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The term “offshoring” conjures a vision of work flowing from large corporations to technology vendors halfway across the globe. Perhaps the burgeoning Indian IT and BPO industry that is notching upwards of $15 billion to $18 billion a year makes it sound like the work “just flows.” The facts of outsourcing, however, are a bit different. Behind each program, initiative or project that is offshored lie complex decisions involving selecting the right models to suit a particular business need or scenario. I dedicated a section to the topic of offshoring models in my recently published book, Offshoring IT Services: A Framework for Managing Outsourced Projects. In this article, I abstract some of the key ideas from the book and my research regarding offshoring models.
Selecting an appropriate offshoring model is a crucial aspect of developing your company’s outsourcing plan. The process involves several factors, including aspects of international business strategy, selecting the country, scanning the landscape and deciding on the outsourcing strategy. The three models most popular currently among business leaders are joint ventures, subsidiaries and outsourcing to a service provider.
Joint Venture Offshoring
In a joint venture (JV), an organization ties up with a local firm or company either by taking an equity stake or forming an independent company in which each company contributes resources. The goal is generally to work towards a “win-win” deal where both organizations hope to benefit from the other’s strengths. By capitalizing on the strengths of a local player, the client organization can mitigate some of the risks of internalization; similarly, the local player can benefit from partnering with a strong player and the opportunity to scale up the value chain.
A joint venture contract may sometimes include build-operate-transfer (BOT) clauses to motivate both parties to work towards a clearly defined exit strategy. The BOT or its variation, build-own-operate-transfer (BOOT), may involve an option for the domestic company to sell its stake to the foreign company after a stipulated period or after agreed-upon milestones.
There are several advantages to a JV model, especially if the company is also looking to “learn” the intricacies of managing local business customs and mores from the domestic partner, which will pave the way for a subsidiary down the road. An excellent example of this strategic evolution from a joint venture to a fully owned subsidiary is that of EDS’ entry into India. Though a few articles in the media portray EDS’ strategy as a dramatic step, it is, in fact, the culmination of a gradual evolution that began with a joint venture-like relationship with vendors in India a decade ago.
Subsidiary/Captive Development Center Offshoring
Companies may decide to bypass the JV model altogether and go directly in for a subsidiary or local office if the management is comfortable in dealing with the nitty-gritty of internationalization and local market operations. Some of the popular terms used to describe the model include offshore development center (ODC), captive development center or in some cases simply branch or local office.
Subsidiaries operate as independent business units or branches, executing programs and projects for onsite teams. From this perspective, the mode of managing a subsidiary is similar to managing projects and programs in a global delivery center (GDC) model promoted by software service delivery and offshoring companies.
The key challenge in a subsidiary model, apart from internationalization and localization of business management, pertains to management of expatriate staff, line workers, technical experts and line managers from multicultural backgrounds.
The local office model is extremely popular among high-tech organizations that are comfortable in management of technology development and innovation and look to offshoring as an extension of their diversification strategies. Large software development companies including IBM, Microsoft and Oracle are already comfortable doing business in a global marketplace. Moving development or maintenance of some of the projects and work is a way to extend their geographic footprint. Similarly, software giants like Accenture, EDS and Deloitte Consulting, among others, have been at the forefront of bundling newer services for their clients; offshoring being the latest in their suite of services.
Service Provider Offshoring
The JV and subsidiary models of outsourcing may involve deep commitment on the part of a client organization, a move that management at traditional companies may sometimes be averse to. To counter the perceived risks of these models and to capitalize on the benefits of offshoring, companies resort to outsourcing projects, programs and individual work orders to offshore vendors. Interestingly, outsourcing to service providers is also the most visible offshore outsourcing model, and it encompasses a wide range of work, from small projects to multi-year contracts amounting to millions of dollars. Here are the most popular forms of outsourcing to offshore vendors.
Onsite Subcontracting with Offshoring
This is perhaps the simplest outsourcing model, where a firm places its skilled people “on site” at the client’s location. The people thus placed become a virtual part of the client’s team. The model is also called staff augmentation. Most offshore outsourcing firms trace their history back to their software services model and continue to offer onsite project support along with some staff augmentation. This model of outsourcing is typically adopted by smaller firms that have a relationship with the client organization and the means to hire and staff people.
Pure Offshore Projects
A pure-offshore project involves instances where the scope is well defined and the work is discrete enough to be done remotely with little supervision. Examples of this model include work farmed out by smaller organizations and individuals to freelancers around the world using online tools provided by vendors like Guru and RentACoder. This model of offshoring is less prevalent and generally seen only in a small scale development of software component or modules. The model is also being adopted by innovative organizations looking to capitalize on foreign talent that isn’t very mobile. An example is the drug-research consortium that runs innocentive.com.
Offshoring Individual Projects
Organizations that have a well defined outsourcing program mitigate their risks of outsourcing by dividing the work into small, more manageable projects that they outsource to vendor organizations. Managers at client organizations who have well defined deliverables, programs or modules to be developed outsource them to vendors with whom they may have relationships.
Global Delivery Onsite/Offshore Model
This is the classic offshoring propagated by most software service providers, where they take on the project, module or program from a client organization, deploy a small team onsite that works with the client managers and teams and coordinates work with the offshore team that does the bulk of the work. This is a more mature stage of the “offshoring individual projects” approach.
In this model, multiple projects, and programs at the client organizations are outsourced to a vendor, which also takes on the end-to-end program management and delivery on behalf of the client. For the outsourcing vendor organization, it’s a step up the value chain; for the client organization, it’s a value-added service since their employees don’t have to manage the nitty-gritty of individual projects. Rather, the outsourcing organization’s employees focus on managing the relationship and program and ensure that the vendor delivers as agreed.
Multi-vendor Offshoring (Multisourcing)
In the discussion on offshoring models, we’ve assumed that the relationship is between a client and a single vendor. However, in reality, a client may have multiple vendors working on a project or initiative. Organizations attempt to de-risk their outsourcing strategies by empanelling a selected list of vendors (“preferred vendors”) from which individual projects and managers opt to select and source work.
Offshoring can be a complex strategic decision. Since it’s hard and expensive to change course midstream, organizations and business leaders need to spend considerable time strategizing and planning the model suitable for their specific business needs. The models highlighted in the discussion are some of the most common ones encountered. Clients in the west are learning about the pros and cons of the different models offered by players in the marketplace, in some cases specifying a hybrid model tailored to their businesses. Many large service providers also offer a mix-and-match portfolio of options to clients and sometimes draw a roadmap to migrate from one model to another as the client’s understanding of the offshoring business matures.