Offshore development is when a company develops software or provides IT services in country other than its own. It is done in order to reduce costs and to seek advanced technology, and typical development destinations include India, China, and the Philippines. Advantages include cost-effectiveness and the utilization of expertise, but challenges include communication difficulties and quality control issues.

 What is offshore development?

Until now, Japanese companies have mainly outsourced to China, but in recent years, labor costs within China have been rising sharply, and new offshore development outsourcing is shifting to countries such as Vietnam, India, and Myanmar.

Recently, in light of the shortage of IT engineers in Japan, it has also been increasingly used to secure development resources. In such cases, it is not just about reducing costs, but also about "global sourcing," which secures optimal resources globally from a comprehensive perspective, including technical capabilities and development systems.

Even though it is called Offshore development, there are many companies that outsource development simply because the company they are outsourcing development to is located overseas. This shows how low the hurdles have become in recent years.

Especially since the outbreak of the coronavirus, the shift to remote work has progressed rapidly not only in the field of IT development but across the entire business. As a result, there has been a gradual decline in social resistance to offshore development, which involves advancing development projects remotely with overseas development sites.

In offshore development center, it is important to effectively link the domestic base in Japan with the overseas development base to advance the development project. Therefore, in order to facilitate smooth communication in terms of language, culture, and business practices, there are many cases where an engineer called a " bridge engineer (bridge SE) " acts as a communicator and manages and coordinates the project.

A similar term to "offshore development” is " nearshore development ." This is the outsourcing of IT development work to development companies in areas of Japan where labor costs and prices are low.

What is the purpose of offshore development?

There are two main purposes for offshore software development: one is to reduce costs, and the other is to secure development resources.

In the survey results for 2021 and 2022, cost reduction was the top answer in both cases due to the economic downturn caused by the coronavirus and increased cost consciousness. However, due to the recent serious shortage of IT personnel, the top answer in the 2023 results was "securing development resources."

Securing development resources

Offshore development has recently come to have a greater meaning as a form of global sourcing. The background to this is that securing IT human resources has become a major issue due to the decline in the domestic labor force. In particular, there are many cases where talented domestic engineers are exhausted due to the rising unit price due to their scarcity, and working on multiple projects at the same time.

On the other hand, the IT industry in offshore development destination countries is growing rapidly, and there are an abundance of talented IT engineers. Especially in the rapidly growing Vietnam, there is an increasing number of development projects using cutting-edge technologies such as AI , IoT , cloud, and blockchain, and concerns about technical capabilities have been dispelled. 

In other words, it can be said that offshore development companies that can set up a system to flexibly supply necessary resources on a project basis have become common. Against this background, I think that the number of companies that respond to the problem of IT resource shortages by securing optimal resources globally is rapidly increasing.

According to the Ministry of Economy, Trade and Industry, it is estimated that as of 2023 there will already be a shortage of 200,000 IT personnel (*1), but a more pessimistic view is that by 2030 there will be a shortage of approximately 790,000 IT personnel (the 2030 problem). These figures make it unrealistic to complete IT development using only domestic resources. The introduction of offshore development on a small scale is spreading, primarily among companies that believe that "utilizing global human resources requires at least some experience and know-how." From now on, this will likely enter a period of greater popularity and expansion.

For a long time, the main purpose of offshore development was "cost reduction," but now the top answer is "securing development resources." This shows that the domestic labor shortage is becoming an issue for many companies. The third most common answer was that "development speed" is an issue due to the labor shortage.

System development costs are heavily dependent on the labor costs of engineers. Therefore, by using overseas engineers with lower wages instead of Japanese engineers, whose wages are rising sharply, labor costs can be reduced and costs can be cut. Looking at the data below, we can see that a large number of companies consider price to be their biggest issue when it comes to domestic development vendors.

Looking at domestic companies, the issues are centered on "price," "resource procurement," and "development speed." These issues are largely due to the "shortage of domestic IT talent." The shortage of talent leads to problems such as rising unit prices and difficulty in procuring resources... and even slower development speed.

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 Ranking of offshore development outsourcing destinations by country

Now that we know what kind of companies are engaged in offshore development, let's take a look at the "Ranking of popular countries for offshore development destinations." The ranking of outsourcing destinations for 2023 is as follows.

Vietnam remains popular!

This year, Vietnam was the most popular destination. Excluding those who answered "no preference," nearly half of the companies want Vietnam as an offshore destination. Of course, even among those who answered "no preference," there is a high possibility that Vietnam will be selected after consideration, and it is certain that new offshore development projects are still being ordered mainly from Vietnam. The reasons for this include the country's affinity for Japan, its hardworking national character, geographical proximity, and low unit prices.

Benefits of offshore development

We will explain the benefits of offshore development from three perspectives.

Cost reduction

Labor costs for engineers in Japan are rising, making it difficult to keep costs down with in-house development. However, with offshore development, costs can be reduced because the labor costs of overseas engineers are low. In fact, many companies that have introduced offshore development have achieved cost reductions. For example, one major SIer succeeded in reducing development costs by about 30% by outsourcing offshore development to a development company in Vietnam.

Utilizing global resources

By collaborating with overseas development companies, you can advance into the global market and respond to overseas customers. For example, a small or medium-sized enterprise has advanced into the global market by outsourcing offshore development to an Indian development company. Also, a large company is using offshore development to strengthen its response to overseas customers.

