Are you thinking about offshore outsourcing? Overview of things to consider

Nicolas
Oct 18, 2024
5 min read

Multiplication of technologies, complexity of infrastructures, criticality of systems and information... responding to the various challenges of IT operability or the expansion needs of an organization is becoming extremely difficult and costly.

Controlling operational costs in IT often involves outsourcing.

Outsourcing, yes but what?

When deciding to outsource, you must first choose which part of your IT you wish to outsource: site/software development, application operability (ERP, CMS, CRM, etc.), infrastructure operability , IT support, etc.

In all cases, it is important to maintain a certain control and independence for everything that can be considered critical for the company, its core business for strategic reasons (avoid entrusting the entire development of its flagship software to a third party company for example).

Onshore or offshore outsourcing

Onshore outsourcing is very frequently used and involves entrusting specific missions to a local service company (ESN). ESNs cover all needs and allow an organization to effectively modulate what it wishes to outsource and what it wishes to keep internally. It is not uncommon for an organization to call on several ESNs, each meeting specific needs and also making it possible to avoid creating strong dependence on a single partner.

Offshore outsourcing consists of using a company (or subsidiary) based in a third country. The choice of offshore is generally made more with a view to reducing costs than to provide specific skills. TMA (Tierce Application Maintenance) and NOC (Network Operations Center) are the most frequently concerned by offshore outsourcing, but it is not uncommon to also find outsourcing in an expansion process.

Offshore…but in which country?

choosing country for externalisation — Choose the country for your outsourcing

The choice of country is very delicate and must be made taking into consideration a certain number of parameters that are more or less difficult to evaluate.

First of all, it is essential to consider the economic and political context of the country. Are there economic agreements between countries that can facilitate this collaboration? What are the risks of political conflict? diet changes? Is the local currency stable compared to the currency used in my organization?

As an example, the recently observed case of an IT development company with experience in offshore outsourcing. The company, based in the United Arab Emirates, has 3 development centers: 1 in Western Asia, 1 in Western Europe, and 1 in Southeast Asia. In search of a market with advanced skills in artificial intelligence, the company decided to open a new center in Ukraine and at the same time strengthen its center in Western Asia (the two countries forming part of the former union Soviet, Russian is widely used in each country, promoting communication).

A few months later, the conflict between Russia and Ukraine began. Despite its efforts to maintain its center in Ukraine, the company had to close it shortly after. The conflict will also have significant economic repercussions in the region, including a significant variation in exchange rates, leading to an increase of more than 30% in the cost of the center located in West Asia.

While it is difficult to predict a war, certain regions of the globe are more prone to the escalation of armed conflicts. It is therefore unrecommendable to bet doubly on countries which could be affected by the same upheaval. In the specific case of this company, the choice of a country like Estonia would undoubtedly have been more judicious.

Then, it is obviously necessary to analyze the local market and the job market. What is the cost of labor (minimum income, average income for the type of professional sought)?

Is it difficult to find qualified resources? Searches on local job sites or on networks like LinkedIn can provide some answers. Analyzing teaching programs at local universities is also a good source of information.

Another important point to consider: language. What is the communication language that will be used between the local site and the remote site? In general, there are two scenarios: the two countries have the same official language; the 2 countries communicate in English. In this second case, it will be necessary to ensure the real competence of the staff of the 2 sites to express themselves correctly in the language of Shakespeare (it is not uncommon for decision-makers to overestimate the real level of English of their teams, then shifting the blame to the offshore teams on the pretext that the accent is disturbing).

Finally, something that is often difficult to measure concerns professional culture. The relationship with work and/or with the employer differs greatly from one country to another. Rigor, absenteeism, loyalty, integrity... are all factors which can have a strong impact on the success of its outsourcing. Absenteeism or significant turnover will negatively impact the profitability of the offshore site.

Always linked to the local labor market, the legal framework is of particular importance in the offshore outsourcing process. First of all, if you need to set up a subsidiary of your company, you'll need to follow all the local procedures and take into account the associated costs and legal obligations.

Corporate tax rates ;
Level of capital gains tax;
Social security contribution rates;
Simplicity of administrative procedures;

The country's banking system must also be taken into account.

Bank charges ;
Exchange controls;
Remote banking (Internet);
Membership of the IBAN network;
Authorization for a foreigner to hold an account;

The Labor Code also needs to be studied with care. What are the legal working hours? How many paid vacations per year (including public holidays)? What is the legal severance pay?

As public holidays and school vacation periods generally don't coincide with those in your own country, you don't want to create any operational bottlenecks in your company on days when the offshore site is not open.

To conclude this review of the challenges of outsourcing, although it may seem obvious, the location of the chosen country can have some significant operational implications. Collaboration with your offshore center will essentially take place in 2 ways: via online meetings, and during one-off assignments where staff will have to travel.

In the first case, the time zone of the offshore country can have a major impact on the range of time slots available for online meetings. When the time difference is limited to 1 or 2 hours, the impact is negligible. On the other hand, with time differences of 5, 6, 7 hours or more, there will only be a few hours a day when teams can communicate with each other.

In the latter case, it is important to define in advance the frequency of trips, the number of employees involved, and thus calculate the cost of each trip (transport costs, accommodation costs, meal costs, cost of employees being unavailable during trips, etc.).

Conclusion

Offshore outsourcing is far from trivial, but can nevertheless represent a substantial gain. You also need to be careful about how offshore outsourcing is perceived by your local team. There may be a certain fear of having part of your business outsourced to low-cost labor. It is therefore essential to point out the potential benefits of the approach, such as the possibility for local teams to concentrate on future projects, or accelerate developments to bring new products to market quickly.

In any event, it is important to define a contingency plan in advance, so that outsourced services can be “repatriated” at any time, should a problem arise.

Some examples of countries often used for offshore IT: