Offshore development centers (ODC) are an increasingly popular method of outsourcing software development. It balances the speed and low cost of outsourcing with the dedication of an in-house team.
For companies, this means higher quality work at costs similar to traditional outsourcing.
In this article, we’ll explore:
- What offshore software development centers are;
- The key benefits of the offshore development center model;
- The top three locations for offshore development;
- How to get started with an ODC.
Offshore Development Center Meaning
An offshore development center is your software development studio located in a foreign country.
They’re popular in countries with a highly skilled and technical workforce, but a low cost of living. Foreign countries can leverage these talented workers while paying less than they would for workers in their home country.
ODC vs. Traditional Outsourcing
Typically, ODCs are created by native companies and contracted out to foreign ones.
The difference from typical outsourcing or offshoring is that the foreign company gets access to a full, dedicated team. ODCs are also fully managed, saving the foreign company time, money, and administrative effort.
ODCs can also be created by foreign companies. This involves finding a location, hiring employees, and running an entire center while complying with local tax, labor, and hiring laws. This gives the company complete control over the ODC’s operations, but at a much higher significant cost.
Compared to other offshore models, ODCs are more dedicated and more transparent. Clients know all of the costs and operations required to run an ODC. The ODC provider is dedicated to the client’s operations.
In general, smaller companies benefit more from contracting work to an ODC, while larger companies benefit more from building their own.
Benefits of Offshore Development Center Model
Offshore development companies provide significant time and money savings. Specifically, they:
- Provide foreign companies access to skilled developers;
- Eliminate the need to hire developers;
- Provide and manage office space, human resources, and technical resources;
- Are cheaper than hiring developers in high cost of living countries like the US.
Top 3 Locations for Your Offshore Development Center
While there are many popular offshoring locations, there are a few that stand out.
These destinations are popular due to their low cost, access to high quality developers, and ease of offshoring.
India has a long-time reputation as a popular offshoring destination and a hotspot for IT and software development.
Some of India’s offshoring statistics include:
- Growth of its business and technology service industry from $4 billion to $58 billion over 10 years.
- More than 15,000 foreign companies outsourcing to India.
- Home to major technology and software companies including Microsoft, Oracle, Dell Cisco, Alphabet, and IBM.
- Saved companies an estimated $200 billion in costs.
- Responsible for 7% of the global technology sourcing market.
One of India’s strengths is its low cost workforce. The average hourly wage for an Indian developer is $15, compared to $100 for an American developer. The problem is that this workforce is massive, making it difficult to find skilled developers and specialists.
India also faces uncertainty from new immigration and outsourcing policies in the US and the UK. The industry’s growth projections shrank from 12% in 2014–2015 to 10% in 2016–2017. But despite political challenges, India is still a top outsourcing destination supporting some of the world’s biggest technology and software companies.
China is the second most popular offshoring destination behind India. Some of its highlights include:
- An increase in outsourcing revenue from $1.38 billion to $106.46 billion over 10 years.
- Home to Foxconn Technology Group, the primary manufacturer of Apple iPhones, which can produce 500,000 iPhones per day.
- Fast startup and response times, even for large manufacturing jobs.
- Home to major technology companies including Tencent, Huawei, ZTE, Alibaba, and Baidu.
- Hosts global technology companies such as Google, which recently opened offices in Beijing and Shenzhen.
China’s labor force is a major factor, being both cheap and readily available. Chinese workers have been known to work 12–16 hour shifts for less than $1 per hour. The software industry is no different: an entry level programmer in China is 30–50% less expensive than one in the US.
Chinese companies can also mobilize and adapt to changes quickly, which is ideal for software development.
One of China’s biggest challenges is intellectual property (IP) protection. Companies are afraid of vendors leaking software, or worse, rebranding and redistributing it as their own.
61% of companies outsourcing to China see software piracy as its number one problem.
Until China can reign in its piracy rates, software companies will be reluctant to offshore to it.
Despite political turbulence, Ukraine is quickly becoming a leading offshore development provider. Ukraine’s IT sector:
- Grew from 0.06% of the GDP to 3.3% since 2013 and is currently valued at $5 billion.
