According to a 2011 report by Outsourcing Alert, 94% of Fortune 500 companies outsource at least one major business function. Today, taking into account global IT talent shortages and the uneven distribution of developers worldwide, the situation is no different.
Outsourcing at least one business function, be it IT, logistics, payroll, or customer support, can boost your company's growth, free up internal resources, and help you optimize your operational costs. That is why thousands of global businesses hire developers in Ukraine, or choose other popular outsourcing locations to move their development to.
However, going offshore is no silver bullet, and often involves certain risks. In this article, we will take a look at a number of successful outsourcing case studies and try to learn from some of the failed projects.
While not all of them are ready to admit it, many successful companies have used outsourcing at some point (or continue to rely on third party providers for some tasks). The following companies speak openly about their experience with offshore development teams.
Back in 2012, WhatsApp had only 30 full-time and 5 part-time employees in their small office in Mountain View. This didn’t prevent it from becoming one of the most popular chat apps worldwide, racking up over 50 million downloads in just 3 years after its launch. In 2014, just two years after launch, the company was sold to Facebook for $19 billion.
With barely any starting capital (the seed round was $250,000), WhatsApp needed to keep operation costs down. To build and launch the product, the company turned to Eastern Europe in an attempt to source the required tech talent. WhatsApp hired offshore developers from Russia because “there are excellent engineers there”, according to co-founder, Jan Koum.
Most of the in-house employees were focused on customer support and operations, while development was handled offshore. However, while WhatsApp initially contracted most of its engineering staff offshore, it relocated some of the contractors to the USA later on.
One of the leading American financial services corporations worldwide, Citi has been outsourcing its tech operations since 1992. The company runs multiple offshore locations across India, the Philippines, and Poland. Moreover, in 2012 Citigroup has reportedly cut 11,000 jobs at its HQ, at least quarter of which were IT-related positions. Most of their IT operations are now carried out offshore.
Alongside their so-called “centers of excellence” (offshore development centers run by Citigroup) the company has ongoing relationships with a number of outsourcing companies, including TATA Consultancy Services and Wipro.
Citigroup is not the only banking giant to have moved tech skills offshore: Other names include Bank of America, Barclays, Goldman Sachs, and J.P. Morgan.
As the original influencer ranking platform, Klout is a startup that has benefited greatly from offshore development. To bring his idea to life Joe Fernandez, the startup’s founder, went to Singapore and hired a bespoke development team there. He stayed for 4 months, working closely with his developers to build a beta version of the product.
The first version of the product was funded by Joe himself, his friends, and family (seed funding was just $200,000). Yet, in just under 4 years, the company had attracted a colossal $40 million in funding, and later was sold to Lithium Technologies for $200 million in 2014.
According to TransferWise, a global money transfer service, they don’t “do offshoring, outsourcing or use consultants”. However, the company admits having a number of “independent workers”, who form an integral part of the core engineering team.
The company’s dispersed development team is located across Estonia and Ukraine. The company has been particularly active in hiring Ukrainian developers from the Lviv region in the west of the country. Meanwhile, some of the developers who worked with the company in its early days are now relocating to join the core TransferWise team in Estonia.
Marek Unt, Head of PR at TransferWise has often stated the value of Ukrainian technicians for their “quick technical wit and engineering education”.
An online education platform, StudyTube, also relies on nearshore programmers. Based in the Netherlands, the startup initially relied on part-time freelancers for engineering. However, the company soon realised that the approach was not best suited to building a solid product.
For this reason, StudyTube decided to source its required engineering talent offshore. Again, the company hired Ukrainian developers.
“... our Kharkiv team is made up of reliable people who produce high quality code. Now that our internal processes are well established, we’re happy with how the remote model is working out for us.”
Stepan Suvorov, VP of Engineering at StudyTube
The startup has already secured 3 rounds of investment totalling €1,500,000 and continues to scale.
Read more about StudyTube’s experience: Stepan Suvorov, VP of Engineering, shares his firsthand experience working with Ukrainian programmers and talks about his company’s hiring process in this interview.
IBM’s failed attempt to build a Health Payroll System for Queensland (which resulted in 20,000% cost overrun and has led to an ongoing legal battle) is probably the best-known outsourcing disaster.
However, IBM is not the only big name to be involved in failed IT projects. Here are some more examples of how outsourcing can turn to disaster.
Another global consultancy, Deloitte, was involved in an IT outsourcing disaster back in 1996, when the company was contracted by the Massachusetts State Legislature to build a computer system for the state’s courts (MassCourts).
The project took almost 4 times longer than initially planned, a colossal process spanning 19 years instead of the agreed 5. While independent industry experts will often tell you that IT outsourcing projects are regularly delayed or exceed budget, this particular case is beyond comparison.
Deloitte has also failed to deliver several more projects over the last decade, including a tax collection system that was plagued with over 1,000 defects, and an unemployment claims system that was delivered 2 years overdue, ran $6 million over budget, and also had multiple errors.
MyCalPAYS is a payroll system that the state of California hired SAP to build. The project started in 2010 and was put on hold three years (and $254 million) later. The company did manage to deliver on the first of its 5 planned phases, even though this "revealed a significant volume of troubling errors".
The project was terminated in 2013. While there are no clear accounts of exactly what went wrong with the project, some sources mention problems with “planning, quality assurance and inadequate scheduling”.
As the latter examples prove, no one is immune to failure. However, there are many proven strategies for outsourcing success.
As with any partnership, at least half of your project’s success depends solely on your side. From choosing the best service provider, to assembling an engineering team, to communicating requirements, and managing day-to-day operations, it’s you who can either wreck your offshore development or allow it thrive.
This is where our model comes into its own. At Daxx, you will be fully in charge of your software development project, working directly with a dedicated team of talented software engineers. Our process is simple:
In addition to custom IT recruitment, we help you set up your own offshore development center, handle payroll, taxes, office management, and retention so you can focus on what matters most - your product. This is what makes our model better than conventional outsourcing.
If you are ready to explore the opportunities offered by our model, get in touch with us by using the form below, or review our latest list of available developers.
Learn more about our model or talk to a specialist about the opportunities for hiring with Daxx. Simply fill out the form below and we will be in touch.