Strengthening technical capabilities and development systems

Overseas development companies often have technology and know-how that Japanese development companies do not have. Therefore, by utilizing offshore development, you can strengthen your company's technical capabilities and development system. In addition, with offshore development, it is possible to assign engineers from multiple development companies. This allows you to supplement resources that you cannot cover on your own and strengthen your development system.

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Disadvantages of offshore development

Offshore development center can utilize international resources, reduce costs, and secure specialized skills, but it also has disadvantages due to language, cultural differences, and time differences. In particular, communication challenges, quality control difficulties, and security risks can hinder the success of offshore development. By understanding these disadvantages and taking appropriate measures, it is possible to minimize the risks of offshore development.

Communication Barriers and Solutions

In offshore development, language and cultural differences can be communication barriers. This can lead to misunderstandings and information discrepancies, increasing the risk of project delays and poor quality. To overcome communication barriers, a multi-pronged approach is required, including regular meetings, establishing clear communication guidelines, and providing language training.

Difficulties in quality control and countermeasures

Another challenge of offshore development is the complexity of quality control. When developing in a remote location, it is difficult to grasp the work status and quality standards of the local team, which leads to problems of inconsistency in quality. To thoroughly control quality, it is essential to set clear quality standards and evaluation criteria, conduct regular code reviews, conduct tests, and strengthen the feedback process.

Recognizing and mitigating security risks

Security risks are a major concern in offshore development. In addition to the increased risk of information leaks due to increased data exchange, development in different jurisdictions can cause problems due to differences in data protection laws.
To mitigate security risks, it is necessary to set strict data management rules, strengthen security training, and ensure legal compliance.

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Key points for successful offshore development

Success in offshore development is achieved through the intricate intertwining of many factors, including project management, communication, quality control, etc. By understanding these factors and addressing them strategically, it is possible to minimize the risks of offshore development and move towards success.

Setting clear objectives and goals

It is important to clearly define the purpose and goal of introducing offshore development. The optimal form of offshore development varies depending on whether you want to reduce costs, strengthen your technical capabilities and development system, or utilize global resources. Clarifying your purpose and goal will lead to smoother communication and easier selection of development companies.

For example, if your goal is to reduce costs, you need to choose a development company in a country or region with low labor costs. If your goal is to strengthen your technical capabilities and development system, you need to choose a development company with a proven track record and technical capabilities. If your goal is to utilize global resources, you need to choose a development company that can easily collaborate with overseas development companies.

Proper communication

In offshore development center, it is important to have proper communication because development companies in Japan and overseas work together to advance development. Make sure to have regular meetings and use information sharing tools to ensure smooth communication. It is also important to determine communication rules to prevent misunderstandings and problems due to language and cultural differences.

Choosing the right development company

When choosing a development company to outsource offshore development, it is important to consider the company's technical capabilities, track record, and communication skills. Offshore development involves various risks, such as communication issues due to language and cultural differences, communication issues due to time differences, and quality control issues. Therefore, whether or not you can overcome these risks is also an important point.

Specifically, pay attention to the following points when selecting a development company:

• Development track record and technical capabilities
• Communication skills
• Risk response capabilities

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Recommended offshore development companies

When considering offshore development, we often hear people asking, "Which country should we do offshore development in?" Since the labor costs (unit price) of engineers, culture, and national character differ depending on the country, it is certainly desirable to carefully consider the country as well.

However, it is now even more important to compare offshore development destinations by company. The number of IT companies providing offshore development to Japan is increasing, especially in Vietnam, which has an abundance of IT human resources. What is happening there is that competition between contract companies is intensifying, and "differentiation" is becoming a major theme.

As offshore companies strengthen their own characteristics, uniqueness, and expertise, the options for clients have expanded, and the chances of finding a contractor that is perfect for your company have increased. It can be said that an environment that makes offshore development easy to work in has been created, making it easier for many companies to consider offshore development. 

Due to this situation, it has become difficult to uniformly recommend a specific offshore development company. I think the key to success is to find the best development company based on your requirements and requests, such as the development content and what you want to achieve. If you are having trouble finding a company that suits your company, please feel free to contact offshoredevelopment.com.

For your reference, we will introduce three offshore development companies with a wealth of development experience and a reputation for their technical capabilities and quality.

Read more: 10 Criteria For Choosing The Best Quality IT Outsourcing Partner

EDUTO - BEST PARTNER IN OFFSHORE DEVELOPMENT

EDUTO was founded in 2023 and started its business in the central Vietnamese city of Ha Noi, where it is the city's largest and oldest IT company. In cooperation with FPT University and HUST, the company has been able to secure a stable supply of resources, with 30 outstanding students joining the company every year.

Therefore, we can build a "true hybrid" offshore system that combines human resources from Japanese corporations and Vietnam according to the customer's request. We assign Japanese personnel to upstream processes, organize requirements with the customer, and give instructions to Vietnamese members to carry out development. Since the customer does not have to directly interact with the offshore, we provide offshore development that does not feel like it is offshore.

In addition, because we have many years of experience, we have been able to turn all lessons learned from failure cases into knowledge, enabling us to handle a wider variety of projects (web, mobile, embedded, AI, etc.).

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