There are many reasons why small and midsize businesses feel overmatched when it comes to offshoring, some more real than others. Many of these firms struggle to find the resources to manage the kind of complex business relationships offshoring brings with it. But other, more psychological reasons also come into play.

According to Robert Brown, a research director at Gartner Inc., small businesses suffer from the mother of all inferiority complexes. "There is a perception among these companies that the size of their business is too small to justify offshoring," Brown says. "It is a deeply held notion with no basis in fact, and I just don't buy it." While it is true that the more work you offshore, the more money you're likely to save, most of the application development and call-center work is priced by headcount. So even if you offshore the work of only one employee, says Brown, you're still likely to save.

Small companies are also grappling with the fear of losing control—something most Fortune 500 companies got over years ago. "People believe that if their data is 10,000 miles away, there's a good chance something will go horribly wrong," says Brown. "They want to be able to drive down the road and kick the server if something doesn't work right. It's irrational."

But perhaps the single biggest factor holding back small firms is that no one is begging for their business. The offshore market catering to small and midsize businesses is immature, at best. "We went to people we knew, did online searches, and did phone interviews with firms," says RuffaloCODY's Lehrman. "And many of the companies we looked at had very little experience." All that for a company that was looking to offshore a pretty sizeable job—about 100,000 development hours.

"A lot of the major offshore vendors have not been actively marketing to these businesses," says Gartner's Brown. "The offshore companies have bigger fish to fry. These guys are drinking from the fire hose right now. So between that and the hemming and hawing of the small businesses, it's like two ships passing in the night."

Lehrman gave up on the Ukrainian firm after having trouble communicating his needs to the senior executives. "If we had trouble talking to the senior team, we knew it would be worse with the team members," he said. He finally narrowed his exhaustive search to two Indian firms. He then ran what's known as a "dual pilot," in which a client gives two small projects to two different firms in order to gauge their abilities. Each project ran four weeks and had specific deliverables. "We wanted to find out if they would ask the right questions, hit the right timelines and produce quality work," Lehrman says.

After the dual pilot, Lehrman selected Lambent Technologies Pvt. Ltd., a small firm in Nagpur, India. But he has been slightly disappointed with the savings his company has realized. "We've had to spend a lot more time documenting and testing than we anticipated," he says. "And there have been some cultural difficulties. They've produced a lot of decent code, but if you depend on them to make judgment calls, you get into trouble. Overall, it's been slightly cheaper [than outsourcing in the U.S.], but not as cheap as we'd anticipated."

The Incubator Model

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