Organisations striving for a competitive edge are venturing into
Vietnam for their software development, but before you consider
tracing their footsteps there are some pitfalls to be overcome.
Marc Lopatin reports
What do the companies Nortel, Cisco, IBM, Hewlett-Packard, British
Petroleum, Sony, Fuji and Tata have in common? Apart from being
successful multinationals, they all outsource software development
to Vietnam. At up to half the cost of India, and with a wide range
of programming skill sets, Vietnam is fast gaining credibility as a
new offshore market. And yet the question remains: given the risks
of outsourcing, can a new entrant such as Vietnam really add value
to the development process?
Of more than 50 software companies identified as offering quality
software development in Vietnam, 35 are already working for
overseas customers. It is a little-known fact that Vietnam is home
to pockets of outsourcing excellence to rival established markets
such as India and Russia.
Research Vietnam, an outsourcing intermediary based in Ho Chi Minh
City, has been assessing the potential for offshore development in
Vietnam for the past year. Company director, Dan Stern says an
emerging market is taking shape largely undetected by UK software
houses.
"Many firms outsourcing to Vietnam would prefer you not to know
about it. They choose to remain anonymous given the huge
competitive advantage they are enjoying in terms of quality and
cost," says Stern.
"With charge-out rates running at half those in India and a
fraction of those in the UK and US, Vietnam offers a compelling
alternative for outsourcers committed to building long-term
partnerships with local suppliers," adds Stern.
Some companies outsourcing to Vietnam are willing to talk, however.
Nortel Networks has been working with a local partner in Ho Chi
Minh City since 1998. Commenting on the company's experience in
Vietnam, Hung Truong, director of software engineering at Nortel
Networks-Shasta IP services division, says, "Vietnam is well
positioned to compete alongside Romania, India and China. We did
not have any reservations about working with Vietnam-based
developers since the country has a vast pool of intellectual
resources that remains largely untapped."
Other large players are also getting in on the act. Le Quang Tri,
software solutions manager for IBM Vietnam, admits the IT giant is
gradually homing in on Vietnam. IBM, along with other
multinationals, has chosen a soft-entry strategy of working closely
with established local partners as a precursor to opening a
dedicated development centre.
"We are looking closely at Vietnam this year and may consider
opening up a development centre here in the future. Work is going
on and talks have already started between IBM and the Vietnam
government. We require skills in Java as well as Web/host
applications and these are almost certainly available in abundance
in Vietnam," says Le Quang Tri.
And it is not just US-based companies getting in on the act.
UK-owned companies including Harvey Hash and Unisys have set up
development centres in Vietnam. Vietnam has also attracted software
entrepreneurs such as UK technologist David Appleton, who set up
SilkRoad Systems in 1997 after working in Tokyo for many years.
Today, he has more than 30 staff and works for clients from Japan,
the UK and the US.
"Vietnam turned out to be the perfect choice for us," says
Appleton. "The combination of a willing client and cost-effective
skilled labour allowed us to grow the business quickly. Things are
really looking up and we've just signed a deal with the US
government - a first for Vietnam."
Another British-owned firm, Atlas Industries, set up a development
centre in Ho Chi Minh City during 2000. The company specialises in
computer-aided design on behalf of engineering and architectural
firms in the UK, Europe and the US.
Atlas chief executive Joe Woolf says Vietnam provides real
advantages. "Labour is skilled and low-cost. Combine this with the
mobility and flexibility of the Internet and the seven-hour time
difference, and you have a winning combination."
Stern argues that the emerging market in Vietnam could pay
dividends for the right kind of IT inward investor.
"The Vietnamese IT market has grown 45% since 1998 and is projected
to grow to $690m [£470m] by 2003 with sectors such as software and
telecoms set to grow at twice that rate. Some companies are
seriously undervalued - which means there are some real bargains on
offer to astute investors who are willing to do their homework."
Government support
One of the key drivers of the
Vietnamese software industry at the moment is the Vietnamese
government. A number of IT investment plans have been announced
covering infrastructure, e-government and education. In May 2001,
the Ministry of Finance introduced zero-rated tax for software
exports and raised the personal income tax bracket for both
foreigners and local employees to $1,000 a month. Enterprise income
tax is set at only 10% and even then firms enjoy four years of tax
breaks.
