The two popular outsourcing models discussed in this blog post are a dedicated software development team model and an offshore development center. Both help to avoid costly recruiting processes and remove the challenges of team retention and upskilling when dealing with local hires. At the same time, you can use them to access the best talent that will be available just when you need it.
Let’s determine the difference between the two outsourcing forms and decide which is the best for your project. By the end of the article, you’ll learn:
Share your project details with us and we will offer you the most appropriate form of cooperation with a development team.
We’ll start with the core factors driving their popularity and identify current tech labor market trends in the USA.
Our analysis of the tech hiring market data provided by Wired, CNBC, and other resources suggests that the US software development labor market is experiencing a challenging time. The number of job postings in the industry is falling, while big tech companies are laying off their staff to stay afloat. However, despite shrinking hiring plans, many SMEs and companies outside the traditional tech industries still demand software developers.
Demand for tech skills in the USA:
Digging deeper, we see that some tech positions remain unfilled because of the local area's limited reach of candidates whose skills and experience match the requirements:
“There are two distinct trends in the tech job market currently. On one hand, there's a demand for diverse expertise, where individuals can work at the intersection of various disciplines. Typically, smaller companies and startups seek such versatile professionals. On the other hand, larger enterprises are increasingly seeking specialists with deep expertise in specific fields or topics”.
Many businesses seek alternatives to in-house hiring to optimize costs and reduce time-to-hire. This is when an offshore development center and a dedicated team model enter the game.
First of all, we need to begin with the offshore software development center meaning and provide the definition of this term.
Let’s decode the definition to see what the model genuinely offers. When using this option, you will:
As you can see, this form of cooperation presupposes working with a service provider based outside of the client’s home country.
This company provides a physical office that houses a team of cross-functional specialists, including developers, software engineers, QA specialists, administrative staff, etc. The head office defines the number of team members and their roles. Coordination between onsite stakeholders and offshore teams requires a local project manager who thoroughly understands the business requirements and development processes.
When opening an ODC team office in a foreign country, you create a legal entity that acts under your brand name and officially represents your interests on the market. This local partner independently deals with legal regulations, accounting, HR-related issues, and other tasks. That is why you don’t need to send operational resources overseas to manage problems like office repairs and payroll taxes or learn a new language to understand local regulations.
1. Choose the right location.
Indeed, not all countries are created equal in providing the best conditions for setting up an offshore software development center. For example, imagine establishing your local office in a small town with limited access to relevant professionals. The same applies to choosing the correct country as well. You can access low rates and not deal with the bureaucracy but eventually face a skills shortage. And that can lay a heavy burden on the project’s timelines. Therefore, it is necessary to shortlist a couple of outsourcing destinations by specific criteria:
Here’s a curated list of top offshore software development countries in the world.
2. Select the right vendor.
The right ODC company is the one that demonstrates reliability and has a proven track record of successful projects. Other factors to consider are the following:
3. Choose the suitable model.
You can leverage offshore development center services using different cooperation models with the chosen vendor. They include BOT (build-operate-transfer) and managed ODC business practices. You need to navigate the peculiarities of each model to make the right choice and invest in the most appropriate solution for your project. Let’s have a quick overview of the two options.
| BOT | Managed ODC |
|---|---|
| The client contacts the local vendor in a chosen outsourcing destination. The latter handles the organizational part of setting up a development center. They also hire employees, build the necessary infrastructure, and solve legal issues for the client’s company. In the final stage, the vendor transfers the entire operations to the client. | This model also requires a vendor to set up and operate the development center on behalf of the client. The vendor is responsible for handling the administrative and organizational parts and managing payroll and accounting. Thus, we can genuinely talk about the client establishing a branch office with a managed offshore development center in a foreign location. |
4. Initiate recruiting.
To start the recruitment process, you need to create job descriptions for all vacancies and transfer them to the service provider. This data enables researchers to scan the labor market and identify the pool of relevant candidates. When recruiters find the best talent for your company, the next step is to interview them and pick the most appropriate candidates. Finally, evaluate both the soft and hard skills of your future employees.
You must also source local administrative staff to manage ongoing tasks, finances, taxation, legislation, and other aspects of the ODC’s proper functioning.
5. Organize workspaces.
If you want to start working in a separate office, renting one and equipping it with proper infrastructure is necessary. You need to collaborate with local real estate professionals to shortlist the best locations for the team. When you find a suitable office space, purchasing and maintaining hardware and office equipment is necessary, as is establishing a security system and managing other administrative tasks.
