The digital transformation of the economy is associated with numerous opportunities – but also with risks if this structural change is tackled too late or with a lack of momentum. But it is also clear that there is no way around it. For companies, the implementation of the Digital Roadmap is increasingly associated with the challenge of finding the right IT specialists. The German NGO bitkom recently reported, that the gap between IT specialists and vacancies is becoming increasingly wider (in 2019 it was 124 000, up from 40.000 in 2017).

Quite a number of Companies have already come up with a response to this challenge, an offshoring or nearshoring strategy has become “the new normal” among companies of all sizes: From start-ups to large corporations. In the following I will give a short overview of the different options (or phases) of an offshoring strategy to India, explaining advantages and disadvantages for each approach.

Option 1: IT Outsourcing of individual projects

If you want to get to know India as an offshoring option, you can may – as a start – have a single software project developed in India – a test balloon. Projects based on the traditional waterfall method are just as suitable for this approach as are Agile projects. As a thumb rule, this approach works best (whether offshoring or nearshoring) for the development of an entire software product or for the software development of a largely independent software module with a manageable number of interfaces to the Core product.

For large companies and larger projects (were more than 15 developers are required) the well-known big players come into question: WIPRO, Tata Consultancy Services, Infosys or also Tech Mahindra. SME should use the services of IT providers such as Categis GmbH.

The advantages of this offshoring option are obvious: The contracts can be designed in such a way that risks in the Software Development Project are largely shifted to the offshoring service provider: Milestone based payment agreements, fixed price per sprint and similar payment options shift risks like employee attrition to the service provider. Project management is carried out by project managers of the Offshore IT Provider who are experienced with cultural challenges and pitfalls, such as time management.

As compared to the option of “setting up your own team”, such a project can usually be started quickly and there is a high level of agility. You can choose the IT Offshore Provider who fits best with the requirements for your spezific technology stack requirements or with a spezific domain knowledge requirement. There is no long-term commitment.

Your project manager may well be a German-speaking person; if the projects are developed in an agile manner, however, you should be prepared to stick to English for the entire communication.

The disadvantages can be summarized as follows: The risks are of course priced in, so this full-service option of offshoring is more expensive than the other options (compare below). In particular, a digital corporate strategy does not only require a one-time software development / introduction, but rather a long-term orientation towards the (further) development of digital processes and digital products; precisely this requires that resources are available in the long term and are more deeply integrated into the product and process development of a company.

Conclusion: Offshoring of individual projects is very well suited to gain initial experience with the IT Offshore location India; it is also the preferred option when you have one-off software development requirements, rather than a long-term IT staffing need.

Option 2: IT Outstaffing or Build-and-Operate

If you want to go for a long-term integration of IT specialists in the development of digital products and processes, IT Outstaffing or Build-and-Operate is a great choice: Software Developers are recruited based on company-specific requirements (target profiles), and a “matching” with the corporate culture of the client is possible (domain-specific interests, company size, project management method, personality). The client is often directly involved in the recruitment process.

This service usually includes the on-site management of the developers, which includes working time monitoring/time management, coaching by senior developers / architects, measures to avoid employee attrition and the like; It also includes the client’s learning-on-the-job of cultural competence that the client lacks at the beginning. Typically, the client also receives advice on remote team management. The provision of a workstation with the entire infrastructure (hardware, software, Internet access, uninterruptible power supply, etc.) is also part of the service.

The establishment of such a team is of course associated with a longer lead time: In first-tier cities (Bangalore, Hyderabad, etc.) the recruitment time for developers is about 2 to 5 months, in second-tier (Cochin, etc.) or third-tier cities the recruitment time can be even longer. The risk of employee attrition (combined with a renewed training period and know-how management / knowledge transfer) lies typically with the client, however, in case of attrition in the first few months after recruitment, the recruitment of a replacement is for free; the contracts can be designed very differently here. Typically, a “management fee” is charged on top of the salary costs (“at company cost”), which are in the range of 1,000 EUR to 1,500 EUR per month.

Conclusion: Build-and-Operate is a good choice for building up long-term resources for a digital corporate strategy. The client can fully focus on employee development, overhead and infrastructure are the responsibility of the offshoring service provider.

