Make or Buy - outsourcing provider or "founding on your own"?

Make or Buy - outsourcing provider or "founding on your own"?

Many companies fancy the idea of having their own software development team abroad. As a rule, the question quickly arises as to whether one should open its own office for this purpose, or rather use the services of an outsourcing provider.

We are not talking about individual projects (contract for work), but a team of developers who should be available permanently, unlimited and 100% available. Such collaborations are planned to last several years and therefore require careful examination and consideration.

If you take a closer look at the terms and conditions of these providers (in technical jargon they are usually called "outstaffing" providers), you easily get the impression that the providers charge substantial fees. Therefore, the question arises as to what causes these costs and in which scenario it is better to set up your own branch abroad.

First, there are the services of the provider for the infrastructure, often called "facility management":

  • Office space, including extra space for expansion
  • Conference rooms for stand-ups and meetings
  • General equipment, furniture, sanitary facilities, cleaning
  • Internet, ideally redundantly designed, sufficient repeaters etc.
  • Admin services to set up VPNs, or local test servers, for example
  • Logistics support to organize flights, hotel and transport for customers
  • Drinks, food vending machines, snacks
  • Celebrations for country-specific holidays, such as "Woman's day" or "Developer day", culturewise they play an important role in maintaining a sense of belonging

In addition to these basic infrastructure services, the provider must also distribute the following ongoing services:

  • Payroll accounting for employees & consultants
  • Payment of taxes, social security, private health insurance etc.
  • Regular company events, such as summer or Christmas parties
  • Language courses, training opportunities, other joint activities
  • Accounting, towards customers and suppliers

There are two main comments on invoicing:

The outstaffing is usually supported by the invoicing. Many providers have a company in Germany (DACH) through which invoices are issued. This is also a significant difference or simplification. An invoice from one source has great advantages: all services, as listed above, are included in the service flat rate of the outsourcing provider. The whole "micromanagement" is no longer necessary. This is especially important if you have a small team of IT specialists. If you set up and found a company yourself, all this must be directly or indirectly administered and handled. It all costs time and money.

In our opinion, however, the essential added value of the provider lies in other areas:

  • Recruitment with an existing and well-rehearsed recruiting team, which has a network built up over many years.
  • Detailed knowledge of the local labour market and wage levels.
  • The outsourcer usually has a brand, developed over the years, so it is easier to find good developers, as something like this takes time.
  • Many years of experience with culture. This helps to interpret certain behaviours correctly and to react adequately. The provider thus acts as a bridge, moderator and "diplomat" between cultures.
  • Based on this experience, the provider is available in an advisory capacity in the initial phase to avoid making mistakes that could endanger success from the outset.
  • Organization of events and parties, which also requires local know-how.
  • If a team is quite small at the very beginning, it often feels a bit "lost". The provider can build up a community feeling here because there are other teams in the office.
  • Exchange with other customers. Experienced, professional providers organize events where customers can exchange information and learn from each other.
  • Contracts: solid providers often present contracts in the language of the customer in addition to the standard (English) contracts, this facilitates contract negotiations and minimizes costs if external legal advisors must be engaged.

In addition, speed and minimization of the entrepreneurial risk are important:

  • The provider can usually provide a team more quickly.
  • Very short terms of the contract allow the team to be disbanded if necessary. In this way, the costs can be reduced to zero by up to one month.
  • Due to the above mentioned experience and cultural understanding, the provider knows when to escalate an issue. The provider is on site and sees things that the customer cannot observe directly from a distance of 2000 km.

However, there are also situations in which having your own branch office is the better choice:

  • If you want to represent "greatness" to your own investors , also with regard to your own valuation, you should set up your own legal entity, but also be aware of the risks.
  • In our experience, it makes sense to think about your own legal entity if you plan to have more than 30-40 employees . A good option is to grow to this size with a partner in the first few years and then take over the employees. This should then be included in the contracts (so-called "buy-out clause") and discussed directly during contract negotiations. Any "utopian demands" must then be renegotiated.

Conclusion: The outsourcing provider takes over a number of tasks which are not so obvious at first, but which are important for success due to many years of experience. Above a certain size, however, a legal entity of your own still makes more sense.

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