4 Operating Models to build Effective Relations with your Offshore IT Partner

It’s hard to be you right now…

Your CEO is unhappy with the pace of software development and has asked you to expand your development team with offshore resources. Meanwhile, you have dozens of IT offshoring companies emailing you, but it’s impossible to distinguish among them.

This blog post will give you a high-level overview of different offshore operating models that you might consider for your company, the approximate cost of each and level of commitment that is required from you. Also, it will give you several tips you should take into consideration while discussing the details of a contract with your selected offshore provider.

We are going to talk about the following 4 operating models with offshore IT consulting companies:

  • Project-based
  • Dedicated team & BOT
  • T&M or Ad-hoc
  • Captive Office

Project-based approach

In the project-based model, you create a short list of software development companies that you plan to consider and ask them to bid on your project. Usually, you will get a quote with the expected delivery time and cost, although it will be difficult to find a company who will provide a road map of sprints, with the delivery dates of each iteration. This can mitigate your risk and keep the cost from blowing up unexpectedly.

Pros:

  • Lets you access specific skill sets that you lack. E.g., if you need to port an app to a certain mobile platform with which your in-house team lacks experience
  • Costs are lower than an onshore team and you don’t need to hire internally

Cons:

  • You don’t really get any leverage from the investment you make in training the developers on your business and your systems
  • You may get a product of questionable quality, and the risk of failure can be high
  • IT Contractor will not be flexible if you make a change request and usually add around 30% from the cost to manage risks

Price: medium

Your involvement: low, you provide your initial guidance, specs, and vision and wait for the results

Dedicated team & BOT

A dedicated team approach is the best practice if you have a long-run need for a cost-effective software development team. If you’re using an Agile process, where you release new functionality with each sprint, there’s always some new development to be done, as long as new customers and revenue keep coming in. So you would contract for a period of 2-3 years with an offshore provider who will provide a dedicated team of developers who remain on your team for the long run. This approach seems like a win-win for both parties: you get better results and your service provider gets a constant revenue stream.

Pros:

  • Having invested in ramping up the team to the point where they understand your product, your development process, and your business, the team gets progressively more productive as their knowledge and understanding grows
  • Better team spirit. Your dev team is motivated to show better results compared with the project-based model
  • You can take advantage of the offshore development company’s pre-existing recruiting capability, office, development processes, and tools
  • Costs may be lower over the long run since you’re making a longer-term commitment to the service provider

Cons:

  • Like it or not, you will need to dedicate a lot of your time to onboard the team, transfer knowledge, and provide initial guidance
  • You’ll need to invest time to develop a trusted team leader on the offshore side
  • You will need to cover sick days and vacation days for your team members

Price: Up-front cost may be higher, the long-run cost is lower

Your involvement: high at the beginning, medium after the team reaches a steady state

*Build/Operate/Transfer (BOT) when the offshore service provider starts to work with you on a Dedicated team basis and agrees to transfer the team to you after some period of time. So, for instance, at the end of a three-year contract, you might have the option to buy out the team from the development company, and the employees become yours. From this point forward, you will be the owner of the team and will be responsible for all operational issues in a county with different legal system and traditions including office administrating, people management and accounting.

T&M or Ad-hoc is an approach that might work for small companies that have some temporary increase in workload and the best way to pay hourly. Your service provider might have a partner of theirs who can provide the needed staff member on short notice. You’ll want to have transparent relations with your consultants so you have a clear understanding of who is doing the work. If your project start can wait for 1-2 months you might be better off asking your IT Company to provide you with their own internal resources.

Pros:

  • You have access to a pool of specialists for a short-run assignment: e.g. QA engineers, dev ops, UI/UX designers
  • You can ramp resources up or down quickly

Cons:

  • Higher risks of failure: the contractor may change the developer due to the low priority of your project for him
  • You may get an avatar of a senior developer, and somebody more junior than you expect may be performing the work
  • Your team may be comprised of an ad-hoc group of people assembled from sub-contractor companies

Price: low

Your involvement: high

In the “captive” offshore development model, you create a legal entity in the offshore country and build the software development center from scratch. This option may work if you are interested in hiring at least 25 developers. But it’s a lot of work to get going. You’ll need to hire a lawyer, hire an office manager, rent office space, hire team leads and hire developers, testers, contract for a cleaning service, etc. Doing all of these things means that this approach is going to take a lot longer to start up than the others. Also, you need to be prepared to visit your offshore office frequently, until you have someone who you trust locally.

Price: very high up-front, but can be cost-effective over the long run if you need to build a very large team

Your involvement: the highest

All of these are viable offshore operating options, depending on your needs. You’ll need to consider your long term goals, budget and the amount of time you’re willing to dedicate.

Good luck!