Outsourcing to Vietnam

By Marc Lopatin

This emerging though still rough frontier for low-cost software development is showing signs as a viable alternative to India

If someone offered you a 90 percent discount on your offshore development costs, guaranteed almost zero rates of programmer attrition while working on your project, and threw in promises of wonderful customer service, you'd probably think the IT slowdown was causing some developers to take leave of their senses.

But such temptations have already induced the likes of Anheuser Busch, Bayer, Cisco, IBM, Nortel Networks and Sony to outsource software development projects to Vietnam - either directly or through third-party developers with an onshore presence in the United States and Europe. In fact, about 30 software development companies are currently operating in Vietnam. Some, such as Atlanta-based Paragon Solutions, are U.S.-owned. For others—companies such as Glass Egg Digital Media of Ho Chi Minh City, for example, which has U.S. sales and liaison personnel and a client base that includes publishers Harper Collins, Simon and Schuster and McGraw-Hill, as well as Disney Interactive—Vietnam is truly home. The result is that while China and Singapore tend to hog the region's IT headlines, Vietnam is slowly emerging as a viable alternative.

It's Not India

Cogita Solutions of San Francisco chose Vietnam as an offshore development center after spending much of last year trawling South East Asia for a vendor. The company finally cut a deal with Vietnam's largest (and state-owned) IT company, The Corporation for Financing and Promoting Technology (FPT), which—despite this exalted status—still employs around just 200 programmers. The deal will ultimately pave the way for the development of enterprise-level projects, says CEO Brad Reynolds. "If a company our size goes to India, no one is going to get excited—we're not Sun or IBM. But in Vietnam, service levels are much higher for smaller projects [from companies like ours] because the market is still emerging."

And it was for precisely such reasons that Hong Kong-based Web applications company Diffinc Innovations decided on Vietnam, after experiencing quality problems in India. The company actually plans to close in-house development centers in China and Singapore and replace them with operations in Vietnam, explains CIO Paul Gresham. "We are happily dealing with Vietnam. While it is true there is a lack of spoken English at the lowest levels, the understanding of technical English specifications is far greater than it is in China or India."

Before making a final decision, Gresham scrutinized the ability of senior and midmanagement to adequately control the development process. "Managerial support, teamwork and technical skills are by far the most important factors. We were very impressed by the industry's team spirit and skilled management, which sets Vietnam apart from other development centers across the region," he says.

Foreign Intrigue

On paper, at least, the attractions of Vietnam aren't hard to spot. Industry observers claim that developing software in Vietnam is 90 percent cheaper than in the United States, and between one-third and one-seventh of the cost of developing in India. Moreover, IT companies in Vietnam retain key staff and keep project teams together for months at a time. Low rates of attrition in comparison to Indian and U.S. onshore development ensure continuity and that familiarity grows between client and contractor.

Even so, transforming Vietnam into an offshore development center requires a leap of the imagination. For anyone thinking of outsourcing IT projects there, an understanding of Asian business values and a saint-like patience for dealing with Vietnam's legendary bureaucracy are still prerequisites. And Vietnam indisputably remains a nation of farmers rather than developers or other high-tech folk—statistics show that 80 percent of the population, 80 million people, still live off the land. In addition, the country's IT infrastructure remains remarkably poor by South East Asian standards, while the copyright notion is treated as little more than a Western eccentricity. Oh yes, and the military remains a big player in the world of commercial business—something to bear in mind when contemplating outsourcing projects with even the faintest defense ramifications, provided the U.S. government would even allow that to be sent offshore.

There is very little accurate market data available about IT in Vietnam, and what there is can sometimes unsettle even the most seasoned decision maker. Bandwidth is both limited and expensive, for example, as Internet access is owned and controlled by state-owned monopolies. A 128k leased line currently costs $2,000 per month, and international phone calls are among the most costly in the world.

The choice of potential location is also constrained. Vietnam's fledgling IT industry is largely a tale of two cities and is likely to remain so-the capital Hanoi, and the country's real powerhouse, Ho Chi Minh City, in the south. It's at Ho Chi Minh City, for instance, that Vietnam's most modern software park, the Quang Trang Software City, opened in March 2001. This development will, when complete, accommodate 10,000 programmers.

Being There

Despite those obstacles, telecom giant Nortel Networks has been in Vietnam since the early 1990s, and is well acquainted with the pros and cons of doing business in the country. Alex Pierson, vice president of Nortel's Enterprise Business Networks division, which has an annual turnover of $1.6 billion, urges caution, but maintains that Vietnam is well worth a look.

"American CIOs engaged in software development should be looking further than India, where costs are rising," he says. Even so, he warns that Vietnam is an emerging market in which uncertainty and sudden change are constant threats to the value creation of sound outsourcing. "Vietnam is no place to come for a one-off project. As an emerging market, the country should only be approached on a mid- to long-term strategic basis," Pierson stresses. "We learned the hard way that it's no good tying up costly onshore resources to manage a botched project overseas. Value creation is lost and a new solution must be sought."

To prevent falling into such pitfalls, Pierson recommends that interested CIOs seek out a local partner. Nortel works with TMA Solutions of Ho Chi Minh City, the largest privately-owned developer in Vietnam, with more than 100 highly-trained programmers. The company will soon start work on Nortel's Shasta line, developing software to run high-speed switches for digital data networks.

"We feel very confident outsourcing to TMA," says Pierson. "The skill-set of their best developers is on a par with anything in the United States and India." Equally important, he says, "the company employs experienced expatriate workers in key management posts to provide an interface between ourselves and the Vietnamese project teams."

Nortel first began working with TMA in 1997, becoming aware of TMA through one of its U.S. employees who is Vietnamese. Certainly, the potential for this kind of connection is there: around 1 million expatriate Vietnamese live in the United States-a significant number of them working in IT.

"The importance of having someone who understands the way business is done in Vietnam should not be underplayed," Pierson says. "Whether it's a local contact or a Vietnamese employee, someone who can explain the cultural and political ramifications of outsourcing to Vietnam is invaluable."

The advice is echoed by Eric Bruner, director of Enterprise Technology Solutions at RWD, a U.S.-based developer of education software, and a client of Paragon Solutions of Atlanta, which has offshore development centers in India and Vietnam. "If you're going to outsource to somewhere like Vietnam, you have to take the time to learn the culture of your team. We have not done this well enough ourselves yet," Bruner admits. "You have to trust these people to develop your application when you're sleeping."

Looking Forward

A growing number of the small band of international observers familiar with Vietnam's IT industry believe that the moment has come to place that trust. Vietnam is a young country—half the population is under 30 years old—and a growing proportion of the economically active population consequently tend to regard the war with America as ancient history.

In addition, the government abandoned socialist planning in the late 1980s, mindful that the forces of globalization could condemn Vietnam to poverty unless it found a niche beyond the comparative advantage of cheap factory labor. An urban elite is slowly emerging, just as it did in India, and is beginning to provide the knowledge workers of tomorrow. Last year, the country's government set an objective of training 50,000 IT workers by 2005. An Indian training company Aptech is designing courses, while an aid package from the Japanese government provides funds.

"As international companies become more cost conscious they will look to Vietnam as an alternative to India. If the government can provide a stable investment climate, the young intelligent and dedicated human resources of Vietnam will provide the rest," says Anil Sinha, an analyst working for the World Bank, who has watched the IT market evolve in Vietnam during the past few years. Nortel's Pierson agrees: "Fundamentals are in place and improving all the time. The IT industry could take off here—it really could."

Marc Lopatin is a freelance journalist based in Ho Chi Minh City, Vietnam. He can be reached at marclopatin@onebox.com.