Introduction to setting up an Offshore Development Center
In our previous articles on the SPD Group blog, we have covered various aspects of offshore software development, delving deep into the concepts of IT Staff Augmentation, Managed Services, and Dedicated Team models. However, there is a lot more we can talk about and even more information we can offer you in this area.
This time we will focus on the situation where you need a considerable number of experts (let’s say 40 or more) with access to a wider talent pool in a country that has an excellent business environment. In these conditions, it would make sense to consider building a dedicated offshore development center (ODC) for your organization. We have briefly touched upon this topic before; but, in this article, you will find a more detailed overview of the ODC and learn how it can help you meet your offshore software development needs.
Therefore, whether you require assistance in building your product from scratch, expanding an existing software product, setting up an R&D center, freeing up your in-house teams, or opening a separate branch office for an existing project in another country an offshore development center could be a viable option.
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What is a Dedicated Offshore Development Center?
An offshore development center is an office set up in a foreign country that houses a team of software developers, Project Managers (PM), and HR personnel, as well as any other required employees. It is essentially a full-fledged branch of an organization in a different geographical location.
An offshore software development center can be considered a company’s technical representative office. This means that it functions under the same brand and shares the parent company’s corporate policies. The teams in the ODC basically function as in-house teams, bringing value to the company and following its core business objectives.
Although a company’s head office determines the final structure of its offshore office, ODCs typically include the following roles:
- Project Managers
- Team Leads
- Software Engineers
- Front-End and Back-End Developers
- QA Experts (Manual and Automation)
- Web and UI/UX Designers
- Tech Writers
- The HR team and other office departments such as recruiting, marketing, etc. (optional)
Note: Having operational staff in the Offshore Software Development Center is optional. You can delegate accounting, legal support, HR payroll, and recruitment functions to a local vendor. Besides, it is beneficial to have a vendor as a partner as they can provide you with additional insights on the specifics of doing business in that country and help you with legal compliance.
This model is very appealing for both start-ups and well-established IT companies, as it enables them to set up a business presence in another country and have lower expenses at the same time. As most of our workforce is based in Ukraine, and we have many years of experience operating in this region, we can quote giants such as Samsung and Grammarly, which have offshore development centers in Ukraine, as an example.
Offshore Development Center Operating Models
1. Customer model
This model is more suitable for large enterprises. For instance, General Electric established their India-based ODCs 25 years ago.
With the customer model, the ODC operates as a subsidiary of the parent company. All the offshore team members are full-time employees of your organization, the only major difference being that the business unit’s operations are based overseas. This kind of ODC includes an on-site group of senior employees to make all the key decisions and manage the office otherwise. The development, testing, and execution are provided by local experts. A typical structure for the customer model can look as follows:
2. Contractor model
In this model, offshore experts are not full employees of your organization, which lets you save on overhead costs from salaries. Based on the requirement, you can easily hire specific experts for the subprojects and remove them whenever their services are no longer needed. To illustrate, a typical contractor model can look like this:
Although this model is more suitable for start-ups and small and mid-sized companies, it can be leveraged by large corporations as well. In this format of cooperation, the in-house product or engineering managers communicate with the Project Manager at the Offshore Software Development Center. All tasks are performed by the offshore team and reported back to the headquarters.
With this approach, you can focus on the marketing of your product or working with your in-house teams, while the ODC will perform a certain part of your product development.
When Do You Need to Set Up Your offshore development center?
1. The project scope is large
For a minor project, like creating a simple mobile app, you can easily use other outsourcing approaches. However, when you are building something massive that requires continuous support and updates, for example, an enterprise application for a Fintech industry leader, you may find the ODC approach more suitable. After assessing the project requirements to define the project scope, time, and cost estimates, set up a dedicated offshore development center, and follow your goals!
2. You need a large and diverse team
As mentioned previously, if you require 40 or more experts in your team, you should certainly consider setting up an Offshore Software Development Center. Additionally, while developing a complex solution, you are likely to be working with diverse, and sometimes hard-to-come-by Machine Learning, Data Science, and Cybersecurity experts. It would be a good idea to follow the ODC model and have those experts under one roof, which could be problematic with the other outsourcing options.
3. You are building security-sensitive software solutions
When your project contains substantial security-sensitive data, such as financial information or personal customer information, a data breach can entail devastating reputational and financial consequences. Hence, if you have a security-sensitive project and require a powerful cybersecurity team, the Offshore Development Center model could be a better fit than the other outsourcing approaches. Nevertheless, you can also have an in-house cybersecurity team as an alternative.
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Offshore Development Center vs Outsourcing: What are the Key Differences?
Although both the terms are often used interchangeably, there are some distinct differences between the two — let’s break them down!
