Offshore Outsourcing An Overview


The term “offshore outsourcing” has become a common expression in the Information Technology industry. It can be found almost in all trade publications, it is an all the go and you can hear it in the company boardroom to the coffee machine. If you have any relation to any facet of the IT industry, it is crucial for you to be in the know about this latest development in evolution of the industry.

We will introduce the overview of offshore outsourcing scene and diverse ways of how organizations are involved in offshore outsourcing. We will also provide the number of recommendations for executives and managers who consider offshore outsourcing for their company.

Let us look a bit closer at the term “offshore”. Offshore in the expression “offshore outsourcing” stands for any overseas country where wages IT professionals’ salaries are significantly lower if compared to the developed countries. The most popular locations for offshore work are India, Russia, and Ireland. Other destinations to mention are Eastern Europe countries like Ukraine and Bulgaria, Israel and China. Low salaries in these countries are conditioned by low cost of living. The average salary in these countries may range anywhere from one-third to one-tenth of the salary similar skills in Western markets. Now the turn of term “outsourcing”. From the point of view of business, outsourcing is when a definite piece of activity is transferred to a third party provider to be performed. Generally speaking, outsourcing involves two or more independent organizations working together. For instance, a US Company draws the specifications for a software application, and passes it to Ukrainian Outsourcing Company B for development. There are some types of IT work that is typically outsourced: software development, remote system administration, product support and maintenance.

Having considered the definitions of offshore and outsourcing we can now put them together and define the term of IT offshore outsourcing – outsourcing of IT functions to overseas countries. Offshore outsourcing can already boast of some history. IT offshore outsourcing dates back to the 1970’s. The pioneers were several Indian companies which rendered services to US organizations at those times. IT offshore outsourcing began to gain scale in the early 1990’s and became all the go during the dot com Boom of late 1990’s. Later on, when the dot com boom faded away, offshore outsourcing shifted to center stage – the locomotive was the fact that due to offshore outsourcing companies were able to lower costs of operations and new development.

Offshoring activity may have several categories:

  • Completely offshore. Represented by small companies conducting business in offshore countries. They typically hire from 1 to 50 employees. Such companies spend very little, if anything at all, on external marketing. Their business is driven by from word of mouth promotion and referrals from ongoing customers. They rarely have offices in countries where their customers come from. This category also includes freelancers and informal teams of friends and associates working together.
  • Completely offshore with representative office (-s) in the client countries. Availability of an office in customer countries is an effective tool to get client leads and market their services. These are largely medium to large sized companies, with the staff from ranging from 50 to several hundred. The top of this category are companies employing thousands and generating millions of US dollars revenue.
  • Western companies that established their own dedicated development centers in offshore hubs, it is also usually called a hybrid model. The bulk of global IT companies have their centers offshore, and even medium sized companies also turn to this alternative.
  • Western companies acting as mediators for offshore companies. They are also called service brokers: they have their own network of offshore companies. They usually offer end to end project management, including project and financial risk management, or just introduce a Western company to an offshore provider and charge a commission on the work done.

Some recommendations on using offshore resources:

  • Point out potential companies by inquiring your associates and looking through online offshore provider directories. If you run a small company, completely offshore company would be an ideal choice for you.
  • After having chosen some prospects, find out as much as possible about the company. Scrutinize their online case studies and portfolios. If a company seems to be a good candidate for partnership, ask for references and learn their testimonials. Try to get direct contacts of former and ongoing customers to communicate with them.
  • As soon as you made a decision to partner with an offshore provider, start with small pilot projects. This will allow you to test their abilities and expertize without jeopardizing your own business.
  • Make sure to have risk management mechanisms in place and sign service level agreements with your offshore partners, also sign non-compete and non-disclosure agreements.

Offshore outsourcing became an essential part of the IT industry. In the following few years, its importance will only grow. Analysts predict that 25 per cent of IT jobs will be “offshored” by 2010. And the question will be not whether to outsource or not, but which partner and strategy to choose.