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."

This article was originally published on 03-06-2006
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