6. Hire the team.
Once you’ve finished the candidate selection process, send job offers to the best talents, and let the first employees get to work. Upon arrival in your company, ensure a productive onboarding process for all the newcomers.
7. Get the project started.
Everyone on the team should know their area of responsibility and their role in the project. Remember that every developer, HR manager, or accountant needs to realize whom to escalate any questions and suggestions.
What happens upon the project’s completion or failure? If the project is closed, the company must dismiss every team member, remove the legal entity, and terminate local legal contracts without violating local laws. It is necessary to fulfill all obligations to the vendor and other interested parties.
We will discuss the risks of setting up your offshore development center a little later. It is worth mentioning, however, that current conditions in the labor market can cause additional challenges. Many software developers and tech experts are accustomed to remote-first policies and work from home. Creating the offshore development center may become rather complicated as they are looking for positions that will allow them not to attend offices. However, there are alternatives. One is to obtain a dedicated team model service, which resembles the ODC’s offering but lets you avoid some challenges.
As an experienced company hiring senior software engineers and entire teams globally, we can develop a tailored solution for your specific request. Schedule a free consultation with our specialists.
Think of this model as a way to supply the specialists with relevant skills to address the challenges of the given project. In this case, you get the necessary resources, which extend your in-house team and maintain focus on the tasks.
Instead of hiring and recruiting the best candidates yourself, you delegate that task to the chosen software development vendor. As a result, there is no need to supervise new hires, check their technical skills, and evaluate their performance. All these tasks remain the vendor’s responsibility.
We can create a dedicated software development team per your needs!
With this model, large and long-term projects pass massive workloads to dedicated remote programmers. As a client, you can control the process and adjust the workflow if needed. That gives you a certain amount of convenience while you can focus on core business tasks and have peace of mind.
You have two important tasks when planning to start cooperation with a dedicated software development team.
The first is to create a list of requirements for your dedicated project team. You need to understand how many specialists you want to work with and what skills and knowledge they should have. Though these requirements are essential for assembling a team, do not worry if something may change after the beginning of your project realization. This model allows excellent flexibility; you can always introduce updates when needed.
“If you partner with Geomotiv, we’ll make that process even more straightforward, even if you have stringent deadlines or exotic requirements. Senior recruiters in my team know which requirements to collect before hiring a dedicated team for your project. We have developed a comprehensive framework for assessing your hiring needs to match you with suitable candidates on the first try”.
The second task is even more responsible than the one mentioned above. You must find a software development partner to create a dedicated team. How can you do it? You can use Google or rely on the data of platforms such as GoodFirms, Designrush, or Clutch, which act as a one-stop shop for those looking for service providers. Moreover, you can find a vendor based on the recommendations of your business partners or friends who have had successful experiences in such cooperation.
What factors should you consider?
Reasons why Geomotiv should be on your vendor shortlist:
Say you’ve chosen Geomotiv for hiring dedicated development teams. What will be the further steps of our cooperation?
Our fine-tuned hiring process ticks like a clockwork. Share your requirements and provide scope estimations – the rest off your shoulders. The team is ready for action.
Thus, companies have several choices when moving offshore. In this article, we have under consideration only two of them: creating an offshore development center or hiring a dedicated team. Of course, your decision should depend on a whole list of factors. So let’s consider them and identify the strong sides of each outsourcing option.
| ODC | Dedicated team | |
|---|---|---|
| Workload | All tasks can be delegated to the offshore development center: administrative and organizational to development and other technical ones. | The model best suits projects with a constant and sizable flow of ongoing tasks. Project teams can focus on one task and then progress to another with time. |
| Project’s length | Both models involve hiring full-time specialists and fit long-term projects starting from 1 year. | Both models involve hiring full-time specialists and fit long-term projects starting from 1 year. |
| Upfront costs | The creation of an ODC is associated with relatively high initial investments. However, thanks to the possibility of working with developers from abroad, your expenses will be lower than the development and office maintenance costs in the USA. | There is no need to invest in setting up infrastructure and office equipment. Clients pay monthly salaries to every team member on pre-discussed hourly rates. |
| Branding | Your company promotes its brand and culture in a foreign country. As a result, it gets closer to target customers. | You don’t get a legal entity in a foreign country. You get only the team and their development services. |
| Team size | The number of team members may vary, but they are usually large (10+). | Team size can vary. As a rule, it is recommended to have at least three specialists (two developers and one QA). |
| Team composition | All kinds of specialists, from engineers to tech writers and accountants. | Tech specialists as per project’s requirements. |
| Headhunting | A local recruiting team sources and recruits candidates. | A local recruiting team sources and recruits candidates. |
| Control | Full control under one brand. | Complete control due to a transparent cooperation. |
| Scaling | Limitless scaling opportunities. | Limitless scaling opportunities. |
| Security | Comprehensive security: - Sensitive information is protected; - NDA is always signed; - IP is never shared with third parties. | Comprehensive security: - Sensitive information is protected; - NDA is always signed; - IP is never shared with third parties. |
Otherwise, the whole process won’t be convenient and efficient for either of you.
