Outsourcing vs. Opening an Offshore Development Center

In today’s globalized world, many companies are looking to expand their software development capabilities beyond their own borders. There are two main options for doing this – outsourcing development to an external vendor, or setting up your own offshore development center. Both have their own advantages and disadvantages. In this comprehensive guide, we’ll look at the key factors you should consider when deciding between outsourcing and offshoring.

What are Offshoring/Offshore Development Centers?

Offshoring means setting up your overseas subsidiary or development center to employ technical staff abroad. Common locations to set up an ODC are India and Eastern Europe, but offices can be located anywhere with affordable talent.

Benefits of operating offshore development center include:

• Cost Savings: While not as low as outsourcing, offshore team costs are still usually 50% or less compared to local hiring. The overhead is lower, too.
• Improved Quality Control: With your own team, you have greater oversight of code quality, security, and IP protection. You define the processes.
• Knowledge Retention: Unlike outsourcing, all the technical skills and knowledge stay within your company. This fosters future innovation.
• Direct Management: Teams are under your control, with direct lines of communication and quick problem resolution. Cultural alignment can be tighter.
• Scalability: You can rapidly ramp hiring up or down in your own center as needs change. No need to renegotiate contracts.
• Business Advantages: An offshore presence can put you closer to new markets, resources, and global talent pools.

The cons of setting up an ODC can include:

• Higher Overhead: While lower than onshore, you still carry more HR, legal, real estate, and administrative costs than outsourcing.
• Complex Setup: Establishing a foreign entity requires considerable effort, including legal hurdles, hiring, and infrastructure. Offshore project management also has a learning curve.
• Retention Challenges: Offshore team turnover can be high. This disrupts continuity and causes a knowledge drain unless managed closely.
• Isolation Risk: Physical separation from the offshore team can impede communication and collaboration. Close management is required.
• Long Ramp Up: Establishing an offshore center and achieving the desired productivity takes considerable time and effort. Benefits accrue over the years.

What is Outsourcing? Benefits and Limitations Explained 

Outsourcing software development means hiring an external vendor, usually in a foreign country, to handle all or part of your development work. The outsourcing provider takes full responsibility for recruiting staff, managing projects, and delivering solutions. Common outsourcing destinations include India, Eastern Europe, Latin America, and Southeast Asia due to lower costs and availability of skilled developers. You can hire remote developers from such locations at 1/3rd or lower prices and have a more diverse skillset and experience working on projects like yours. 

Some key benefits of outsourcing include:

• Cost Savings: Outsourcing can significantly reduce development costs, with hourly rates often 50-80% lower than hiring locally. 
• Access to Specialized Skills: Experienced outsourcing providers have access to wider talent pools, letting you tap skills that may be scarce locally. This includes niche technical capabilities or language skills.
• Flexibility: It’s easier to scale outsourced teams up or down as your needs change. This gives you more flexibility to respond to shifts in priorities or market conditions.
• Focus on Core Business: Outsourcing lets your own staff concentrate on core business goals rather than getting bogged down in development work. It frees you from HR duties and overhead, too.
• Speed: Pre-screened outsourced teams can be assembled rapidly, letting you accelerate development. Experienced providers can deliver solutions faster.

Potential downsides of outsourcing can include:

• Loss of Control: You have less oversight and control compared to in-house teams. Outsourced code quality can suffer without proper governance.
• Communications Challenges: Distance and time zone differences can hinder collaboration. Remedies like daily standups are essential.
• Hidden Costs: While hourly rates seem low, travel, management time, turnover and rework can eat away at savings. Careful vendor selection is key.
• Knowledge Leakage: Important technical and business knowledge can leak away from your company over time. Intellectual property protection must be addressed.

Key Factors in the Outsourcing vs Offshore Decision

Choosing between outsourcing versus an offshore captive center depends on carefully assessing multiple factors. Remember, it doesn’t need to be a this OR that decision. You can outsource certain aspects of your project whereas offshore other aspects. However, for most scenarios, if you are confused about which is the right choice, these factors might give you some better clarity to make a more informed decision – 

Strategic Considerations 

• Will an offshore presence help us expand into key overseas markets we are targeting?
• Do we want the flexibility of outsourcing so we can quickly reprioritize resources?
• Are there strategic benefits to having an offshore presence for domestic clients?
• How important is it to keep development capabilities consolidated internally?

Development Factors 

• Do we need access to niche technical skills or capabilities that an outsourcing provider is more likely to have?
• How critical is it for us to retain and build institutional knowledge within our own teams?
• Will an outsourcer provide better development processes, tools, and quality management?
• How important is partnering closely with development teams, which is easier with offshoring?

