Small Businesses Struggle to Offshore - ' The Incubator Model '

If all this is sounding a little too scary for your company, there are some services that offer offshore training wheels. Designed to allay the fears that frequently hold back small firms, these "build-operate-transfer" services are the outsourcing equivalent of renting-to-own. And for Jeff Stenger, vice president of development at Burlington, Mass.-based St. Croix Systems Corp., it was just the right speed.

Stenger's company develops software for the healthcare industry that tracks the utilization and depreciation of medical equipment. When Stenger came onboard three years ago, he knew he wanted to get the cost savings that offshore development promised, but the company was still grappling with control issues. "We wanted our own employees, rather than contracting out, because we wanted that level of control," recalls Stenger. "This is our IP, and it's basically our company. We wanted it to be more like a company in the U.S. that is colocated, with everybody focused on the same mission. Only the programmers would be offshore. We wanted to nurture them, and be certain their loyalty was to St. Croix."

Before joining St. Croix, Stenger had worked as a project manager for a company called i-Vantage Inc., and he knew the cofounder. I-Vantage offers two offshoring models to small firms: an incubator model, in which i-Vantage provides the facility, resources, network infrastructure and team of employees, all of which are managed but not owned by the client; and a subsidiary model, in which i-Vantage provides the facility and network infrastructure but hires the client's employees and creates a legal entity in India. "If you don't want to embrace the Indian model wholeheartedly, this is a low-risk, trial way to do it," says Sandeep Kaujalgi, president and CEO of i-Vantage.

Stenger started with a group of eight developers, working as subcontractors, but quickly moved to the subsidiary model. His discomfort level with doing business in India abated almost immediately after he began working with i-Vantage. "It was almost a nondecision," he says. Stenger visits St. Croix's subsidiary in India once a year, and someone from India comes to the U.S. every year or two as well. And the arrangement has yielded the kind of unity Stenger was after. "We're all part of one company moving toward a common goal," Stenger says. "That sounds like a warm and fuzzy thing, but it's real."

What is also real are the wage increases Stenger has been absorbing at St. Croix's Indian subsidiary. Salaries have been increasing 30 percent a year. In the first year of offshoring, Stenger estimated that he was getting five times the resources in India than he could get at home. But because of the ballooning salaries, "it is getting to the point that we are starting to ask how much of a benefit we're getting," he says.

So, for the time being, offshoring for small businesses is a decidedly mixed bag. Finding vendors appears random. Negotiating with them is informal, at best. And managing the relationship is a work in progress. But as more small companies recognize offshoring as a viable sourcing option, the market of vendors will expand and mature, and best practices will be adopted. In the meantime, the offshore process will remain a rough voyage that may not meet the expectations of small companies. And despite the overwhelming hype around offshoring, even the OOBP's Goland has to admit, "Sometimes, you're just better off staying home."

The Incubator Model

Offshoring 101
By now, offshoring is second nature for big, multinational corporations, but small and midsize businesses are still trying to feel their way through the global jungle. Gartner Inc.'s Robert Brown recommends the following phased approach to going offshore.
Sourcing Evaluation and Selection Create and align your offshore strategy with your overall sourcing strategy. If you haven't taken the time to craft a sourcing strategy, do so now (but first perform a benchmark to see how costeffective your current processes are). Inertia among tactically oriented midsize businesses is a pernicious enemy. A sourcing strategy is an essential management tool that will ensure alignment between your critical IT and business strategies and the outsourcer you choose. Assess your global sourcing readiness. Do you have the desire, IT processes, risk tolerance, governance capability and in-house skills to manage a global sourcing deal successfully? Create a detailed implementation plan for proceeding with global sourcing. For businesses doing this for the first time, a consultant may be useful. Craft a carefully formulated governance capability for managing your global sourcing efforts. Involve the affected people in business units and IT. The involvement of senior executives from the vendor side can be beneficial.	Sourcing Evaluation and Selection Choose an offshore country to start with. Given small businesses' affinity for proximity when dealing with their vendors, consider starting with an offshore provider in a neighboring or nearby country. Determine the right provider for your size and needs. Choose a Tier 2 provider (or credible niche provider) if you are concerned about being a "small fish in a big pond." Small and midsize businesses should seek out Tier 2 providers that have a country and local presence in their industry domains and a strong niche focus on the SMB marketplace. To deliver a strong value proposition, the selected provider must demonstrate an understanding of the challenges facing SMBs in their industry domains. For true small businesses of 100 to 1,000 employees, initially look for smaller, Tier 3 local providers that are hungry for business and receptive to specific requirements. Execute a pilot project. For small businesses, a pilot project with 10 to 15 full-time equivalents for six months usually works best.	Negotiation and Contract Development Engage an outsourcing attorney to help structure the outsourcing contract. Deal with concerns about loss of control. Small businesses have understandable concerns about the potential loss of control, the distance from their supplier's delivery center, and challenges with intellectual property protection, data security and software piracy. These concerns are no different from those expressed by larger companies when they took their first steps toward offshore sourcing. Because the issues are the same, the answer is ultimately the same: Establish a comprehensive statement of work with clear, detailed roles and responsibilities, and train in-house staff to manage the offshore service providers. Create a workable cost structure without worrying about getting the lowest rate possible. In global sourcing, you usually get what you pay for. Although Tier 2 or Tier 3 providers will often have somewhat lower hourly rates than Tier 1 providers, least-expensive provider.do not reflexively look for the

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