5 min read

Small-Scale Offshoring

Smaller companies have shied away from offshore outsourcing because of the risks. Here's how some are making it work.
Among other things, using an offshore services provider has forced the company to become a more disciplined operation. "The benefit of a small company is that I can just turn around and ask someone a question," Franchina says. "Now, we're going to need a lot more formal documentation, but it's an opportunity to strengthen our practices."

That management discipline is where many offshore projects fail. Many smaller companies are used to operating in an ad hoc style or don't have training in effectively dealing with contracted parties. Rudzinsky says he's learned that a good offshoring partner must "have a strong local presence that can effectively communicate my needs to the offshore team." At the same time, it's wise for smaller companies to try to bring on board more staff experienced in working in collaborative, outsourced environments so that they can directly handle more of those communications. "It's the new model, and not just in software," says Commendo's Gil, whose company was built from the ground up to operate largely as a virtual organization.

And as interest in offshore outsourcing grows among software startups and other small businesses, more service providers are springing up to cash in. There's a void to fill as most of the large, well-known offshore vendors such as Infosys Technologies, Tata Consultancy Services, and Wipro aren't aggressively courting smaller business. "They can barely keep up with demand from the Fortune 500 customers so they don't yet need to tap smaller markets," says Stan Lepeak, managing director at outsourcing advisory firm EquaTerra.

Smaller companies are increasingly interested in big-business concepts such as time to market, agile platforms, and high-velocity turnaround, says Larry Gordon, VP at Cognizant. "Offshoring gives them the means to get there," he says.

Chart: Going OffshoreBorn from the ashes of a former dot-com, Denver Web-hosting and design-services company Ixion Inc. is one of the new breed catering to the offshore-services needs of the small and midsize business community. It's simply a matter of following the money, Ixion president Daryn Harpaz says. "We have customers contacting us from a number of industries, and they're only interested in offshore services," Harpaz says. "It's in- creasingly on the radar of smaller companies."

As a result, Ixion, which maintains a development center in India, expects its revenue and staff size to double this year, though the privately held company declined to disclose its revenue. Ixion's staff in India recently developed an online listing and content-management system for Equibus, an online classified system for the international horse trading community.

But companies like Ixion aren't exactly recognizable names with long-established practices, and smaller businesses may need help finding and selecting services providers that are right for them (see story, "Do Your Homework: Know Your Offshore Options"). Elance helps small businesses make those connections. "If you're an employee at GE, you have resources in your company to tell you who you should be buying from and what price to pay," says Elance CEO Rosati. "When you're a small business, you don't have those resources, but you still have the need." Buyers on Elance who are risk-averse tend to use U.S.-based service providers, but those looking for the best price typically choose contractors in India, Rosati says.

Beyond matching buyers and sellers, Elance, which is funded by Kleiner, Perkins and chaired by tech luminary Ray Lane, collects and publishes user feedback on the service providers registered with its site. That's important given the risks of offshore outsourcing for small and midsize businesses. They typically don't have the time or resources to carefully screen vendors and vet contracts, so any advice about a provider before they sign on can be a big help, Cognizant's Gordon notes. "We see big banks and insurance companies that literally take years before signing off on an offshore deal," Gordon says. "That's not going to happen in the small- and midsize-businesses space."

It sure isn't, concurs Hologic's Rudzinsky. "We have one guy [who reviews contracts] for the whole company. He's around the corner from my office so I can squeeze things in. But that can be a barrier for companies our size," he says. So can the language of service-provider contracts. "Someone asked me what our SLAs are; I said I would let them know if I could find them."

And, adds EquaTerra's Lepeak, "it can be a challenge dealing with a service provider you will likely never see; there are a lot disappointments." Even the now-satisfied Rudzinsky says he's selective about what he sends offshore, noting that he can't necessarily expect the same returns enjoyed by large companies. He keeps a close eye on overhead costs such as management time required to work with an offshore service provider. "We need to be very conscious of where the break-even point is--a lot of times it won't kick in unless you're a larger company facing a larger expenditure," he says.

On the risk-versus-reward scale, smaller companies increasingly see the value on the reward side. Commendo Software probably wouldn't even exist if it weren't for offshore outsourcing, Gil says. But it does, he says, and "now we're out there creating jobs, we're hiring marketing and back-office people, and we're delivering a product to the market." There's nothing small about that.

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Do Your Homework: Know Your Offshore Options