Cost Structure

• Based on hourly rates, outsourcing costs look substantially lower. But how do the total multi-year costs compare once we factor in overhead and management costs of offshoring?
• How much management time and travel is needed to work with outsourcing vendors vs. our own offshore team?
• Which option offers the most scalability and cost flexibility as needs change?

Will an outsourcer’s lower hourly rates beat your offshore overhead? Model out the true multi-year costs.

Management Bandwidth  

• Do we have executives with the availability and experience to manage an offshore subsidiary effectively?
• Will outsourcing allow our managers to focus more on core priorities?
• How much management overhead can we take on to monitor outsourcing relationships closely?

Security Needs 

• Is all our intellectual property highly sensitive, favoring an offshore captive center?
• Does outsourcing pose unacceptable risks for the security and privacy needs of our systems and data?

Quality Needs

• Is having direct control over quality assurance, testing, and code reviews critical?
• Can we cost-effectively enforce all required processes, security standards, and quality levels with outsourced teams?

Scalability Needs

• How quickly do we need to scale up development capacity in response to business needs or market opportunities?
• Does outsourcing offer more flexibility to ramp teams up and down on demand?

Integration Requirements

• How closely coupled will offshore development be with in-house teams or internal systems?
• Will outsourcing encourage knowledge and best practices to leak away from our organization over time?

For most companies, the choice is not black-and-white. A mixed approach using both outsourcing and offshore development can combine their relative strengths. For instance, you could outsource commodity work while keeping higher value IP and skills in-house offshore. Testing and QA work may fit better with outsourcers.

Best Practices for Outsourcing Effectively

If you do opt for outsourcing, how do you get the best results? Follow these key practices:

• Take Time Selecting Providers: Thoroughly evaluate multiple outsourcers on technical skills, English proficiency, cultural fit, controls, and costs. Check references diligently.
• Start Small: Begin with small, non-critical application development projects to test outsourcers before assigning bigger work.
• Define Specifications Clearly: Leave no ambiguity in what you want delivered and how. Set measurable goals and SLAs.
• Institute Oversight Processes: Require status reports, demos, code reviews, and metrics to catch any deficiencies early.
• Assign Internal Project Managers: Have experienced IT project managers oversee all outsourced work. This will head off problems.
• Visit Team Sites: Make regular trips to visit offshore teams to strengthen collaboration and alignment.
• Rotate Staff: If using multiple outsourcers, rotate projects among them to avoid too much knowledge residing in one vendor.
• Protect IP Entirely: Ensure comprehensive IP protections are in legal contracts. Never give outsourcers full access to code bases and systems.
• Focus on Long-Term Relationships: Sustained partnerships build understanding and improve execution over time. Avoid switching vendors often.
• Maintain In-House Capability: Always keep some critical technical skills and architecture knowledge inside to evaluate work.
• Coach Cultural Alignment: Encourage offshore teams to understand your business culture and share your values for smoother collaboration.

Setting Up Offshore Centers Right

Proper implementation and poor implementation of setting up an ODC can make all the difference in the efficiency and rewards you can gain and maximize through such a process. To maximize the benefits of offshore development centers, be sure to –

– Choose Location Carefully

Pick cities with the best infrastructure, laws, tax incentives, talent availability, language skills, and cultural fit for you.

– Invest Up Front 

Commit capital for office space, equipment, HR, legal, recruitment, and training to build solid foundations.

– Transfer Knowledge 

Rotate onshore staff overseas to transfer domain knowledge and skills to new teams. Phase in work gradually.

– Strengthen Communications

Establish reliable infrastructure for communications, including videoconferencing. Over-communicate to avoid isolation.

– Clarify Requirements

Institute processes for clear requirements gathering and specifications to prevent misalignment.

– Implement Robust QA

Offshore or third-party testing helps catch problems early. Perform code reviews remotely.

– Monitor Progress Closely 

Plan regular demos and rigorous project management via tools and on-site visits. Stay on top of milestones.

– Watch for Turnover

Offset turnover risks via competitive compensation, engagement, and training. Backfill key roles swiftly.

– Promote Collaboration

Build relationships between onshore product owners and offshore developers for better alignment.

– Plan Possible Expansion

 Leave room to scale to other locations. Multi-country delivery provides advantages.

– Manage Cultural Differences

Respect offshore team culture while ensuring adherence to your processes and quality standards.

Final Words

Done right, outsourcing and offshoring can deliver game-changing cost efficiencies, skills, scale and business agility. But the risks are also genuine, from IP theft to communications breakdowns. 

Define your priorities and requirements clearly, research providers thoroughly, phase in work gradually, and institute rigorous management and processes. With diligence and commitment, your global expansion can pay huge dividends for years to come.