Talent shortage in the USA alone forces local companies to put their projects on hold until they find the right expertise and skills. The number of job openings for a software developer position on Linkedin is getting close to 200,000. If we dive further into the data, we can find that 10% of the vacancies involve a remote form of engagement.
Tech skills shortage in the USA:
- 195,000+ software developer job openings on LinkedIn
- 45,000+ software developer job openings on Glassdoor
- 90,000+ software developer job openings on Indeed.com
It is no wonder that many businesses turn to outsourcing as a way to combat these issues and open up more opportunities.
A dedicated software development team model and an offshore development center are the two models of outsourcing. 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 it to access the best talent that will be available just at the time when you need it.
Let’s figure out the difference between the two forms of outsourcing and decide which of them is the best for your project. We start with offshore development center basic terms and then move on to contrasting it to the dedicated team model. By the end of the article, you’ll be aware of both dedicated team and offshore development center benefits as well as its major risks and challenges.
What is ODC - Offshore Development Center?
An offshore software development center is a form of cooperation with a service provider 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.
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 deals with legal regulations, accounting, HR-related issues, and other tasks by themselves. That is why you don’t need to send operational resources overseas to manage issues like office repairs, payroll taxes or learn a new language to get to grips with local regulations.
How To Set Up an Offshore Development Center?
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 don’t 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:
- Affordable development costs;
- Low office rent, maintenance, Internet costs;
- Access to a vast pool of tech specialists;
- Favorable economic environment;
- Cultural affinity and English proficiency;
- Lack of legal and bureaucratic hurdles for setting up a new legal entity;
- Optimal price-quality ratio.
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:
- past client’s testimonials;
- timely responses;
- compliance with legal requirements;
- ability to conform to your regulations;
- English skills of each employee.
3. Choose the right model. You can leverage offshore development center services using different models of cooperation 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. The client contacts the local vendor in a chosen outsourcing destination. The latter takes care of the organizational part of setting up a development center. They deal with hiring employees, building the necessary infrastructure, solving legal issues for the client’s company. In the final stage, the vendor transfers the entire operations to the client.
- Managed ODC. This model also requires a vendor to set up the development center and operate it on behalf of the client. The vendor’s responsibility is to handle the administrative and organizational parts, manage payroll and accounting. Thus, we can genuinely talk about the client establishing a branch office in a foreign location with a managed offshore development center.
4. Initiate recruiting. To get the recruitment process started, 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 will also need to 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 work in a separate office, it is necessary to rent one and equip it with proper infrastructure. You need to collaborate with local real estate professionals to shortlist the best locations for the team. When you find the suitable office space, it is necessary to purchase and maintain hardware and office equipment, establish a security system, and manage 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 down 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 will have to 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 talk in detail about the risks of setting up your offshore development center a little later. It is worth mentioning, however, that current conditions significantly increase the chances of failure. Restrictions caused by coronavirus infection and the rise in popularity of remote-first policies make businesses search for less risky undertakings. One of them is the decision to obtain a dedicated team model service, which resembles the ODC’s offering but lets you avoid a certain amount of challenges.
What is a Dedicated Team?
This service enables clients to access a team of software developers to meet specific project requirements for a predefined period. 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 by 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.
With this model, large and long-term projects pass massive workloads to dedicated remote programmers. The client, in turn, can control the process and adjust the workflow if needed. That gives the client a certain amount of convenience while they can focus on core business tasks and have a piece of mind.
Thus, companies are left with two choices when moving offshore: opt for an offshore development center or hire 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.
|Workload||All tasks can be delegated to the offshore development center: administrative and organizational to development and other technical ones.||The model suits best projects with a constant and sizable flow of ongoing tasks. Project teams can focus on one task and then progress to another one with time.|
|Project’s length||Both models involve hiring full-time employees and fit long-term projects starting from 1 year.||Both models involve hiring full-time employees and fit long-term projects starting from 1 year.|
|Upfront costs||Unlike hiring in-house, setting up an ODC involves small startup and infrastructure costs. In addition, the development and office maintenance costs are lower than 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. It can have at least three specialists (two developers and one QA).|
|Team composition||All kinds of specialists, from engineers to copywriters 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|
Pros and Cons of Each Option
ODC Model Pros
- You hire the best talent. Instead of hiring individual programmers in one of the outsourcing hubs, you can establish office space for employees and thus increase the chance of attracting the best local talent. Likewise, your company’s local presence in one of the countries where you plan to source candidates is a good strategy when you plan to assemble a team or a couple of groups there. So, you can forget about signing individual contracts with freelancers or individual developers from different companies. Instead, just build your team under one roof and allocate tasks.
