Offshoring Secrets:Offshoring versus Outsourcing

By Utkarsh Rai, Guest Author, Author of “Offshoring Secrets”.

Offshoring and Outsourcing are two words that are often used interchangeably. For the purpose of this article let us define the terms in a simple manner: “offshoring”, where the organizations decide to open their own captive center in another country; “outsourcing”, where the company decides to contract the work in another country. In this article we focus on India, but the basic principles are the same with other geographies.

Let us cover the circumstances under which a company should outsource:

Headcount increase: The organization does not want to add headcount to its payroll because the project would be of short duration or that there is only need for a certain number of people at various phases of the execution.

Non-Core functions: The organization wants to engage its own people in the core functions alone and outsources the non-core activities, such as supporting a product line that is going to be obsolete in the near future.

Kick starting a project: Sometimes, in order to kick-start a new project, a company requires some of the resources immediately with a specific background.

Setup & execution overhead: When the company wants to avoid the overhead related to setup, hiring and managing teams, project management.

Cost: Though there is no industry data to prove whether offshore centers are cost effective to outsource or do in-house as captive centers, based on unofficial data neither has any significant cost advantage over the other.

A lot of planning is required to make an outsourcing option feasible. Planning is required to determine the size of the team and its composition. Detailed attention and focus is required in specifying the work to be outsourced. Considerations about the type of process to use, reporting mechanisms, risk analysis, escalation strategy, tools required for the project and other factors are also very important. The type of training and its frequency including a travel plan (the engineers will travel abroad or a team of instructors will travel to India) is also required.

Some people have raised concerns that the same service company also hosts teams from competitors and therefore IP protection may become an issue due to movement of people across project accounts. Services companies take utmost care in ensuring that confidential information is not shared between two teams. It is, however, often a practice where if one customer’s project headcount is ramping down and another’s is ramping up, then it is logical for the services company to shift resources from one company account to another, if the domain knowledge is more or less the same, as this will limit people sitting on the bench (non-billed).

This is an important reason why outsourcing, for IP-heavy companies, may be dangerous.

So, why do companies offshore work?

Strategic decision: The first and most important point is whether offshoring is a strategic or tactical decision. Outsourcing is typically a tactical decision to get around the issues at hand, while offshoring is a strategic decision in alignment with the company’s growth plan.

Better hold on talent pool: The service companies usually ask their clients to choose the core team by selecting from a set of resumes and briefly interviewing the short listed candidates. However, this is normally limited to the formation of the core team. The management team of the service company chooses the other team members. There is a limitation with this approach, as you are either not given a free hand in choosing the rest of the team, or do not have the time to do it. Besides, you have to compromise based on the resumes you get. This will lead to the formation of a team, which might not be what you had envisioned. Offshoring, in contrast, offer more control.

Resource movement: Resource movement is high within services companies. People can move out due to their own career advancement, or seed other projects for a different client. At times, the scope of work in the service company is not end-to-end. Hence, some of the early people who joined the team would not get an opportunity to contribute in the later phases and are moved out to another project. In a captive center, this does not happen very often.

Intellectual Property: Technology companies pay keen attention to intellectual property. Small companies or startups with one or two product lines in their pre-launch stage will have issues in sharing product knowledge with the services company. Clearly stating that the ownership of patents generated during the collaboration is important in avoiding any misunderstanding later. However, the human accumulated knowledge is still a risk factor.

Processes and Tools: If the agreement is to allow services companies to use their own development processes, tools and quality metrics, then rolling them back up to the client’s master system is a problem. On the other hand, if the outsourcing partner follows the same process and uses the same tools the client does, then the cost of the tools must be addressed within the cost structure. Offshoring does not cause any of this clumsiness.

Cost: Setting up one’s own offshore center will have virtually the same cost advantages as outsourcing. The cost for the human resource is up to 75% of the expense, whether the work is outsourced or offshored. The offshore center will have a higher human cost if the average experience level of the team is higher than what the outsourcing partner provides.

There is a whole class of companies called Outsourced Product Development (OPD) providers. Persistent, Symphony, etc. are notable examples. Small product companies have been using outsourcing often. It is extremely difficult for small startups without a brand name to attract talent in India, hence, unless the company has achieved a certain size, it doesn’t pay to try to set up a captive center, despite the apparent advantages.

This segment is a part in the series : Offshoring Secrets