The popularity of IT outsourcing among organizations is growing, as the Global Offshore Software Development Market is projected to reach USD 112,609.5 million by 2030, exhibiting a Compound Annual Growth Rate of 15.2% from 2023 to 2030.
Our previous articles on the SPD Technology blog covered various aspects of offshore software development, diving deep into the concepts of IT Staff Augmentation, Managed Services, and Dedicated Development Team Service models. This time, we will focus on the Offshore Development Center (ODC), one of the most effective and popular tactics to build software solutions.
2024 Offshore Software Development Market Overview
Global spending on outsourcing hit USD 731 billion in 2023, according to Exploding Topics. The global business process outsourcing market is projected to reach $525 billion by 2030 if Grand View Research is to be believed.
As the market grows, we should expect that offshore software development will continue to move forward as digitization and virtualization in 2023. Overall, outsourcing will be used to implement even more projects in technologies like Artificial Intelligence, Augmented Reality, and Virtual Reality.
This year, hybrid teams will become even more popular thanks to effective conferencing apps and even more belief in the effectiveness of remote work by companies. It is expected that even more organizations will power up their in-house teams with offshore developers via dedicated development teams and the opening of ODCs in other countries.
The general economic slowdown and massive firings in global corporations is also a big factor we should talk about. In some regions, there will be a surplus of free talent looking for a job, there will be a lot of opportunities to open an ODC in a particular location to your benefit.
What Is a Dedicated Offshore Development Center?
To put it simply, an Offshore Development Center is an office set up in a foreign country that houses a team of technical specialists and optionally, functional departments, as well as any other required employees. It is essentially a full-fledged branch of an organization in a different geographical location.
An offshore software center can be considered as a company’s technical representative office. This means that it functions under the same brand and shares the parent company’s corporate policies. The teams in the ODC basically function as in-house teams, bringing value to the company and following its core business objectives.
Although a company’s head office determines the final structure of its offshore office, Offshore Development Centers typically include the following roles:
- Project Managers
- Team Leads
- Software Engineers
- Front-End and Back-End Developers
- QA Experts (Manual and Automation)
- Web and UI/UX Designers
- Tech Writers
- The HR team and other office departments such as recruiting, marketing, etc. (optional).
Olexandr Boyko
Delivery Director at SPD Technology
“Having operational staff in Offshore Software Development Centers is optional. You can delegate accounting, legal support, HR payroll, and recruitment functions to a local vendor. Besides, it is beneficial to have a vendor as a partner as they can provide you with additional insights on the specifics of doing business in that country and help you with legal compliance.”
The offshore software development model is very appealing for both start-ups and well-established IT companies, as it enables them to set up a business presence in another country and have lower expenses at the same time.
Offshore Development Center vs Dedicated Team: What Are the Key Differences?
Although both the terms are often used interchangeably, there are some distinct differences between the two — let’s break them down!
Setting up a dedicated development team means hiring external specialists to boost the development and deployment of your software solutions, quickly scale up the project, and achieve higher cost-efficiency. These experts continue to be the employees of your offshore software development partner and work with you only for the duration of a certain project. Your partner is responsible for meeting the deadlines and achieving targets. When the project is completed, the development team moves on to the next project, tackled by your provider.
Thus, hiring an outsourced team is a great choice for one-time projects, for example creating a website or Proof of Concept and MVP development. Just like we did in one of our cases, creating a computer-vision powered API for an Israeli-based pet care mobile solution.
In an offshore development center-based model, you are the employer of the entire team, as they are a part of your company. Nonetheless, you may need help from a local technology partner to form the team and set up an office. Your attitude will need to be more committed as compared to the scenario when people work with you on a temporary basis, and the results will depend on your team’s efforts. Let’s compare the two approaches on the following key points.
Commitment
Being part of the project, software developers who work for product companies typically show more dedication and interest in the outcome of the project. With the Offshore Development Center approach, you have higher chances of attracting people with a product mindset who thrive on being part of something great. That said, you may come across outsourced developers with a high level of engagement too, but you can certainly expect more commitment from employees with an ODC.
Cost Efficiency
The remote dedicated team option is probably more cost-effective, but with the limitation, your project is not going to scale much. The ODC requires up-front investments and additional time to assemble a team of experts and set up a properly functional office. However, in the long run, you can expect a higher Return On Investments (ROI) from it.
Management
You do not have any direct influence on the team of your outsourcing partner. The PMs on the side of your service provider can change the team composition or shuffle particular team members between different projects. With an ODC, you are in complete control of the management and decision-making.
Offshore Development Center Models
Now, let’s compare the two most common engagement models for opening an ODC, each of them has its distinctive advantages for different business scenarios.
