Many recent IT market studies, including those commissioned by Gartner, IT Sourcing Europe, PMR Research etc, confirm the fact that a growing number of Western European and Nordic businesses are currently seeking ways to benefit from different options of software development sourcing. Thus, today’s companies are much more eager to engage in nearshore or offshore outsourcing partnerships and are offered a wide array of business models to choose from. In the recent past outsourcing companies mostly partnered with their offshore vendors (as outsourced nearshore development is a relatively new trend gaining popularity only nowadays) via project-based and dedicated development center models. While the first has always been considered as the model suiting best for short-term outsourcing benefits, the latter became famous and over-evangelized in the media as a long-term value generator. However, my thorough assessment of diverse business models and their factual capability to bring long-term value to the buyers of the outsourced software/web development services does not support the ballyhoo around DDC. Instead, it supports another less popular theory that DDC model is the major contributor to the failure of most of the outsourced projects. Further in this article I’ll try to explain how it happens and describe a true win-win model that has great potential to drive today’s software development outsourcing to the next stage of maturity and, as a result, to add flexibility, innovation and quality to the outsourced operations.
In the outsourcing context, Dedicated Development Center (DDC) is referred to as having full-time cost-effective developer resources allocated to work exclusively on client’s projects for a prolonged period of time, i.e. as an extension of client’s organization in the nearshore or offshore country. IT services suppliers who want to partner with their clients via DDC are ideally supposed to provide all of the necessary resources, facilities and project teams that correspond to client’s business needs, culture, mission, objectives etc. The client is ideally supposed to pay a fixed price for the received services. The key word here is ideally. As a former marketing associate I know the kitchen of DDC at my fingertips. And the reality is far from the ideality. Normally, within DDC the IT vendor provides the client with its on-staff developers and promises their full-time exclusive engagement in the client’s project. But because most vendors want to save costs and earn as much as possible from their clients, they prefer taking the most from their on-staff developers rather than hiring new people (who 100% match the client’s project requirements) and spending additional costs on training, orientation, taxes etc. So, what they do is using the same people on multiple clients’ projects, encouraging them to work overtime and increasing their compensation once in a while. Of course, I’m not trying to say that all of the providers practice it, but believe my experience – most do! As a result, burning the midnight oil brings more harm than value: software developers and testers work on projects while being tired and exhausted, have diffused focus due to engagement in two or more projects and tend to look for better employers and higher salaries. Such situations inevitably lead to delayed project delivery, unmet milestones and staff turnover. So, when offloading their software development projects to a third party via DDC model, clients have no idea of the actual state of affairs with their vendors. Eventually, they are surprised why the actual incurred costs of the outsourced services far exceed the contracted ones and they manage to save only 10% or less from their outsourced development. It mainly occurs because they do not know that in DDC model, in most cases, clients pay for everything, from vendor’s service fees to infrastructure improvement to project staff replacement and/or promotion to project managers’ pay increase etc.
The bad news is that no matter how thoroughly you study your DDC contract, you are almost always doomed to face the hidden costs of outsourcing and pay overheads. But the good news is that there is a much healthier alternative – a Client Own Team model. It is an innovative business model that 100% shapes the hallmarks of Outsourcing 2.0 – the next stage of outsourcing maturity characterized by agility, flexibility, innovation and sustainability. Unlike DDC, in which the client has to rely on the vendor’s project management, retention strategy and honesty, Own Team model allows the client to have 100% managerial control of every tiniest detail related to the own outsourced project. Within this model it is the client, not the vendor, who hires people to complete its project, sets up each team member’s compensation and benefits, creates its own retention/promotion/training strategies and works directly with the team avoiding any project management from the vendor’s side. In short, it is equivalent to running own IT department, but for a much lower price and with no administrative headache, as it is the vendor’s duty to provide the client with appropriate office space and other necessary resources for successful project completion. The client’s own team can work independently from the vendor’s IT infrastructure, i.e. it can have its own room and room access system, its own dedicated server or remote access to client’s corporate server in the home country and own outsourcing management to keep the knowledge in-house, avoid misunderstanding and better protect corporate data privacy. The model also allows clients to properly evaluate each outsourced team member’s contribution to the project, replace developers with better specialists and reduce/eliminate staff turnover by different creative incentives.
But the greatest advantages of the Own Team model are focus on long-term outsourcing relationships and pricing transparency, as the client company normally pays a fixed price comprised of each member’s salary on the outsourced team and vendor’s service fee. My raw calculations show that managing own outsourced team in a low-cost Eastern European country like Ukraine would cost a Western European client from EUR 1,800 to EUR 2,700 per person per month depending on developer’s seniority, technologies used and location (this cost includes infrastructure, tax, all social benefits, salary and vendor’s profit). And this price will remain flat all the way in the project. In DDC model managing the same team would cost the same, but the price may vary from month to month due to attrition management and extra bug/error fixing because of vendor’s project management failures etc and the overall long-term savings from the outsourced development will be much fewer than in Own Team model.
Considering today’s stringent intellectual property (IP) protection concerns and high staff turnover rates, Client Own Team model seems to be the best solution to these and other challenges. However, this model works best with nearshore outsourcing, as it requires very frequent trips from client to vendor and the shorter the distance between the client and its outsourced team, the more effective the communication with the own team and the lower the travel costs. Another huge BUT of this model is that the client company should be overly selective in its choice of the own project management and outsourcing partner, as partnership with an inexperienced manager and/or vendor can ruin the relationship in a split second and lead to the entire project failure. But believe me – once you take time and thoroughly evaluate each prospective vendor’s Own Team model capability and projects portfolio, ask competent consultants and peer companies for references and make the right decision, the game will be worth the candle!
Author: Viktor Bogdanov, IT Sourcing Europe