How to choose the right offshore IT model

The risks and benefits of five business models for taking your IT offshore.

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offshore IT The risks and benefits of five business models for taking your IT offshore.

A growing number of UK companies are moving IT systems and business functions overseas to lower-cost countries such as India in a bid reduce costs.

However, there are various types of offshore outsourcing and it is crucial for an IT director to make sure they choose the right one for their organisation before negotiating a contract with a supplier. There are five main models for offshore IT, each with their advantages and potential risks.

Offshore outsourcing

This is when a company moves IT systems or business overseas and the supplier runs the service. The main advantage with this model is that the supplier will usually guarantee savings in IT-related costs under detailed service level agreements in the contract. On the downside, this option normally results in job losses for UK IT staff and can often attract negative media coverage.

If the decision is taken to outsource, the natural reaction is to find a credible "local" service provider and enter into an outsourcing agreement with them.

Onshore outsourcing

A similar but alternative approach is to use a UK-based service provider and enter into an outsourcing agreement. The service provider then uses its overseas operations (sub-contractors) to provide the services from the foreign destination. This means that although the customer can use a known service provider, the overall cost of the project will increase.

Do it yourself

The alternative to outsourcing is for an organisation to establish its own operations overseas. This removes the need to pay a service provider's margins and gives more flexibility as to how the overseas operations are used.

Whether this is carried out by means of a branch, subsidiary, etc, this will be influenced by many factors, particularly tax rules.

Build, operate and transfer

The build, operate and transfer model is for those companies which want to test the water before establishing their own operation. A service provider is used to build and operate the business for a period of time, after which the customer can, if they want, acquire the operations.

For the commercial model to work, no infrastructure or set-up costs should be paid up front. The service provider pays for building the operation and if the customer decides to exit, the service provider has to find a new customer to recover the costs.

Joint ventures

Apart from tax reasons, joint ventures should only be used for outsourcing when there is genuine potential for collaborative exploitation between companies.

Keeping the distinction of customer/supplier (rather than venture partners) is very important. As an example, if you are a joint venture partner which also receives outsourced services from the joint venture, you are partly responsible if there are problems with the outsourced service.

On the other hand, if your supplier does not fulfil the outsourcing agreement, it is clear where the responsibility lies.

Tim Pullan is a senior lawyer in technology and outsourcing at law firm Tite & Lewis
This was first published in January 2004



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