As increasing number of product firms across the globe are boarding – or at least thinking to board - the offshore bandwagon, I think it is important for these firms to first understand the stages in sending product development offshore. Here, the golden rule is - building Product Design Offshore Capability is a journey, and not a quick fix.

While developing a globally distributed R&D system, firms essentially pass through four stages as they mature their program management processes, define what is core and non-core development, and build trust in their suppliers. Forrester’s research shows that the evolution parallels just how clients’ IT services relationships develop. And over a 36 to 60-month voyage, firms build internal support for sending more complex work to countries like India and steadily update their internal processes to suit distributed product design.

The four stages in taking product development work offshore:

Based on a comprehensive study of more than 20 companies that use offshore locations (such as India) for product design, our research shows that the migration of the work follows the same four-stage offshore evolution that Forrester has observed in traditional IT services. This four-phase framework takes customers from having no offshore presence to a point where the global delivery has become a core competency for the customer. The way firms leverage remote locations, the complexity of the work sent offshore, and the level of project management skills varies substantially across the stages.

Stage I: Bystanders. These companies either have no offshore initiatives or they have just started to investigate the potential for taking work to India or Russia. Clearly, these companies (high-tech and otherwise) have not developed the program management expertise to govern the offshore work. More than 50% of product companies fall in this category.

Stage II: Experimenters. The typical firm in this stage has pilots with one or more suppliers and/or a small captive center (a company-owned offshore operation). Our interviews show that these companies perceive offshore resources as a staff augmentation play or merely low-cost contractors and lack a clear long-term offshore strategy and commitment. The limited integration of the offshore supplier with systems like project management and testing typifies this arms’-length relationship. These unsophisticated companies lack the program management expertise to control product development spread across different parts of the world. Twenty-five percent of product firms are in this stage.

Stage III: Committeds. After experiencing success in the Experimenter phase, a limited group of firms have migrated to the next stage. Committed companies have a clearly defined offshore strategy, delineated program management practices, and are committed for the long term. They implement a sophisticated governance function with clearly documented distributed collaboration processes. Instead of a mix of suppliers, Committed firms focus their efforts around one or two third parties. In the case of large, billion-dollar-plus revenue product companies, a typical offshore team comprises 200 people or more. Our research and analysis shows that Committeds spend an average of 20% of their R&D budget offshore. A leading CRM product company in this phase has 30% of its R&D team in India, between the company’s facility and two suppliers. Forrester believes that only 30 to 35 product companies have reached this level.

Stage IV: Full Exploiters. At the top of pyramid sit those companies that take complete advantage of offshore as standard operating procedure. Efforts in this stage focus on areas like granting full supplier access to the architectural road map, new product development plans, and a defect tracking system. Based on the product design needs and skills available on-site as well as offshore, Full Exploiters establish a rule-based task segregation that allows them to select the best offshore location for the work. Full Exploiter firms establish systems for the code ownership and the decision-making at each location. They put emphasis on capability development of the partners and constantly assert the benefits. For example, Cisco has an accreditation program where third-party employees can be tested and certified on different product lines. The networking company also executes bi-annual and bi-directional customer/vendor satisfaction surveys between the on- and offshore teams. Only five to eight product companies — mostly high-tech firms — have reached this level of sophistication, and have more than 500 offshore resources.

In a nutshell, these four stages demand that every organization contemplating offshore product development should build a culture and a set of metrics that encourage sending work offshore successfully. However, even the pace of sending work offshore is a double-edged sword, and organizations should avoid the temptation to hasten this process by sending complex work before the required process and cultural maturity have developed. Vendors in this space can help these firms accelerate their migration by providing the cultural workshops as well as process consulting.