- You promote the brand. There is no denying that the company’s headquarters can leverage an online-only presence in one of the countries. But having a physical office in one of the attractive locations can raise the chance of reaching out to more customers and improving the overall service. Another crucial advantage is the ability to solve logistics challenges when establishing an offshore development center.
- You don’t have to worry about security. Even if your product belongs to a highly competitive market, your remote team can’t but keep all the data protected. Working under your brand, you can control the flow of data and ensure its security and integrity. In addition, the vendor provides that no third party has access to intellectual property.
- You cut down on costs. Affordable locations like Kyiv have office rent that is almost three times lower than in New York. And that is just one small share of the total expenses pie. You need to factor in other costs like office facilities, equipment, or developer salaries. They are likely to keep snowballing when you opt for building a development center in the USA.
ODC Model Risks
- You will need assistance with headhunting. It might be risky to onboard a full-service team of specialists when unfamiliar with the country’s labor market. Therefore, it is a good idea to research the right offshore destination and find insider expertise for proper channels of the talent search.
- You can face legal and bureaucratic hurdles. Setting up an office in some countries can turn into a nightmare as not all of them are friendly foreign businesses. In addition, you will have to navigate local regulations for making at least a step towards setting up a physical office.
- You need to factor in cultural differences. Ensure that you have a mutual understanding of the differences:
- personal and professional values;
- conflict management;
- standards of communication.
Otherwise, the whole process won’t be convenient and efficient for either of you.
Dedicated team model pros
- You have no setup costs. Outsourcing providers take care of hiring and onboarding new employees and organize their workspaces. You only have to pay a salary based on a pre-negotiated hourly rate.
- You can hire top talent with rare skills. This cooperation model gives access to technical expertise located in one of the top outsourcing hubs. You can implement the required functionality using dedicated programmers provided by trusted service providers.
- You get total commitment from dedicated developers. The outsourcing vendor ensures that your team works exclusively for your project. Much effort is dedicated to keeping employees engaged and motivated to deliver high-quality solutions within stipulated timeframes.
Dedicated team model risks
- It is not suitable for short-term projects. The dedicated team model may be inefficient for projects lasting no longer than one or two months. The same applies to the situation when there is a shortlist of technical requirements.
- It is not suitable for a non-negotiable budget. When a fixed, non-negotiable budget is the primary factor in choosing a development team, this business model is not likely to meet your demands.
- It might take a long to source the right talent. Your dedicated team should have the relevant skills and expertise that fully correspond to the project’s requirements. Because of that, the hiring process may take a substantial portion of time. You need to put that time into initial estimations.
Offshore Development Center vs. Dedicated Team: Cost Analysis
Both models present a good 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.
Monthly expenses in Eastern Europe (Ukraine): ODC vs. Dedicated team
|Lines of expenses||ODC||Dedicated Team|
|HR payroll||$3,500-4,000 |
|$6,000-8,500 range |
|Payroll tax||$175-200 |
per developer salary
|Included in salary|
|Legal support||+$$ |
(depends on particular case)
As the table above shows, setting up an offshore development center involves a great deal of investment in organizational and administrative parts. And if a new physical office is required, you need to factor in additional costs of contemporary furnishing, renovations, equipment, parking lots, and other operational expenses.
Another difference between the two models is that the developer's salary is higher with the dedicated team model. You can save from $2,500 to 4,500 per developer and thus repurpose the budget for other items like administrative issues. However, the client doesn’t have to manage taxes, cover overheads, and pay recruiting rates with the dedicated team model. Instead, they compensate for the work of the developers every month. In addition, when the contract expires, the client doesn’t have to handle any legal issues or manage obligations with a partner. As for the vendor, their HR team will search for another project for their development team.
As a result, it is easier to move on with other tasks, stay more flexible, and have the freedom to switch service providers. This model works great when the project requires the same. Another pleasant bonus is gaining access to rare or niche expertise and expanding the development capacities at least for a limited time.
In this article, we’ve collected the essential aspects of the two outsourcing 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. So, if you want to engage remote teams with rare or specialized skills and a long-term dedication to projects, don’t hesitate to contact our experts.
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