Nowadays, the IT industry seems to be flourishing as never before, especially in Eastern Europe. This sphere is developing so fast that almost every day more and more opportunities arrive in front of product tech companies. Naturally, tech giants start to look for new horizons. For instance, the need for creating an R&D team instead of hiring more in-house workers often leads IT companies to go abroad. However, in order not to face many different troubles and avoid risks during the offshoring process, they tend to cooperate with service providers that make it all work efficiently.
Speaking about different modes of work between tech companies and IT providers, there are T&M Contracts, Managed Services Models, IT staff augmentation, and other engagement models. I’m going to focus on a special kind of business cooperation called the Build-Operate-Transfer model.
What is a Build-Operate-Transfer Model?
Build-Operate-Transfer (BOT) is a form of business engagement model (and a kind of project financing) which aims at building an R&D team in a foreign location. This process is usually delegated to the chosen IT partner in a host country where the development team will function.
To be more specific, a BOT IT outsourcing provider is responsible for recruitment, legal compliance, payroll, accounting, and other operational functions. However, in some time this R&D team is going to be transferred back to the client.
For example, our team was once approached by the leading AI platform provider in B2B sales from the USA – People.ai – to set up their R&D office in Eastern Europe from scratch. We carefully assessed the requirements of our client and created their office in just 4 weeks! The R&D setup included many services like tech recruitment, office searches, payroll management, and legal compliance. Our tech recruiters attracted, interviewed, and hired 25+ IT experts for People.ai with the rarest skills on the market. The client also chose to use our legal and payroll services, which contributed to the flawless operation of their R&D center.
Build-Operate-Transfer Model vs. Managed Services
Compared to BOT which requires you to completely outsource the process of setting up your R&D team with further buy-out transfer, managed services is the practice of delegating only a part of the responsibility for certain operations. For example, a managed services provider can take care of tech functions, IT infrastructure management, technical support, or just conduct consultations regarding the functioning of your product.
Both these external organizations become your strategic partners and help you save time on many tasks. That’s why I recommend paying special attention to their reliability. In this regard, a managed services provider is less likely to give you certain guarantees. A BOT outsourcing provider, in turn, usually provides transparent pricing, recruitment KPIs, clear deadlines, and of course full legal compliance. For these reasons, tech product businesses consider cooperation with professional BOT agencies in the tech industry that focus on IT recruitment and provide the complete set of operational functions.
How Does a BOT Model Work in IT Outsourcing?
As its name suggests, the BOT model has three key stages:
1. Build Phase
It goes without saying that facilities, space, and team make a foundation for the successful start of any BOT project. At this stage, the chosen IT provider employs competent staff, finds accommodation, and provides the required software/hardware. Usually, this is done at the expense of a provider’s own space and resources.
2. Operational stage
This stage involves all kinds of management, starting from the office up to HR and accounting. The BOT support organization operates all necessary processes to make your business work well offshore.
3. Transfer stage
At a definite point in time, your service provider transfers the already mature business to you. Both parties negotiate a transfer contract. It should also be mentioned that there is a high possibility of losing the deal, since a great number of pitfalls are waiting for you at this stage.
Build-Operate-Transfer Model Examples
A great example of a Build-Operate-Transfer project is the cooperation between the leading tech provider of electrification & automation and a BOT provider. The former wanted the transition from IT outsourcing to create its own professional remote software team abroad via the BOT model. Eventually, this contract resulted in hiring the needed number of software developers and saving considerable costs for the client. Even though the transfer stage had not been accomplished for several years, the BOT model turned out to be a win-win solution both for the client and the provider. When it was decided to finalize the transfer stage, this transition was smooth, and all software engineers became official employees of the client.
In terms of other Build-Operate-Transfer model examples, let’s consider the experience of a software engineering company. In order to implement the Build-Operate-Transfer model, they initially worked with a few BOT vendors for several years. The build and operate stages turned out to be a success but when it came to the last step of transfer, the company faced certain issues. First of all, all the resources had to be transferred back to them from the BOT vendor. Secondly, the client decided to establish their subsidiary in the BOT location in order to be able to supervise the team. Luckily, the client settled for one competent BOT provider that finally addressed all these challenges.
