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Exploring Offshore Development Centers (ODCs): A Guide to Understanding the Basics
This article is a comprehensive guide to understanding the basics of Offshore Development Centers, including what they are, how they work, and what benefits they offer.
04 March 2023
An ODC is a suitable choice for their business needs?
The article will explore the advantages of setting up an ODC, such as cost savings, access to a larger talent pool, and the ability to scale resources quickly. It will also address some common concerns businesses may have when considering an ODC, such as language barriers, cultural differences, and security concerns. Finally, the article will provide an overview of the steps involved in setting up an ODC, including selecting the right location, identifying the right team, and managing the outsourcing relationship effectively.
By the end of the article, readers will have a solid understanding of the basics of Offshore Development Centers and be better equipped to make informed decisions about whether an ODC is a suitable choice for their business needs.
By the end of the article, readers will have a solid understanding of the basics of Offshore Development Centers and be better equipped to make informed decisions about whether an ODC is a suitable choice for their business needs.
The Global Trend
The global trend of business digitalization is everywhere; nobody can stay competitive and operational without a strong digital presence, from a small family firm to a large corporation. But this transition may cost a company too much, especially if it operates in North America, Australia, or Western Europe.
The hourly rates of coders ready to handle software development tasks climb to new heights every year, and even with such skyrocketing prices, there’s always a shortage of qualified talent. So, how can a mid-sized business on a budget develop software and expand without breaking the bank? The answer is outsourcing.
The outsourcing market has grown steadily within the past few decades as the Internet became more accessible and the global workforce grew more globalized. Today, there’s no difference between having an IT team next door or a thousand kilometers away, provided you have well-established communication channels and work in synergy.
Due to these benefits of globalization, the IT outsourcing market exceeded $530 billion in 2021, and it’s expected to grow beyond $1 trillion by 2030. Here we discuss one of the ways to take advantage of outsourcing without the hassle of working with dozens of remote freelancers or hiring a new dedicated team whenever you need a website or an app. This model is called an Offshore Development Center (ODC), and it presupposes building an overseas software agency on your own instead of hiring one.
This approach is ideal for businesses looking for ongoing software development services, but it’s not devoid of risks and challenges. Read on to find out how ODCs work, what to consider when creating one, and how to organize their operations in line with the best global practices.
The hourly rates of coders ready to handle software development tasks climb to new heights every year, and even with such skyrocketing prices, there’s always a shortage of qualified talent. So, how can a mid-sized business on a budget develop software and expand without breaking the bank? The answer is outsourcing.
The outsourcing market has grown steadily within the past few decades as the Internet became more accessible and the global workforce grew more globalized. Today, there’s no difference between having an IT team next door or a thousand kilometers away, provided you have well-established communication channels and work in synergy.
Due to these benefits of globalization, the IT outsourcing market exceeded $530 billion in 2021, and it’s expected to grow beyond $1 trillion by 2030. Here we discuss one of the ways to take advantage of outsourcing without the hassle of working with dozens of remote freelancers or hiring a new dedicated team whenever you need a website or an app. This model is called an Offshore Development Center (ODC), and it presupposes building an overseas software agency on your own instead of hiring one.
This approach is ideal for businesses looking for ongoing software development services, but it’s not devoid of risks and challenges. Read on to find out how ODCs work, what to consider when creating one, and how to organize their operations in line with the best global practices.
What Is an Offshore Development Center?
Definition and overview of ODC
The Offshore Development Center (ODC) is a software development facility set up from scratch overseas by a company headquartered in a different location. The ODC’s primary goal is to organize a turnkey software development agency that can address all business needs for software design, creation, testing, and maintenance in a favorable legal climate and at a more affordable cost than the company would have to pay at home.
This way, companies setting up ODCs close their chronic coding tech stack gaps and have a fully equipped overseas agency provided with the needed software and hardware tools to work on the head office’s software projects. As a rule, an ODC is first established by a core team coming to the destination country to choose an office, build all infrastructure, and hire local talent. Once the training and onboarding tasks are over, the ODC may operate independently or under the control of top management assigned from the head office.
The history of ODCs started with offshoring manufacturing activities. For instance, General Electric was the first company to launch an ODC in India in 1996, while outsourcing to Mexico under the maquiladora system was popular among U.S. enterprises since the 1960s.
