Why nearshore IT development is the best strategic choice for Western Europe’s VC-backed companies

Posted: April 19, 2010 in Benefits of nearshoring

So, you have a bright and innovative idea and want to turn it into a successful and profitable venture? But you have to make a long way prior to putting it on plate, especially here, in Western Europe, where taxes are high, labor rules are rigid and financial support is very scarce.  You also know you’ll need to build up a positive image and track record from scratch, which will certainly involve a lot of time consuming and expensive advertising and marketing efforts. And, of course, you’ll have to establish a strong web presence, as no business is possible without e-business in the 21st century.  If you really want to skim the cream off your business idea in the future, be ready to invest a lot in development and maintenance of a state-of-the-art IT function today. Even though e-business generally reduces market entry barriers, you still have to wait long for return on investment due to necessity of winning client confidence first. In short, if you have a great idea, but a small capital to put into it, you’re nearly doomed to end up as one of many ‘promising’ early stage companies, with no revenues and increasing operating losses.

But don’t worry – ultimately, there’s solution to every problem! You should seek external sources of financing your business. Venture Angels are a good option to consider, as they help “promising” companies like yours to grow into successful businesses. However, according to the latest Dow Jones venture statistics, despite the fact that in Q3 2009 VCs’ investments in Western Europe increased by 23% from Q2, the investors are still very selective in whom to support. VCs normally invest in company’s infrastructure and balance sheet until it becomes sufficient in size and credibility. In essence, VC purchases a stake in your idea, nurtures it for some time, gains profits and exits, leaving you on your own. In essence, venture money is not long-term money. But today, in the post-crisis times, venture capitalists agree to stretch their funding over a longer period of time, as incoming revenues are very hard to forecast. To be eligible to the stretched venture-backed funding, you must find a cost effective, yet convincing solution. In addition, you need faster time to market to ‘leapfrog’ the competitors and begin to cash in on your product/service as early as possible, while it’s still unique and fresh. In short, your solution should be dynamic, scalable, flexible and cost effective. To push start-ups to find such a solution, many Venture Angels encourage them to try to take advantage of reduced IT development costs, which is often associated with offshore outsourcing. The Dow Jones statistics further reveals that start-up companies, opting to use IT outsourcing, are to a significant degree outnumbered by those who do not rely on this strategy. And that is true, you may say, as start-up growth companies have:

  • no clear roadmap,
  • immature software development setup,
  • not as good a chance of attracting qualified IT talent as the large multinationals do,
  • scarce managerial bandwidth,
  • difficulty of cross-cultural communication, and
  • fear of losing intellectual property

As a start-up growth and VC-backed company, you typically believe that:

  • outsourcing is for large companies only,
  • outsourcing requires a lot of people to be involved in the project,
  • outsourcing requires a very well defined IT function,
  • although offshore software engineers cost a third as cheaper as the domestic ones, they are only half as productive, so the game is not worth the candle

As a result, you reject the idea of outsourcing and limit yourself to the scarce resources and IT specialists left inland by the bigger competitors. But you’re totally wrong! There’s a cost effective, yet convincing solution – to locate your IT development nearshore!

As a start-up business, you critically need to have control over each spent penny. That is why traditional models of IT outsourcing that may fit big and well-established companies do not work well with the early stage and VC-backed ones. For instance, a big company can afford to tell its Indian vendor that it wants to move its billing system from Cobol server to Oracle’s Sun server, pay additional $2 million and wait without taking a beating for 6 to 8 months to have the work done. You do not have such a privilege and cannot waste your time and money, if you want to ‘keep the head above water’.

Instead of enjoying ‘slim pickings’ at the domestic market and in order to use your VC’s money in a most efficient and optimal way, why not consider looking out for some innovative IT outsourcing services providers in Central and Eastern Europe (CEE) and leveraging your IT excellence with their help? Unlike traditional and process-packaged offshore outsourcing suppliers, who are used to the idea of being the winners of the global outsourcing market and, thus, focus on increasing the clients’ number rather than improving the service level, the CEE software companies are more energetic and enthusiastic about attracting new clients and retaining the old ones. Therefore, they’re very inventive in achieving an unsurpassed mix of technology innovation, cost effectiveness and top quality. With some CEE providers you’ll be able to insource your own IT development team nearshore, which will allow you to keep the knowledge in-house and have full strategic management of your IT project and each team member, while your outsourcing partner will be taking care of your HR, administrative and legal issues. As a result, you’ll be able to:

  • save 40-70% of product development costs (e.g., full-time equivalent (FTE) of London-based IT team-member costs around 6,000/month, while, say, in Ukraine it is only nearly €1,500/month)
  • build a world-class team of IT developers for less money and free of administrative hassle
  • get instant IT consultancy and start-up support
  • receive just one invoice per month for the entire team (and you do not deal with the complexities of tax legislation, employee insurance, social security payments and other overheads related to setting up own IT operations in low-cost neighbor countries etc)
  • have an Agile or SCRUM development methodology, which is flexible and adaptable to your rapid requirements’ changes
  • dedicate 100% of time to your core business competences and product’s promotion
  • significantly accelerate time to market
  • get access to as qualified IT talent as in your homeland
  • provide your Venture Angel with a cost effective R&D solution to allow stretching the funding over a longer period of time

Doesn’t it sound like a great incentive for start-up businesses whose key strategy is to gain a competitive advantage and to quickly bring product to the market?  Why not admit it – when you have top tier investors standing over your shoulder and pushing you to be more effective, doesn’t nearshore outsourcing seem to be the most effective option for growing your idea into a successful and profitable business?


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