What Does Economic Uncertainty Mean to Your Company?

by Michael Mah, Senior Consultant, Cutter Consortium

Recently, I had a conversation with a senior VP of software engineering who said that certain "macroeconomic trends" were going to influence the direction of his software development strategy. Reading between the lines: the CFO was going to cut budgets in the face of the current economic downturn.

Rising energy costs, subprime shockwaves in the credit markets, and higher healthcare expenses mean that corporations are looking to cut costs. During periods of falling revenue and rising spending, CFOs gain more influence. We've seen this before. In effect, they are allowed to make de facto engineering decisions via staff cutbacks and are potentially sending work offshore, if they aren't already.

A client of mine recently said that his CFO asked to double or triple use of offshore resources from current base levels. This could potentially affect the company's ability to increase inhouse development using agile methods. Until now, it didn't keep track of productivity, quality, and time-to-market metrics. As the adage goes, without metrics, you're just someone with a different opinion. IT managers -- without measures to defend their position -- will find that the CFO's opinion has more influence, and wish-list items such as agile can lose out. Offshore IT companies are like Wal-mart: they frequently win during a recession.

The problem I see is the long-term trend. As far as we can tell right now, energy costs will continue to rise. In Oslo, Norway, where I traveled recently, gas was almost $12 per gallon, similar to other parts of Europe. Medical costs will continue to rise. CFOs will look at revenue, expenses, and investments. The trick for IT managers today will lie in determining how to frame IT in terms of expense or investment. They'll have to be competent in using such metrics as cost, schedule, delivery throughput, productivity, and quality. Investments into process, tools, talent, or such methodologies as XP, Scrum, or variants of agile will have to be framed in ways that show ROI benefits and value. Unfortunately, most organizations don't know how to measure themselves, and they'll face CFOs who may dictate their destiny using lower-cost labor in India or China.

What can we do? I'm not saying, "all offshoring is bad" and "all agile is good." Clearly, there are organizations that successfully use talented engineers in other places. Others find that cost savings aren't what they expected, with schedules that slip from higher defect rates. In a recent Cutter survey on outsourcing, the majority of companies that outsourced were looking to switch suppliers or bring work back inhouse. Low domain knowledge and complex communication can cause outsourcing to be harder than people think.

What I am saying is that managers and their CFOs need to be thoroughly informed so that they make the right decision, whatever that may be for them. Here are some facts:

• The declining value of the dollar is causing salaries in places like India to rise, often negating the perceived labor cost advantage.

• As complexity rises, it's more difficult to build software with distributed teams across continents and multiple time zones. Costly rework due to higher defects can actually increase project costs, despite lower labor rates.

• In the face of lower hourly costs, many organizations elect to use larger offshore teams than industry average in the face of schedule pressure. Brooke's Law says that adding people can make a late project come in later, and our metrics research proves this true. This is because larger teams trying to compress time often create more defects, which ironically requires more time later for testing.

• Offshore teams that succeed can do so if they solve things like distance, time zone, language, and cultural differences. This is not trivial, and to do this often requires investment and new engineering processes that need to be considered.

• Agile development is showing huge promise according to our metrics research. Time-to-market and defect levels at organizations with highly mature agile implementations are achieving some best-in-class results.

What would your measures or benchmarks show on offshoring, agile, or waterfall? If you know the answers, your company will be better equipped to make the right decisions in the face of economic uncertainty, whatever that may be. I welcome your comments on this Advisor and encourage you to send your insights to mmah@cutter.com.

-- Michael Mah, Senior Consultant, Cutter Consortium