- Has over 90,000 IT professionals today, with 200,000 expected by 2020.
- Has highly educated workers, with 84% holding at least one university-level degree.
- A high degree of English speaking workers.
- Works closely with the US, with 80% of its work coming from the US.
Ukraine’s workforce is the largest of any Central or Eastern European country.
Ukraine’s educated workforce means that salaries for IT professionals are higher. In 2015, the average software developer salary was $1,600/month, or around $19,000/year. This makes Ukrainian work more expensive than China and India on average.
However, Ukraine is culturally and geographically closer to its clients. Ukraine is only 2 time zones away from the UK, compared to 5 for India and more for China. Its large English-speaking population makes it more accessible to foreign companies.
And while Ukraine isn’t a full member of the European Union, passport holders can travel to and from the EU, US, and other countries without a visa.
Setting Up an Offshore Development Center
There are two ways to set up an offshore development center:
- find a vendor to help you…
- or do it yourself.
Vendors can act as your guide to the offshore country. They provide resources to help your project while handling administrative details like taxes, office space, developer resources, and complying with local laws. They understand their country’s culture, business practices, and work ethic.
A good vendor will work with you to build the best team for your project.
On the other hand, doing it yourself gives you much more control. The ODC essentially becomes an extension of the company.
The downside is the significant startup cost. You need to find a location, learn the local laws, hire employees, and so on. You need managers, accountants, lawyers, developers, and other employees to maintain everyday operations. All of this requires substantial amounts of time and money.
Whichever way you choose, setting up your ODC involves 4 steps:
- Defining your objectives and scope
- Selecting a vendor
- Creating a project plan
- Maintaining constant collaboration
Define Your Objectives and Scope
What is your objective in creating an ODC? Is it to save costs, reduce startup time, or increase development capacity?
Your objective determines the scope — the size and complexity — of your project. Scope factors into planning out resources, development effort, and timelines for delivery.
Scope also factors into budget planning. You should have an estimated project cost before even researching vendors. While the actual cost will vary based on where you outsource to, a good baseline keeps you from spending more money than planned.
Select a Vendor
Choosing the wrong vendor could jeopardize your project.
You want a vendor that works with your company, not just for it. Good vendors are experienced, understanding, and have a proven track record of delivering quality software on time.
Your vendor’s location is also important. Time zone differences will make it harder to collaborate during the workday. On the other hand, hiring a vendor on the other side of the globe means development can continue overnight.
Price is also important. Good vendors offer a mix of value and expertise. Rates vary depending on the location and reputation of the vendor, project size, and the skill set required. More money doesn’t always mean higher quality.
Create a Project Plan
A project plan is your blueprint. It keeps you and your vendor on track throughout the project’s lifecycle.
ODCs are often managed, meaning you won’t have direct oversight over developers.Instead, you’ll communicate with a project manager. A good plan helps management assign tasks and manage deadlines.
Traditionally, software projects are planned at the beginning. With Agile development, project planning focuses on features rather than specific tasks, with teams given a set time to research and develop each feature. This is why Agile projects are split into iterations (called “sprints”).
Agile makes it easier to change projects mid-development, but at the cost of not having a complete upfront development timeline.
This flexibility could mean a longer development period. The benefit is that companies can build and test iterations of the product after each sprint, and provide immediate feedback for the next sprint.
Maintain Constant Collaboration
Always communicate objectives, remaining tasks, and timelines with your vendor. This helps you track progress and stay informed of any bugs, reworks, or delays.
Since your developers are remote, having the right tools is essential. Project management tools keep track of individual tasks and features, as well as overall progress of the project.Bug trackers, issue trackers, and task management tools let you manage problems, provide feedback, and track sprints. Other tools like chat and messaging clients are also useful for collaboration.
Communication also involves keeping good documentation. Documentation helps current and future team members understand how the product is built. If you close your ODC or end the contract with your vendor, good documentation makes it easier to build off of the existing code.
Setting up an offshore development center offers significant benefits for companies of all sizes. While there is no single answer as to where and how companies should establish an ODC, making informed decisions will help you get the greatest value.