In the 1990s, with the boom of the IT industry, outsourcing acquired new shades of meaning and took a different form – setting up development centers in neighboring countries with lower taxes and cheaper workforce. The pioneers of IT outsourcing were Dell and IBM; these tech giants quickly grasped the financial potential of ODCs and set up call centers, financial departments, and IT development hubs in India, the Philippines, and Eastern Europe.
This way, companies setting up ODCs close their chronic coding tech stack gaps and have a fully equipped overseas agency provided with the needed software and hardware tools to work on the head office’s software projects. As a rule, an ODC is first established by a core team coming to the destination country to choose an office, build all infrastructure, and hire local talent. Once the training and onboarding tasks are over, the ODC may operate independently or under the control of top management assigned from the head office.
The history of ODCs started with offshoring manufacturing activities. For instance, General Electric was the first company to launch an ODC in India in 1996, while outsourcing to Mexico under the maquiladora system was popular among U.S. enterprises since the 1960s.
In the 1990s, with the boom of the IT industry, outsourcing acquired new shades of meaning and took a different form – setting up development centers in neighboring countries with lower taxes and cheaper workforce. The pioneers of IT outsourcing were Dell and IBM; these tech giants quickly grasped the financial potential of ODCs and set up call centers, financial departments, and IT development hubs in India, the Philippines, and Eastern Europe.
Benefits of an offshore development center
Today, the ODC scale continues to grow, as many businesses with large-scale development needs choose to set up overseas facilities instead of paying 2-3 times more at home. Indeed, having an ODC comes with many additional benefits besides development costs. Let’s take a closer look at them.
Cost savings
The main reason for the ODC setup is the financial aspect. When companies have a large set of software development tasks and ongoing projects at hand, an outsourcing agency may not be enough to handle that scope of work, and the time comes to hire an in-house team. However, the coder salary rates and huge taxes may become an unbearable financial burden for businesses operating in Europe and North America. Thus, by opening an ODC, they kill two birds with one stone; they get a fully dedicated in-house development team and save costs on expensive local coders.
Access to a Broader Talent Pool
Another benefit of ODCs is the broader geographical outreach and ability to hire developers with an extensive tech stack without local limitations. For instance, many American companies or businesses in Western Europe experience a severe shortage of coders with rare or cutting-edge technology mastery. These exclusive-level experts are already fully engaged in tech giants’ teams, which limits access to the required talent for SMEs and startups. The situation changes once a business builds an ODC in a destination country after checking the availability of local coders with the required tech stack.
Better Scalability
Building an ODC in a large overseas IT hub is a strategically wise solution to the issue of scalability. Even if a company manages to staff its in-house team with the required coder talent, there are no guarantees that it will find the needed coders to expand the team once its software development needs grow. Thus, it’s always better to choose a country with a rich talent pool and avoid the scalability ceiling.
Convenient Time Zones
Some think of outsourcing as the need to work with some distant Asian company with a 10-12-hour time difference. However, it’s not always the case, as many ODCs are built in nearshore locations and operate optimally for the head office and the ODC staff. This way, for instance, an American or Canadian firm often opens an ODC in Latin America, which guarantees a similar time zone, easy communication, and optimal travel routes.
Core Competency Focus
By setting up an ODC, you can free your head office team from the hassle of managing daily software development tasks and concentrate on the core strategic activities for business expansion.
Types of Offshore development centers (ODC)
An ODC concept is pretty versatile; businesses can choose different ODC setup models depending on the destination country’s legal requirements.
Captive ODCs
This form of ODC requires the least effort on the part of the head office, as the business finds an already operating IT agency and purchases it. This way, the agency gets under the umbrella of the head company, with its top management changed without a serious change in the staff’s operations.
Joint Venture ODCs
In this model, the destination country’s IT agency and the head company are equal participants in the ODC’s setup, management, and control. This way, the ODC doesn’t belong to the head company entirely and is managed under the joint control and ownership principle. Some countries allow only this form of ODC to be set up in their territories, demanding that at least one owner of the ODC is local.
Outsourced ODCs
This model presupposes hiring a local company to build the ODC based on the head company’s requirements and expectations. Once the process is over and the ODC is a well-functioning software development center, its ownership is transferred to the company that ordered its creation.