Dedicated Development Center (DDC) Model
With the DDC model, the ODC operates as a subsidiary of the parent company. All the offshore team members are full-time employees of your organization, the only major difference being that the business unit’s operations are based overseas. This kind of ODC includes an on-site group of senior employees to make all the key decisions and manage the office. The development, testing, and execution are provided by local experts.
- In a DDC model, an organization sets up a dedicated development center in a foreign location, often referred to as an offshore development center (ODC).
- The client has full control over the team, project management, and tasks. The offshore team works exclusively on the client’s projects.
- This model is more suitable for large enterprises. For instance, General Electric established its India-based ODCs almost three decades ago.
Build-Operate-Transfer (BOT) Model
An offshore software development center built according to the BOT (Build-Operate-Transfer) is a business arrangement where a company (the client) partners with a service provider to establish a dedicated offshore development center. The name of this ODC model corresponds to each of the stages of its setup.
- Build. The stage involves establishing the physical infrastructure, recruiting skilled personnel, and creating the necessary operational and technical frameworks.
- Operate. During the operational phase, the ODC is fully functional, and the service provider manages its day-to-day operations. The client, while maintaining some level of control, relies on the service provider.
- Transfer. At this stage, the ODC is fully transferred to the client, usually after the established unit has proven its effectiveness and all the operations are running seamlessly.
With this approach, you can focus on the marketing of your product or working with your in-house teams, while the ODC will perform a certain part of your product development.
- In a BOT model, a service provider establishes and operates an offshore development center on behalf of the client for a specified period.
- The client benefits from the provider’s infrastructure, resources, and expertise during the “build” and “operate” phases.
- After a predetermined period or project completion, the client has the option to transfer the operations and team to its own entity or continue with the service provider.
- Although this model is more suitable for start-ups, as well as small and mid-sized companies, it can be leveraged by large corporations as well.
New to software development outsourcing? Feel free to read our guide on 6 Tips to Help CTOs in Outsourcing Product Development.
When Do You Need to Set Up Your Offshore Development Center?
In this section, we will discuss the most common scenarios, when the ODC model is the best fit.
The Project Scope is Large
For a minor project, like creating a simple mobile app, you can easily go for another tactic, for example, opting for project-based mobile app development services. However, when you are building something massive that requires continuous support and updates, for example, an enterprise application for a Fintech industry leader, you may find the ODC approach more suitable. After assessing the project requirements to define the project scope, time, and cost estimates, set up a dedicated offshore development center, and follow your goals!
You Need a Large and Diverse Team
As mentioned previously, if you require 40 or more experts in your team, you should certainly consider setting up an Offshore Software Development Center.
Olexandr Boyko
Delivery Director at SPD Technology
“While developing a complex solution, you are likely to be working with diverse, and sometimes hard-to-come-by Machine Learning, Data Science, and Cybersecurity experts. It would be a good idea to follow the ODC model and have those experts under one roof, which could be problematic with the other outsourcing options.”
You Are Building Security-Sensitive Software Solutions
When your project contains substantial security-sensitive data, such as financial information or personal customer information, a data breach can entail devastating reputational and financial consequences. Hence, if you have a security-sensitive project and require a powerful cybersecurity team, the Offshore Development Center model could be a better fit than the other outsourcing approaches. Nevertheless, you can also have an in-house cybersecurity team as an alternative.
Benefits of Building Your Own Offshore Development Center
In this section, we will review what tangible advantages the ODC model brings to your organization and how it improves your processes.
Lower Cost of Software Solutions Delivery
Cost reduction is a top reason to use outsourcing services in the first place, according to the respondents of the Global Shared Services and Outsourcing Survey. In addition to the opportunity to pay lower employee salaries for the same level of expertise, you can expect savings in other expenditures such as payments for office rent, IT infrastructure-related expenses or even taxes. This results in a reduced price tag for your software product’s development.
Access to a Wide Talent Pool
Operating in a country with a developed offshoring market, you can tap into a massive talent pool of skilled IT professionals. When a country becomes a well-known offshoring and outsourcing hub, it attracts even more professionals capable of working with the latest technologies. It, in turn, increase your chances of setting up a top-tier development team.
We, at SPD Technology, have numerous success stories of providing highly specialized talent to our clients from different parts of the globe. In one of our cases, we developed a B2B Legaltech Solution for a LATAM Startup, significantly strengthening and dramatically expanding their business presence in the LegalTech market of their region.
IP Rights Protection
Some other offshore development center benefits also include lower risks associated with intellectual property (IP) rights. In the dedicated development center model, you will be required to collaborate with a third-party organization only while setting up your ODC, and no outsiders will have access to the product during the development process.
What Actions You Can Take to Protect IP Rights with ODC
- Draft detailed contracts that clearly define the scope of work, ownership of IP, confidentiality provisions, and any restrictions on the use of the developed software.
