The sourcing partner – an additional expense or an economic advantage

We often meet the assumption that a sourcing partner is an additional expense that diminishes the economic advantage of outsourcing the software development. It is not an unreasonable thought, because how can it become an economic advantage to add an extra supplier that also have to make a profit? Moreover, when is a company better off arranging the outsourcing themselves?

In the following, we will explain some of the services a sourcing partner handles, as well as explaining when a sourcing partner is more likely to handle the software development better than the company themselves, and which type of projects a company might be better of handling themselves.

On the figure beneath, you can see the various tasks a sourcing partner handles for software development companies. These services are all included in the fee you pay to your sourcing partner.

Macro environment

How is the market governed in the country you wish to outsource to? How is the taxation? And what about the general labour conditions? If you do not have detailed information about the country, you have to study the macro environment thoroughly, in order to be ready for operating in the country. If you have a sourcing partner, you do not have to spend time and energy on this part, as your sourcing partner knows all about the macro environment.

Recruitment

What is the average salary in the country? If you do not have a clue, it will be difficult for you to know if you are overpaying your developers. Although you hire a recruitment agency, you can actually still end up paying too much for your developers, as the agency’s fee is related to the developer’s salary. Therefore, the agency would be interested in negotiating a high salary for the developer. When you do not know the average salary level, you might think that DKK 25,000 per month is cheap, but if the same developer would be satisfied with DKK 17,000, you are basically paying DKK 8,000 too much according to the market. If the recruitment agency also demands 2 months’ salary as a part of their fee, you have overpaid DKK 16,000, just to get started. The sourcing partner knows the salary level in the country and does not have any interest in increasing the salary level.
Although you have a sourcing partner, you are still involved in the recruitment process. Your sourcing partner introduces a number of talented candidates for you, after which you choose the developers you would like to work on your project. You do not have to spend a lot of time on looking for candidates in a CV database.

Integration

The integration (the start-up of new teams, integration between the Danish and the outsourced developers and the integration of new team members on existing teams) can easily be handled by yourself. However, it requires that you have an employee in the sourcing country which can handle the integration and that you have an understanding of the cultural differences, which exist between Denmark and the sourcing destination.

Administration

Visa applications and payrolls are quite easy to handle, but you have to ensure you pay the correct social fees etc. If you can manage this, the task is fairly simple, especially if you are prepared for the fact that communicating with the local authorities can be a timely matter.

Working conditions

When finding an office for your developers, you have to know the law for buying/leasing offices in another country, and you have to evaluate if you have the abilities to negotiate a leasing contract abroad.
When you have a sourcing partner, they handles all practicalities. Your developers have an office, they have access to meeting rooms, scrum-rooms, a canteen etc. Naturally, you share these facilities with the sourcing partner’s other clients and their developers, but it means that you benefit from economies of scale. Contrary to what many people think, the price for renting an office is quite high in Ukraine. The rent in Kiev is more expensive than in Copenhagen, and the rent in Lviv is higher than in Aarhus and Aalborg. A team of 15 developers will need 75 m2 and with extra space to move around – you will need 200 m2. If we take a rent price at the low end, you have to pay DKK 80 per m2, being a monthly rent of DKK 16,000. Besides the rent, you have to pay for an internet connection. Internet is more expensive in Ukraine compared to Denmark, so it would be an advantage to share the bandwidth with other companies.

Competence development

A sourcing partner ensures that the developers participate on technical seminars and English classes, which makes it easier for you to communicate with them. You could also handle these sessions yourself, but it can be difficult to find the best IT seminars in the country and you have to spend time on the English classes as well.

Monitoring

Once your development team in e.g. Ukraine is up and running, it is important that someone is monitoring your team. You can decide to handle the monitoring yourself, which often makes sense as it is your team. Even though a sourcing partner spends time and energy on monitoring all their teams, their focus is not just on your team. Therefore, you may experience your team not getting immediate help, if the delivery manager is busy helping another team.

HR

Often, a sourcing partner has a good relationship with the universities in the country and they know the IT market, which is a good foundation for the recruitment process we mentioned earlier. In addition, it is important to prioritise the welfare of the developers, as it will motivate them to speak fondly of the company. A good reputation is important, when you want to recruit the most talented developers. It can be difficult for a minor company with few employees to attract the best developers, it is much easier for a sourcing partner, who has an extensive network. Even large Danish companies can have difficulties in finding developers, if they are not well-known in the sourcing country.

With or without a sourcing partner?

After having presented a variety of the tasks a sourcing partner handles, it is obvious that many services are included in the fee you pay to the sourcing partner. Naturally, there may be areas which do not get same dedication, as if you handled the outsourcing yourself. If we were only evaluate the economic aspect, we are confident that it will always be beneficiary to involve a sourcing partner due to economies of scale and market knowledge.