While the feasibility of utilizing offshore/nearshore resources for the delivery of certain business activities or processes has already been established, the long-term strategic viability and appropriateness of various engagement models is still under scrutiny.

The most common approaches today are to work with a third-party outsourcing provider or to set up captive operations in lower-cost locations. Participation models can be differentiated based on the client organization’s need to control management, operating costs, risks, and other factors.

Third party outsourcing

Third party outsourcing is a classic customer-supplier relationship governed by contractual obligations and service level agreements. It is primarily driven by tactical reasons, such as short-term cost savings and staff flexibility. Non-essential or non-critical activities are typical candidates for outsourcing.

Traditional third-party outsourcing comes in two main forms:

• Project Based Outsourcing it is considered the most appropriate for software development with well-defined requirements and deliverables. It is suitable for irregular but ongoing or one-off projects. On-site presence may be required to facilitate estimation, specification, and relationship management. Typical pricing models are Time and Materials (T&M) and Fixed Price.
• Dedicated Development Center The model addresses software with changing requirements, maintenance and support of large systems, research and development, testing, as well as other types of complex ongoing tasks in the medium or long term. In this type of engagement, the vendor provides the necessary facilities and assigns a team that works only on the account’s projects and is managed by a customer representative. This option is often preferred when resource requirements are low. The client is charged a flat monthly rate per full-time employee (FTE).

captive operations

When considering how to organize the remote delivery of software development services, the captive subsidiary option is often not given full consideration compared to outsourcing. While it is generally accepted to outsource certain non-critical activities, in certain cases this approach is inappropriate for core functions and critical activities. The decision to take the work overseas/nearshore does not necessarily mean that you have to outsource it. Using remote resources to deliver functions close to the core business while maintaining operational control and benefiting from real cost advantages can be achieved by creating captive facilities, thus keeping work in-house.

The captive model means that the client organization makes a strategic decision to create its presence in the lowest cost location and perform the work there as part of its own operations. Activities are performed remotely, but are not outsourced to the provider. Therefore, the client can retain full control and mitigate respective risks associated with intellectual property and other sensitive business information.

Organizations looking to establish captive centers have similar goals as those implementing traditional or shared service business operations. First, captives are supposed to reduce costs through labor arbitrage. But recent research shows that buyers are looking not only for cheaper labor but also for skilled labor in overseas/near-shore locations. They want to gain competitive advantage and profit from process improvements. To avoid the risks of underutilizing captive capabilities, organizations must carefully assess their long-term operational requirements and predict service needs that may arise in the future.

The most common approaches to establishing captive operations are the following:

• Creating a captive hub from scratch (DIY captive) can be successful when the client organization has the necessary resources, local expertise, and market knowledge. The decision to establish your own captive center can evolve organically through growth. The organization can conduct extensive due diligence on its own or purchase an existing business with operations in the chosen location.
• Construction Transfer operation (BOT) stands for partnering with an outside provider to establish and stabilize the center. The provider is responsible for the initial setup, staffing, and operations of the captive center for the pre-defined period of time. At the end of the contract period, ownership is transferred to the customer. Thus, the organization takes charge of the turnkey captive center adapted to its specific needs. The BOT option is best suited for organizations that do not have local expertise or extensive resources available. In this type of engagement, only the logistics associated with setting up the captive center are outsourced. Build-Operate-Transfer optimally combines the control element of the pure captive model with the flexibility of outsourcing. Essentially it provides maximum control with minimum risk.

Main benefits of having your own captive center:

• Continuous realization of real cost savings
• Total operational supervision and control
• Full ownership after transfer
• Minimization of intellectual property and data security risks
• Retained knowledge of specific industry, processes and business techniques.
• Improving communications through continuous reinforcement and experience.
• Easy replication of parent organization processes
• The captive center may be commercialized at some point in the future

Both outsourcing and captive operations have similar driving forces (cost reductions and competitive pressures in the first place) and particular advantages, but the main factors for choosing one or the other vary.

Both approaches will provide benefits in terms of improved focus, process optimization, operational cost reduction, faster time to market, etc. But companies must carefully evaluate each option to identify the one that best fits their specific requirements, company culture, and strategic goals.

The approach selected will depend on whether the primary driver is short-term cost savings or whether the company has a long-term vision for offshoring/nearshoring and wishes to retain control over processes and intellectual property.

Establishment of a captive center near the coast in Ukraine through the BOT model

If software development is a core competency of your company and you have long-term specialized resource requirements, it makes sense to develop your own capacity to support the full software lifecycle, secure intellectual property and develop specific expertise. Today this process is not as difficult as it used to be. The key to success is finding a trusted partner who is already operating in the country environment. By doing this, you will benefit from:

• Clearly defined setup methodology and schedule
• Step-by-step planned implementation
• Responsibility for all logistics associated with establishing a captive center
• Working knowledge of setting up IT business and dealing with related legal and contractual issues.
• Thorough understanding of the cost and effort components associated with setting up and running a software development center in an offshore/nearshore country
• Practical experience in generally recognized software engineering, methodologies, processes and quality assurance that can be adapted to the captive center
• Established HR practices, experience recruiting qualified IT staff
• Attention to address security and business continuity issues.
• Advice and support throughout the installation process
• High level of business commitment and responsiveness.
• Flexible customer-specific approach