in general, the software vertical is not a major market for Indian vendors. The common answer: why focus there when the software market is so soft?

Well, the software market is about to come under even more pressure, and which is exactly why Indian vendors should more aggressively seek out software vendors.

Car manufacturers, for years, have understood the economics of their Tier 1 and 2 suppliers in intimate detail. Similarly, corporate buyers seeing significant cost and quality payback from their own use of offshore vendors are showing interest in understanding software vendor economics.

Two recent questions to our corporate clients illustrate the type of scrutiny: a) how does maintenance for a piece of software break down (new features vs. helpdesk vs. bug fixes) and should we discontinue vendor support, self support or find third party support? b) If a vendor is truly committed to helping us manage TCO, why are so few of their implementation partners using lower cost deployment models?

For years there has been quiet dissatisfaction about the quality of packaged software and the torrent of bugs, fixes, and patches. Now with their offshore vendors, companies have benchmarks that have proved that externally developed code can be much better. Most CIOs will agree that Oracle application version 11i, in particular, represents a sharp contrast to the CMM level 5 standards they are coming to expect. So, in various ways, the software industry will be under significant pressure for the next few years and that is good news for offshore vendors.

The challenges in selling to software vendors
Expect some challenges, though, in selling to software vendors—and be prepared to tackle these objections:

There is a “not invented here” syndrome with many development teams. It takes a brave VP of Engineering to acknowledge that others can develop software better or cheaper. Indian vendors—by flouting their Six Sigma certifications—only add to this competitive posture.

Vendors look harder at in-sourcing (building their own captive offshore unit) than what the average large corporation does. It also means that almost every year, they will compare in-source versus continuing outsourced relationships.

A fear that a number of software companies share concerns intellectual property protection. Accenture was once a software company. “What guarantees do we have that Infosys or Wipro will not one day compete with us?” It is a somewhat irrational fear given how different the capitalization models and cultures are between software and services companies, but the fear persists.

A number of large corporations have chosen India as their offshore destination because they found scale they could not find in alternative markets—each seeking hundreds to thousands of software engineers. Most vendors will only need a fraction of that. For many, Russian or Israeli vendors may represent an adequate—perhaps a better fit—than Indian vendors.

Are we cannibalizing our services revenues? Many software vendors derive a significant portion of their revenues from services. The balancing act of charging a customer consulting rates many times what their offshore vendor is charging them (albeit for very different skill sets) will be increasingly tricky.

Today, vendors lack of procurement and outsourcing experience. Service level definitions, unique personnel issues in outsourcing such as re-badging employees, vendor management—large corporations have far more outsourcing experience than do software vendors.

The sourcing process in vendors is often convoluted. In private companies, VCs will sometimes steer portfolio vendors towards a sister services company, not necessarily the best choice. Also, since the software community has a lot of Indian executives, the sourcing decision can get muddled by ethnic considerations. Successful offshoring has more to do with competent outsourcing—just being Indian does not automatically make you good at that but that does not stop many Indian executives from volunteering (or being asked) to head offshoring efforts.

Software vendors as dream customers
In spite of the challenges in selling to them, in many ways, software companies are a joy from an offshore vendor’s perspective. The sales cycle is much shorter than selling to a Fortune 500 enterprise. Executive buy-in at the highest levels is easy to arrange with a tech-savvy team. The code specifications tend to be much tighter than what they get from their corporate clients. The software community is already pretty multi-ethnic so the cultural problems that often occur in large corporate offshoring are not as common.

Software vendor offshore maturity model
Software vendor offshoring has its own CMM—with the “C” standing for Comfort. An easy first step is to hand over maintenance of an older release to an offshore vendor. That allows internal teams to focus on more current, more “exciting” technology. As an HR application executive pointed out, though, there are no clean-cut lines between maintenance and development always. In his case, tax and legal updated functionality had to be built not just for current releases but also earlier releases. So they had to rethink just offshoring maintenance of older releases.

Involving an offshore vendor in quality assurance and documentation development around a new release is another low risk area for a vendor. Porting of a new release to secondary platforms or their globalization is another area.

As vendors get more comfortable, they discover time-to-market advantages through round the clock development with an offshore component. Next come help desks first for Asian customers, then a broader audience.

Implementation partnering, Outbound marketing, Marketing collateral development, Back office processing—the range of activities being considered by software vendors with initial offshoring successes is very wide.

The key is to move them up the comfort curve. With some nudging from their customer bases, it will increasingly happen.

Bottom line
The software industry will increasingly be pressured to do much more offshoring than it has so far. Successful Indian vendors will need to read software executives’ sensitivities—and must also match their offerings to the software vendor’s offshoring maturity index. This political balancing will undoubtedly pay off in the end—in many ways software vendors will become their most enjoyable, if not their biggest, clients.

Vinnie Mirchandani is CEO of Jetstream Group, which helps large companies – and software vendors – to better procure technology contracts. Previously, he was a Gartner analyst covering the enterprise application software market. He can be emailed at vm@jetstreamgroup.com.