Exerpt from An Overview of Offshore Software Development, by Dr. Bernard L. Palowitch, Jr., President & CEO of Incoda Corporation.

Business Models

There are two primary models for performing offshore development: (1) offshore outsourcing model, and (2) offshore ownership model. There are several variations within each model.

Offshore Outsourcing

The offshore outsourcing model involves a customer, usually located in a developed country, who contracts for specific IT services with an external services supplier in a developing country. The supplier uses technical resources located in the lower wage-rate country to fulfill all or part of the contract. There are three variations of this model that depend on the physical location of the project team.

1. Onsite / Offshore. In this scenario, the supplier deploys a project team that is split between the customer’s location and the supplier’s offshore development center. The primary benefits of the Onsite/Offshore approach are improved communications between the customer’s business and IT personnel and the supplier’s on-site team members, faster issue resolution, and greater influence and control over the requirements by the customer. The drawbacks of this approach are that it generally requires higher levels of involvement from the customer’s staff and that it requires an on-site (i.e., physical location) for the onsite team.
   
   
2. Offsite-Onshore / Offshore. In this scenario, the supplier’s project team is not located on site, but is split between one or more of the supplier’s own offices in the customer’s country or from a separate leased facility near the customer’s location. As in the Onsite/Offshore approach, the work is performed by a combination of offsite-onshore and offshore technical resources. This approach is best when the customer does not want or does not have the space for the supplier’s project team on-site.
   
   
3. Pure Offshore. In this scenario, the entire project is performed offshore. The supplier does not have any local presence and all of the communications between the customer and supplier are done electronically—not face-to-face. The Pure Offshore approach provides the greatest cost savings but at an increased risk for miscommunication and misunderstandings over requirements and deliverables.

Offshore Ownership

The Offshore Ownership model provides greater ownership and control over the delivery of offshore services than the Offshore Outsourcing model. There are two basic approaches.

1. Joint Venture Offshore Facility. In this approach, a customer and an offshore supplier use a long-term contract, formal business partnership, joint venture, or other business arrangement to establish an offshore facility. For example, MasterCard launched an IT-services joint venture with Mascon Global Ltd., an offshore service provider in Chennai, India. The companies launched Mascon-MasterCard Global Technology Services Ltd. to develop and maintain software for MasterCard's core processing functions. The new company, 51 percent-owned by Mascon, had half of its programmers devoted to MasterCard projects and the other half assigned to other clients. [1] In this type of arrangement, staffing levels fluctuate based on the needs of the client or project. Suppliers will typically submit fixed-price bids for standard ADM projects and bill on a time-and-materials basis for new or more complex work. A benefit from this type of model is increased cost savings; a drawback is that the customer is bound to a long-term agreement. Companies typically enter into a JV arrangement only after they have had several years of positive experience with an offshore supplier.
   
   
2. Dedicated Offshore Facility. The dedicated offshore facility model is typically embraced by only the largest companies who have huge software development demands and a need to fully control the software development process and resources. These companies view the investment in an offshore facility as part of a long-term strategy, have the capital for the initial investment, and have significant business experience in the offshore country. The primary benefits from a dedicated facility are immediate access to technical personnel and complete control over the software development process and intellectual property.

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The selection of an optimal offshore model depends on many factors, including the number and size of the projects involved, the customer’s level of experience using offshore development, and the customer’s business experience in the offshore country. The customer may also choose to manage a portfolio of offshore suppliers, possibly using different delivery models, that recognizes the unique strengths of the individual suppliers and optimizes the suppliers against the company’s IT and business needs.

Build, Operate, and Transfer

The Build, Operate, and Transfer (BOT) model is a dynamic delivery model that evolves with the customer’s offshore development needs and experience. A company’s business strategy may include owning a dedicated offshore facility at some point in the future, but at present, it may lack the investment capital or sufficient demand. In this model, an offshore supplier establishes an offshore delivery facility for the company. The supplier may hire the initial management team; establish the internal software development processes; and then operate the facility with the goal of stand-alone operation. The entire facility is then transferred to the customer at a future date. The BOT model creates the offshore facility desired by the customer, while minimizing the initial capital requirements and start-up and operating risks.

Onshore Presence

Onshore presence by the supplier is highly recommended. Face-to-face interactions simplify communications, enhance project and program management and coordination, reduce cultural conflicts, facilitate workflow, and provide faster issues resolution. When the detailed design, coding, and testing activities are being performed in a country that is 10 or 12 time zones and thousands of miles away, it is reassuring to be able to interact with someone locally.

Outsourcing suppliers can be grouped into categories based on their combination of offshore and onshore presence.

• Offshore companies with no onshore presence. Many small offshore companies do not have the revenues to support overseas offices for sales and technical support. If a local presence is required for a specific project, the supplier will send a team to the customer’s location to perform the onsite tasks. Billing rates are the most competitive in this approach because the project team is usually paid at their domestic (offshore) salaries. A major drawback is that the onsite project team is composed of foreign nationals with little or no experience in the client’s industry or specific business processes. In addition, the cultural and language differences hinder communications. Most offshore companies use this approach.
  
  
• Offshore companies with onshore office(s). The larger offshore suppliers maintain sales and/or technical support offices in their target markets. Depending on the size and type of project, the supplier will tap both local and offshore resources to staff the project team. One benefit from this approach is that technical resources from an onshore office usually perform some of the software development work onsite and onshore, which gives a customer closer control on projects as well as a local contact for questions. Another benefit is that the supplier can respond more quickly to questions and problems because he can access other company resources based in the local market. A drawback is that because the onshore-based team members are usually paid competitive salaries in the onshore country, billing rates are generally higher than companies with no onshore offices. As mentioned above, the onsite project team is typically composed of foreign nationals with little or no experience in the client’s industry or specific business processes, and the cultural and language differences hinder communications. Examples include TCS, Wipro, Satyam, Zensar, and Blue Star.
  
  
• Local (onshore) companies with captive offshore development centers. Several major domestic IT services companies have been establishing offshore development centers as a way to lower their software development costs and be competitive with offshore services companies. A major benefit of using local companies for outsourcing is that cultural and language difficulties are eliminated. In addition, most of the local services companies have specialized industry and business process expertise. Drawbacks of using domestic IT services companies are that the overall project rates are generally the highest of all of the options and that the software development and quality assurance processes are the least mature. Examples include Accenture, Keene, and Cognizant.
  
  
• Local (onshore) companies that use leverage multiple offshore companies. Some domestic IT services companies have established business relationships with many of the leading offshore companies. The combination of two companies provides the benefits of local presence, specialized industry and business process expertise, and the involvement of the optimal offshore company for the specific assignment. Incoda is an example in this category.

Onshore and Offshore Tasks

In offshore outsourcing, the tasks performed during the software development process are split between onsite/onshore and offshore locations. In application development and maintenance, typically the strategy, business needs, requirements capture, solutions architecture, prototyping, and design work are performed by a team of analysts located at the client site. The detailed design, coding, and unit and system testing tasks are then carried out at an offshore development center. User acceptance testing, implementation, and training are conducted primarily at the customer’s location.

The split of tasks between onshore and offshore activities varies, and depends on the specific type of project, size of project, project methodology employed, and other customer and vendor preferences. The ratio may also be adjusted based on complexity of the work and relevant risk factors. [2] On average, approximately 70 percent of the total effort is done offshore and 30 percent of the effort is done at the customer’s location. The 30 percent is further split into roughly equally efforts for client and vendor personnel, yielding a 15:15:70 split, where:

• 15 percent of the client’s staff is retained to provide strategy, architecture, and governance
• 15 percent of the supplier’s resources are co-located (onshore) with the client to provide liaison, functional, and technical assistance and project management
• 70 percent of supplier’s resources are located offshore.

Note that the numbers are averages over the duration of the project. More staff will be required onshore at the beginning of the project.

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To learn more about Incoda's perspectives on offshore software development, please see:

• Overview of the Offshore Software Development (OSD) Market for IT and IT-enabled services
• Benefits and Challenges of Offshore Software Development
• Key Differences Between Local and Offshore Software Development
• Comparison of the Leading OSD Countries

To download the entire Incoda white paper, An Overview of Offshore Software Development, please visit the Resources Section of this website. Registration is required.

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This page discusses the primary delivery models and the split of activities between onsite/onshore and offshore locations for custom application and web software development.