Nearshore Dedicated Development Center - a Viable Long-term Outsourcing Alternative for European Companies

According to Gartner research, growing number of European businesses seeks possibilities to benefit from global sourcing of software development services. In the recent years, more and more companies are getting involved in nearshore outsourcing partnerships – contracting vendors from lower-wage countries, which are relatively close in distance and time zone. They prefer nearshoring over offshoring mainly for benefits associated with cultural, geographic, time and linguistic dimensions of proximity.

Companies that are interested in long-term outsourcing for satisfying their growing software development needs may consider the following three alternative models: project-based, dedicated center and captive operations.

Some businesses that find typical project-based outsourcing to be unsuitable to their needs may decide to establish captive facilities in attractive nearshore locations (namely Eastern European countries) and conduct work there as a part of their own operations. However, this model has tangible disadvantages in terms of risk, investment, operational efficiency and organizational issues. Thus, it can be applied mostly by large companies and multinational corporations that are ready to invest heavily, take calculated risks and allocate necessary management resources. In this respect, nearshore dedicated development center (DDC) engagement appears to be a viable alternative for businesses with expected long-term need for software outsourcing.

Project-based model is regarded as the most appropriate for development of rather big and well-defined applications or their modules. Alternatively, dedicated center caters for software with changing requirements, maintenance and support of large systems, research and development, testing as well as other types of complex tasks. DDC is about having full-time cost-effective developer resources allocated to work exclusively on client’s projects for a prolonged period of time. It serves as an extension of customer’s organization in the nearshore country.

In DDC type of engagement, vendor is responsible for providing necessary facilities and setting up a software development team that correspond to client’s methodologies, practices, management style and even business culture. Nearshore partner also undertakes administrative functions, support of technical and office infrastructure, staffing, human resources management and ensures service delivery standards.

Advantages of nearshore dedicated center model

* Cultural and geographical proximity

* No or insignificant time zone difference

* No long-term initial investments

* Full operational control

* Mitigation of business risks

* Quick return on investment

* Consistent and flexible team

* Competitive rates and flexible pricing

* Readily available technical and office infrastructure

* Accumulation of customer-specific business process knowledge

* Joint venture and Build-Operate-Transfer options

* Strong service delivery and methodology practices

There are several types of DDC engagement options catering for different needs of the customers.

Staff-based dedicated team model is probably the most common for clients that possess outsourcing experience and utilize solid offshore/nearshore delivery practices. In this case vendor only provides necessary facilities and allocates a team that works only on account’s projects (client has full operational control).

Certain types of dedicated centers address more specific needs associated with technology and vertical expertise as well as the purpose of the project. They are tailored to custom business models. Term "tailored DDC" covers the following: product development center, product competence center, project center, research and development center, software maintenance and support center, application reengineering center, quality assurance center etc.

Joint venture DDC may be considered as a transitional stage to establishing captive operations in the nearshore location. Since it is funded by both vendor and customer, this contributes to risk sharing and improved performance tracking/reporting.

"Build-Operate-Transfer" option basically means that vendor sets up necessary infrastructure, hires people, establishes and operates dedicated center for a predefined period of time. Afterwards this facility is fully transferred to the client. At the initial stage vendor assigns technical experts and managers who become the core of the future organization, adopt and implement customer-specific processes and practices, conduct staffing and training of the personnel. At the transfer stage client becomes the owner of a stable captive software development facility staffed with appropriate specialists and operating with minimal supervision by parent company. Benefits of this type of engagement are lower overall infrastructure costs and having turnkey captive operations staffed with well-established team of developers.

Methodology of establishing a nearshore dedicated development center

Outlined below are steps that most of software development vendors generally follow to set up nearshore dedicated center and ensure its optimal performance in accordance with customer’s existing practices and project objectives.

* Definition of cooperation model

* Negotiating formal Service Level Agreement (SLA)

* Building a dedicated team

* Setting up technological and office infrastructure

* Definition of communication mechanisms

* Knowledge transfer (onsite to nearshore/offshore)

* Alignment with customer's objectives/requirements

* Training of the dedicated team

* Project execution

* Review of DDC performance and SLA

* Implementation of the feedback