By submitting your email address, you agree to receive emails regarding relevant topic offers from TechTarget and its partners. You can withdraw your consent at any time. Contact TechTarget at 275 Grove Street, Newton, MA.
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."
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.
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.com
Outsourcing to Vietnam
- Half the cost of India
- Skilled IT graduates
- Government incentives and tax breaks
- Pockets of development excellence
- Telecoms deregulation around the corner
- Fragmented market of fluctuating quality
- Poor English language skills
- Project management skills lacking
- Intellectual copyright violation
- Media laws restricts free flow of information.