Tomorrow never dies (or will offshore development survive?)

"It's hard to predict, especially the future".
--Niels Bohr.

First value proposition of the offshore software development was saving [a lot of] money by employing software engineers from developing countries at much lower rates. As Developing countries’ economies grow at much faster rate and those gaps are going to be eliminated in the next 5-10 years, will offshore development still survive?

For some of the countries it’s already the case. Israel is one of the major offshore destinations and the cost of hiring an engineer there are not much lower than hiring an engineer in US. Do companies stop doing business with Israel? Not really. Well, many companies are still looking at the cost as a major factor and Israel is definitely loosing it’s offshore development market share, but I believe that as the rate gaps get closed offshore providers will have new value proposition that will keep them in business.

Many companies got burnt by letting someone else to perform one or several software development functions at a lower costs. Through much pain these companies understood that offshore software development has many success factors and these companies have changed their approach. These companies have realized that time zone difference, cultural differences and lack of face-to-face contact in virtual and distributed environments require great deal of management to succeed.

At the same time, offshore providers have also realized that they cannot get requirements, deliver software and call it for a day. In fact I remember an Information Week article few years back talking about Indian offshore providers and their inability to provide innovation. I do not believe that Indian engineers cannot provide innovation, I think that offshore providers have not looked at innovation as a value proposition, and frankly, US companies have not “put this line item in the contract”.

I believe that while many offshore providers might be out of business in the long run, the ones that will survive will have a game changing value proposition that most likely will be around innovation. The other alternative for those providers is changing the business model completely and using great talent pool for spinning off some start-ups.