Outsourcing provider vs. Legal Entity
Many companies fancy the idea of setting up their own software development team abroad. As a rule, the question then arises quite quickly as to whether one should open one’s own office for this purpose or whether it would be better to use the services of an outsourcing provider.
We are not talking about individual projects, which are usually carried out via a contract for work. Rather, we mean teams of IT specialists who are available on a permanent, unlimited, and 100% basis. Such cooperations are designed for several years and should therefore be carefully examined and considered.
If you take a closer look at the conditions of providers (they are usually called outstaffing providers in technical jargon), you can easily get the impression that the service providers charge considerable fees. The question is what causes these costs and in which scenario it is better to set up your own branch and legal entity abroad.
Both variants have advantages and disadvantages. Which model you choose depends primarily on the time horizon, team size, and experience in managing external remote teams.
In this article, you can read about the services a service provider can provide for you and how you can benefit from working with an outsourcing partner.
Services of the Outsourcing Provider
First, the service provider provides the infrastructure for the software development team. This is usually referred to as “facility management”.
This means everything that must first be available so that the developers, testers, etc. can work. This includes in detail:
- the office space, including additional space if the team expands
- Conference rooms for meetings, daily stand-ups, etc.
- Facilities such as furniture, sanitary facilities, and the cleaning of the rooms
- Internet connection, ideally redundant and with sufficient repeaters
- IT admin services, for example to set up VPNs or local test servers
- Logistics support to organize flights, hotels, and transportation for customers
- Drinks, snacks, food vending machines and the like.
In addition to providing the basic infrastructure, the outsourcing provider also provides other services.
These usually occur on an ongoing basis and concern the administration of the team. So it is precisely at this point that you are actively relieved.
In detail, this means:
- the payroll of the employees
- the payment of taxes, social security, private health insurance, etc.
- the accounting towards the customers and suppliers
- Language courses, further training, or other joint activities
- regular company events such as summer events or Christmas parties
Invoicing from a single source
Billing is often an argument in favor of working with a vendor that provides space, infrastructure, and administration for your team.
Especially in the field of outstaffing, many service providers have a company, for example in the DACH region, through which invoices are issued.
This is also a significant difference or simplification. Invoicing from a single source has major advantages: all the above-mentioned services are combined in one service flat rate or service fee. All the “micromanagement” is eliminated.
This comes into play especially when you have a small team of IT professionals. If one were to set up a company oneself, all services would have to be administered and handled directly or indirectly. This costs time and money.
The true value of a provider
However, we are convinced that the essential added value of an outsourcing service provider lies in areas that you will not necessarily find on an invoice.
On the one hand, this concerns the topic of recruiting. With an already existing and very well-coordinated recruiting team that has a well-established network, you have clear competitive advantages.
Your provider has been on site for many years in the country where you want to build a team. So, they have detailed knowledge of the local labor market and wage levels.
The outsourcer has often built up a name for itself in the local market. It is, therefore, easier to find good developers through them. Employer branding, done by you, takes time.
There is no substitute for many years of experience with the culture. It helps to interpret behaviors correctly and to react adequately. The provider thus acts as a bridge, moderator, and “diplomat” between the cultures.
Holidays play a major role in all cultures and strengthen the sense of belonging. Disregarding them could have fatal consequences. The service provider recognizes country-specific holidays, such as “Women’s Day” or “Developer Day”.
They organize events and parties; local know-how helps them. They may even network their customers by hosting events where customers can meet, share and learn from each other.
Due to their experience, the provider is primarily on hand to provide advice during the initial phase. The expertise helps to avoid mistakes that could jeopardize success right from the start.
When a team is quite small at the very beginning, it often feels a bit “lost.” Your local partner can build a sense of community here by putting teams together in an office.
Often, solid providers offer contracts in the customer’s language in addition to standard contracts (in English). As a customer, this facilitates contract negotiations and minimizes costs if external legal advisors need to be engaged.
Speed and entrepreneurial risk
The fact that you can work with a partner and use its infrastructure usually means that development teams can be made available more quickly. The provider takes care of recruiting for you. You can start work much faster.
Your risk is low because very short contract terms allow you to dissolve the team quite quickly should this become necessary. This means that costs can be reduced to zero for up to one month.
Due to many years of experience and cultural understanding, the service provider knows when to escalate an issue. They are on-site and see problems, conflicts, or the like that the customer cannot recognize directly from a distance of 2000 km.
When are your own branch and legal entity the better choice?
So far, it seems that working with a provider is the only and best option. However, there are situations where having your own branch office is the better choice.
When it comes to wanting to represent “greatness” to your own investors, including in terms of your own valuation, you should set up a legal entity, but be aware of the risks.
In our experience, it makes sense to think about having a legal entity if you need more than 30-40 employees – in other words if you have a certain team size.
A good variant is to start with one partner, then let the team grow to this size in the first few years and take over the employees later. This can be included in the contracts (“buy-out clause”). It is best to discuss this directly during the contract negotiations to avoid having to renegotiate any “utopian” demands later.
The outsourcing provider takes on several tasks that are not so obvious at first. However, it is precisely these tasks that help to avoid stumbling blocks, prevent mistakes and successfully build a software development team.
This is mainly due to the fact that the provider is directly on site, knows more, sees more and achieves more. With an experienced service provider at your side, you have it easier.
If your team has reached a certain size, it makes sense to consider a separate legal entity. You can then take over the infrastructure and administration yourself and have a back-office team to support your developers.
Talk to us about both options!