With IT outsourcing, external specialists are hired to boost the development and deployment of your software solutions, quickly scale up the project, and achieve higher cost-efficiency. These experts continue to be the employees of your offshore software development partner and work with you only for the duration of a certain project. Your partner is responsible for meeting the deadlines and achieving targets. When the project is completed, the development team moves on to the next project, tackled by your provider.
Thus, hiring an outsourced team is a great choice for one-time projects, for example creating a website or Proof of Concept and MVP development.
In a customer model-based ODC, you are the employer of the entire team, as they are a part of your company. Nonetheless, you may need help from a local technology partner to form the team and set up an office. Your attitude will need to be more committed as compared to the scenario when people work with you on a temporary basis, and the results will depend on your team’s efforts. When your project is complete, you will need to decide what to do with your employees.
Let’s compare the two approaches on the following key points:
Being part of the project, software developers who work for product companies typically show more dedication and interest in the outcome of the project. With the Offshore Development Center approach, you have higher chances of attracting people with a product mindset who thrive on being part of something great. That said, you may come across outsourced developers with a high level of commitment too, but you can certainly expect more passion from employees with an ODC.
The outsourcing option is probably more cost-effective, but with the limitation that your project is not going to scale much. The ODC requires up-front investments and additional time to assemble a team of experts and set up a properly functional office. However, in the long run, you can expect a higher Return On Investments (ROI) from it.
You do not have any direct influence on the team of your outsourcing partner. The PMs on the side of your service provider can change the team composition or shuffle particular team members between different projects. With an ODC, you are in complete control of the management and decision-making.
Benefits of Building Your Own Offshore Development Center
Lower cost of software solutions delivery
In addition to the opportunity to pay lower employee salaries for the same level of expertise, you can expect savings in other expenditures such as payments for office rent, IT infrastructure-related expenses, or even taxes. This results in a reduced price tag for your software product’s development.
Access to a wide talent pool
Operating in a country with a developed offshoring market, you can tap into a massive talent pool of skilled IT professionals. When a country becomes a well-known offshoring and outsourcing hub, it attracts even more talent. Although there is no guarantee that you will get the best team of professionals even in the most favorable offshoring location, your chances of assembling a powerful team, capable of working with the latest technologies, will be higher.
Some other offshore development center benefits also include lower risks associated with intellectual property (IP) rights. In the customer model, you will be required to collaborate with a third-party organization only while setting up your ODC, and no outsiders will have access to the product during the development process.
Control and engagement
Every expert in the ODC will be a part of your team. They will act just like your in-house team, the only difference being their location. You can set up your management processes exactly the way you want, and expect more interest in your business from your workforce since they have a strong attachment to your company. Speaking of visibility, you can set up reporting processes in accordance with your requirements, and keep your finger on the pulse of the project.
Offshore Development Center Challenges & Risks
Contradictory pieces of advice
Opening an office in a foreign country usually requires that you consult with several law firms, accounting specialists, and financial advisors. They may provide you with contradictory information. To avoid this, it is advisable that you find a partner that has extensive proven experience in the region’s IT industry.
There are cases when local recruiters, appointed by a company fail to hire the necessary IT experts within a reasonable time to quickly form and put together an effective team. It is advisable that you use the services of experienced recruitment agencies or a partnering company to assemble your initial team.
It is important to set up a management structure that will balance visibility and power to facilitate decision-making locally. Not managed properly, your Offshore Development Center may potentially end up with the same communication problems many outsourcing arrangements have. You must ensure to have a project manager for each offshore development team, follow the Agile approach, and introduce reasonable communication practices.
Even under best-in-breed management and communication approaches, different cultural values are always a challenge when people from different countries work together. Hence, it makes sense to operate in a region with a similar culture. For instance, if you are from the US and want to set up an R&D center in Ukraine, Poland, Romania, or any other Eastern-European country from a cultural perspective, it could prove to be a better idea than opening an ODC elsewhere. This does not mean that everything will run smoothly, but the possibility of friction associated with cultural differences will be dramatically reduced.
The legal landscape and business policies of a foreign country can be a major obstacle in setting up and operating an Offshore Development Center. Make thorough research into this and consult a local legal agency to prevent any possible issues when you make a decision to establish an overseas business presence.
Just like with any outsourcing and offshoring arrangement, you should always be aware of the security risks. To mitigate these risks and prevent the leakage of sensitive information, robust network security must become of your ODC’s infrastructure. Additionally, you can make security audits and risk assessments on a regular basis to deal with the security challenges of your situation.
