MAKING THE LEAP TO OFFSHORE OUTSOURCING: Choosing the Right Model
by Cepios Offshore News

The decision to outsource software development offshore is a decision more and more companies are making. While most large companies have already made the leap, it s also a big question many small to medium sized enterprises (SMEs) are seriously considering. If you are an SME, there are a lot of unknowns, and you ve likely heard a few horror stories about outsourcing. You may question the quality you ll receive, and the political climate is making such a big issue of outsourcing that you re unsure now is the right time. These are all valid concerns, but you have other concerns too. You re finding you can t charge your clients the same rates for technology services as you could before because your competition is undercutting you. How can they do it you ask? The answer may very well be that they are outsourcing offshore. So maybe the question you should be asking isn t whether outsourcing is right for your company, but how will you survive without outsourcing?

Offshore Outsourcing Models

Choosing the right offshore outsourcing model for your company is a critical decision, which must be made with utmost care. Choosing the wrong model can have drastic consequences later on. Of all the variations of offshore outsourcing models being used today, we will look at the four primary models which all the others are based on:

Project Outsourcing

 When many executives think of offshore software outsourcing, they often think of the traditional project outsourcing model. This is the most common outsourcing scenario in which an offshore service provider is identified to provide a service on a per project basis. Advantages are that it is typically faster to implement and involves less risk if the right partner is chosen. Disadvantages include loss of control, lack of vendor flexibility, and quality and timeline uncertainties. This is the most common model, especially among SMEs, because of the ease of entry.

Offshore Joint Venture

The offshore joint venture used to be a very popular model as it saved organizations money since expenses, resources, and workload were all shared with the joint venture partner organization. Just as a joint venture is created in the United States, creating a joint venture with an offshore company involves combining resources to achieve stated objectives. Participating companies share ownership of the venture and responsibility for its operations. However, they usually maintain separate ownership and control over their operations outside the joint venture. Joint ventures can save organizations money since resources, expenses, and workload are all shared.

Captive Offshore Subsidiary

In the past joint ventures often produced satisfactory results, but as outsourcing has evolved more companies have discovered the advantages of starting their own offshore subsidiaries. The primary advantages to the captive offshore subsidiary model cited by companies which have pursued it include more control and flexibility and lower prices on a long-term basis. Corporate cultural issues are also often mentioned as a reason for the success of subsidiaries. The subsidiary model enables companies to pursue models which are more aligned with their internal corporate cultures. As a result this is what most of the Fortune 500 and Global 1000 companies are doing today. However, the primary drawback to the captive offshore subsidiary model for SMEs is that the initial required investment can be a prohibitive expense of hundreds of thousands if not millions of dollars.

Offshore Staffing

The alternative model many SMEs have begun to pursue is something called Offshore Staffing. When most people think of staffing, they often think of staffing an office or hiring employees. Offshore staffing is a little different, but the concept is the same. You essentially hire people, but instead of working on-site in your office, these resources work from a vendor s office offshore and are completely dedicated to serving your company s needs. Essentially these resources become virtual employees of the client company. This model is a hybrid of the project outsourcing and the captive offshore subsidiary models but comes with advantages. These include more control over development processes without the added burden of maintaining an office. The disadvantage is that it can require more effort on the part of the client to manage the offshore team.

Outsourcing vs. Staffing for SMEs

Most SMEs find the Captive Offshore Subsidiary model to be cost prohibitive. They also often lack the cultural expertise necessary to establish and run a subsidiary office offshore. Offshore Joint Ventures are somewhat more attractive, but they too include the drawbacks associated with the Subsidiary model. That leaves two options, Offshore Project Outsourcing and Offshore Staffing.

Most SMEs interested in outsourcing offshore opt for the traditional project model, but they should be looking at Offshore Staffing as a viable alternative if they are truly interested in cultivating a long-term, successful outsourcing model. The advantages of traditional project outsourcing include fixed costs, less drain on in-house management resources, faster time-to-deployment, focus on core activities, and access to critical skills not available in-house. These are all valid assumptions, but the reality is often less than desired. Poor planning and change requests affecting project scope often lead to fixed costs  ballooning out of control, which in turn put projects behind schedule. Outsourcing so management can focus on strategy and other core activities works until the project hits a roadblock at which time management is forced to put everything else on hold and put out fires.

Offshore Staffing offers a unique opportunity to companies that understand its advantages and are willing to learn how to manage offsite resources. These advantages include truly fixed monthly costs, the ability to manage and control offshore staffing resources and rededicate resources as needed. Additionally, all the advantages of the traditional project model also apply, including fixed costs, less drain on in-house management resources, faster time-to-deployment, focus on core activities, and access to critical skills not available in-house.

Conclusion

 Whether you decide to outsource or not is a decision only you or your company can make. Once the decision has been made to outsource offshore, determine which outsourcing model is right for your company. Beware of quick fix solutions and do your homework to identify the right model for you. Avoid lowest price vendors as there is usually a reason they are priced so low.

Done right, offshore outsourcing can open a whole new realm of possibilities and alleviate many of the pressures of doing it all onsite with in-house resources. Outsourcing is here to stay, and adopting a successful outsourcing strategy will enable you to better contend in today s ever competitive software services market.

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