Offshore Software Development Center vs Dedicated Team: Which Model to Choose

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Julia Sakovich , Author at Geomotiv
Reviewed by Alex Kharkauski, COO at Geomotiv
Published: Feb 8, 2024

The US software development labor market is experiencing a challenging time. The number of vacancies in the industry is falling, while big tech companies are lying off their staff to stay afloat.

Tech skills shortage in the USA:

  • 129,000+ software developer job openings on LinkedIn,
  • 38,000+ software developer job openings on Glassdoor,
  • 65,000+ software developer job openings on Indeed.com.

The predictions for 2024 are controversial. Nevertheless, despite the labor market's overall economic situation, the demand for software development and other related services stays relatively high. Many businesses are looking for alternatives to in-house hiring to combat the existing issues and optimize their costs. And here is when outsourcing enters the game.

The two popular outsourcing models we will discuss 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 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 outsourcing forms and decide which is the best for your project. We start with the offshore development center's essential terms and then move on to contrast them with the dedicated team model. By the end of the article, you’ll know about a dedicated team and offshore development center benefits and their significant risks and challenges.

Share your project details with us and we will offer you the most appropriate form of cooperation with a development team.

What is ODC - Offshore Development Center?

First of all, we need to begin with the offshore software development center meaning and provide the definition of this term.

An offshore software development center is a company’s full-fledged branch set up in another country that houses a team of software engineers and other specialists engaged in software creation.

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.

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.

Read now

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 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.

BOTManaged ODC
The client contacts the local vendor in a chosen 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.This model also requires a vendor to set up the development center and operate it 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.
BOT model

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 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 a certain amount of challenges.

What is a Dedicated Team?

Dedicated development team 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. 

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.

How to Find a Dedicated Team for Software Development?

When planning to start cooperation with a dedicated software development team, you have two important tasks.

  1. The first is to create a list of requirements for your dedicated 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 very important for assembling a team for you, do not worry if you think that something may change after the beginning of your project realization. This model allows great flexibility, and you can always introduce any updates when there is such a need.
  2. The second task is even more responsible than the one mentioned above. You must find a software development partner to create a dedicated team for you. 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?

  • Experience of the company;
  • Its model of work;
  • Financial terms;
  • Access to a talent pool;
  • Reviews that were written by its clients.

When the choice is made, you can discuss all the organizational aspects related to your cooperation and sign the required agreements and contracts. The search process will begin after you share your requirements with the vendor. And you will need to wait until the best candidates are chosen. Then you will be provided with the possibility to conduct interviews with them and approve the final composition of your dedicated team for software development.

Pros and Cons of Each Option

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.

ODCDedicated team
WorkloadAll 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 lengthBoth 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 costsThe 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.
BrandingYour 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 sizeThe 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 compositionAll kinds of specialists, from engineers to tech writers and accountants.Tech specialists as per project’s requirements.
HeadhuntingA local recruiting team sources and recruits candidates.A local recruiting team sources and recruits candidates.
ControlFull control under one brand.Complete control due to a transparent cooperation.
ScalingLimitless scaling opportunities.Limitless scaling opportunities.
SecurityComprehensive 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.

ODC Model Pros

  • You hire the best talent.
    Instead of hiring individual programmers in one of the popular 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 Warsaw (Poland) have office rent that is 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. 
Office rent

ODC Model Risks

  • 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. To mitigate the related risks, businesses often hire a partner in the chosen destination who will bear a significant part of the responsibilities related to the organizational side.
  • You may need assistance with recruitment and hiring.
    When unfamiliar with the country's labor market, it might be risky and challenging to onboard a full-service team of specialists. While you may already know all the peculiarities of recruitment and hiring in your local market, your approaches may not be relevant at a new destination. Therefore, it can be a good idea to research the right offshore destination and find insider expertise for the proper channels of talent search.
  • You need to factor in cultural differences.
    Ensure that you have a mutual understanding of the differences:
    • personal and professional values;
    • conflict management;
    • punctuality;
    • standards of communication.

Otherwise, the whole process won’t be convenient and efficient for either of you.

Benefits of Dedicated Team Model

  • You have no setup costs.
    Outstaffing 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.
    The dedicated team engagement 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.
  • You can get access to a rich talent pool.
    When working with a diligent vendor with a vast pool of experts, you can cooperate with seasoned developers and other specialists, even with the rarest skills and niche expertise.

Dedicated Development 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 unsuitable 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 will be challenging to promote your corporate values.
    For some projects, it is crucial to ensure that all team members share the same values and deeply understand the core principles of your organization. However, for a newly created dedicated team, it can take time to get quickly involved in the specificity of your corporate culture.
ODC vs Dedicated Team

Offshore Development Center vs Dedicated Team: Cost Analysis

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.

Estimated monthly offshore outsourcing expenses: ODC vs Dedicated team

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 categoryPolandPortugalArmenia
Monthly Gross salary of a Middle/Senior developer$6250 / $8250EUR 2700 ($3000) / EUR 3850 ($4200)$4000 / $6085
Office rental fee (in a capital city)$100-200 per sq.mEUR 20 ($22) per sq.m$30  per sq.m
Taxes and fees related to hired employees
Income tax12% (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 feesPension 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 employeePension 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 tax19% (9% for small businesses)21% (17% for small and mid-sized businesses)18% (0% for companies with IT certificates)
VAT23%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.

PolandPortugalArmenia
Approximate monthly expenses on a dedicated 5-member team$45,000$40,000$30,000

As the tables show, setting up and maintaining an offshore development center involves many costs related to organizational and administrative parts. You should care about all the peculiarities of tax systems and make the required payments. Moreover, a new physical office is required. In that case, you need to factor in additional costs of contemporary furnishing, renovations, equipment, parking lots, and other operational expenses following your needs.

Another difference between the two models is that the developer's salary is higher with the dedicated team model. You can save significant amounts and thus repurpose the budget for other items like administrative issues. However, with the reliable team model, the client doesn’t have to manage taxes, cover overheads, or pay recruiting rates. Instead, they compensate for the developers' work every month. In addition, when the contract expires, and all the terms are successfully fulfilled, the client doesn’t have to manage any financial obligations with a partner. In the case of an ODC, the agreement with employees may include severance compensation payments. 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.

Offshore Software Development Center and Dedicated Team: When to Choose Each Option?

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?

  • You need to hire both tech and non-tech experts;
  • You know that your team will include 10+ specialists;
  • You want to promote your brand in new locations and have a physical presence there;
  • You are ready to invest in office rent and equipment and you have the budget required for managing a team.

When to hire a dedicated development team?

  • You want to hire only tech specialists or specialists with tech-related skills (developers, UI/UX designers, QA engineers, project managers);
  • You know that your project’s requirements can change;
  • You want to avoid setup costs;
  • You need to find experts with rare skills for a specific project;
  • You want to focus on your core business activities while administrative tasks will be solved by a vendor.

Wrapping Up

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.

We will find you the best specialists with rare or specialized skills who will stay fully engaged in your long-term projects.

FAQ

How do you manage an offshore development team?

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.

What is the responsibility of the development team?
How do I hire an offshore software development team?
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