Key Considerations When Setting Up a Development Center
Now that you know what ODC is and how it may be created, it’s time to get ready. Here are the key steps to take before getting down to practice.
1
Choose a Location
Proper country and city selection lays the basis for your ODC’s success. Destination countries have varying legal policies regarding ODC operations; it’s also vital to consider tax rates and ensure the availability of talented recruiters and coders.
2
Check the Legal and Regulatory Environment
Next, it’s essential to analyze the chosen location’s legal environment in more detail. It’s better to hire a local legal expert to get high-quality analytics and concrete advice on setting up an ODC.
3
Consider Infrastructure and Facilities
You need to choose a building that will host your staff. It’s better to prioritize the search for facilities, as you will probably need to renovate the building, order new equipment, and set up all the IT infrastructure before welcoming staff to it.
4
Choose by Communication and Culture Fit
ODC location’s choice should go hand in hand with considerations about the local coders’ English proficiency, cultural values, and business mindset. It’s much easier to work with people on the same page with you regarding quality, punctuality, and conflict resolution.
5
Mind the Opportunities for Talent Acquisition and Retention
Building an Offshore Development Centre in a place where many coders of your interest reside is only part of the task. You should also ensure that the location offers enough talent for talent acquisition and retention; otherwise, you will need to bring your recruiters and HR managers from the head office.
ODC Setup Challenges
Once you set up an ODC, you can encounter several significant challenges in the process. Anticipating them and taking proper measures to minimize the risks is a wise way to approach this business task.
Communication & Culture Misfit
It’s hard to work with people with poor knowledge of English and a lack of a cultural match. So, double-check the availability of properly trained staff in the chosen location and visit that place to get acquainted with the local culture.
Control Issues
It’s always hard to give away a part of control over sensitive data or corporate secrets. Thus, you should ensure that the ODC has a secure IT architecture, passwords, and multiple tiers of authorization. Sign an NDA with all staff members to avoid data leakage.
Time Zone Differences
You may build an ODC in a distant location for many reasons; if you do, addressing the time zone difference is a key priority for organizing the in-house team’s interactions with ODC staff. Discuss optimal overlapping hours and set up effective communication channels to reduce delays.
Security Risks
Physical security may also become challenging, especially in developing countries with corrupt police officials and influential gangs. We recommend avoiding such destinations to keep your hardware, software, and critical business data intact.
Best Practices for ODC Management
Here are some pro tips on setting up an ODC without friction
Well-Organized Communication
Take proper care of effective communication at the very start of ODC’s operations. It’s vital that the ODC staff feel they are a part of the head office’s team, so they should be included in regular meetups, discussions, and teamwork.01Culture of Collaboration
The ODC is not a company subsidiary; it’s a partnership where the staff collaborates with the head office on equal terms. By introducing such a collaborative culture, you will ensure that the ODC staff has a sense of ownership and commitment to your core business goals.02QA and Control
Operating a remote ODC is not as easy as controlling an in-house team, especially regarding code quality. Thus, you should set up continuous quality control and assessment processes to ensure that all ODC staff are held accountable for their input in the project work and that all errors are identified and corrected on time.03Strong Team Culture
Working as a team is essential for ODCs, as the remote team often feels overboard in terms of corporate decisions and processes. To address this point, you can set up cross-functional teams, including in-house and ODC staff, to give your employees a better sense of connectedness across business branches.Ongoing Performance Review
As with QA control, staff performance assessments become more important with ODCs. You should employ continuous performance review tools to avoid a “hawkish” control of daily staff activities while at the same time monitoring performance dynamics and intervening when something goes wrong.
Conclusion
As you can see, ODCs are becoming increasingly popular among large businesses wishing to outsource their software development projects. ODCs give more control over staffing, equipment, and talent recruitment and suit companies with ongoing, complex software needs. This outsourcing model is optimal in terms of saving costs and reaping all perks of outsourcing, but it also comes with risks and challenges you should consider in the process.
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Sergio Art is the entrepreneurial mind behind the Offshore Development Center (ODC), which he launched in 2010 to support U.S. businesses in their digital transformation efforts through access to skilled software engineers.
