Offshore Outsourcing Business Models. Part I

Offshore Outsourcing Business Models. Part I

One of the main points while developing your outsourcing strategy is choosing the right delivery model for your type of business. In this article we will talk about outsourcing business models, their types and advantages.

Offshore outsourcing business models are defined by two dimensions:

Ownership or relationship structure (RS)

Geographical location of the work (GL)

Types of Ownership structure

1. Pure Contract Offshore Outsourcing (buy or third party)

A company delegates control of a function to an external service provider in a foreign country. The provider takes over the function and does much of the work offshore using cheaper labour.

Main benefits: limited operational risk, the potential for cost savings, rapid speed at which it can be executed.

2.Joint Venture (JV) (partnership agreement)

This is a product of two or more companies that combine their resources to produce a new entity to perform business project for a set period of time. Joint venture has its own management and organizational freedom.

Main benefits: Both parent-companies save money because expenses, resources and workload are shared.

3. Captive Offshore Subsidiary (build or insource)

Captive offshore subsidiary is set up by a parent company in a foreign country. Subsidiary is completely owned by the company.

Main advantage: more control and flexibility, lower prices on a long-term basis.

Geographical Location

1. Onsite Outsourcing.

It means that all processes are carried out at the client’s premises. The third-party provider utilizes its own workforce to service clients on their premises.

2. Offsite Outsourcing.

The project or work may be done offsite, but it’s still in the same country as the client.

3. Offshore (Nearshore) Outsourcing.

The project-related activity is done at the vendor’s premises nearshore or offshore.

Experts define two generations of offshore business models: the second generation is characterized by greater complexity of the model structure, usually blending or combining of first-generation business models. We will provide information on the second generation business models in our next article. Look forward to our updates.

Let’s take a closer look at each of the first-generation business models:

Internal Delivery (Department-Based model) (RS – completely owned, GL – onsite)
This is a delivery model where an internal department provides services to other business units of the same organization.
Advantage: This is the most flexible model because the unit manager may change the rules and the processes as much and as often as needed.

Offsite Onshore Shared Services (RS – completely owned, GL – offsite)
Companies execute the shared services model by establishing a separate division or organization and transferring selected supporting processes and activities to it.
Advantage: This model helps to eliminate the duplicate processes, activities and staff that individual business units have.

Offshore Captive Shared Services (RS – completely owned, GL – offshore)

In this model a company sets a completely owned centre that is dedicated to serving the different business units of the company.
Advantage: This model is very common in multinational companies that want to control their BPO operations, quality and intellectual property.

Cosourcing (RS – joint venture, GL – offsite)

Cosourcing is the term that describes companies that execute a shared services centre with an external vendor in the same country.

Advantage: This model is an option when firms don’t have skills or money to set up a shared services centre on their own.

Offshore Development Centre (ODC) (RS – joint venture, GL – offshore)
ODC is a joint venture with offshore vendors. This is a dedicated, customized and secure development center established by a vendor for a customer who needs to outsource substantial software development, maintenance or engineering work.
Advantage: cost savings; direct control on hiring and retention of offshore resources; less recruiting, more focusing on core business issues.

Staff Augmentation, Contracting, or Temporary Services (RS – 3rd-party vendor, GL – onsite)
This is the oldest onsite outsourcing model in which corporations leverage supplemental staff to contain costs and handle overflow work
Advantage: Staff augmentation reduces the costs associated with hiring, benefits and termination, recruiting, training and retraining personnel.

Pure IT or Business Outsourcing (RS – 3rd-party vendor, GL – offsite)
In this model companies delegate one or more business processes to an external onshore provider that owns, administrates, and manages the processes based on predefined and measurable service level metrics.
Advantage: Eliminates two problems 1) lack of staff with appropriate skills and 2) not enough time to do the job right.

Offshore Outsourcing (RS – 3rd-party vendor, GL – offshore)

In this model companies delegate projects to an external offshore provider. These projects are then executed completely offshore with local, low-cost labour.
Advantages: cost reduction, access to highly qualified specialists.

The source for the article: Offshore Outsourcing. Business Models, ROI and Best Practices by Marcia Robinson, Ravi Kalakota.

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