Small Business Offshore Outsourcing Models
Small businesses can adopt five different offshore outsourcing models to outsource their projects. Selecting appropriate offshore outsource model involves several factors like type of work to be outsourced, short-term and long-term strategic business goals, country where the outsource work will be performed etc. Each model has its own advantages and disadvantages, small business owners must carefully understand the different outsourcing models and choose appropriate one that suits their needs. This article explores the different offshore outsource models in detail and gives pros and cons of each model in detail.
Captive offshore outsource model
In this offshore outsourcing model small business, setup a fully owned subsidiary company in lower-wage country like India, Philippians, China, etc, to do the outsource work. Generally, captive model is suitable for large organizations. Small businesses can consider this model if it satisfies following criteria: Small business has a long-term need to outsource their work and it fits their short-term and long-term strategic goals. Small business management team has the money and expertise to setup a captive center in offshore location. The country where the captive center will be located has English-speaking workers who can perform the work and the country has IP protection laws to safeguard the Intellectual property rights of small businesses. Small businesses have mature internal business process standards and thy can easily duplicate it in their captive centers.
Captive offshore outsource model has been successfully followed by large companies like IBM, Motorola, Texas Instruments, American Express, etc. It is not a popular choice for small businesses mainly due to the cost and management expertise needed to run the operation in foreign country. However, if your small business satisfies one or more of the above criteria then you should consider this model.
Assisted captive offshore outsource model
The assisted captive offshore outsource model is similar to captive outsource model, except it is usually managed by an experienced partner based in the offshore location. In this model, the small business controls the overall management of the offshore facility. The partner will help the small business management in specific tasks like hiring local talent, purchasing or renting office building, IT infrastructure setup, working with local government entities etc. This model is less risky than the pure captive model; in this model the small businesses uses the local partners to manage the risks in setting the offshore location and managing it on a daily basis. The small business still controls the offshore facility’s internal operations through local management team reporting directly to the small business management team.
Joint venture (JV) offshore outsource model
In this model, the small business collaborates with the local business in the offshore location to setup a joint venture. . In this model, the small business either takes an equity stake or creates an independent company in which both the small business and the local company give resources to it. In this model, small businesses can capitalize the strengths, experience of local player, and reduce their risks of owning and managing the offshore branch. The local company benefits from collaborating with global player and has the opportunity to learn and move up the value chain. Therefore, for both parties it is a win-win solution.
Build Operate Transfer (BOT) offshore outsource model
The BOT model has two variations, in the first variation it is similar to JV model in which options will be given to the local company to sell its stake to the small business after a fixed period or after an agreed upon milestones. In the second variation, the local company fully owns the offshore facility on behalf of the small business and in the future, if small business wants it can acquire the full ownership of the offshore facility. The BOT offshore model gives several benefits to small businesses, specifically if small business management team is interested to the learn ins and outs of managing the company in offshore location. In the BOT offshore model, it is also possible to set specific conditions like performance measurement, Quality standards, operational expenses, etc, upon which the small business can acquire the ownership of the company. This significantly reduces the risk for the small business management team in managing the offshore operations.
Offshore Outsource model
The entire offshore outsourcing industry was started from this model. During the Y2K, years Indian based IT outsourcing companies started the trend and still it is the most popular way of outsourcing projects to lower-wage countries. In the offshore outsource model small businesses can outsource their IT and BPO projects to a third party outsource provider. As a small business owner you identify the projects that needs to be outsourced, identify potential offshore outsource vendors, select the best one and give complete responsibility to the vendor to complete the project. The offshore outsource model works very well for both short-term and long-term outsource needs of small businesses.
Offshore outsoure model
Best Small Business Outsource Model
Among all the models described, offshore outsource model is the best choice for small businesses. It is highly cost effective and less risky compared to all other models explained in this article. Small businesses can try a vendor for a brief period and if they like it, can have long-term relationship with that offshore vendor. Therefore, there is no upfront cost involved in setting up the facility in offshore location. In this model through economies of scale offshore outsource vendors can give competitive price than the captive and BOT models. In addition, through economies of scale the offshore outsource vendors can bring in best practices and business process standards and efficiency to the small business outsource projects.
The offshore outsource model offers higher ROI to the small businesses compared to other models. Depending on the outsource initiative total cost of outsourcing varies from project to project, if the small businesses identifies the total cost of their outsource efforts and compare it with ROI, the offshore outsource model gives maximum ROI compared with other models.
Recently research reports are coming that suggests the Indian based captive centers are not performing well due to cost increases and sharp decline in the US dollar value. Recent study from McKinsey consulting and Nasscom, Indian outsource association, found that the captive centers run by US companies are less efficient compared to companies run by outsource vendors that specialize in niche vertical industries. For some captive centers, the cost is 30% higher and the higher in cost not necessarily results in higher quality of work and lower employee turnover.
Bottom line for most of the small businesses offshore outsource model will be the best choice. If small businesses have specific goals of establishing an offshore presence due to reasons like Intellectual Property protection, government regulations etc, in lower-wage countries then they should explore the captive or other models explained in this article.
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