5 Benefits of Build-Operate-Transfer IT Services
To see what exactly you will receive from BOT, I’ve listed the top five Build-Operate-Transfer services benefits that often make CTOs go for offshoring:
– A wide range of talents
If you’re based in the United States or Western Europe, you must have already noticed that it’s complex to hire the right on-premises employees. It happens because of the high demand for talented developers among different local IT companies – from SMBs to enterprises.
– No white labeling
Compared to an outsourced team, a Build-Operate-Transfer agreement software team are your employees and work under your brand from the beginning. They will not develop a product and then just let you rebrand it. Offshored developers hired via the BOT provider are no different from your in-house team, yet they simply work in another country.
– Substantial cost savings
If you create your R&D office via Build-Operate-Transfer, you will do it in regions with developing markets that have a strong IT community, like Poland and Romania in Eastern Europe. Here, you will considerably save on office rent and developer salaries that are 2-4 times lower than in the U.S.
Taxes are a whole different story because Polish programmers and other IT specialists who are employed under the B2B contract pay from 8,5% to 12% in income tax. At the same time, Romanian software developers are exempted from payroll income taxes.
– Full operational back-up
Your IT vendor in the offshoring country will do everything in terms of administrative tasks – from hiring people to tax consulting. This way you will be hardly involved in operational processes – and mostly focused on your core business.
– Compliance with the legislation in the offshoring location
As a rule, a skilled R&D vendor has in-house lawyers with international educational backgrounds and expertise in IT law. They will ensure the legality of the functioning of your offshore office and prepare documents for successful R&D transfer.
3 Challenges of Using the BOT Model for IT Outsourcing
Even though you can reap many benefits of BOT, here are three important difficulties that need your attention:
– Offer rejections from candidates
If your company is new to the offshore market, candidates might neither apply nor accept your offers. What is even worse, not all BOT providers can help you promote your brand in the local IT community to solve this problem.
The efficient Build-Operate-Transfer model in the IT industry presupposes working with a vendor that uses employer branding as part of your offshore strategy. For instance, they will launch your branding campaign, create your profiles in the local tech media, and fully integrate your corporate culture.
– Dedication issues
If your Build-Own-Transfer structure doesn’t belong to you from the beginning, there might be problems while transferring this unit eventually to you. Some BOT providers don’t recruit software engineers directly to your company and kind of assume the role of employer. So, developers might be confused about whom to report. To prevent this, make sure your vendor just helps you run your R&D facility and doesn’t have access to your core development.
– No expertise in operational management
Many people think that only providers who perform professional IT services (e.g. custom software development and testing) can carry out the BOT engagement model. However, these firms often have no idea how to build and run R&D because it implies mostly administrative back-up support. So, if you don’t want to waste your money on ineffective offshoring, you should choose a vendor with practical experience in establishing R&D offices for companies like yours.
What to Consider Before Starting IT Outsourcing?
To arrange a win-win agreement with your Build-Operate-Transfer IT outsourcing vendor, you should consider the following aspects of cooperation:
All terms of the agreement in BOT are specified before the collaboration starts. However, this evokes the danger of being caught in an “agreement to agree” trap. It means that de facto the parties will agree on the price or transfer terms of their contract right at the time of making the deal. However, de jure such an agreement does not make any sense. Consequently, the deal cannot be reached.
Obviously, no one knows for sure the price at the very moment of the deal: a million or a billion. That is why the pricing model is negotiated with some specifications taken into account. Primarily there are no definite numbers, only formula with several variables. When it is high time to sign an agreement, these variables are calculated according to the current state of the cooperation between a Build-Operate-Transfer IT services provider and tech company. In the end, you have an exact figure and set the price.
Generally, price is made up of the following constituents:
Expenses on the R&D center usually mean an average payment for a certain number of developers working for a client at the transfer date.
Multiplier is the cost price that becomes less over time. This is due to the fact that your R&D center should pay off first. For instance, if expenses on the offshore R&D office have not been covered yet, the multiplier is quite big. Within the next months, at least some money is paid back and the cost price goes up, which means that your R&D center is ready for sale. Normally, the sale is restricted by the agreement for the first 12 months.
Unfortunately, IT companies often diminish the role of offshore team management. As long as the staff is the main asset that transfers to you after the deal, a lot of attention should be paid to employees. Many business leaders take people’s opinions and attitudes into account and communicate with them about future deal. I faced cases when a deal with R&D transfer failed because very few people agreed to work for the new client (5 out of 30).
