While working in the Philippines, I received this question from a Web development company in Europe.

Of course, one of the first things they wanted to know was, “How are the salaries in the
Philippines?”

Everybody knows that salaries are often lower in countries suitable for outsourcing. Although outsourcing isn’t entirely based on cost benefits, in many cases, it’s about availability of resources and how long it takes to find the right team members.

To avoid a dry list comparing the benefits and disadvantages of having your own
Outsourcing Company versus a virtual team in an existing outsourcing / near shore setting or working with fixed price projects, here is a Skype-conversation (adapted) with details in the next paragraph.

Above slide was presented by a Mother-Entrepreneur of the Philippines (international outsourcing summit 2011) who said;

"Jobs created through Outsourcing/BPO make that family members don't need to go abroad anymore to find work, now families can stay together!". 

>> Read my other article at Savvysme; Outsourcing, cruel in times of unemployment in the West?

Descriptions:

Virtual team: A team of people (programmers, designers, call-center agents, e-marketers, project manager, etc.), also called ‘captives’ who work for you from a distance being part of an existing company. The existing company takes care of local labor laws and provides work environment necessities such as PC, infrastructure, etc. In this scenario, you don’t have to legally set up your company. You will be billed for the services of your virtual team on a monthly or hourly basis, depending on your agreement.
Virtual employee: An employee who works for you from a distance, in an existing company.
Fixed price projects: You provide a functional description / clear guidelines for your project or campaign. The existing company estimates the required time and proposes a cost and delivery schedule, mostly after asking multiple questions, until all is clarified. For larger projects, a price may be charged for the estimation.
Your own Outsourcing company: You establish a legal company, hire your own people, HR, accountant, lawyer, rent office space, etc.
(Time) Estimations: After dividing the project into smaller parts, a time estimation is made. How long will the project take? How many people and which skills are required Some skills have a different price; for example, mobile development skills are generally charged per hour unlike for basic PHP development. It also depends on the required level of experience and skill.

Our Skype call;

James Web: Hi Patrick, we have a small Web development company and need more resources. We are thinking of setting up an outsourcing office. What would that cost

Patrick Van Dun: Hi James, it all depends on what you want, of course.
- What’s your main goal?
- How many people do you need?
- Which skills do you require; PHP, .Net. JAVA, … programmers, designers, slicers, copywriters …?

James Web: We’re thinking of starting with 4 people, 1 programmer who is specialized in the most common programming languages and can take over our server management (Barry does this now, he’s good, but cheaper is better), 1 designer/slicer who is also good in English copywriting for SEO, etc. (Google, Baidu, Affiliate Marketing, Social Media), 1 developer who has experience with Android and Apple mobile devices, and 1 for cold calling to generate leads. And yeah, if possible, somebody who can translate in Mandarin and knows the e-commerce scene in China to manage our e-commerce in Hong Kong.

Patrick Van Dun: James, is it ok to be very straightforward with you?

James Web: OK, shoot

Patrick Van Dun: I don’t think setting up your own outsourcing company is a good idea, James. The good news is, I have a better idea that will suit your needs. Setting up your own company for only four people and very diverse skills doesn’t seem like a good idea because:
 

A. Your overhead costs will be too high;

You will have to bear legal costs for the company setup and yearly paperwork.
For the start-up, you will have to fly several times to the Philippines, pay hotel and
restaurant bills, take taxis and hope they bring you where you need to be (I am not joking), and live with traffic jams. Most importantly, you have to find out the whole process, the right legal partners, and you can imagine what else; all these take time and don’t come for free.

HR doesn't have to be a full-time person, but in some countries an agency could take care of HR activities temporarily.
Legal support
Accountancy + office rent, infrastructure, and maintenance.
Not to forget, of course, the headache of getting started. How to find an office (and to verify local contracts). The wrong location means a bad start to attract the right profiles and even suppliers. Certain areas are more attractive (so are favored by employees) due to transport availability, proper Internet connection, or even a stable power source and power back-up (ask in the building or provide it yourself). In certain areas, it will be impossible to find specific talent. People flock to places well known to them. How to recruit the first managers and your whole team? How will you find them? What salary and benefits will you offer to keep a talent pool? What do other similar companies do? How to handle office policies, contracts, salaries? What is the impact of local labor laws? If you hire the wrong people and let them go in a way that conflicts with local labor laws, it could backfire on you big time. How to adapt to cultural differences, work with local employees, and make the best match, win-win for both? How to find suppliers, infrastructure, and get them installed? It’s not as easy as saying; “I want 3 offers for everything we buy”. You may not even get one offer and promises aren’t kept. One ‘real example’, ‘it took me more than 1 month to get a phone line in the Philippines’. To start all this up, you need a dedicated manager. It’s impossible to do all of this in a couple of months; that’s ‘great entrepreneurial spirit’ however it doesn't match reality. I have not mentioned the learning curve yet; it’s more difficult than starting a company in the West and you know, it’s impossible to get all things right and streamlined the first time. Wrong choices made at the start will affect your operations later on.