Geomotiv’s global hiring capacity lets you engage software developers with rare and unique skills. Our base of specialists contains exclusive experts in any role including candidates not accessible in the job market.
Both models present an excellent opportunity to save on development rates, recruiting costs, and office maintenance when it comes to expenses. Top outsourcing destinations like Eastern Europe offer cost-efficient and beneficial economic conditions for future growth. This region has low living costs and a vast pool of technically advanced employees.
When we dig deeper into the differences between ODC and dedicated team models, we can identify their expenses.
To help you better understand the financial side of offshore outsourcing, we offer a look at particular examples. We’ve analyzed three markets (Poland, Portugal, and Armenia) in which we have experience and provided the results in the tables below.
When planning to create an ODC in a foreign country, you should understand that, in this case, your expenses will include not only salaries to employees and office-related costs but also taxes and fees (like your company’s taxes, income taxes, insurance fees, etc.). The size and set of taxes to be paid may seriously differ in different jurisdictions. We strongly recommend you analyze them before choosing a country to set up an offshore development center.
| Expense category | Poland | Portugal | Armenia |
|---|---|---|---|
| Monthly Gross salary of a Middle/Senior developer | $6250 / $8250 | EUR 2700 ($3000) / EUR 3850 ($4200) | $4000 / $6085 |
| Office rental fee (in a capital city) | $30 per sq.m | EUR 20 ($22) per sq.m | $30 per sq.m |
| Taxes and fees related to hired employees | |||
| Income tax | 12% (when the tax base does not exceed $30,000 per year) 32% (when the tax based exceeds $30,000) | Progressive scale from 12% to 48% | 20% (for employees of certified IT companies - 10%) |
| Social fees | Pension insurance: 9.76% Disability insurance: 1.5% Access to healthcare: 9% Sick-leave pay: 2.45% | 11% | 5%-10% |
| Company’s corporate taxes | |||
| Social taxes per employee | Pension insurance: 9.76% Disability insurance: 6.5% Accident insurance: 0.67% - 3.33% Labor Fund): 2.45% Guaranteed Employee Benefits Fund: 0.10% | 23.75% | Military tax: $3.7 -$37 per employee |
| Profit tax | 19% (9% for small businesses) | 21% (17% for small and mid-sized businesses) | 18% (0% for companies with IT certificates) |
| VAT | 23% | 23% | 18% (some tax systems presuppose 0% VAT) |
| Dividend tax for founders (shareholders) | 19% | 28% | 5% |
In those cases, when you work with a vendor that builds a dedicated development team for you, you will have cost calculations based on the rates of developers in each region. All issues related to taxes, social fees, and office rental will be the responsibility of your outsourcing partner.
| Poland | Portugal | Armenia | |
|---|---|---|---|
| Approximate monthly expenses on a dedicated 5-member team | $45,000 | $40,000 | $30,000 |
Key takeaways from our cost estimations:
These cooperation models can become an excellent choice for long-term projects that require the full commitment of your development team. But what makes them different? Let’s briefly summarize the cases when each of these models will be the most appropriate.
When to choose ODC?
When to hire a dedicated development team?
We will find you the best specialists with rare or specialized skills who will stay fully engaged in your long-term projects.
In this article, we’ve collected the essential aspects of the two business models. Both offshore development center and dedicated team provide access to the benefits of remote cooperation with a trusted and skilled service provider. Still, it is essential to understand the peculiarities of each approach to conducting business abroad.
We at Geomotiv have accumulated vast experience in creating distributed teams for diverse projects. And now, with so much hype around remote work format, we know exactly which solution to choose for particular business requirements, personal clients’ needs, and tech specifications.
When you hire dedicated offshore developers, it is vital to establish the main principles of your communication and cooperation. As a rule, companies choose convenient collaborative tools to assign tasks and track progress.
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