An Exploratory Study on the Offshoring Strategies of Business Software Vendors

With the development of networking technology and globalization, the distance between countries is getting shorter in the software world. The emergence of India software industry due to global software outsourcing is a critical example. Moving software production to a low-labor-cost country can help software vendors to reduce production costs, but may also increase transaction costs at the same time. Therefore, it is an interesting issue how software vendors can governance the offshore production activities effectively. The present research attempts to review this issue from various theoretical angles, including international economics, transaction costs theory, governance theory and competitive strategy framework, with a hope to provide useful suggestions to Taiwanese business software vendors.
From knowledge economics perspective, software productions can adopt different modules and can be specialized based on comparative advantages. However, when software vendor lowers production costs with offshoring, the transaction costs may increase. The present research reviews various governance models of offshoring and has recommendations on the decision making processes. Besides, we found CMMI is a good signaling device for reducing the level of information asymmetric and to reveal vendors’ competence.
For the offshoring strategy of business software vendors, our research found that: 1）Business software vendor can have offshore specialized production based comparative advantages to reduce production costs；2）There are four governance models of offshoring, including offshore market, offshore outsourcing, offshore on-site outsourcing and offshore in-house production；3）In order to reduce transaction costs effectively, business software vendors have to choose the best governance model based on local IP and labor laws；4）CMMI as a signaling can reduce the information searching cost and can be a useful reference for vendors to review their competence. At the end, we suggest business software vendors should focus on innovation advantage at the initialing stage and focus on cost advantage at the mature stage.