Outsourcing to an existing company means that you can:

Start within a week or a month
Spend more time focusing on the new business and less time worrying about office issues

B. You will need somebody to manage your team. 

Do you plan to let one of your employees live in the Philippines or hire a local manager who can manage them, flies over sometimes, or manage everything from a distance? This also has a cost of course.

C. Maybe the most important one:

As in Western Countries, good people like to work together in a team, they like peers who do similar work to learn from and share ideas with. A team of four is not enough to attract the bright minds you envision. Of course, you can find a programmer with experience. But, to find an expert in multiple programming languages, platforms, and one who can also perform server management (depending on the required level) is almost impossible. Somebody is either an expert or is an all-rounder. One person is needed to do cold-calling 8 hours a day on his own, not as part of a team. Let’s see if we can find a more efficient solution. The Chinese translator/e-commerce person will be difficult to get. Do you need Cantonese and/or Mandarin? For Hong Kong, it is best to have both. The designer combination you ask for, it would be a dream girl (or guy).

James Web: So you basically say, “Dream on!”

Patrick Van Dun: Hi James, there are other options for now and after a while, when you need more people, setting up your own company could be a good idea.

James Web: What do you mean? From how many people onwards would it make sense?

Patrick Van Dun: 10, 15, or 20 – it depends where you would set up an outsourcing company. PHP-programmers can be found more easily (depending on the level, Drupal and MVC; framework-specific skills are more difficult) than .Net or experienced mobile device programmers. In large cities such as Manila, there are more possibilities but, there is also more competition for the same workforce. Your future employees will look at the offers at hand. If an established company has 30 people, including specialized teams for .Net, PHP etc. you will have a tough time competing with them, even if you give higher salary. People look for established companies, for job security. Bright people look for team members who are working in the same field so they can learn every day and grow professionally.

James Web: I was thinking you could help me but, you say it is impossible? What you say makes sense but…

Patrick Van Dun: Don’t worry; I have a perfect solution in mind. Do you still have 10 minutes?

James Web: OK

Patrick Van Dun: For a start, I propose to work through an existing, well established company that establishes a virtual team for you. It could work like this:

Clearly define the kind of skills you need. For example, you could specify which CMS you often use so that the existing company can look in their available workforce or hire people tailored to your requirements.
The existing company can take care of the overhead cost (infrastructure, HR, etc.).
The company can hire and manage your employees.
If you don’t need a full-time designer or slicer (most designers aren’t good in slicing), you could hire them part-time or on an hourly basis, only when you need them (to be agreed on); that could be a good option.
You will still have to follow-up with your virtual team and organize project management from a distance or hire a local project manager, who needs your guidelines.\
The disadvantage is that you will pay more per employee if you look purely at the salary. Depending on the amount of people you need, your total cost, including overhead will be cheaper than starting and managing your own company for only 4 people.
The existing company will invoice your company.

James Web: OK, the established company provides a platform for my virtual team, so they can work and take away all the hassle about local HR laws, etc. And, what if my team needs to grow? For example, after a while, I have 15 people working for me. What will happen if I, at a certain point, want to start my own company? Do I have to buy out my virtual team or start from scratch?

Patrick Van Dun: I advise to make an agreement with the existing company in case you decide to start your own company, that you can take your virtual team with you. This should be without extra cost or depending on what you agree. It should be clear from the start.

James Web: Sounds reasonable, and would they provide a Chinese employee to support our e-commerce in Hong Kong?

Patrick Van Dun: I propose that we talk again soon. For the Chinese employee, I propose to work together with an internet-marketing company specialized in the Hong Kong and the Chinese markets. You could hire a virtual employee from them or work together on a fixed price project model. If you could write down the requirements/responsibilities for this person/project and e-mail it to me, I will look into it ASAP and put you in contact with potential partner companies.

