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 (see comparison table below).

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.

• 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.

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

Case study:
Intellias - a Nearshore Dedicated Development Center of Pickaweb Internet Servicess

Pickaweb is one of the leading hosting and web development companies in the UK that provides full range of services for web-enabled businesses.

Partnership with Intellias allowed Pickaweb to extend the range of web design services, thus assisting the company in generating additional revenue and strengthening its market position.

In 2002 being limited in development and management resources Pickaweb Internet Services was not able to meet the growing demand for its web development services. The company needed to outsource most of its custom development activities to a vendor that it could trust. Subsequently, Pickaweb was aiming both at strengthening its market position and at limiting resources spent for management of the outsourcing relationships.

Pickaweb signed a one-year contract with Intellias and established a nearshore dedicated development center in Ukraine. At the beginning of the partnership, certain smaller projects were developed. Consequently Pickaweb experienced superior technical and management competence of Intellias dedicated team. Thus partnership relations grew from one project every 6 weeks to weekly-delivered new project.

After reviewing first-year service agreement Pickaweb decided to prolong cooperation. Intellias became its exclusive technical partner for web design and development. Since then a dedicated team of Intellias developers works on behalf of Pickaweb, communicating with end customers via email, instant messengers and phone. Company’s clients would never guess that their projects are developed at the outsourced development center in Ukraine.

"We are satisfied with great performance of the Intellias team and our partnership. For years, Intellias demonstrated outstanding results and proved to be a nearshore partner whom we can rely on. Their competence makes their solutions far above the quality standards, hence ensuring timely, first-class results to our customers", says Antony Messer, CEO Pickaweb Internet Services.

• Additional revenue from web design and development services
• Strengthening market position in web development segment
• Expertise of Intellias dedicated team working for Pickaweb end-clients
• Sharing of management resources
• Possibility to acquire larger projects
• Freeing up resources for concentrating on core activities