- Have all team members sign robust Non-Disclosure Agreements.
- Clearly articulate the ownership of intellectual property rights in the development process.
- Restrict access to sensitive information only to individuals who require it for their specific tasks.
- Conduct regular audits of your offshore development center’s processes and systems.
Control and Engagement
Every expert in the ODC will be a part of your team. They will act just like your in-house team, the only difference being their location. You can set up your management processes exactly the way you find reasonable, and expect higher employee engagement into your project since they have a strong attachment to your company. Speaking of visibility, you can set up reporting processes under your requirements, and keep your finger on the pulse of the project.
How to Set Up an Offshore Development Center
Let’s discuss the most important steps you should take to build an effective and modern ODC that will benefit your organization.
Conduct Research and Analysis
Now that you know what is ODC, it’s time to figure out how to build one. The first move is to determine whether an ODC is a good fit for your organization overall. Conduct rigorous research on the pros and cons of existing models. Our article on IT staff augmentation contains a detailed comparison of the most popular ones, so we advise you to start there.
Select a Location
There are a multitude of factors that positively influence companies’ decisions to establish ODCs, including lower salaries and operational costs, accomplished technical skills, suitable time zones, and cultural similarities. To promote a better understanding of the ODC model’s benefits, later in the article, we will also discuss the related rates by country.
Find a Partner
After selecting the location and deciding on the suitable ODC model, you will need to find a trusted custom software development company to represent your organization in a foreign country.
Assess the experience and expertise of potential providers, as you look for companies with a proven history of successful projects in your industry or similar domains. Consider their tech stack proficiency, reviews of previous clients, and the size of the talent pool. We, at SPD Technology, have been providing offshore development services for more than 18+ years already, and can boast of an 8,9 average customer satisfaction score, 75% Employee NPS. More than 600 technician specialists under our roof would be glad to help you develop new-generation software for such industries as FinTech, LegalTech, and eCommerce.
Start the Recruitment Process
It will be a good idea to clearly define the roles you need in your ODC, outlining the specific skills, experience, and qualifications required for each role. To hire the best possible team, make sure to leverage various recruitment channels to reach potential candidates. This may include online job portals, social media platforms, professional networks, and collaboration with recruitment agencies specializing in offshore hiring.
Get Additional Legal Support
You may need the help of local lawyers or even the expertise of an agency to align with local laws and avoid any legal issues that might result in additional expenses. Local legal professionals can assist in drafting employment contracts that adhere to local labor laws, ensuring that your workforce is legally compliant. Moreover, they can provide insights into intellectual property protection, helping safeguard your proprietary information in accordance with regional regulations.
Open an Offshore Software Development Office
While your offshore development team is being assembled, it is time to think about the office space. The location, availability of parking lots, security level, office planning, number of seats, and equipment are all very important factors for a productive working environment.
Offshore Development Center Challenges & Risks
The right vendor can help you avoid the risks and challenges mentioned in this section, however, you should still be aware of the most common roadblocks you may face.
Contradictory Pieces of Advice
Opening an office in a foreign country usually requires that you consult with several law firms, accounting specialists, and financial advisors. At the same time, they may provide you with contradictory information. To protect your business from the risks of misleading advice, you should find a vendor that has proven experience in the region’s IT industry to avoid this potential problem.
Tips On How to Navigate Through Legal, Financial, and Regulatory Landscapes
- Engage with local law firms that specialize in international business law. They can guide you through the legal requirements for setting up a business entity, obtaining necessary licenses, and complying with local regulations.
- Work with accounting and tax professionals who understand the local tax laws and can help you navigate tax obligations in a foreign country. This includes corporate taxes, employment taxes, and any other relevant financial considerations.
- Familiarize yourself with local employment laws and regulations, including hiring practices, employee rights, and benefits. Consider consulting with HR specialists or employment law experts to ensure compliance.
Recruitment Challenges
There are cases when local recruiters, appointed by a company, fail to hire the necessary IT experts within a reasonable time to quickly form and put together an effective team. It is advisable that you use the services of experienced recruitment agencies or a partnering company to assemble your initial team.
Management Challenges
It is important to set up a management structure that will balance visibility and power to facilitate decision-making locally. If not managed properly, your Offshore Development Center may potentially end up with the same communication problems many outsourcing arrangements have. You must ensure to have a project manager for each offshore development team, follow the Agile approach, and introduce reasonable communication practices.
Need more actionable tips for remote software development team management? Find them in our detailed guide!
Legal Challenges
The legal regulations and business policies of a foreign country can be a major obstacle in Offshore Development Centers setup and operations. Make sure to research the legal landscape and consult a local legal agency to prevent any possible issues when you make a decision to establish an overseas business presence.