James Web: OK, thank you! That’s a lot to think about!

What To Do?

Setting up my own outsourcing office, working with an outsourcing company, or using freelancers?

You can make a decision depending on the below parameters:

1. Where (in which country or city) would you like to have a team?

The place you choose should match your current and future needs, a very important
decision:

Availability of resources for the skills you need
Price versus quality
Ease of communication (language, cultural barriers, and time-zone difference)
Political stability of the region
Infrastructure (electricity, Internet, water)
Distance (travel time, expenses such as a hotel/restaurant close by and accessibility)
Labor laws, and in general, rule of law
Cost and regulations to set-up your own business (100% ownership allowed or?
 

2. What’s your budget (long and short term goal)?

If you need a team for a short time, obviously it’s better to work with an already established company or freelancers, as can be found through www.odesk.com or www.freelancers.com to name a few.
What is a ‘short time’ to decide whether you set up your own company, partner with an existing company, or hire freelancers? This depends on how many people you need and how fast you can recover the cost from setting up your own company including the learning curve, management, and overhead cost (hiring, administration, infrastructure, management and communication time, etc.).
Similarly, the budget has to be in line with your goals whether it’s with an existing
company or your own company. Whichever choice you make, both will require time from your management and cultural adaptation to communicate and work together. With an existing company your learning curve is shorter; you can start much faster, and most importantly, focus on your core business.
 

3. Is your project a long-term project (years) or a short-term development with change requests or new features?

Let’s say you have a project for 500 data entry people for a period of 2 years. You also have management with experience in this kind of projects in outsourcing countries, available and willing to relocate for the duration of your project. Depending on the calculations and profit margin, it could be a good option to do it yourself or in partnership with an established company who helps you in the start-up period. I used the above example to make clear that aspects such as workflow, ability to streamline production, and quality control have to be taken into consideration. A data entry project that is well estimated based on trial runs is easier to streamline than a web and software development unit with ongoing new projects, new features, and bug fixing for projects that were finished a long time ago.

4. Can outsourcing work for a small web and software development company?

A small web and software development company which wants to work with an established
outsourcing company or setup their own company would have to look into the following:

How many hours of work do they need each month?

Is the required amount of hours large enough to set up your own company?

If it’s only the occasional Wordpress, Joomla, Drupal, website and/or small software projects for 4 weeks or less that comes along, it is not easy to find the right outsourcing/nearshore partner; neither is it worth it to set up your own. The outsourcing company has to sell hours and should earn back their extra project management efforts. In case of many small projects, the project management overhead is high. Small website clients have often small change requests that require a lot of communication time. Making outsourcing profitable for small Web and software development companies can be done by optimizing the work and communication flow.

Look for an outsourcing partner who specializes in the CMS you use (it’s easier if you use only one or two CMS systems). If the outsourcing company knows the software in and out, it can install and upgrade the CMS easily and give first-hand advice regarding new add-ons and features. This will benefit your sales, time to delivery, and client satisfaction thanks to a good after service, including change requests. If you work often with the same outsourcing company, it can become more like a partnership. Your sales team will be able to use website packages and add features to that. Time (and cost) estimations will be fast and easy to make (with a minimized risk of errors) so sales can focus on selling and the outsourcing company on delivering. Programmers who are focused on one CMS can deliver faster and do a better job with fewer errors. Web design is always a challenge because people can discuss for ages about colors and design. It’s often also easier if the client can stand next to the designer’s screen. If the web design is not delivered by the client company (company that hires the outsourcing partner), you can use an online whiteboard to go over the design in an online session. Alternatively, you can also temporarily set designs online (without slicing) to show the different options or they can be shared by e-mail or file sharing websites.
To improve communication, use an issue or task management system to communicate about small updates and avoid a lot of small details in multiple e-mails and attachments. An experienced outsourcing company will guide you to find the best workflow. Often easy (and free) tools such as Google Docs can be of great help for small projects.

