What is an Offshore Development Center? How To Set Up One?

9 min readApr 23, 2024

What is an Offshore Development Center? How To Set Up One?

What exactly is an offshore development center (ODC)? It’s a strategic setup where companies outsource software tasks to teams in different countries. This allows access to a global talent pool and specialized skills that might be scarce or expensive locally.

Offshore development extends beyond simple outsourcing; it involves a dedicated team that functions as part of the main company, despite geographical differences. Why opt for this model? The appeal of an offshore development center lies in significant cost savings and non-stop productivity.

By using offshore development services, businesses can cut costs and speed up project timelines. This happens through overlapping work hours across different time zones. Understanding what an offshore development center is and its benefits is crucial for any business looking to expand efficiently without a hefty budget increase.

Building an offshore development center can be challenging because of different geographical environments and many other legal aspects. Thus it is better for companies to hire an offshore partner who can help you build an offshore development center. According to my sources the top 3 companies that can help you are, Resourcifi, Goji Labs, and Designli.

Understanding Offshore Development Centers

An offshore development center (ODC) is more than just a branch for outsourcing; it serves as a strategic extension of a company. What is an ODC, exactly? It’s a facility situated in another country where a dedicated team focuses on specific software development tasks. This setup allows companies to capitalize on lower operational costs and access a broader talent pool.

Key Aspects of Offshore Development Centers

Cost Efficiency: On average, maintaining an offshore development center can reduce operational costs by up to 60% compared to domestic operations. This significant cost advantage is due to lower labor costs in popular ODC locations like India, the Philippines, or Eastern Europe.
Access to Talent: Offshore development centers provide access to a vast array of skilled professionals globally, helping companies overcome local shortages in IT and tech expertise.

Extended Benefits of an Offshore Development Center

Scalability: ODCs offer the flexibility to scale operations up or down based on business requirements without the typical logistical and financial constraints associated with physical expansion in home countries.
Focus on Core Business: By delegating non-core functions to an offshore team, companies can focus more on strategic growth areas and core competencies.
Innovation Through Diverse Perspectives: Bringing together diverse cultural and technical backgrounds can foster innovation, providing fresh insights and approaches to problem-solving.

Primary Functions

Software Development: The core activity of most ODCs includes full-cycle software development, from initial design through development, testing, and maintenance.
Support Services: Many centers also offer additional support services like 24/7 technical support and customer service, enhancing product support and customer satisfaction.

Challenges and Considerations

Setting up an ODC comes with challenges that companies need to manage.

Cultural Differences: Effective communication and integration strategies are crucial to overcome cultural barriers.
Time Zone Management: While managing different time zones can be challenging, it can also facilitate round-the-clock business operations, increasing productivity.

Understanding the strategic importance of an offshore development center can help companies effectively extend their operations and market reach. Offshore development centers not only help minimize costs but also enhance productivity by tapping into diverse, skilled workforces. This combination of benefits makes offshore development services a critical component of global business strategies today.

Industries That Benefit Most From ODCs

Offshore development centers (ODCs) play a critical role in enhancing productivity and efficiency across various sectors. The integration of ODCs has been particularly transformative for industries requiring extensive technological capabilities and substantial human resources.

Technology and IT

This sector is the most common user of offshore development services, with companies saving up to 40% on development costs by utilizing ODCs in regions with lower labor costs. Offshore teams often handle tasks such as software development, IT support, and cybersecurity.

Telecommunications

Given the ongoing need for innovation and system updates, telecom companies leverage ODCs for both software development and customer service solutions. Offshoring allows these companies to provide 24/7 support and maintenance services more cost-effectively.

Banking and Financial Services

This industry uses offshore centers for a range of functions, from routine back-office operations to complex algorithmic trading and risk management. Offshoring can reduce operational costs by up to 60%, while ensuring adherence to international standards.

Healthcare

Offshore development centers support the healthcare industry by managing data entry, billing services, and developing patient management systems. The cost savings and access to specialized skills allow healthcare providers to focus more on patient care rather than administrative tasks.

By understanding what an offshore development center is and recognizing its potential, industries can significantly enhance their operational efficiency and reduce costs. As global markets continue to evolve, the strategic use of offshore development services will be crucial for maintaining competitive advantage in these and other sectors.

Key Steps to Setting Up an Offshore Development Center

Setting up an offshore development center (ODC) can significantly enhance a company’s operational capacity and global reach. Here are the critical steps involved in establishing a successful ODC:

Step 1: Defining Your Needs and Goals

Before setting up an offshore development center, it is essential to clearly define what your business needs from it. Understand the specific functions you want the ODC to handle, whether it’s software development, support services, or something else. Setting clear objectives early on helps ensure that your ODC aligns with your company’s strategic goals.

Identify the primary purpose of the ODC within your company.
Decide on the types of projects and tasks the ODC will undertake.

Step 2: Choosing the Right Location

The location of your offshore development center is crucial and should be selected based on several factors,

Cost Efficiency: Consider countries known for cost-effective labor without compromising on quality. Popular locations include India, the Philippines, and Eastern Europe, where savings on labor can be as much as 70% compared to Western countries.
Talent Availability: Ensure the region has a steady supply of skilled professionals in the required domains.
Political and Economic Stability: Choose a location with a stable business environment to mitigate risks.

Step 3: Legal and Compliance Requirements

Navigating the legal landscape is critical when setting up an ODC,

Research and comply with local laws regarding business operations, employment, and data protection.
Establish a legal entity according to the host country’s regulations.