Vietnam is also rich in raw talent. The population is young - very
young. It is estimated that 60% of Vietnamese are under the age of
25. The education system in Vietnam has an implicit bias towards
rote learning, maths and logic that lays the foundations for good
programmers rather than creative thinkers. As yet there is no
shortage of IT graduates with five-year computing degrees, and
overseas IT trainers including Aptech, NIIT, Tata Consultancy
Services and Oracle are already providing modern IT curricula.
What makes Vietnam's outsourcing emergence all the more remarkable
is the relatively poor state of the country's telecoms
infrastructure. There are plans afoot to modernise communications
as laid down by the signing of the bilateral trade agreement with
the US in December 2001. Total bandwidth has almost doubled in the
first half of 2002, while the high cost of making international
calls is expected to fall in line with regional averages by
2003.
However, other issues remain serious threats to the growing
software market in Vietnam. Top of the list is enforcing
intellectual copyright - largely regarded as a Western eccentricity
across much of Asia.
There is no doubt that Vietnam is a pirate's paradise. DVDs, CDs
and software are widely available in cities and towns across the
country. This situation will change in the short- to medium-term
but companies wishing to develop software for export from Vietnam
have less to fear. The leading software companies in the country
have well established security procedures that meet international
standards. They routinely restrict access to floppy drives,
printers, networks, CD burners; have established back-up
procedures; and even use swipe cards to control physical access.
And significantly, these companies use licensed software.
Speaking the language
Other barriers to entry include
the poor level of English language skills in Vietnam. Spoken
English is improving rapidly but many a receptionist at a local
developer will test the patience of a saint as he or she tries to
connect with the correct member of staff. The situation is eased by
expatriate workers dominating client-facing roles in leading
companies. One encouraging aspect is that written technical English
is less of a problem for Vietnamese developers as IT students use
English-language textbooks when they attend university.
Quality assurance and project management
To date only a
small number of IT companies in Vietnam have been awarded
International Standards Organisation and Capability Maturity Model
certification. But to be fair, there is a growing awareness among
firms that they need to present standardised and transparent
working practices before international customers. The high cost of
formal assessment is still a major disincentive for local companies
and there is little in the way of subsidy from government or
technical assistance donors.
The upshot suggests that outsourcing to Vietnam can be a profitable
alternative but requires careful selection and engagement. Stories
of jobs gone wrong are as plentiful as are success stories that
deploy the correct outsourcing model.
One such example is provided by Australian firm Commercial
Interactive Media. Recalling his experience of outsourcing to
Vietnam, Commercial Interactive Media's director, Duc Do, says, "We
expected bumps along the way but what we encountered were holes the
size of elephants. It did not take long for things to go wrong and
it soon became evident that the level of detail we had to provide
was time consuming and inefficient."
Another UK -based outsourcer, who asked not to be named, had a
similar experience. "Our partner in Vietnam promised it could
deliver on our spec. However, the job arrived late, half done and
full of bugs. We were embarrassed in front of our client and nearly
lost the deal. We will certainly be more careful in the
future."
One of the ways to avoid such pitfalls is to use a third party to
project manage partner selection and the ensuing development
process.
This was the view taken by Research Vietnam having spent a year
analysing Vietnam's offshore potential. The company now offers
in-country project placement and management services through a
combination of technical staff in the UK and Vietnam.
"In essence, we are the eyes and ears of our customers. We take the
hassle out of partner selection and project delivery. Our English
and Vietnamese speaking staff combine technical know-how and
project management experience that strengthens the weakest points
of the outsourcing chain," says Stern.
Looking ahead
Vietnam's biggest challenge in the years
ahead is getting its message across to an international community
of outsourcers that are simply unaware of the opportunities
available.
Stern recalls, "Just last Christmas I told someone on a visit to
the UK that I was now based in Saigon and they asked me what it was
like to live around all those unexploded bombs everyday."
Andy Gent, UK chief executive of HSBC Vietnam, agrees that
exploding myths, rather than bombs, is the biggest barrier to the
growth of IT in Vietnam. "Significant effort must be made to market
Vietnam to an external world that still views the country with
dated perceptions harking back to the 1970s."
This article is based on analysis and comment from a report
entitled IT Vietnam 2002: outsourcing to an emerging market.
For a free executive summary and charge-out rate survey visit
www.researchvietnam.comOutsourcing to Vietnam
Pros:- Half the cost of India
- Skilled IT graduates
- Government incentives and tax breaks
- Pockets of development excellence
- Telecoms deregulation around the corner
Cons:- Fragmented market of fluctuating quality
- Poor English language skills
- Project management skills lacking
- Intellectual copyright violation
- Media laws restricts free flow of information.