The 2011 European ITO research finds that the majority of the Western European outsourcers partner with their service providers via dedicated development center (DDC) or fixed-price project-based delivery models. Another interesting finding is that these very companies demonstrate rather high levels of dissatisfaction with the provided services, point to poor project management on partner’s side as well as hidden agenda and are prone to terminate their outsourcing contracts and back-source operations back in-house.

My thorough assessment of diverse business models and their factual capability to bring long-term value to the ITO buyers does not support the whole ballyhoo around traditional outsourcing models that almost ninety percent of both nearshore and offshore service providers continue to evangelize in their sales pitches and presentations globally. Instead, it supports another less popular thesis that these models are the major contributors to the failure of the outsourced engagements.

In the outsourcing context, DDC is referred to as having full-time cost-effective developer resources allocated to work exclusively on client’s projects for a prolonged period of time, i.e. as an extension of client’s organization in the nearshore or offshore country. Simply speaking, ITO vendors are ideally supposed to provide their partners with all of the necessary resources, facilities and project executors that correspond to each client’s business needs, culture, mission, objectives etc. The key word here is ideally. The reality is oftentimes a far cry from this. In reality, most of vendors intentionally put the same people in multiple clients’ projects in order to save money on  new hires and their induction and training. Additionally, only few ITO vendors with a very positive track record can afford to hire specialists with sufficient expertise and pay them accordingly. It is therefore a frequent practice that the client’s dedicated team is actually comprised of people with qualifications not as high as billed for or even with the wrong skills. As a result, the client gets a team of under-qualified and under-paid developers to execute the project. Such situations inevitably lead to the delayed project delivery, unmet milestones and hidden agenda.

When offloading their software development projects to an external provider via DDC model, clients often end up surprised with why the actual incurred costs of the outsourced services far exceed the contracted ones (sometimes up to 75 percent) and why they manage to save only 10 percent or less from their outsourced development, while promised to be able to save up to 60 percent at the pre-agreement stage. The answer is simple – it happens because they do not know what they actually pay for beyond their SLAs. And they pay for everything – from vendor’s staff turnover to infrastructure upgrade to project managers’ pay increase to God only knows what else.

Models like DDC allow ITO vendors to use different “dirty tricks” to bid low at the pre-agreement stage and “milk” their clients later, at the production/implementation stages: they intentionally exclude some of the project features from the initial estimate and charge extra for scope change later on or they intentionally drag out the project in order to have billable work for a longer period of time. And there are much more likewise tricks discouraging ITO buyers from any further engagement and causing them to back-source.

The bad news is that no matter how thoroughly ITO buyers study their DDC contracts, they are almost always doomed to face the hidden costs of outsourcing and pay overheads. But the good news is that there is a much healthier alternative – Own Development Team model. It is an innovative Outsourcing 2.0 business model characterized by agility, flexibility, innovation and sustainability – a perfect mix for a successful long-term strategic outsourcing journey. Unlike DDC, in which the client relies on the vendor’s project management, retention strategy and honesty, Own Software Development Team model allows the client to have 100% managerial control of every tiniest detail related to their outsourced project. Within this model it is the client, not the vendor, who hires talent to complete the project, sets up and negotiates each team member’s compensation and social benefits, creates own retention/promotion/training strategies and works directly with the team avoiding any intermediary project management on vendor’s side. To put it in a nutshell, it is equivalent to running own in-house IT department, but for a much lower price and with minimal administrative “headaches”. Within this model the ITO vendor acts a provider of the office space, candidates’ pool and value-added services, but not as a sole project executor.

The client’s own team can work independently from the vendor’s IT infrastructure, i.e. can have its own room and room access system, own dedicated server or remote access to the corporate server in the home country. But what is more importantly, the client relies on own outsourcing project management and has a chance to keep the knowledge in-house, avoid misunderstanding and better protect corporate data safety. The model also allows ITO buyers to properly evaluate each outsourced team member’s contribution to the project and reduce/eliminate staff turnover by different creative incentives.

But the greatest advantages of the Own Team model are focus on / factual capability to establish long-term outsourcing relationships and pricing transparency. The client company normally pays a fixed price comprised of each team member’s salary, vendor’s service fee and a local administrative tax. My raw calculations show that managing own outsourced single-person team in a low-cost Eastern European country like Ukraine or Belarus will cost a Western European company from EUR 1,800 to EUR 2,700 per person per month depending on developer’s seniority, technologies used and location. And this price will remain flat all the way in the project. In DDC model managing the same single-person team will eventually cost a double price given all of the extra charges described above.

Considering today’s stringent intellectual property (IP) protection concerns and high cost / shortage of domestic IT resources in Western Europe, Own Development Team seems to be the best solution to these and other challenges. However, this model works best with nearshore outsourcing, as it requires very frequent trips from client’s to vendor’s site and the shorter the distance, the more effective the communication and the lower the travel costs.

Those not so many European outsourcers that already use own development team in their outsourcing journeys are a way more satisfied with the general ITO outcomes and savings as well as quality of deliveries, although saying that the model does increase the management expenses. But investing in own project management leads to the in-house knowledge accumulation and better strategic vision which, blended with the expertise of the cross-border teams, permanent knowledge sharing and rapid time to market, will save the company a fortune and help gain a sustainable competitive advantage in a long-term perspective.


The Author: Viktor Bogdanov is a research coordinator and managing director of IT Sourcing Europe, a UK-based IT outsourcing market intelligence company.

> Mehr von diesem Autor: Recent Survey Reveals Key IT Outsourcing Trends in Switzerland in 2011