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Outsourcing and exclusive operations – Which model is best for your business?

2019-05-16 Business No comment

While the feasibility of using offshore/nearshore resources to deliver certain activities or business processes has been established, the long-term strategic viability and appropriateness of the various modes of participation are still under review.

The most common method at present is to work with third-party outsourcing providers or to establish exclusive operations at low-cost locations. The participation model can be differentiated according to the needs of the customer organization for management control, operational costs, risks and other factors.

Third party outsourcing

Third-party outsourcing is a typical customer-supplier relationship managed by contractual obligations and service level agreements. It is primarily driven by tactical reasons such as short-term cost savings and staffing flexibility. Non-core or non-critical activities are typical candidates for outsourcing.

Traditional third-party outsourcing has two main forms:

  • Project-based outsourcing from

     It is considered to be the most suitable software for developing clear requirements and deliverables. It applies to irregular but ongoing or one-time projects. Site presence may be required to facilitate estimation, specification and relationship management. Typical pricing models are time and materials [T&M] and fixed prices.

  • Dedicated development center from

     The model is suitable for software that requires constant change, maintenance and support of large systems, R&D, testing, and other types of complex ongoing mid- or long-term tasks. In this type of engagement, the supplier provides the necessary facilities and assigns teams that are only applicable to the account project and is managed by the customer representative. This option is usually preferred when resource requirements are low. The customer charges a fixed monthly fee per full-time employee [FTE].

Exclusive action

When considering how to organize remote delivery of software development services, proprietary subsidiary options are often not considered adequately compared to outsourcing. While it is generally accepted to outsource certain non-critical activities, in some cases this approach is not suitable for core functions and key activities. The decision to work offshore/nearshore does not necessarily mean that you must outsource it. The use of remote resources to provide functionality close to the core business while maintaining operational control and benefiting from real cost advantages can be achieved by setting up dedicated facilities to maintain internal work within the company.

A proprietary model means that the client organization makes strategic decisions to create its presence at a lower cost location and work there as part of its own operations. These activities are performed remotely but are not outsourced to the supplier. As a result, customers are able to maintain complete control and mitigate their respective risks associated with intellectual property and other sensitive business information.

Organizations that want to build a dedicated center have similar goals to organizations that deploy traditional enterprise or shared service operations. First, captives should reduce costs through labor arbitrage. But recent research shows that buyers are looking for cheaper but skilled labor not only at sea/nearshore. They want to gain competitive advantage and profit from process improvement. To avoid underutilizing the risk of self-sufficiency, organizations must thoroughly evaluate their long-term operational requirements and anticipate possible future service needs.

The most common ways to set up exclusive operations are as follows:

  • Create a captive center from scratch from

     When the client organization has the necessary resources, local expertise and market knowledge, [self-captured] can be successful. The decision to build your own dedicated center may grow organically through growth. Organizations can perform extensive due diligence on their own or choose existing companies that operate at selected locations.

  • BOT mode from

     The [BOT] approach means working with third-party vendors to establish and stabilize the center. The supplier is responsible for the initial setup, staffing and operation of the dedicated center for a predefined period of time. At the end of the contract period, ownership is transferred to the customer. As a result, the organization took over the turnkey-specific center tailored to its specific needs. The BOT option is best for organizations that do not have local expertise or extensive resources. In this type of participation, only logistics related to the setting of the labor center is outsourced. Build-Operate-Transfer best combines the control elements of a purely proprietary model with the flexibility of outsourcing. Basically it provides the greatest degree of control with minimal risk.

The main benefits of having your own dedicated center:

  • Continue to achieve true cost savings
  • Comprehensive operational control and monitoring
  • Completely vested after the transfer
  • Minimize intellectual property and data security risks
  • Retain understanding of the industry, specific business processes and technologies
  • Improve communication through continuous reinforcement and experience
  • Easily copy the process of the parent organization
  • The captive center can be commercialized at some point in the future

Both outsourcing and proprietary operations have similar drivers [first, cost reduction and competitive pressure] and special advantages, but the main factors for choosing one or the other are different.

Both of these methods can improve focus, optimize processes, reduce operating costs, and reduce time to market. But companies must thoroughly evaluate each option to determine the options, business culture, and strategic goals that best meet their specific requirements.

The choice will depend on whether the primary driver is short-term cost savings or whether the company has a long-term offshore/nearshore vision and wants to maintain control over processes and intellectual property.

Establish a nearshore captive center Ukraine Through BOT mode

If software development is your company's core competency and you have long-term professional resource requirements, it makes sense to build your own capabilities to support a complete software lifecycle, secure intellectual property, and build specific proprietary technologies. This process is not as difficult today as it used to be. The key to success is finding a trusted partner that already operates in a national environment. By doing so, you will benefit from:

  • Clearly defined setup methods and schedules
  • Progressive implementation of the plan
  • Responsible for all logistics related to the establishment of a dedicated center
  • Practical knowledge of establishing IT operations and handling related legal and contractual issues
  • Deep understanding of the cost and workload components associated with building and running software development centers in offshore/nearshore countries
  • Practical experience in software engineering, generally accepted methods, processes and quality assurance, can be adapted to the captivity center
  • Establish HR practices and recruit qualified IT staff
  • Pay attention to solving security and business continuity issues
  • Provide advice and support throughout the setup process
  • High level of business commitment and responsiveness
  • Flexible customer-specific approach
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