I often meet the assumption that a sourcing partner is an additional expense that diminishes the economic advantage of outsourcing software development. The thought is in itself not unreasonable:
How can adding a supplier (and their margins) be an economic advantage? Moreover, when is a company better off arranging the outsourcing themselves?
In the following, I will explain some of the services you should be getting from a reliable sourcing partner. I will also address how a sourcing partner is likely to handle software development better than the company itself, and which type of projects a company might be better off handling alone.
As my experiences are from Ukraine, I will use this country as my point of departure in the prices. I believe the calculation will have the same outcome, whether outsourcing to Poland, Pakistan or some other sourcing destination.
In the diagram beneath, you can see the various tasks a sourcing partner should be handling. Therefore, these services should all included in the fee you pay to your sourcing partner.
When using a sourcing partner you should at least get the deliables listed above.
At the outset, there are a few very significant questions you need to ask:
· How is the market governed in the country you wish to outsource to?
· How is taxation?
· And what about the general labor conditions?
If you do not have detailed information about your target country, you have to study the macro environment thoroughly to be ready for operations. This is a very significant overhead; mistakes are easily made but can be very expensive. With a reliable sourcing partner, you do not have to spend time and energy on this part: they already know all about the macro environment.
What is the average salary in the country? Experience shows that when clients from Western Europe negotiate salaries, they pay more. If you do not have a clue, it will be difficult for you to know if you are overpaying your developers. Even if you hire a recruitment agency, you can actually still end up paying too much for your developers: agencies’ fees are related to the developers’ salaries. Therefore, the agency could be interested in negotiating a high salary for the developer. If you don’t know market rates, you may think that EUR 3.000 per month is cheap. If the same developer would be satisfied with EUR 2,000, you are basically over paying EUR 1,000. As well as having a vested interest in higher salaries, recruitment agencies also demand 2 or 3 months’ salary as a part of their fee. Your sourcing partner should be doing this and it should be in your fee. What’s more, they know the salary level in the country and do not have any interest in increasing the salary level.
Although you have a sourcing partner, you are still involved in the recruitment process. Your sourcing partner introduces a number of talented candidates for you, after which you choose the developers you would like to work on your project. You do not have to spend a lot of time on looking for candidates in a CV database.
You could theoretically handle the integration (the start-up of new teams, integration between the in house and the outsourced developers and the integration of new team members on existing teams). However, it requires that you have an employee in the sourcing country to run this process and that you have an understanding of the cultural differences, which exist between your own country and the sourcing destination.
Visa applications and payrolls are quite easy to handle, as long as you have reliable staff to do it. You have at all times to ensure you pay the correct social fees etc. If you can manage this, the task is fairly simple, especially if you are prepared for the fact that communicating with the local authorities can be a very timely matter. Indeed, this can be a black hole on your time and if you get it wrong may negatively impact your ability to deliver.
When finding an office for your developers, you have to know the law for buying/leasing offices in another country and evaluate if you really have the ability to negotiate a leasing contract abroad.
When you have a sourcing partner, they handle all practicalities. Your developers have an office; they have access to meeting rooms, scrum-rooms, a canteen etc. Naturally, you will be sharing these facilities with the sourcing partner’s other clients and their developers, but it means that you benefit from economies of scale. Contrary to what many people think, the price for renting an office in Eastern Europe is often significantly higher than what we know from e.g. Scandinavia or Germany, so being on your own you need to pay quite a high rent per person as you cannot share cost of, e.g. meeting rooms or recreational areas with others.
Similarly internet connections are more expensive so having to get sufficient bandwidth and probably also backup connections from a second and maybe even a third ISP is costly when it cannot be shared with others.
A good sourcing partner will ensure that your developers participate regularly in technical seminars and English classes, which makes it easier for you to communicate with them. You could also handle these sessions yourself, but it can be difficult to find the best IT seminars in the country and you have to spend time on the English classes as well.
Once your development team in e.g. Ukraine is up and running, it is important that someone is monitoring them locally. You can decide to handle the monitoring yourself, which may make sense since it is your team. However only by being in the same location as the developers you can truly monitor atmosphere, distribution of workload etc. So that means that you should calculate a cost of having someone permanently at the remote site.
Often, a sourcing partner has a good relationship with the universities in the country and they know the IT market, which is a good foundation for the recruitment process I mentioned earlier. In addition, it is important to prioritize the welfare of the developers, as it will motivate them to speak fondly of the company. A good reputation is important, when you want to recruit the most talented developers. It can be difficult for a minor company with few employees to attract the best developers; it is much easier for a sourcing partner with an extensive network. Even large companies with very strong local brands can have difficulties in finding developers, as they don’t have the same brand in the sourcing country.
With or without a sourcing partner?
After having presented a variety of the tasks a sourcing partner handles, it is obvious that many services are included in the fee you pay to the sourcing partner, so I am confident that it will always be beneficiary to involve a sourcing partner due to economies of scale and market knowledge.
Carsten Hansen, CEO