To get a good price, make a deal with your outsourcing partner regarding sales volume in website packages or development hours. If you can’t afford your own outsourced development team because of an unstable production (not enough work for your developers) you will have to work on a project basis. The outsourcing partner will deliver ASAP considering ongoing projects and deadlines.
Although you could approach multiple outsourcing companies and order from the one that requires minimum time, I don’t suggest this approach. If you work with one company you build loyalty, a partnership, and get used to communicating efficiently together. By asking for estimates too often and not giving projects, you may realize that you don’t receive estimates anymore and your company will be seen as a less important client. One of the big success factors of an outsourcing company is to decide which estimates to put effort in and which clients to work for. For larger projects it’s not uncommon that estimates are requested. For example, some outsourcing companies work only for corporate clients whereas requests from individuals (private persons) are ignored. Any time spent in estimations and communication that doesn’t lead to more income in the long term, is wasted time.

You get the best outcome when the outsourcing partner and the client company share a partnership based on mutual benefit from their cooperation. It’s logical, of course, but easily forgotten. I once heard a web development company say, “Our client doesn’t have budget for this and we forgot to include it”, and now there’s the expectation that my outsourcing company would do it for free. In a partnership, companies can agree to help each other out (depending on what/how); it’s also nice to do if possible, as long as it is both ways.

5. Can you or your project management team bridge the language and cultural gap, be flexible and available, recognizing potential time differences, and still have time to do their other work?

Easiest answer is, “We get it done anyway”. However, in the meanwhile, your business and all daily work is still ongoing. Underestimating management time is the same as buying a Ferrari and having no time to drive it. If you decide to set up your own company in an outsourcing country, it comes with all the work and hassle a Western company faces. To make it more complex, you’re in an unknown country with different customs, laws and administration, and time zone differences. Imagine doing your daily work (8-12 hours) during European office hours and having to get-up at 4 a.m. to start with your team in India and quickly go through major issues.

A key success factor to get things done is keeping your remote team members and(Western) management motivated. An established company will have a project manager who can bridge cultural gaps, filter out messages when a client uses some harsh language in a fit of stress. Do you have managers available to bridge the gap? In one instance, a client used words such as “Bullshit”, etc. in an e-mail directly to a programmer. OK, it’s a harsh word but the impact on the employee in Asia was serious, much more serious than meant by the client.

6. Does your team have experience in managing projects from a distance, making functional and potentially technical descriptions that can be understood by a remote team, using supporting software?

What happens if a new employee starts in your Western company? The person needs attention, guidance, and probably some specific training. It’s the same if you have a company in an outsourcing country! If you work with an existing outsourcing company, they can guide you through the process and have supporting software and procedures available.

7. Would you like to manage your team remotely or at the location, fly frequently to the destination, or live over there?

If you choose to start your own company abroad, obviously, you will have to fly over often and for sure during the initial months. Finding local management who can run your company is a possibility; however, it is easier said than done and it takes time. Also, the management in your current company will have to adapt and learn how to work with the outsourcing team. Working together always requires a learning curve. If you prefer to work with an existing outsourcing or near shore company, the learning curve is much shorter but still exists.

8. If you would use an existing company, do you prefer:

A team managed by that company on an hourly basis or for a fixed price (if your projects are described in detail and can be estimated accordingly)?
A virtual team that you manage from a distance for an hourly rate?

9. How many people do you need in your team?

If you only need a small number of people (less than 10 or 15), depending on the skills required and your location, it’s likely that the overall cost of your own team is more expensive than working with an established company. Good calculations, where all costs and time required are included, are of key importance.
 

10. Do you need team members who can use the local language and/or other
languages? For example, for translations, data entry in multiple languages, etc.?

Modern communication and fast travel opportunities mean that language proficiency,
cultural differences, and market adaptation are the main barriers for worldwide business. If you need offices in different countries and multiple languages, you have to choose between setting up all these offices yourself and working with one or more partner companies in the required countries.

It also could mean that you need a large production unit and sales offices. Imagine you produce technical devices for the European market, or have a large translation team and want to market this in China. Suppose you choose to have your production in China (for example, 300+ FTE). Your production unit will probably not be in Beijing (too expensive) but your sales HQ should be. Besides the cost, an important consideration is also: “Do I want to spend most of my time managing my foreign companies”, “Do I want to focus on sales and business development” or “Am I sure that I am able to do both”?

In their enthusiasm and desire to get things done, hands-on entrepreneurs often take a big bump by underestimating costs and time required to set up and manage their outsourcing offices.

I experienced first-hand how much energy, time, and money it takes.

* Pictures are from my former teams in Nepal and the Philippines.

* This article is part of an e-book published by Bridge Outsourcing; "How to get prepared for managing a remote team".

This article was written by and is copyright of Patrick Van Dun, If you like to publish the article, mail for approval.