To make your offshoring experience as successful as possible, appoint a certain day when you are ready for communication with employees regarding the upcoming deal. Feel free to discuss the terms of their transfer. You should also keep in mind that even top tech companies in the U.S. can be completely unknown in Eastern Europe. Don’t hesitate to invest in employer branding abroad, because in the long run it can play a crucial role. People are less likely to work for a “no-name” company, especially including it in their CVs.
Last but not least, you should think about the transfer of facilities and equipment. After the deal is reached, people and hardware are supposed to move out of the provider’s place. Yet you would be better off to take care of it beforehand. There are different options on how to rent or sublease a new office. As for facilities, the predetermined assessment of your equipment is always a good idea. Software is another point of consideration here. I would like to highlight that, usually, software belongs to the third party that issues a license. You may buy a sub-license or purchase new software. The best way to handle this problem is to appoint an operational director, be it your team lead or a site manager.
As can be seen, one of the greatest advantages of the Build-Operate-Transfer model is a small number of investment funds. However, indirect access to people is a sufficient disadvantage of this model. In general, the BOT model requires plenty of effort to sustain your business adequately.
Consider Alcor BPO – Your Trusted BOT Provider in Eastern Europe
When it comes to successful Build-Operate-Transfer implementation, many American and European business executives are considering Eastern European countries like Poland and Romania. Not only is this region rich in qualified software engineers, provides lower remunerations and taxes, and has many HE institutions with stellar tech programs, but also lets technology companies work with competent providers. For example, our BPO company Alcor can provide IT recruitment in Poland, Romania, and other Eastern European countries for you. Basically, you obtain the benefits of the BOT model and avoid its challenges.
Build-Operate-Transfer Case Studies
Opening a research and development center for Tonic Health is one of our company’s best Build–Own–Operate-Transfer examples. This is an IT product company based in Silicon Valley that develops a platform for medical data collection. They wanted to offshore to Eastern Europe, but at first, the company decided to create an R&D office on their own. Tonic Health faced all Build-Operate-Transfer pros and cons, and the main problem was that candidates refused to accept their offers. Eventually, they reached out to us and we signed a contract.
In the end, Tonic Health got what they wanted – the dream office with their own branding, efficient IT recruitment in Eastern Europe with no offer rejections, proper accounting services, detailed HR management, and the needed insights into the local IT market to build a prosperous business!
We specialize in helping IT product companies set up their dedicated offshore development centers in Eastern Europe with a focus on tech recruitment. Alcor’s clients create and grow effective remote teams and boost their sales, using our services. For instance, People.ai managed to attract the needed $100 million in investments in 2021 and is now estimated at $1,1 billion!
Apart from People.ai and Tonic Health, we also worked with such tech giants as Ledger, Samsung, Sift, Huawei, Globality, Grammarly, Amadeus, Certent, and many others.
How do we work?
Although our services may seem like traditional Build-Operate-Transfer, we don’t have the “transfer” stage that implies buy-out fees and additional transfer costs. Since the development team belongs to you from the very beginning, we don’t take over direct management of your development team, but legally protect your IP rights so that you keep confidentiality.
First of all, more than 40 of our experienced IT recruiters hire Romanian developers or software engineers from other Eastern European countries who belong to your company from their first working day. Our job here is to provide you with verified candidates in 5 days, pre-screen them thoroughly, check hard & soft skills and close your vacancy in 3-6 weeks. This process is supported by our guarantees of quality: if our candidate does not pass the probation period at your company, we’ll find another one free of charge.
Secondly, we become responsible for legal support and compliance of our clients’ operations within local laws. What is more, our team plans and pays taxes to local authorities for your business in Eastern Europe, creates and maintains employee records, and pays salaries to the development crew. Sometimes our managers deliver additional services like the legalization of foreigners or M&A deals support if the client needs it.
In conclusion, I would like to note that both the psychological and legal aspects are of great importance when running an R&D office. If you are considering nearshoring vs. offshoring in Eastern European countries, draft all possible terms of the agreement at once. It’s vital to choose a vendor who can not only take care of back-office functions but also guarantee the safety of your intellectual property and provide high–quality recruitment services.