Option 3: IT Outstaffing or Build-Operate-and-Transfer

There can be various reasons for transferring developer resources from a build-and-operate-service-provider to a legal entity of ones own: The development team for the client reaches a sufficient size to be able to run its own legal unit at reasonable overhead costs (compliance, accounting, office renting, etc.) This “threshold value” for team size can vary greatly from client to client, but this step is by no means mandatory. It is not unusual for the build and operate service provider to operate development teams of 50 developers and more for a single client.

A trigger for the spin-off may also be that clients attach great importance to “employer branding” or the implementation of their own corporate culture. This applies, for example, to the design of the office space and also its location within a city. Another reason is a deeper technical integration, such as the connection via an SSLVPN to the client’s company network; if, for example, the requirements of ISO 27001 have to be met, this may be more easily achieved by setting up a legal entity of its own.

It is clear that such a spin-off requires sufficient experience with the cultural peculiarities of the IT offshore location India; the issues of compliance, uninterruptible power supply and the like also need to be considered, but meanwhile do not pose any real challenges.

Conclusion: Build-Operate-and-Transfer (in short: BOT) is the logical continuation of Build-and-Operate. If teams reach a critical size or a deeper (technical) integration becomes necessary, this step should be considered..

Option 4: Start with your own subsidiary

This variant is more common for big companies and large medium-sized enterprises. A sub-variant is also the building up an IT business unit after a company has already been in India for several years with a sales or production site in India; in the latter case, a company has already gained an understanding of the cultural framework and can deal with challenges typical for the location.

For medium-sized companies without experience with specifics of the business location India, such an approach is associated with a higher initial investment (and thus also: cost risk): Sending an expatriate for at least 6 months (with regard to India as a location with a distinct relationship culture, a sending period of at least 12 months is more recommendable), cultural training and the like. Such a procedure only makes sense (from a business management point of view) if an IT development centre of critical size is set up (the initial investment or cost risk is correspondingly high): at least 10 developers, rather more.

Real cost advantages compared to build-and-operate models can only be expected if the margin for the build-and-operate provider is above its own overhead costs; this makes sense, if a company sets up larger development teams or if a medium-sized company already has a sales or production facility in India. Another advantage of this approach is about gaining full control over the spatial and technical infrastructure from the very beginning, for example with regard to Intellectual Property or a security-critical IT infrastructure.
Conclusion: Starting your own IT development center is an obvious option if you already have either your own sales or production facility in India. Or if the rapid establishment of an IT development center with greater development capacity is desired.

Option 5: IT direct placement or insourcing

Finally, you have the option of Insourcing: This is the direct employment of an Indian IT specialist in your company in Germany, France, Italy, etc.: If you target senior developers, this usually requires the subsequent immigration of the entire (core) family of the software developer.

The lead time as well as the costs for insourcing are relatively high. The placement costs (or the costs for personnel recruitment) are in the order of 20% of the annual salary of the IT specialist; in addition, there are costs for relocation services (providers such as: LOCAL4YOU Relocation Service), visa procedures. To improve the odds of a successful integration (this is: high probability of the IT specialist staying in the country), it is recommended to offer language and cultural training not only for the IT specialist himself, but for the whole family (e.g. intercultural qualification provider: ICUnet Group). It goes without saying that salary expectations are based on the local salary, so that no cost advantages can be realized through wage arbitrage from low-wage countries. In fact, there are currently only a few insourcing providers for the Brainpool market India, such as devhof.

Insourcing can be observed in the following contexts: Only a few developers are needed, the establishment of an offshore development location to scale development capacities is not necessary. The client is not aiming for cost advantages. The company language in the company is English anyway, so the integration of (initially) English-speaking employees is easy. The development process is designed in such a way that close on-site coordination is necessary.

There is another scenario that combines the “insourcing” and “offshoring” strategies, namely “Offshore development by proxy”: To avoid (cultural, communicative) frictional losses between an offshore location and the local development team, a “proxy” is used, which originates from India and has been socialized in the developer community. He is directly integrated into the German development team and coordinates the Indian offshore team.

Conclusion: The insourcing is recommended for companies who want to close a gap in the IT development team on site; the priority is close integration into on-site development processes instead of cost advantages.

Sebastian Zang

The author is a manager in the software industry with international expertise: Authorized officer at one of the large consulting firms - Responsible for setting up an IT development center at the Bangalore offshore location - Director M&A at a software company in Berlin.