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Should I prioritize on price or prioritize on value when looking for an offshore IT services partner?

Many clients look to software outsourcing as a way to get a better bang for their buck. Because of price differentials between global economies, this is clearly one of the advantages of offshoring IT services. However, there are probably tens of thousands of companies globally whose prices will beat your local market rates (specially if you are located in the US or Western Europe). The question is how to determine which foreign vendor will deliver the right price to quality ratio for the needs of your organization.

From our experience in the market, most IT services players will fall in one of the two camps. On the one side, we find vendors that are structured for price competitiveness. We will call them "price-first" vendors. On the other side of the spectrum we find vendors that prioritize multiple aspects in the provision of their service, price being only one of the variables they consider. For simplicity, we will call them "value-first" vendors. Let's look a little bit deeper into each camp:

When an IT vendor is selling on price, it structures its whole organization around this objective. It is common for such organizations to hire preponderantly more junior resources, or resources that do not have a formal IT degree. Infrastructures in these organizations is extremely measured, to make sure it does not add to the final cost of the service.Investments in training are low, as these would undoubtedly increase rates. The salaries these organizations pay to their employees can fall in the lower tiers of market wages, hence it is difficult for them to attract top local talent. In such companies, it is common to find few administrative or management staff to oversee projects, as this would add cost to the service equation.

Now, don't discard a price-first vendor outrightly. Working with such a vendor is extremely attractive price-wise, as they can offer rates that can be one third to one fourth the cost of a regular engineer in the US. For projects that require little technical know-how, or that involve repetitive tasks (such as ETL migrations or heavy manual testing), these type of vendors can be ideal.

However, as projects become more sophisticated, risks begin to arise under the price-first approach. For example, the churn experienced when working with these organizations can be high, generating re-training costs and slowing projects as the partner fights to re-staff attriting teams. Low cost structures offer little room for the company to invest in training its employees. This can generate important risks in the relationship, such as non-standard code that is difficult to maintain. Furthermore, poor infrastructure and controls may create risks to IP (loss of information; delivery of code that is shoddy and may contain information security vulnerabilities). All in all, in our opinion, there is a higher risk of accumulating technical debt with a price-first vendor, not to mention the frustration local teams may face when working with personnel offshore that is not at a level where they feel comfortable interacting and communicating with.

Value-first vendors, on the other hand, will almost always be more expensive from the get-go. After all, the rates offered by such vendors have to absorb, among others:

1) the cost recruiting and hiring some of the best talent available in their foreign markets (and the premium, wage-wise, that needs to be paid for such talent);

2) the investment in training that talent, keeping it abreast of the latest technologies and trends, as well as making sure that the team follows a set of standards and best-practices in its coding;

3) the investment in physical infrastructure required to keep people comfortable and happy to minimize churn (one cannot keep good people happy and motivated in a tech "sweatshop"; .

4) the investment in administrative and technical oversight that enables the company to provide services that protect the client's IP responsibly (legal advice, proper insurance, information security certifications, etc.) .

All of the latter cost money, which is reflected in the fact that a value-first vendor will have to charge a higher rate than its price-first peers.

In conclusion, often companies scout the globe looking for offshore IT partners that can save them money or that can help them accelerate their software product cadence. When selecting your list of vendor candidates, make sure that you have a clear answer to at least the following two questions: 1) Is your project so simple / repetitive that smart minds will get bored and bail-out (in that case, consider a price-first vendor whose talent most probably better matches the task at hand, and at a lower price to boot!); 2) Are you seeking a partner for the long-term, in a challenging project, that is as good as your own internal team (in that case go for a value-first vendor, with the conviction that the "extra" price you are paying is worth its salt in value-added you are gaining).

Would you like us to have a conversation to see which strategy might fit better with your project? Drop us a line and we´ll get in touch.

Regarding PSL: PSL specializes in outsourcing and nearshoring Agile software development, software maintenance, quality assurance and staff augmentation. With offices in Colombia, Mexico and the US, PSL has customers all over Latin and North America, ranging from tech startups to Fortune 500 companies. 

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Friday, 18 August 2017

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