Offshore in Israel - the new trend in software development for organizations: high quality at low cost
The modern economy makes it possible to have software development and testing done in countries such as India and China, where the cost of human resources is much lower, meaning that development and production costs can be reduced. However, offshore outsourcing to the East does not come without a cost: the distance, cultural and linguistic differences, and different work hours, along with the increase in prices and high employee turnover rate have made outsourcing to these countries less attractive. In response to this problem, Matrix established an Israeli R&D center that employees skilled professionals at competitive costs, essentially offering the first Israeli local offshore outsourcing solution. The activity has been a great success with the 50 women who have already worked on five big development projects for large companies and organizations in the Israeli and global market.
by: Moti Gutman, CEO of Matrix
There has recently been an upswing in the number of newspaper articles about Israeli and international R&D centers that are closing up shop in Israel and relocating to India, China and Eastern Europe, where labor costs are lower. These headlines demonstrate that Israel is starting to lose (if it has not already lost) its relative advantage in terms of R&D know-how to countries where R&D costs are lower. The reality is that international projects are no longer being outsourced to Israel; large Israeli high-tech companies are moving their R&D centers out of the country, and software development that used to be conducted by the IT units of large organizations is now being performed abroad.
Elisha Yanay, General Manager of Motorola Israel and Chairman of the Israel Association of Electronics and Software Industries, said not long ago that in recent months the high-tech industry has lost close to 3,000 hardware and software development jobs to countries offering lower labor costs. Yanay called on the government to draft a plan to stop this loss of jobs to offshoring and give Israel a strong position relative to other countries that lure Israeli companies into relocating R&D, followed quickly by production. Yanay further stated, "The multinationals whose centers are outside of Israel (for example, Intel, Motorola, IBM, Cisco, etc.) and the "multinational" Israeli companies (such as Teva, ECI, RAD, Comverse, Amdocs, Formula, etc.) are moving their R&D activity out of the country. In less than a year, we may find that we have lost 30%-40% of these jobs in Israel.
Cutting the costs associated with the R&D process
Many companies in Israel and worldwide are looking for ways to cut the costs associated with the technology development process. One of the most popular ways to do so is to adopt an approach based on offshore outsourcing. According to this approach, the local development processes are handed over to an R&D team in a country that offers a human infrastructure skilled in technology development and low-cost human resources.
In principle, offshoring is designed for customers that want to transfer part of their software development and testing activity abroad to reduce costs and accelerate development. These activities do not require ongoing discussion with the customer, and clear and binding output can be defined subject to a binding timetable. The offshore development team works according to unique procedures developed for this purpose and is closely monitored by the quality control team.
But offshoring also has its disadvantages
The picture for offshore outsourcing, however, is not completely rosy. In many cases, western companies have a hard time working with a company that is so far away, not only because of the geographic distance, but also because of the cultural divide. Obstacles such as many international trips by project managers, work hours and workdays that differ from country to country, different work culture and language, all make work more difficult and increase costs. To overcome the cultural and language issues, the companies have assigned their own project managers to these projects and they have relocated to the less expensive countries (onsite outsourcing). When this did not improve communication, the company providing the development services opened a local branch near the customer (offsite outsourcing), designed to offer a better means of communication, albeit the additional increase in costs.
However, this does not resolve the problems. If we take India as the leader of offshore activity, we can look at the processes that have taken place over the past year. The strong demand for R&D professionals has led to a growing rise in wages. In 2004, 25% of Indian companies raised their rates for offshoring projects, and salaries rose by an average of 9%. The cost of one hour of work by a programmer in India went from USD 13-USD 17 an hour to USD 20-USD 25 an hour. The strong demand for professionals has also led to a very high employee turnover rate, due to the many tempting offers Indian programmers receive (remember the situation in Israel in 1999-2000). This means that in many cases, most of the team that started on the R&D project will no longer be there when it is completed.
Offshoring can also work in Israel
As Israel's leading information technology company, Matrix recognized these trends and the inherent risk they pose to the Israeli economy. A special Matrix brainstorming team came up with a concept that offers a unique solution to the problem by integrating the Haredi (Ultra-Orthodox) community into the Israeli economy. Matrix opened an R&D center in Modi'in Illit, where it provides comprehensive development training to Haredi women and offers employment on projects that are at the forefront of high-tech activity in Israel. As part of the project, known as Talpiot, the Haredi women get jobs at the R&D center near their homes, in a homogeneous environment that understands their unique needs. They are offered flexible employment and can earn more than they would in other jobs in their immediate surrounding area.
The Talpiot R&D center's activity is based on quality personnel that undergo serious suitability testing. Because this is a quality population that wants to become part of the work force in an area with a low cost of living, Matrix is currently able to offer its customers local offshore outsourcing at costs similar to those offered in the East, but with the advantages inherent in working with a local R&D center: geographic proximity, cultural compatibility, same workdays (Sunday - Thursday compared to Monday - Friday abroad), the same holidays and vacations, same work hours, same language and more. Moreover, employment conditions that are well suited to Haredi women and the blessings rabbis have given Talpiot make for a very loyal workforce.
Today, just a few months after the launch of the project, over five big projects are already underway for large companies and organizations that are not only highly satisfied, but also benefit from lower costs. What's more, there is a strong demand for additional Haredi women to join the project, and the second round of training will soon begin. So, if you also want to know about how high-tech projects can be conducted using quality personnel and low cost - become part of Talpiot.