How to Set Up an Offshore Development Center
Conduct research and analysis
First and foremost, you need to know whether an ODC is a good fit for your organization overall. Consider some other outsourcing options too, like the Dedicated Development Team model, Managed Services, and some others. Make sure that the infrastructure of your organization is ready for cooperation with an offshoring partner if you choose to go with the Contractor model. Finally, before you consider establishing an ODC you must know for sure why exactly it is impossible to meet your software development needs locally and what kind of expertise you require.
There is a multitude of factors that positively influence companies’ decisions to establish ODCs, including lower salaries and operational costs, accomplished technical skills, suitable time zones, and cultural similarities. To promote a better understanding of the ODC model’s benefits, later in the article, we will also discuss the related rates by country.
Find a partner
With the Contractor Offshore Development Center Model, you will need to find a trusted software development company to represent your organization in a foreign country. Likewise, with the Customer model, you may require a local partner to set up your office and help you navigate through the local legislation, business, and political situation, or you can choose to do this with the help of your existing team.
Start the recruitment process
Whether your team is in charge of your recruitment, or you are seeking help from a local partner, you will require skilled experts in your new location. Some companies consider it imperative to enter a new market using their own brand. With the Offshore Development Center Model model, hiring people under your brand to work within your corporate policies can be an additional benefit. Professionals are more likely to join an established and well-known organization than a less known offshore software development partner.
Open an offshore software development office
While your offshore development team is being assembled, it is time to think about the office space. The location, availability of parking lots, security level, office planning, number of seats, and equipment are all very important factors for a productive working environment.
Get additional legal support
You may need the help of local lawyers or even the expertise of an agency to align with local laws and avoid any legal issues that might result in additional expenses.
Equip your offshore development office
Purchase all requisite equipment and set up adequate IT infrastructure for your new office, including computers and laptops, software, servers, security systems, and furniture.
Welcome new members
The onboarding of new employees starts and the first on-site meetings in the main office take place. Now your offshore development center has been officially inaugurated!
Keep HR payroll and accounting in check
This is probably one of the most significant features in the functioning of your ODC. You will require a department or an employee in the office responsible for salaries, payments, money transfers, health insurance, and leaves.
Popular ODC Locations
Often, the financial cost of building your offshore dedicated center will primarily depend on your employees’ salaries and rental costs. Let’s take a look at the most popular regions, suitable for opening an ODC.
Among the Asian countries, India remains the prime destination for offshore development center services, with 59% of respondents choosing this country, according to a survey by Deloitte. Additionally, India remains a country with the lowest salaries of software solutions developers.
In Asia, there are two leaders in terms of the talent pool—China and India. Both the countries have an impressive number of talented software engineers and STEM graduates (science, technology, engineering, and math).
India alone has over four million tech experts. Unfortunately, the skills of those experts are not always the highest. Yet, the fact is that India has both top software engineers and beginner-level developers. However, if you are a start-up owner with limited time and budget and lack experience in your niche, choosing to build Offshore Development Center in India may entail the risk of working with less proficient engineers who lack the skills to get the job done.
This region is a reasonable alternative to Asia, with more than one million IT experts available. Ukraine and Poland have the biggest talent pools in this region, with Ukraine alone having more than 1,500 software development companies.
With over 300,000 software engineers, Poland ranks 40th in the “the ease of doing business” rankings by the World Bank.
Ukraine is another standout country in the Eastern European region, with more than 200,000 software developers. While the annual salaries of software developers in the US constitute $110,000 +, in Ukraine you can find experts
with the same level of expertise in the $30,000–50,000 salary range. Additionally, Ukrainian software engineers have abundant experience in working remotely and operating as part of ODCs, and 70% of them have an intermediate to advanced level of proficiency in English.
What You Will Get With SPD
SPD Group has 15+ years of experience as an offshore development center services provider that offers the Contractor model. One of our prime examples of such cooperation is our partnership with PitchBook, a 12 times CODIE Awards winner. At the moment, the Ukraine-based offices under the PitchBook brand contain more than 200 experts who represent the SPD Group. Our offshore team has developed products for PitchBook from the very beginning, and it remains the key development force for the entire organization.
SPD Group can be your partner—open an ODC for you via the Contractor model or help you build Offshore Development Center via the Customer model using our powerful recruiting department. We can also help you with any kind of offshore software development services.
Please feel free to contact us if you need a consultation or require any additional information in order to choose the best approach for your IT project and the right offshore software development partner!
This is an office of the organization set up in a foreign country, consisting of software developers, management, and functional departments.
There are two primary ODC models, the Customer Model and the Contractor Model. The principal difference lies in the fact that with the Customer Model ODC team is your employees, and with the Contractor Model, the team in ODC is not your full employees.
The key benefits include lower software delivery costs, access to a wider talent pool, securing your IP rights, more control and engagement.
The most popular regions include Asia and Eastern Europe. In these regions, you may find a high level of software development proficiency of experts with reasonable rates.
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