Offshore outsourcing, commonly known as offshoring, has been a popular business process strategy for over a decade. The information technology services, such as offshore software development, have been the most popular among others.

Most small to medium businesses enter the offshore outsourcing scene for various reasons. This may be to address the scarcity of skills of local individuals, achieve efficient quality and process, cost-saving, and focus on core business activities.

Offshoring is a popular business strategy where a company moves a particular business process or production to an offshore third-party service provider. This method helps when there is a shortage of skilled individuals in the local area.

To meet standard-quality output, companies opt to hire services from a third-party company. That’s because hiring skilled professionals in neighboring areas are quite expensive; hiring an in-house development team can even cost a lot more.

This poses a challenge in the development cost of small to medium businesses. That is why these businesses resort to offshoring.

Most often than not, production cost creates a great influence in choosing an offshore service provider. To reduce development cost, companies choose to sub-contract a third-party company service provider from low-wage countries

They have this misconception that cheaper services equating to higher profits. This way of thinking is not good when you are planning to offshore.

Is Cheaper Better?

In a research study conducted by Nils Brede Moe, Darja Šmite, Geir Kjetil Hanssen, and Hamish Barney, they discovered why offshoring ventures fail. For the research, they interviewed four Scandinavian software companies that failed in their offshore outsourcing ventures.

These companies chose a well-known offshore consultancy company to provide quality service. However, their business strategy somehow took the wrong turn.

Instead of standard quality products, they got unsatisfactory output in an extended production timeline, longer than planned. Even more so, instead of saving costs, they’ve acquired a great loss. So what went wrong?

The companies stated their reasons for terminating their offshore contract with their service provider. Their reasons include the lack of technical capability, hidden costs, communication gap, poor infrastructure, and lack of control on the project. These factors are the common risks of offshoring that businesses should avoid.

First off, the companies are first-time offshore clients. The companies that failed in offshoring are most likely oblivious of the risks it entails.

As a result, these companies weren’t able to develop a comprehensive management process that may work for both the client and the service provider. The thought of reducing production costs is too convincing. Hence, they lost track of their goal which is to hire an offshore team with skills and impressive track record.

To achieve a successful offshoring venture, businesses should change their focus from cost reduction and leverage more on intellectual capital.

Intellectual Capital

Every business requires capital to transform from being a simple idea to an income-generating trade. For most people, they consider capital as the money to start a business. But money is not the only capital you invest when you offshore your services. Intellectual capital needs to be a top priority.

Intellectual capital is intangible business value. It is one of the most valuable assets, especially in software development. This covers the skills of individual employees, the whole organization, business process, and the organizational system.

Basically, there are three essential elements of intellectual capital namely; organizational, human, and customer.

Organizational Capital

This pertains to the management, processes, and systems within the organization. This refers to the value of the company as a whole and how they are able to deliver quality service or product output.

Some researchers fused organizational capital with social capital. This refers to the relationship or connection of the organization’s individuals and how they coordinate.

However, this does not limit the organization alone. Social capital extends to the connection or relationship of the organization to its clients.

Human Capital

This element refers to the manpower of the organization. The knowledge and skills of the members are part of the scope of human capital. In relation to software development, human capital covers the technical knowledge and commitment of the developers in an offshore team.

Customer Capital

An element of intellectual capital that refers to the organization’s value measured through satisfactory rates of customers or past clients.

So, you might ask, ‘why intellectual capital is very important in software development?’. The answer is simple. Intellectual capital leans more on the knowledge and relationship value and the software development field requires knowledge-intensive work. This makes intellectual capital an important factor within an organization.

Why do offshoring ventures fail?

The failure to accumulate intellectual capital can be grounds for terminations of offshoring contracts. Again, in the research conducted by Nils Brede Moe and co-researchers, they discovered how failure to develop intellectual capital — specifically organizational and human capital — significantly contributed to their offshoring downward curve.

There are three common challenges that small to medium businesses face. This may be an outcome of the failure to develop intellectual capital. Lack of organizational capital and offshore teams prioritizing bigger projects or clients may lead to a high turnover rate. On the other hand, a lack of technical knowledge comes down from human capital deficiency.

High Turnovers

High turnovers can extremely affect an offshoring team. In the end, the service providers are unable to develop a satisfactory product that the client highly expects. In offshoring, the two parties — offshore team and client — should communicate properly on how to develop the product.

If there is a high turnover of new members, how are they able to learn and discover how the product is produced? This incident shows how some teams take communication for granted.

This may be due to the geographical difference between the offshore development company and the client. However, this can be fairly addressed with modern technology that we currently have.

offshore teams prioritizing bigger projects

Another challenge mentioned is offshore teams prioritizing bigger projects and clients. Why do these instances happen? The most common reason for this is the lack of motivation for the team to work on the project.

The client’s offshore team may not take pride in the project they are working on. To be fair to service providers, these teams are demotivated due to the inadequate transfer of responsibilities and information from the client.

In summary, both parties do not have the trust and confidence needed in a partnership. This outright lack of trust discourages service providers to carry on with their work.

As stated before, organizational capital includes the management, processes, and system of an organization. It also covers the relationship between the organization and the client which happens through proper communication.

The situation portrayed showed how the inadequacy of organizational capital can cripple production and may lead to bigger problems in the future.

Lack of Technical Knowledge

The next challenge is the lack of technical knowledge. Since software development is a knowledge-intensive work, teams should be knowledgeable enough with the latest technology for better results.

Sometimes, this value or asset of an offshore development company is taken for granted. Most of the time, business-owners are dazzled by how some offshore consultation companies offer cheaper software development services.

Listen to Episode 47 of the Startup Hustle Podcast – Offshoring, 10 Tips

Conclusion

By changing the expectations of business owners from reducing the production cost, they should instead focus on looking for an offshore development company that has a high intellectual capital.

So, If you have decided on hiring an offshore software development team, you must first create a checklist. (Read about Full Scale’s offshore software development center checklist here.)

Once you have your checklist, create the development process that you will use in managing your offshore team. The service cost should be the least of your concern. Remember, it’s better not to look for a cheap offshore software development company but a reliable one.

Your offshore team should be technically skilled and knowledgeable, excellent in communication, trustworthy, and an established organization.

That is what we offer our clients at Full Scale. Our company is built on trust and commitment and each team of skilled developers dedicates their full time and effort to develop the product you need.

Our company’s founders, Matt DeCoursey and Matt Watson, are successful entrepreneurs, startup founders, and podcast creators. Their products Stackify and GigaBook are perfect examples of the success of Full Scale’s skilled teams.

We can help you reach and exceed your business goals.