Step 4: Building Your Team

Recruiting the right team is fundamental to the success of your ODC,

Develop a recruitment strategy that targets the needed skill sets.
Focus on integrating the offshore team with your company’s culture to ensure smooth collaboration.

Step 5: Establishing Infrastructure and Technology

An effective infrastructure is the backbone of any offshore development center,

Invest in reliable and secure technology platforms to support operations.
Ensure robust communication tools are in place for seamless interaction between the home office and the ODC.

Step 6: Managing and Scaling Your ODC

Effective management is key to the growth and success of your offshore development center,

Implement management practices that foster productivity and accountability.
Plan for scalability as your business grows, allowing the ODC to expand its capabilities accordingly.

By following these steps, companies can effectively establish an offshore development center that not only reduces costs but also enhances productivity and expands their global footprint. Each phase requires careful planning and execution to integrate the offshore center seamlessly with the main operations while leveraging the benefits of what an offshore development center offers.

Estimating and Managing Costs

Setting up and managing an offshore development center (ODC) involves careful financial planning and cost management. Here’s how companies can estimate and control the expenses associated with an ODC,

Initial Setup Costs

The initial phase of establishing an offshore development center includes several key expenditures,

Infrastructure: Setting up a physical office space can cost anywhere from $20,000 to $100,000, depending on the location and scale of operations.

Legal and Compliance: Legal fees for registration, licensing, and ensuring compliance with local laws can range from $5,000 to $15,000.

Technology Setup: Investing in the necessary hardware and software infrastructure typically costs between $10,000 and $50,000.

Operational Costs

Running an ODC also involves ongoing operational costs,

Salaries: These can vary widely but are generally 40–60% lower than in Western countries. For instance, a software developer in India might earn between $10,000 and $20,000 annually, significantly less than their U.S. counterparts.

Utilities and Maintenance: Monthly expenses for utilities, internet, and office maintenance can range from $2,000 to $10,000, based on the size of the operation.

Technology Maintenance: Ongoing technology support and updates can cost about 10–15% of the initial technology setup per year.

Cost Optimization Strategies

To manage costs effectively, consider the following strategies,

Choose the Right Location: Selecting a location not just for lower labor costs but also for stability, infrastructure quality, and tax advantages can maximize cost efficiency.

Outsource Non-Core Functions: Consider outsourcing non-core activities like payroll, HR, and IT support to local firms to reduce overhead.

Leverage Technology: Implementing state-of-the-art productivity and communication tools can reduce the need for physical space and in-house IT support.

Monitoring and Adjustment

Regularly reviewing the performance and costs of your offshore development center is crucial:

Quarterly Reviews: Conduct financial audits and performance reviews quarterly to ensure operations stay within budget and meet productivity goals.

Adjust as Needed: Be prepared to adjust strategies in response to shifts in the economic landscape, technology advancements, or changes in labor laws.

By carefully planning and regularly monitoring expenses, companies can make the most of their investment in an offshore development center. The key to success lies in meticulous budgeting, selecting the right location, and ongoing cost management to ensure the ODC supports the company’s broader strategic goals.

Don’t miss out — Software Development Cost In 2024: Top 7 Budgeting Tips

Best Practices for Running a Successful ODC

Operating a successful offshore development center (ODC) involves more than just setting up operations; it requires ongoing management and strategic alignment. Here are some best practices that can help ensure the success of an ODC.

Effective Communication

Clear and continuous communication is vital. Ensure that there are daily or weekly meetings to keep every team member on the same page. Tools like Slack, Microsoft Teams, or Zoom can facilitate seamless communication. If language barriers exist, investing in language training helps smooth communication and reduces misunderstandings.

Cultural Integration

Understanding and integrating into the local culture can significantly enhance team cohesion and productivity. Provide cultural training for your domestic and offshore teams to foster mutual respect and understanding. Employ local managers who understand the host country’s cultural nuances. They can bridge the cultural gap between the head office and the ODC.

Quality Control

Maintaining high standards of quality is crucial. Conduct regular quality checks and code reviews to ensure that the work meets your company’s standards. Keep your offshore team updated with the latest technologies and practices in your industry through ongoing training and development programs.

Performance Management

Monitor and manage the performance of your offshore team effectively. Define clear performance metrics that align with your company’s objectives. Establish a robust feedback loop to provide constructive feedback to the team and also receive their inputs on various matters.

Security Practices

Ensuring the security of your data and intellectual property is paramount. Implement strict data protection policies and ensure they are adhered to by the offshore team. Carry out regular security audits and update security protocols as necessary to protect sensitive information.

Scalability

Plan for future growth. Develop scalable processes that allow for easy adjustment as the size of the offshore team changes. Ensure the infrastructure can support larger teams and more complex projects as the ODC grows.

By following these best practices, companies can manage their offshore development centers effectively, ensuring they are productive, secure, and aligned with the overall business objectives. Understanding what an offshore development center is and optimizing its functions play a crucial role in leveraging its full potential.

Conclusion

Setting up an offshore development center (ODC) can greatly boost a company’s capabilities and competitive edge. Understanding what an offshore development center is and setting it up correctly is key to its success.

Businesses that invest in ODCs can enjoy major cost savings, access to a wider talent pool, and better efficiency. Success depends on careful planning, understanding of local laws, clear communication, and strong management.

If you’re thinking about growing your operations, an offshore development company can offer the essential services you need to succeed globally. Offshore development services provide more than cost benefits; they are crucial for fostering business growth and innovation.