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The Next Trend: Offshore Product Engineering

May 28, 2004

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Conclusion

After reading about the actions of the companies we listed (and many that we didn't), we arrived at three separate conclusions:

Organizations are selectively sending skilled product engineering work offshore.
Software companies are offshoring new product engineering work, but mainly on an in-house or captive center model.
The economics of open source software will force companies to pare down development costs further and, in the process, increase the offshore component.

The level of skill involved in offshore IT projects continues to creep upward. Software companies have become more comfortable sending mission-critical development offshore. However, because the software industry is particularly sensitive to intellectual property and piracy issues, many companies offshoring product engineering are opting to build their own development centers rather than hiring a vendor to complete the work.

The last conclusion we drew stems from the growing adoption of open source software. More companies are using open source code to build their software or are migrating existing versions to open source. The business model behind open source software forces companies to reduce their development costs, since they generate revenues from services rather than software. As profit margins shrink, software companies have to adjust their business models—which, in the end, leads us back to offshore outsourcing.

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