Security Challenges
Just like with any outsourcing and offshoring arrangement, you should always be aware of possible security issues. To mitigate these risks and prevent the leakage of sensitive information, robust network security must become an integral part of your ODC’s infrastructure. Additionally, you can make security audits and risk assessments on a regular basis to deal with the security challenges of your situation.
Cultural Differences
Even under best-in-breed management and communication approaches, different cultural values are always a challenge when people from different countries work together. Hence, it makes sense to operate in a region with a similar culture.
Olexandr Boyko
Delivery Director at SPD Technology
“For instance, if you are from the US and want to set up an R&D center in Ukraine, Poland, Romania, or any other Eastern-European country from a cultural perspective, it could prove to be a better idea than opening an ODC elsewhere. While there still may be some bumps in the road, the possibility of friction associated with cultural differences will be dramatically reduced.”
Popular Locations for ODC Setup
Often, the financial cost of building your offshore dedicated center will primarily depend on your employees’ salaries and rental costs. However, you still shouldn’t be guided by financial aspects only. When choosing the best destination to run an offshore development project, consider such factors as:
- Geographical proximity to your headquarter
- Time zone differences
- Cultural compatibility
- Infrastructure and connectivity
- Political and economic environments
- Legal regulations for foreign investment
- Cost beyond labor.
Now, let’s take a look at the most popular regions, suitable for opening an ODC.
Asia
Among the Asian countries, India remains the prime destination for offshore development center services. According to Statista, the size of the IT outsourcing market in India is projected to reach US$10.51 billion by the end of 2024. Additionally, India remains the country with the most competitive salaries for software solutions developers.
Another top IT country in this region is China. The revenue in its IT outsourcing market is expected to reach US$28.76 billion in 2024. There are predictions that this number will increase with an annual growth rate (CAGR 2024-2028) of 9.74%, resulting in a market volume of €38.13 billion by 2028.
Eastern Europe
This region is a reasonable alternative to Asia, with more than one million IT experts available. Ukraine and Poland have the biggest talent pools in this region, with Ukraine alone having nearly 1000 software development companies, according to Clutch.
Poland is a great place to open ODC, as it has approximately 525,000 software engineers available to take on your project, according to the Future of IT 2023 Report, and its IT outsourcing market is projected to reach US$3.05 billion in 2024.
Ukraine is a standout country in the Eastern European region, with approximately 363,000 IT specialists, and additionally 25,000 IT experts graduating every year. While the annual average salaries of software developers in the US constitute nearly $120,000, in Ukraine you can find experts with the same level of expertise in the $60,000 salary range. Additionally, Ukrainian software engineers have abundant experience in working remotely and operating as part of ODCs, and 70% to 80% of them (according to the number of different surveys) have an intermediate to advanced level of proficiency in English.
Conclusion
Establishing an Offshore Development Center can be an effective strategic move for your business to harness global talent, reduce costs, and accelerate project timelines. By carefully navigating through the initial planning, location selection, team building, and operational setup phases, you can create a seamless and efficient offshore extension of your development efforts.
SPD Technology is an offshore development company with 18+ years of experience. One of our prime partnerships is collaboration with PitchBook via the Build-Operate-Transfer model. At the moment, the Ukraine-based offices under the PitchBook brand contain more than 200 experts who represent SPD Technology. Our offshore team has developed products for PitchBook from the very beginning, and it remains the key development force for the entire organization.
SPD Technology can become your partner, as we can open an ODC for you via the BOT model or help you build an Offshore Development Center via the Dedicated Development Center model, leveraging our powerful recruiting department. Get in touch with us today to start building a powerful and compliant offshore development center!
FAQ
- What is an Offshore Development Center?
Offshore Development Centers are dedicated and often remote facilities that serve as an extension of a company’s onshore development team. It is a model commonly used in the IT and software development industry to leverage cost advantages and build remote teams making the best choice in a global talent pool.
- How to Set Up an Offshore Development Center?
Setting up Offshore Development Centers typically involves several key steps:
- Clearly outline the goals and objectives you aim to achieve by joining forces with an offshore development company.
- Select a suitable location based on factors such as cost, time zone compatibility, language proficiency, and the availability of remote teams.
- Understand and comply with the legal and regulatory requirements of the chosen location.
- Recruit skilled professionals for your dedicated Offshore Development Center, to ensure they cover your core business tasks.
- Implement robust communication and collaboration tools, effectively managing offshore development teams.
- Provide comprehensive training and onboarding for dedicated offshore software developers to ensure they understand the company’s culture, processes, and specific project requirements.
- Implement security measures to protect sensitive data and ensure compliance with data protection regulations.
- What Does an Offshore Developer Do?
Offshore development teams, working in an ODC, typically perform tasks related to software development, testing, maintenance, and support.