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

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

Third party outsourcing

Third-party outsourcing is a classic customer-supplier relationship that is governed by contractual obligations and service level agreements. It is mainly due to tactical reasons such as short-term cost savings and staffing 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 model deals with software with changing requirements, maintenance and support of large systems, research and development, testing and other types of complex tasks in progress 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 projects in the account and is managed by the customer representative. This option is generally preferred when resource requirements are low. The client is charged a fixed monthly rate per full-time employee (FTE).

Captive operations

When considering how to organize 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. Deciding to carry out work offshore or close to shore does not necessarily mean that you should 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 within the company.

The captive model means that the customer’s 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. The activities are carried out remotely, but are not outsourced to the provider. Therefore, the client can maintain full control and mitigate the respective risks associated with intellectual property and other confidential business information.

Organizations that want to establish captive centers have similar goals to those implementing shared services or traditional business operations. First, captives are supposed to cut costs through labor arbitrage. But recent research shows that buyers are not only looking for cheaper but also skilled labor in offshore / nearshore locations. They want competitive advantages and profits from process improvements. To avoid the risks of under-utilizing captive capabilities, organizations must carefully assess their long-term operational requirements and predict future service needs.

The most common approaches to setting up captive operations are as follows:

• Creating a captive center from scratch (Do It Yourself Captive) can be successful when the client organization has the necessary resources, local experience, 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 Operation transfer Focus (BOT) means partnering with an outside provider to establish and stabilize the center. The vendor is responsible for the initial setup, staffing, and operations of the captive facility for the predefined period of time. At the end of the contract period, the ownership is transferred to the customer. Thus, the organization takes over 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 minimal risk.

Main benefits of having your own captive center:

• Continuous realization of real cost savings
• Full operational monitoring and control
• Full ownership after transfer
• Minimization of data security and intellectual property risks
• Retained knowledge of specific industry, business processes and techniques
• Improved communications through continuous reinforcement and experience.
• Easy reproduction of the parent organization’s 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 bring benefits in terms of improved focus, process optimization, reduced operating costs, faster time to market, etc. But companies must carefully evaluate each option to identify the one that best suits their specific requirements, business 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 wants to maintain control over processes and intellectual property.

Establishment of a nearshore captive center 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 entire software lifecycle, protect intellectual property, and develop specific knowledge. Today this process is not as difficult as it used to be. The key to success is finding a trusted partner that already operates in the country environment. By doing this, you will benefit from:

• Clearly defined schedule and setup methodology
• Step-by-step planned implementation
• Responsibility for all logistics associated with the establishment of a captive center.
• Practical knowledge to establish IT businesses and deal with related legal and contractual matters.
• Deep 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 in hiring qualified IT staff
• Care to address security and business continuity issues.
• Advice and support throughout the installation process
• High level of commitment and business responsiveness
• Flexible and customer-specific approach